DIVERSIFICATION VS. SPECIALIZATION
HOW DIVERSIFIED IS SOUTH TEXAS?
DIVERSIFICATION VS. SPECIALIZATION
B
ecause of the very nature of nonrenewable resources, an oil boom cannot last forever.
With this in mind, an increasing number of local government officials have made
economic diversification a community development priority. Other things being equal,
a more diversified economy tends to be more stable over time as it is less dependent
on the rise and fall of one individual industry.
One popular measure of overall economic diversity is called the Entropy Index, which
compares the shares of economic activity across all industries in an area against a benchmark
of perfect diversity, or uniform distribution of employment or output across local industries.
The size of a local industry can be measure alternatively by its share of local employment and
its contribution to Gross Regional Product (GRP). GRP is the value of total production or income
of a region. The accompanying column chart shows the five South Texas metro areas’ Entropy
Indexes with a total of 21 NACIS 2-digit-level industrial sectors. Those indexes are expressed in
relation to the case of perfect diversity, meaning that all industries are of the same size. For an
economy with 21 industries, the Entropy Indexes for perfect diversity is 3.0 (3.0=ln(21)). For the
five metro areas, a relative Entropy Index closer to one is more diversified economically.
San Antonio, the largest metro area with GRP nearly $100 billion, is most diversified as its
index score is the highest at 0.89. Likewise, its Entropy Index by employment is the highest at
0.85 relative to the case of perfect diversity. Conversely, smaller economies like Laredo tend to
have lower scores, which indicate a less diversified economy.
Corpus Christi is the second largest economy in South Texas, with GRP over $24.5 billion in
2014. However, in terms of output, it is less diversified than other smaller metro areas. In terms
of employment instead, then Corpus Christi is comparable to San Antonio in diversity.
Entropy Index
Sources: Bureau of Economic Analysis, and author’s calculations.
Annual Review of South Texas Economy
29