January 31, 2022

Entries and Regional Growth: The Role of Relatedness

If new businesses and establishments are more closely related to economic activities taking place in a region, is this associated with higher regional growth a few years later? In this paper, we investigate the relationship between this 'relatedness' of newcomers and growth in employment and labor productivity in Dutch regions. While we find a positive correlation with regional employment growth, its economic magnitude is small.

It is known that new companies can stimulate growth through creative destruction: they push existing less productive companies out of the market or force them to produce more efficiently. New companies can also create knowledge spillovers by introducing new ideas or techniques that disseminate on a local scale. The current research examines these two aspects in conjunction. We consider two industries to be related when their employees possess similar skills. It will then be easier for employees to switch jobs and transfer knowledge between these two sectors.

Then what is the possible influence of new companies in a sector on related sectors? For regions as a whole, we find a positive relationship between the amount of related entry and employment growth. While this relationship is statistically significant, its economic magnitude is small. Hence, it is probably difficult to substantially influence the economic development of a region through related entries with policy, for example by trying to attract related new companies in a region.