Strong Links and Weak Links: How Do Unrelated Industries Survive in an Unfriendly Environment?

Abstract

The evolutionary economic geography strand’s emphasis on related diversification as a path for economic development generally leads to greater territorial polarization: places already at the vanguard of production and with more advanced sectors tend to perform better, while less developed, often peripheral places remain stuck in low competitive equilibria. More recently, literature reveals cases where countries/regions may deviate and jump into new, unrelated industries, which have the potential to generate growth and convergence. Nonetheless, we still know little about what happens after jumps into unrelated industries and what factors facilitate the development of such industries. This issue is important, since it is often difficult for unrelated industries to take advantage of local competences and resources, or unfriendly environments. Our first contribution is thus to fill this gap by examining how unrelated industries could survive in an unfriendly environment. Another contribution is to bring the network properties of the industry space to the forefront, and show that unrelated and related industries have distinct preferences in terms of the number and strength of links. The hypothesis is that unrelated industries with a small of number of strong links tend to have better economic performance, while related industries with a large number of weak links are more likely to grow rapidly. We also contribute to the current literature methodologically by developing a new variety indicator that complements the density indicator. The econometric results confirm our main hypothesis.