The challenges inherent in diversifying the economic potential of an area is something I’ve touched upon a few times, especially in the event of that area’s main industry being disrupted. It’s a feat that few regions have managed successfully, causing great hardship to citizens.
A recent study from MIT Media Lab explores the issue through the lens of the knowledge and experience of citizens who can make firms in a region thrive, with the paper exploring whether a particular mix of experience can be particularly potent.
The study found that pioneering new firms were most likely to survive and scale up when their early hires were those with experience in either the same or a related industry. Experience on the same type of job mattered less.
Related sectors
The work, which was led by Cesar Hidalgo, builds on his previous work, which showed that new products are usually more successful when they’re closely related to the existing product base.
“We know these diversification events are more likely to happen when you have related activities at a location, but someone must still be the first to enter,” Hidalgo says. “That pioneer has to get their knowledge from somewhere.”
To understand the kind of knowledge that leads to success for the new firm, the researchers examined the various types of experience workers take with them when they join the new company. To do this they analyzed data from the Annual Social Security Information Report (RAIS) in Brazil between 2002 and 2013. This dataset covers approximately 97% of the formal labor market in Brazil, including detailed information about each worker. It enabled the team to understand the workers hired by new companies, the industry that company operated in, and the work history of those workers.
“So for a nurse in a hospital, their knowledge of nursing is their occupation-specific knowledge, while their experience in a hospital is their industry-specific knowledge,” Hidalgo explains.
Industry-specific knowledge
The authors found that pioneering firms usually hired people with clear, industry-specific knowledge, if they’d had a largely different occupation in their previous job.
To explore further, the team examined new firms that emerged in a region that were not so much pioneers as a startup in an industry with a substantial presence already in that region. For these firms, industry-specific knowledge appeared to be much more important for the new firms than it was for established firms.
The second most valuable form of knowledge seemed to be specific to the region itself, leaving occupation-specific knowledge languishing behind.
“These results strongly suggest that when regions try to develop new industries, they should focus on accumulating industry-specific knowledge that entrepreneurs can leverage,” the researchers explain. “Once the industry has been developed in the place, both types of knowledge become important.”
The team believe that industry-specific knowledge is so important not only because of the practical knowledge workers gain, but the experience they have of the social network in that sector. For instance, an experienced individual will know the key suppliers and customers in that sector, as well obviously as the rivals a firm might face.
Policy implications
They believe that their work has some quite clear policy implications, especially for governments operating in the developing world. Such governments often strive for foreign direct investment, but the paper makes the case for domestic entrepreneurship instead. The key for local entrepreneurs success however appears to be access to specific types of industry-specific capital.
To support this, the team suggest that it may be valuable for the government to develop industry-specific education programs rather than the occupation-based programs that so often exist today.
To further explore this apparent trend, the team hope to examine whether this phenomenon is consistent between industries or whether there is variation. This will form the basis of future work.
