RS: The New Paradigm of Economic Complexity
RS: The New Paradigm of Economic Complexity
“Specialization and diversification are, in fact, two aspects of the same phenomenon seen from two different scales. If individuals specialize, firms, cities, and countries diversify.”
The New Paradigm of Economic Complexity, Balland, P.-A., Broekel, T., Diodato, D., Giuliani, E., Hausmann, R., O’Clery, N., & Rigby, D. (2022). The new paradigm of economic complexity. Research Policy, 51(104450). https://doi.org/10.1016/j.respol.2021.104450
Key Takeaways
Economic complexity measures the diversity and sophistication of an economy's productive capabilities and knowledge networks.
The New Paradigm of Economic Complexity explains why economic complexity is important. Anyone in local government, economic development or higher education should be aware of these concepts.
The objective is a modern, resilient, future-proofed economy and improved quality of life for citizens.
“Specialization and diversification are, in fact, two aspects of the same phenomenon seen from two different scales. If individuals specialize, firms, cities, and countries diversify.”
“The whole knows more because individuals know different, which is to say that the growth of know-how happens thanks to specialization.”
Includes practical, accomplishable steps for municipalities.
A Shorthand Definition of Economic Complexity
Economic complexity measures the diversity and sophistication of an economy's productive capabilities and knowledge networks.
The greater the level of diversity and sophistication of an economy's productive capabilities and knowledge networks, the stronger, more resilient, more future-proofed and more attractive to talent it becomes.
The Paper’s Main Argument
Economic complexity is a way of understanding interactions influencing growth, development, technological change, income inequality, spatial disparities, and resilience.
It’s useful for policy and investment decisions regarding the accumulation and utilization of productive knowledge. Productive knowledge is the main input of complex economies.
How Are Economic Complexity and Knowledge Connected?
Creating economic complexity requires the right ingredients. The most important ingredient is productive knowledge.
Knowledge Forms: Productive knowledge can be categorized into three parts: embodied (tools and materials), codified (books and manuals), and know-how (tacit knowledge we carry with us). Specialized individuals possess productive knowledge based on these three ingredients.
Division of Knowledge: Modern technological progress is too big and too complicated for any one person. Progress therefore relies on the division and coordination of knowledge among specialized individuals. Specialized individuals working together on complex problems lead to economic diversification.
Specialization and Diversification: Individual specialization leads to city, region and national economic diversification.
Specialization and diversification are, in fact, two aspects of the same phenomenon seen from two different scales. If individuals specialize, firms, cities, and countries diversify.
— The New Paradigm of Economic Complexity
Dynamic Effects: Specialization and diversification enable societies to accumulate and create new productive knowledge, leading to economic complexity.
The Challenge For Smaller Cities
Complex activities require a deep division of knowledge, which in turn creates high coordination costs that big cities and technology clusters help solve by providing infrastructure and opportunities for talent and ideas to collide. This has a systematic, reinforcing effect: a virtuous cycle of specialization and diversification leading to greater degrees of economic complexity.
This can trigger the movement of people, who are critical for the transfer of know-how and technology diffusion. Migration might be a key strategy for knowledge sharing but can also lead to talent draining from less built-up areas.
Responding to the Challenge
Fostering a diverse set of specialized knowledge and skills can lead to greater collective know-how and innovation. In turn, this creates opportunities for a modern, resilient, future-proofed economy and improved quality of life for citizens.
Core Principles:
Leverage local capabilities and existing industries to build complexity.
Encourage related diversification to create more complex activities.
Utilize decentralization to empower local decision-making and foster dynamic capabilities. Less command control, and more creating the conditions to accumulate more productive knowledge.
Managing Complexity and Specialization:
Develop place-based policies that consider the unique attributes and strengths of the local area.
Support the movement of skilled individuals and the co-location of complementary businesses to enhance knowledge transfer.
Mechanisms for Local Knowledge Creation and Economic Complexity:
Invest in local education and training to build a modern, skilled workforce.
Create networks and partnerships among local businesses, educational institutions, and government to facilitate collaboration.
Invest in creating networking events, innovation meetups, and collaborative spaces where individuals from different sectors can come together to exchange ideas, knowledge, and experiences.
Implement smart diversification strategies that align with local strengths and global market opportunities.
Avoid over-specializing at the municipal level too quickly. Leave the door open to greater diversification down the road.
Transfer of Knowledge Types:
Promote local learning and the development of worker know-how. Learning to validate concepts is an important skill to partner with subject matter expertise.
Foster innovation hubs or clusters that concentrate related industries to facilitate knowledge spillovers.
Encourage the use of digital platforms and technology to bridge the physical distance and connect local actors with wider networks.
Leveraging Local Strengths:
Identify and build upon niche areas where the local region has existing or potential competitive advantages.
Encourage local entrepreneurship and the development of small and medium-sized enterprises (SMEs) that contribute to economic diversification.
Facilitate connections with larger urban centers and global markets to enable knowledge exchange and economic opportunities.
Conclusion
The whole knows more because individuals know different, which is to say that the growth of know-how happens thanks to specialization.
— The New Paradigm of Economic Complexity
Economic complexity might be best thought of as a continuum along which every nation, region and municipality progresses. That process can be fast or slow, with consequences for employment and quality of life.
Given the tendency of complex activities to cluster in existing centers and hubs, non-centers must respond in order to maintain and improve quality of life for their citizens. National and regional policy and investment are crucial. Likewise, independent, practical, accomplishable steps are immediately available to municipalities.
Observations
Not every population center is Silicon Valley or global tech hub. Nor should they necessarily want to be. Most places don’t want to abandon what makes them unique in favour of pursuing different goals. However, when people are looking for attractive places to live, rewarding work is critically important. For this reason every city, town and region should build economic complexity into their planning.
Almost by definition economic complexity is hard to spark, manage and grow. Innovation ecosystems have emerged as a solution, unifying the key actors within municipalities: government, economic development, chamber of commerce, business community, entrepreneurs and, in many places, higher education institutions.
Virtually every municipality possesses these economic complexity building blocks, but there is great variance in infrastructure, coordination, scale, intensity, location, investment, and existing technological expertise. Information sharing and partnerships aid in levelling the playing field.
If the objective is a modern, resilient, future-proofed economy and improved quality of life for citizens, then fostering a diverse set of specialized knowledge and skills is of fundamental importance. Start with an accurate assessment of your current position; begin the levelling-up process by leveraging existing local capabilities and industries.