Agents of Structural Change: The Role of Firms and Entrepreneurs in Regional Diversification

TLDR

Regional structural change is driven by either entrepreneurs or existing firms, and the key question is whether local or nonlocal founders generate most novelty. The authors develop a theoretical framework that focuses on the roles different agents play in regional transformation. The framework is applied to Swedish matched employer–employee data to assess the novelty of new establishments’ activities. Incumbents mainly reinforce regional specialization, while unrelated diversification and lasting structural change arise mainly from new establishments—particularly nonlocal ones—though entrepreneur‑led ventures have higher failure rates than new subsidiaries, which achieve more durable regional impact.

Abstract

Who introduces structural change in regional economies: Entrepreneurs or existing firms? And do local or nonlocal establishment founders create most novelty in a region? We develop a theoretical framework that focuses on the roles different agents play in regional transformation. We then apply this framework, using Swedish matched employer–employee data, to determine how novel the activities of new establishments are to a region. Incumbents mainly reinforce a region's current specialization: incumbent's growth, decline, and industry switching further align them with the rest of the local economy. The unrelated diversification required for structural change mostly originates via new establishments, especially via those with nonlocal roots. Interestingly, although entrepreneurs often introduce novel activities to a local economy, when they do so, their ventures have higher failure rates compared to new subsidiaries of existing firms. Consequently, new subsidiaries manage to create longer-lasting change in regions.