Diversification and specialization represent opposing strategies for economic development that can be implemented at business and country-wide level. While diversification involves shifting the economic focus towards greater diversity in terms of products and services (income sources), specialization involves keeping the focus on the incremental improvement of a limited range of goods and services. Policymakers, academia, and economists still debate on the role, suitability, and applicability of these trade strategies in the context of economic development.
Diversification strategy for economic development
Based on the conceptual framework of economic theory, diversification in economics refers to the process of shifting the operational focus from the production of a single or limited line of products and services to a more diverse range that exceeds the initial specialization and competence.
A good example of export diversification at the country level is Guyana which traditionally exported sugar, rice, and bauxite but then diversified its exports to include fish, shellfish, and timber.
At the corporate level, Apple Inc. can be viewed as an example of income diversification. The company managed to develop a comprehensive diversification strategy, evolving from the production of personal computers to manufacturing tablets, watches, audio equipment, and even electric vehicles.
Experts and academia argue that economic diversification provides the safeguarding necessary for countries and businesses to withstand economic shocks, increase productivity and ultimately improve their competitiveness within the international trade sector.
Even if diversification has the potential to assist poorer developing countries to create jobs and foster economic development, the transition involved can prove to be a great challenge.
Table 1. Advantages and disadvantages of economic diversification
Specialization strategies for economic development
Specialization in economics represents a development strategy that maintains the operational focus on the production and incremental improvement of a specific type/line of goods or services.
The Ricardian theory of comparative advantage suggests that countries/businesses should specialize in goods or services in which they have a comparative advantage in production. Identifying the comparative advantage requires an in-depth comparison of the production and opportunity costs across main competitors.
In many cases, such advantages result from the country’s natural resources. In this respect, Saudi Arabia is better suited to producing and exporting oil and petrochemicals while Guatemala is more specialized in exporting coffee.
It should be noted that economic specialization has certain limitations. Export trade strategies based on this model will be successful in the long run if they cover non-perfectly substitutable varieties of goods and services. In other words, if companies or countries produce and export goods or services from a monopolistic stance, there is a higher chance of enduring success. In other instances, parties should look for ways to diversify their production and develop efficient safety nets in case of economic turbulence.
Table 2. Advantages and disadvantages of economic specialization
While diversification and specialization represent opposing strategies for economic development, these are rarely applied independently. In the main, countries and companies aim to create consolidated strategies that incorporate both models. This in turn offers a way to ensure that their ‘star’ products maintain a competitive advantage in the market but do not represent the only means of income.
DevelopmentAid is the leading provider of business intelligence and recruitment tools in the development sector. Join today to diversify your portfolio and gain access to exclusive information on upcoming funding opportunities (tenders and grants), past awards, and contractor lists for over 200 international donor organizations.
