Specialization and diversification

Practical class

In regional economics, we have some questions:

1. Why are some cities specialized and some diversified?
2. What are the advantages of regional or urban specialization and diversity?
3. How does the sectoral composition of regions/cities influence their evolution?
To answer these questions, we work with data that allows us to build indicators about every region.
In regional economics, we have spatial dimensions with spatial characteristics (in terms of social,
economic, or industrial environment). It is strictly linked to the industrial dimension (productive
activities). Those productive activities are in a specific place because that place has certain spatial
characteristics that are optimal for production.
Concentration in the space of economic activities is related to the specializations.

Concentration in space
We can consider artificial lighting as a way of measuring the amount of economic activity (a proxy
for economic activities).
Proxy of something  Even though we can not capture the real phenomenon because it is in a way
“intangible”, we can use proxies (means an approximation of a concept) that are measurables.
Another way to visualize concentration in space is by using a map of the world that changes the size
of the countries according to their GDP and not the real geographical size of the country.
There is a strong concentration of scarce, limited resources in a very limited portion of space.

Specialization
How do we measure it? Usually through the share of the total workforce.
The information is useful but not complete because we are missing a benchmark to know if the data
is high or low, good, or bad. We need that to interpret the reality.
The areas of each sector are different because each region has specific spatial characteristics that
make that region more suitable for a specific sector.  Geographical localization, size, culture,
specialization history, openness to trade, quality of human capital…
According to the factor endowment, different regions might specialize in certain economic
activities. Regions or cities rarely produce everything they need because not all the necessary
goods are produced locally, and locally produced goods exceed…

Indicators of specialization and diversity are necessary to know which one is better.
 - Specialization is calculated based on employment or value-added data.
- The choice of the indicator is relevant because we could arrive at a different conclusion
according to the indicator we use (employment or value-added).
- Beyond the spatial and industrial aggregation, a benchmark is important.
Spatial aggregation  NUTS-0 level data means the country size. NUTS-1, NUTS-2, and NUTS-3
are more specific data. NUTS-1 is the major socio-economic region, NUTS-2 refers to the European
administrative regions, and NUTS-3 to the provinces.
Industrial aggregation  Economic activities are divided into different categories. We can have
more disaggregated inside each category (i.e. Agriculture divides into crops, growing of plants,
plant propagation, etc., etc. And each subcategory has more disaggregated categories for more
specific topics.
Indicators
1. Employment share – Absolute level of specialization
S hi j
¿
E j , i
Ei
¿
100

S
h
= Share

i = City/region

j = Industry

2. Location quotient
L Qi , j
¿
E j ,i
Ei
E j ,c
Ec

Or
L Qi , j
¿
E j ,i
E j ,c
Ei
Ec

i = City/region

j = Industry

c = Benchmark area. Must include my area of interest.

This can be applied to employment and value-added and any other aspect to measure
concerning something else.
 In this case, concerning the absolute share we talk about relative specialization. It compares
the degree to which an area is specialized taking a larger spatial unit as reference.
Value of LQ

 >1  The numerator is higher than the denominator. Characterized by a higher

relative specialization with respect to the benchmark.
 =1 The analyzed area is exactly as specialized as the geographical benchmark.
 <1 The numerator is lower than the denominator. Characterized by lower relative
specialization with respect to the benchmark.
LQ is not enough if we need a measure that captures the overall degree of specialization.
3. Hirschman – Herfindahl Index (HHI)

H H Ii
¿
n

∑ Sh
2
j ,i
j= 1

i) This measures the degree of specialization of an area in terms of economic activity.

 HHI close to 0  Perfect homogeneity of specialization

 HHI = 1  Perfect concentration

ii) It can also be used to define the degree of spatial concentration of an industry.

 The higher the value the higher the spatial concentration of an industry

4. Regional industrial Diversification

D I V i
¿
1
−¿ H H I i

 DIV close to 1  High Diversification

 DIV close to 0  Low Diversification

Where to find data for the group work?

Eurostat  Database  General and regional statistics  Regional statistics by NUTS
classification  Regional labor market statistics  Regional employment – LFS (labor force
survey)  Employment by sex, age, economic activities, and NUTS 2 regions (NACE Rev 2).
From here we click on + on the first option inside the square (geopolitical entity) and filter the
information (age class 15 years or over) according to our region which is BE21.

 Sex  Total
 Statistical classification…  Check everything
 Time  Check all and then we decide which years we are interested in.
 Time-frequency  Annual
 Unit  Thousands
Click on save and go to the data view.
Change the layout of the chart by moving the squares on the table.

Step-by-step graph construction – Info on WeBeep.

1. The graph shows the total employment from 2002 and 2008, and on the other pages you
have employment in each sector. In the project, select for downloading all the possible
disaggregation.
2. First, we calculate the shares. Share of people working in each sector concerning the total
employment in each region to recreate the graph of LQ. We do it for all the regions in the
database but for the group work, we do it only for the region of interest. We create a new
sheet called shares and we paste the first 2 columns (code and name of the regions). First,
we calculate the share of people who work in agriculture, and we copy and paste the
headers to the shares sheet. Instead of employment, we need to have shares. We highlight
the headers, click on replace, find emp, with shares. We do the same for all the other
industries.
3. Calculation of the first share: Divide the employment cell in the agriculture sector by the
total share. Drag to the right and down to complete the table. We found the employment
shares for this first sector. When we get #DIV/01 is because we don´t have the data
complete. We do the same for all the other sectors.
4. Block the first 2 columns and the first 2 rows to move through the Excel and find the main
info easily.
5. Create a new sheet called shares chart.
6. Here we need to select 2 areas. 1 is the area of reference (in our case EU28). We copy-paste
EU 28. Then we select our area of interest BE21 and copy paste also the heading. From cell
C1 and on, we type the names of the sectors.
7. We type = and select the employment shares of agriculture of the most recent year. We
repeat the same for the other sectors. Then we do it for the specific region. We select the
data, click on insert and select scatter plot.
8. Chart title: Shares chart 2008. Then we change the scale of the X and Y axis to be the same.
9. Chart design  Add X axis name which is EU28 Employment share 2008 and Y axis name
is BE21 Employment share 2008.
10. Add the legend of each point and format data labels to put value from cells. Then select the
first row that has the names of the industries and deselect the Y value.
11. Add the bisecting line. We give random values to X and Y to create the like that passes
through 0. Add the data in the graph. The series’ name is Bisecting Line. Dots were added
to the graph. We select one and edit them to change from markers to straight line. Then
remove the markers (circles) from the graph.
 12. Calculate the LQ  Create a new sheet called LQ
13. Copy paste again the first 2 columns with the NUTS code and name.
14. Copy paste all the headers from shares keep is selected and change shares to LQ using
replace.
15. Freeze the view of the panes.
Use the formula:
L Qi , j
¿
E j ,i
Ei
E j ,c
Ec

We already have the first part, so we only divide the employment share from the EU to
the same sector for the same EU. We will have 1, because is the benchmark divided by
itself. We freeze the numerator (always must be EU28) and drag down. Freeze only the
row, and not the column. Drag right and down.
16. Create the radar chart. Create a new sheet called LQ chart. Copy paste again EU 28 and
BE21. Copy paste also the names of the industries and select a 3rd area to be compared with
the EU28 and BE21. We selected BE22.
17. Type = select LQ agricultural 2008 for EU28 and the same for the other sectors in 2008.
And do the same for the other 2 regions.
18. Select the names of the areas and the numbers, insert, charts, all charts, and radar chart.
19. Chart title: LQs chart in 2008.
20. Edit the chart and put the sector's name as the edges of the hexagon. Axis labels.
21. Change in time in LQ across regions chart. Create a new sheet called LQs evolution.
22. We will do it only for BE regions. So only copy codes and names of BE regions. In this
case we must select only 1 sector because we will find the evolution of specialization of 1
specific sector. We select manufacturing.
23. Create the row names lq_manufacturing_2002 and l1_manufacturing_2008.
24. = and click on the data we already calculated for all the BE regions for 2002 and then 2008.
25. We select the numbers, insert and scatter chart. X and Y axis must have the same bounds.
Then, organize the title and axis´s names. Add data labels to the dots and change the
numbers to the codes of the regions (right click, format data labels).
26. Graph HHI (first one). Degree of industrial specialization of the area. SQ the shares on each
sector and sum up them.
27. Create a last sheet called HHI. Copy paste the first two columns (all of them).
28. Copy paste the name of the industries and in each cell of each industry we put the squared
share of the year 2008 that we already calculated.
29. In the last column we type HHI and we type = the sum of all the squared shares.
30. Select HHI values of EU28 and all the BE regions and insert a bar graph.
31. Change the title of the chart and X and Y axis names. Instead of having the number on the
X axis, we edit the chart to put instead the names of the regions or the codes.
NOTE: Usually the larger the area, the more diversified.