Regional static diversification and relatedness between industries

Relatedness has often been shown to have a central role in regional diversification. Knowledge flows between related industries are an important source of innovation, leading to industry growth and the establishment of new industries. Earlier studies have focused on dynamic diversification into new industries, but in this study, we emphasize static diversification, that is, changes in the balance between existing industries in a region. We use linked employer-employee data from Denmark and construct a range of measures at the level of regional industries. The role of relatedness in static diversification 2008-2013 is then analyzed based on industry characteristics in 2008. We find that relatedness plays a more important role in regions that are either spatially peripheral or economically non-peripheral, while relatedness has no relationship to static diversification on average. In addition to the empirical result, we contribute by comparing indices of relatedness, suggesting an alternative employment-weighted index, and conceptualizing relatedness as itself a disparity dimension of diversity. We finally ask how static and dynamic diversification affect disparity. We find that human capital intensity plays an important role in the link between diversification and the evolution of disparity.