Disruptions such as natural disasters, terrorist attacks, and sharp recessions can leave communities fighting for survival and restoration of normalcy. Many are left wondering how to blunt the effects of these negative shocks. Some policymakers and academics have begun to search for mitigating measures that can strengthen the resilience of communities.
Economic resilience generally refers to the ability of an economy to absorb or rebound from shock. Using 35 years of employment data from Ohio, our research has focused on whether counties with greater industrial diversity were better able to maintain stability in the face of negative shock. We estimated the potential benefits of diversity and also explored the implications of diversity during normal economic times.
When times are good, more specialized (i.e., less diverse) economies can be a boon to local businesses, due to economies of scale, greater access to industry-specific inputs (such as a trained workforce) and better access to shared markets. While these companies may compete with one another, the benefits make their close proximity a net gain, as exemplified by Silicon Valley and Boston’s Route 128.
At the same time, cities such as Detroit, Cleveland, and Youngstown provide cautionary tales about how specialized economies may be unable to adapt to demand shocks. We find that a region’s industrial diversity serves as one of the factors that can help to build resilience against changing conditions.
Our research finds, however, that diversity can come at a price – in ‘normal’ periods, employment rates are lower than in economies that are more specialized. While industrial diversity reduced the potential downside (i.e. increased resilience), it also lowered the upside. This reality is not that different from the effects of diversification on an individual’s investment portfolio.
Understanding these potential tradeoffs can lead to more effective planning. We encourage policymakers in specialized economies to consider adaptive strategies such as developing a versatile workforce or creating rainy day funds. On the other hand, those in more diverse economies may wish to investigate more aggressive growth strategies to improve employment opportunities.
This article is based on the paper, 'The role of industrial diversity in economic resilience: An empirical examination across 35 years', in Urban Studies.