Will specialization continue forever? A case study of interactions between industry specialization and diversity

This paper studies the interactions between industry specialization and diversity. Several studies have shown that competitive industries in a region grew faster, thus expanding their shares in overall employment. The implication is that a region will become more specialized in its competitive industries and the process will continue forever baring external intervention. Utilizing an econometric model on county-level employment growth in Virginia, this study confirms that competitive industries experience faster employment growth, reinforcing specialization. However, as specialization proceeds, it reduces economic diversity. That will hurt job creation, as economic diversity also stimulates employment growth. The interactions between specialization and diversity can lead to complex patterns of industry structural change. This study concludes that if a locality starts with low economic diversity, specialization will continue to deepen and the region may be trapped with limited economic diversity. However, when an economy starts with high diversity, specialization and diversity tend to offset each other, resulting a more consistent industry structure.