How economic diversity affects regional resilience in crises

Economic crises do not affect all regions equally. Why do some regions cope better with shocks than others? This EcoAustria Research Paper explores how the structure of regional economies – in particular their level of sectoral diversity – influences their resilience during crises.

Using data for European regions, we analyze how economic diversity shaped the response to two major shocks: the global financial crisis in 2008 and the COVID-19 pandemic. We focus on three key aspects of resilience: how strongly regions were hit, how quickly they began to recover, and how long it took to return to pre-crisis levels.

The results show a clear pattern: Regions with a more diversified economic structure were better able to absorb the initial shock. However, this resilience comes with a trade-off. More diversified regions tend to recover more slowly, while more specialized regions often experience a stronger and faster rebound once the recovery begins.

Innovation also plays an important role. Regions with higher levels of innovation and productivity tend to recover more quickly Overall, the findings suggest that both diversity and innovation matter for resilience – but in different ways. A balanced economic structure that combines diversity with strong innovation capacity may offer a good hedge against future crises