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 pre-existing industries in that region. By employing a new indicator of technological relatedness between manufacturing industries, we use detailed plant-level data to analyze the economic evolution of 70 Swedish regions during the period of 1969-2002. 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 the pre-existing industries in a region had a higher probability of entering that region in comparison to unrelated industries. Industries that were technologically-unrelated to the pre-existing industries of a region had a higher probability of exiting that region. Moreover, we also found that the industrial profiles of Swedish regions showed a high degree of technological cohesion. Despite substantial structural change, this cohesion was very persistent over time. Our methodology also proved useful when focusing on the economic evolution of one particular region. Our analysis indicates that the Linköping region increased its industrial cohesion over a period of 30 years due to the entry of industries that were closely related to its regional portfolio, and the exit of industries that were technologically peripheral. In summary, we find systematic evidence that the rise and fall of industries is strongly conditioned by industrial relatedness at the regional level.