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Industrial diversification in Europe: The differentiated role of relatedness

Jing Xiao, Ron Boschma and Martin Andersson ()

No 1627, Papers in Evolutionary Economic Geography (PEEG) from Utrecht University, Section of Economic Geography

Abstract: There is increasing interest in the drivers of industrial diversification, and how these depend on economic and industry structures. This paper contributes to this line of inquiry by analyzing the role of relatedness in explaining variations in industry diversification, measured as the entry of new industry specializations, across 173 European regions during the period 2004-2012. There are significant differences across regions in Europe in terms of industrial diversification. Relatedness has a robust positive influence on the probability that new industry specialization develops in a region. A novel finding is that the influence of relatedness on the probability of new industrial specializations depends on innovation capacity. We find that relatedness is a more important driver of diversification in regions with a weaker innovation capacity. The effect of relatedness appears to decrease monotonically as the innovation capacity of a local economy increases. This is consistent with the argument that high innovation capacity allows an economy to ‘break from its past’ and to develop, for the economy, truly new industry specializations. We infer from this that innovation capacity is a critical factor for economic resilience.

Keywords: industrial diversification; related diversification; evolutionary economic geography; unrelated diversification; European regions; resilience (search for similar items in EconPapers)
JEL-codes: B52 L16 O14 O18 R11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-cse, nep-eur, nep-geo, nep-hme, nep-ino, nep-sbm, nep-tid and nep-ure
Date: 2016-10, Revised 2016-08
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Persistent link: https://EconPapers.repec.org/RePEc:egu:wpaper:1627

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