Recent economic downturns have led to renewed interest in ways regions can overcome crises. In new research, Mathieu Steijn, Pierre-Alexandre Balland, Ron Boschma and David Rigby evaluate the capabilities of regions to diversify into new activities during crises and how this may help to mitigate their impact. They find that crises tend to restrict the development of new activities, especially those that require capabilities that are not present yet in the region. They also find that diversifying into new activities that are outside a region’s “comfort zone” during crises is actually generally associated with more employment growth, and that that regions with a more diverse range of activities are better able to develop new ones.

Regional resilience, the ability of regions to withstand and overcome crises, is high on the policy and research agenda. Crises lead to falling demand, which tend to overly hit regions that harbor firms that are already using outdated technologies and practices. When profoundly hit, regions rarely manage to overcome the decline of dominating incumbent industries by developing new industries to take over. The prime example is the contrast between Boston, which managed to re-invent itself after each crisis, and Detroit, which did not re-invent itself (yet) when the car industry declined. Our research shows that the impact of crises can likely be mitigated by the development of new activities, which can employ the labor and capital set free by the decline in other activities.

What do crises mean for regional innovation?

Generally agents, such as firms, in regions respond to crises by developing fewer new technologies during crises and when they do these technologies are more technologically related to previous technologies invented. This suggests that crises slow down innovation and a relatively stronger focus on innovations that require less investment in new capabilities.

In contrast, this diversification pattern during crises is exactly the opposite of what generally generates more employment growth: it is actually developing new and less related technologies that is associated with the most employment growth during crises. In other words, the ability to diversify is under strain during crises even though it can help start a new boom.

The ability to diversify is greater when there is a more diverse range of technological activity in a region. Possibly because there are more opportunities for the cross-fertilization of ideas and incumbent industries are less dominating the institutional and policy context to safeguard their vested interests, as also earlier discussed in this blog.

This type of research requires an evolutionary approach. Often in economics, the focus is on measures of general economic performance, such as Gross Regional Product or the total number of jobs. However, this performance is dependent on the type of industries present in a region, which requires an understanding of how the type of capabilities of agents in a region can evolve to develop different types of industries.

Using patent data to examine how regions diversify over time

We build on the recent availability of geolocalized historical patent data that covers 1850 to today. These data include information on the location of inventors and technology classes associated with the patented inventions.

We apply novel metrics to this patent data to measure to what extent technologies require similar capabilities to produce them. Previous studies in this line have shown that capabilities in a region are strong predictors of the evolution of regional industries. For example, when the car was invented regions specialized earlier in the manufacturing of bicycles and coaches had more success in developing the car industry.

The approach allows us to evaluate diversification patterns, that tell us to what extent new technologies that are developed in regions are related to technologies that were already present in that region. Here, we evaluate how these diversification patterns changed during the great historical economic crises of the US, according to the NBER, being: the Long Depression (1873-1879), the Great Depression (1929-1934), and the 1970s recession (1973-1975).

During these crises, regional diversification is likely particularly relevant. Because they occur at the same time as periods of great technological change, notably two industrial revolutions around electricity and then semi-conductors (computers). As a result, the crises co-occur with important shifts in the innovation cycles of many regions and large shifts in the spatial distribution of wealth, such as the divergence in development between Boston and Detroit that starts in the 70s-80s.

Photo by Mike Kononov on Unsplash

Figure 1 shows the results of the comparison of diversification patterns during crises compared to outside of crises. The probability that a region develops a new specialization is smaller for all types of technologies but for strongly related technology the decrease is only about 11 percent while it is about 51 percent for strongly unrelated technologies. We find that the results are virtually the same for smaller local crises, which suggests that the diversification patterns during crises hold in general.

Figure 1 – The difference in probability that new technologies are developed within regions during crises compared to outside of crises 

Note: A 95 percent confidence interval is given in gray.

This is in line with the so-called demand-pull hypothesis: when demand drops during crises funding for the development of new activities also drops making agents avoid risky investments, such as the development of new technologies, in particular when these require more new technological capabilities.

Diverse cities and regions are more able to diversify

Diverse cities have an advantage in developing new technologies. The cities with the most diverse range of technological activities have about twice as much chance of developing a new technology. This holds even when controlling for other factors, such as the inventor connection to other cities, and the fact that diverse cities may be patenting different types of technologies. Possibly this is due to there being more possibilities of cross-fertilization of ideas between industries and less probability of established industries dominating the institutional and policy network to block new key developments. Note that more diversity is also associated with regions being less vulnerable to entering a crisis because there are more other industries to absorb productive sources from the industries hit by the crisis.

Regional technological diversification is likely an aid to overcome new crises. For the 1970s recession patent data and regional employment data per manufacturing industry are available. The development of new technologies leads to more growth in employment that work with this technology in the following 15 years both during and outside of crises, which may be unsurprising. More interestingly, this growth is even higher when the technologies are less related to previous technologies during crises while the opposite holds outside of crises, then it is actually the more related technologies that lead to more employment growth. This suggests that on average unrelated diversification is more beneficial during crises and related diversification outside of crises.

In contrast, our main results showed that regions generally show the opposite of this optimal behavior during crises by actually diversifying less and relatively more into related activities. This may suggest that stimulating (unrelated) diversification is a viable solution for regional policy-makers. However, stimulating diversification should be approached with caution. Spending public money on developing industries is risky. In particular, when these require many capabilities that are not yet present in the region. Not every region can become the next Silicon Valley. Nonetheless, stimulating diversity in capabilities and being cautious of vested interests of dominating incumbent industries that block new developments may provide useful guidelines in providing the environment in which new activities can thrive.

• This article is based on the article, ‘Technological diversification of U.S. cities during the great historical crises’ in the Journal of Economic Geography. 
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• Note: This article gives the views of the author, and not the position of USAPP – American Politics and Policy, nor the London School of Economics. 
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