Impact of Density and Variety of Industry Relatedness on Firm Dynamics in Chinese Cities

The mechanism of technology relatedness affecting firm dynamics has been widely recognized. However, differences in the number and strength of links related to technology relatedness have been neglected. This study explores the complex relationship between industry relatedness and firm dynamics. It classifies the density of relatedness as related and unrelated variety and classifies the variety of relatedness as weak and strong links using firm data of 285 Chinese cities from 1999 to 2012. We constructed a fixed-effects model and a threshold-effect model to analyse the impact of the density and variety of relatedness on firm dynamics. We found that both the density and variety of relatedness play crucial roles in firm dynamics. Their positive and threshold effects on new firm entry and reduced exit can foster related industries and technology investments for regional economic transformation. The effect of industry relatedness on firm dynamics involves regional and industry heterogeneity. Our study provides valuable insights on how to formulate industrial development policies by promoting industry relatedness to make cities more innovative and sustainable.