How do regions diversify over time? Industry relatedness and the development of new growth paths in regions

The question of how new regional growth paths emerge has been raised by many leading economic geographers. From an evolutionary perspective, there are strong reasons to believe that regions are most likely to branch into industries that are technologically related to the preexisting industries in the region. Employing a new indicator of technological relatedness between manufacturing industries, we analyze the economic evolution of 70 Swedish regions during the period 1969-2002 using detailed plant-level data. Our analyses show that the long-term evolution of the economic landscape in Sweden is subject to strong path dependencies. Industries that were technologically related to pre-existing industries in a region had a higher probability to enter the region, as compared to unrelated industries. And unrelated industries had a higher probability to exit the region. Moreover, we found that industrial profiles of Swedish regions showed a high degree of technological coherence. Despite substantial structural change, this coherence was very persistent over time. Our methodology also proved useful when focusing on the economic evolution of one particular region. Our analysis showed that the Linkˆping region increased its industrial coherence during 30 years, due to the entry of industries that were closely related to its regional portfolio on the one hand, and the exit of industries that were technologically peripheral to its regional portfolio on the other hand. In sum, we find systematic evidence that the rise and fall of industries is strongly conditioned by industrial relatedness at the regional level.