Regional Resilience and Diversification: Three Essays on the Role of Local Industrial Structures

This PhD research investigates patterns and determinants of regional economic resilience and industrial diversification in United States counties and European regions. Economic shocks that cascade rapidly across the globe as well as the constantly evolving economy leave a spatially heterogeneous economic footprint. By addressing the role of under-explored facets of local industrial structures, this research contributes to a better understanding on why some regions thrive in times of crisis and change, while others decline. The findings suggest that regions benefit from a diverse set of complementing and interrelated local industries, but also external relations and openness matters for regional resilience and diversification. Thus, this research underlines that policy makers should seek to understand the interconnections of industries both within and across regions. Regional development policies can then be tailored to target local key sectors, which are of strategic value. This research is composed of three distinct chapters: they investigate separate research questions and each chapter corresponds to a paper as a stand-alone piece of research in the field of Regional Science. Yet, there are three common elements, which are worth outlining before describing the chapters individually: firstly, they share the same theoretical approach based on evolutionary economic geography. Evolutionary perspectives emphasize the continuously evolving nature of the economy. Thus, regions have to perpetually diversify into new economic activities to avoid decline, while also showing resilience to acute economic crisis. From an evolutionary view, a regions’ resilience and ability to diversify is strongly rooted in past legacies, which are embodied in local social, institutional and industrial structures. The latter element, a focus on different features of the local industrial structure, is the second commonality among the chapters of this research. Lastly, the three chapters all follow a quantitative methodological approach, utilizing a variety of detailed regional economic data and econometric methods. The first chapter of this PhD research evaluates the role of related variety on the industrial resilience of regions against an economic shock. As highlighted in the evolutionary approach to 2 resilience, a decisive element of regional resilience is the ability of regions to diversify into new growing industrial activities. Thus, industrial resilience is measured by the extent to which a region maintained or improved entry rates of new industrial specialisations as a response to a recessionary shock. The positive impact of related variety, the presence of a diverse set of related industries, on local economic development has been supported by many empirical studies. Related variety promotes inter-sectoral knowledge spillovers and provides better opportunities for re-combinations across industries from which new industry specializations develop. However, during major economic crisis, does related variety make regions more vulnerable to a disruption of their industrial diversification process, as the decline of one industry may affect the innovation opportunities of other related industries in the region? This chapter explores this question with respect to the 2008 economic crisis in the United States (U.S.). The key novelty of this paper is the application of the industrial resilience concept to the U.S. context and the utilisation of a recently introduced industry classification (Delgado and Mills, 2020): differentiating between supply chain and business-to-consumer industries, we use employment data on six-digit NAICS (North American Industrial Classification System) industries and compare entry rates of new industrial specialisations in counties in the pre-crisis period 2002–2007 to the post-crisis period 2009–2014.Overall we find, that related variety exhibits a strong positive effect ∗ on industrial resilience and that this effect is equally present on the entry of supply chain and business-to-consumer industries. Thus, to support the diversification process during crisis periods, the results of this paper underline, that regional policies should foster industrial diversity, but pay specific attention to the complementarity of target sectors. The second chapter examines the drivers of industrial diversification in U.S. counties during the period 1998 to 2017 and focusses on the impact of interregional input-output linkages and relatedness. Despite evidence that interregional linkages are important drivers of local economic development, their role for diversification is not fully understood. The hypothesis is that flows of intermediate goods and services among regions are a vehicle for the diffusion of external capabilities, upon which regional economies can thrive and diversify. Interregional linkages may also relax the role of relatedness, as external knowledge is likely to be unfamiliar, which provides opportunities for new and unrelated recombinations. The key novelty of this paper is the analysis of interregional input-output linkages and their role for counties’ diversification and the application of a new network based methodology to measure interregional linkages (Han and Goetz, 2019): to proxy interregional input-output linkages of counties we use a county centrality measure derived from the national input-output network. We find a positive relationship between county centrality and industrial diversification, where the latter is measured by the entry of new industry specializations. The results also show, that the impact of relatedness is weakened, if local industries are strategically interconnected within the whole input-output network. Interregional linkages via local industries that are prominently positioned within the national production system appear to stimulate regional diversification in general and unrelated diversification in particular. This finding suggests, that industrial policies should focus on key sectors with interregional linkages that have strategic value to the region. This can enable a more targeted policy strategy, which is particularly relevant in the presence of limited public and private resources and other constraints The third and last chapter of this research looks at European regions. The study examines the role of local industrial embeddedness on economic resilience to the 2008 economic shock in 256 NUTS2 (Nomenclature of Territorial Units for Statistics) regions. This article measures resilience based on the ability of regions to grow aggregate employment during crisis. Previous research on regional employment resilience discovered the important role of structural characteristics of local economies related to diversity and industrial composition. However, research has not so far examined the degree of a production system’s local embeddedness, which may be a vital structural element for resilience. Thus, the key novelty of this paper is application of the concept of embeddedness empirically from two angels, forward and backward linkages, on the regional and sectoral scale and examining its link to resilience on a panel dataset. Theory suggests that the embeddedness of intersectoral relationships generates positive external economies of agglomeration, which are expected to benefit resilience. Yet, overly embedded systems suffer from negative lock-in effects, which likely limit resistance and recovery. To explore these opposing effects, the paper measures regional embeddedness as the share of intermediate economic activity taking place within a specific region. Utilizing novel data on regional input-output trade from 2000 to 2010, we approximate sectoral embeddedness shares that are weighted and aggregated to provide forward (sales) and backward (supplies) embeddedness measures for each region. The findings suggest a complex and non-linear relationship between embeddedness and labour market resilience, that is influenced by the direction of linkages. Sales embeddedness is found to assist the resilience of a region up to an inflexion point of 37% after which its effect diminishes. Supplies embeddedness – for which we witness a collapse post-2008 – is not associated with resilience performance. Sector specific characteristics, such as their position along the supply chain also influence the effect of sectoral embeddedness on regional resilience. The strongest policy implication that emerges from the findings of this paper, is that localities need to focus on understanding the embeddedness of their industrial structures in greater detail and identify the thresholds that allow them to have a positive rather than a negative effect on resilience.