Relatedness and regional economic complexity: Good news for some, bad news for others

Purpose – This article aims to evaluate the entry and exit of companies from local productive structures, with a specific focus on the sectoral complexity of these activities and the complexity of these portfolios. The study focuses on empirically demonstrating the thesis that related economic diversification exacerbates the development gap between more and less complex regions. Design/methodology/approach – The article uses indicators formulated by the economic complexity approach. They allow a relevant descriptive analysis of the economic diversification process in Brazilian microregions and provide the foundation for the econometric tests conducted. Through three distinct estimation strategies (OLS, logit, probit), the influence of complexity and relatedness on the entry and exit events of firms from local portfolios is tested. Findings – In all estimated models, the stronger relationship between an activity and a portfolio significantly increases its probability of entering the productive structure and, at the same time, acts as a significant factor in preventing its exit. Furthermore, the results reveal that the complexity of a sector reduces the probability of its specialization in less complex regions while increasing it in more complex regions. On the other hand, sectoral complexity significantly increases the probability of a sector leaving less complex local structures but has no significant effect in highly complex regions. Research limitations/implications – Due to the data used, the indicators are calculated considering only formal job numbers. Additionally, the tests do not detect the influence of spatial issues. These limitations should be addressed by future research. Practical implications – The article characterizes a prevailing process of uneven development among Brazilian regions and brings relevant implications, primarily for policymakers. Specifically, for less complex regions, policies should focus on creating opportunities to improve their diversification capabilities in complex sectors that are not too distant from their portfolios. Originality/value – The article makes an original contribution by proposing an evaluation of regional diversification in Brazil with a focus on complexity, introducing a more detailed differentiation of regions based on their complexity levels and examining the impact of sectoral complexity on diversification patterns within each group.

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