Development strategy of urban industrial diversification based on market potential and path dependence

Numerous studies conclude that urban industrial evolution depends on the technological relatedness-associated supply side. However, such industrial evolution may also be affected by market force-related demand side. To fill this gap, this research aims to examine whether market force, reflected by market potential and market segmentation, also has significant impacts on the diversification of regional industries, and whether such impacts differ among different regions of China. The data used export customs declaration data recorded by customs offices. We introduce the PROBIT binary variable model to explore the effects of technological relatedness, market motential, market segmentation on diversification of regional industry. The results show that the diversification of export industries was not only positively affected by technological relatedness, but also impacted by market potential and market segmentation positive and negative, respectively. Notably, the impact of technological relatedness on the innovation of export industry was weakened in areas with low market potential but strengthened in those with high market segmentation. Moreover, we found that the effect of technological relatedness was weakened in more developed cities, while the effects of market potential and market segmentation were relatively universal. Theoretically, this paper expands the framework of evolutionary economic geography. We understood the influential factors of industrial innovation from both the supply and demand side, instead of the solely supply side in most previous studies. Practically, this study points out a new development path for the industrial evolution of marginal areas