Is diversification desirable?

Should farms and rural regions specialize or is it, both at farm and regional level, more desirable to diversify? Based on ample research carried out by my group during the past decade I’m inclined to plea in favor of diversification. At farm level there is much evidence that diversification of economic activities is desirable:

  • New sources of income can augment otherwise stagnating agrarian incomes.
  • Farm households are less dependent on sectoral fluctuations.
  • Job satisfaction on diversified farms is quite often higher than on specialized farms.
  • Due to more frequent and intensive contacts with consumers / customers multifunctional farmers are better able to adapt to changing consumer and societal demands
  • Multifunctional farmers generally have more interaction with the local community and collaborations with local entrepreneurs and this enhances social capital and may strengthen the local economy.

However, I have also met very successful multifunctional farms that attract a lot of visitors. One of the consequences is an increase in car traffic to and from the farm and  this can lead to clashes with members of the local community who favor the quietness of rurality. In such cases social capital my weaken. Another negative aspect of diversity at farm level is the fact that multifunctional farms are quite often confronted with competing policy objectives and have to deal with a high administrative burden.

 

At regional level there are also several arguments in favor of diversification:

  • Diversified regions can provide a desirable living and working environment due to the proximity of different products and services. This, in return, can maintain or improve the quality of life in rural regions.
  • Greater regional diversity leads to greater regional economic stability as fluctuations in incomes and employment opportunities diminish because downturns in sectoral economies have a much less disastrous impact on a diversified economy than on a specialized one. 
  • Advantage of economies of scope: the costs of joint production of different products and/or services are lower than the sum of specialized production of the same products and services.

Although there is much evidence that more diversified rural and regional economies perform better in terms of competitiveness of the regional economy and quality of life, there are also problems associated with diversification. For instance, the success of the wine routes in Tuscany (a good example of rural diversification) lead to a rapid and substantial increase in land prices. This implies that for some people it might become too expensive to continue living in the area. An increase in the quality of life for some might imply a decrease for others. And … from a ‘district’ or ‘learning regions’ perspective too much diversification may also be counterproductive in terms of innovation, regional competitiveness and economic development.

4 thoughts on “Is diversification desirable?

  1. Interesting post, Han, thanks for sharing. Do you know of any insights how for example regional diversity with specialized farms may hold on to the advances you mentioned above (e.g. with cooperatives).

    I don’t quite understand, by the way, how the wine routes in Tuscany are considered diversification. Do you mean in terms of different types of services/activities offered in a region, and not so much diversification in types of crop production or live stock kept and the tangible farm produce?

  2. Hi Dorine,
    I can imagine that the link between wine routes and diversification is not that straightforward. The foundations of the wine routes are the conversion from the production of unbranded table wine to high quality wines of origin. This quality turn was followed by on-farm sales of wine. Attracting more consumers (both locals and tourists) to the farm created opportunities for farm diversification: on-farm shops, restaurants and accommodations for tourists. By linking food production and consumption and accommodation to other products and services, such as nature and landscape, walking routes, gastronomy, cultural history, etcetera, a more diversified regional economy was established. Wine routes are thus a combined example of farm diversification and the creation of synergies between the local food economy, the tourism economy and the cultural history economy. Maintaining these economies also implied the preservation of nature and landscape (to have an attractive environment).

    I hope this clarifies the link between diversification and wine routes.

  3. Hello Han,

    I wonder, having read your post, if I should even bring it up, but should it be black or white? To me it cannot be otherwise than that there will be a mix of specialization and diversification. Opportunities and restraints both will push people towards what they will think is suitable for them.

    And so for regions I hope there will be opportunities for both. Regions should provide opportunities and also constraints tom maintain the spirit os a region.
    I think it won’t be as black or white but different shades of pale, and people deciding for themselves to fit what they think is best for them and regions to provide cahnces for anyone.

  4. Hello Jeroen,

    It was not my intention or is not my aim to plea unambiguously in favor of diversification. According to me there are many positive aspects to diversification, but also some negatives ones. Furthermore it also depends on the level of analysis. Having clusters of specialized firms, with some substantial diversity between clusters, may be very beneficial from a regional economic perspective. One of the results of the EU-funded project ‘Enlarging the Theoretical Understanding of Rural Development (ETUDE: see http://www.etuderd.eu/) is that we can distinguish two types of robust rural regions in Europe:
    1) The new rural areas, where agriculture is developing along the lines of multifunctionality, is increasingly intertwined with the regional economy and society. In these areas multifunctionality is often articulated at the level of the enterprise and the multi-product enterprise is a distinctive feature of these regions.
    2) Segmented areas, where alongside specialized agriculture other, equally specialized sectors (e.g. housing, tourism, and nature) are emerging; multifunctionality at the level of enterprises is lacking here. Instead, the region as a whole, offers a broader range of juxtaposed services and goods. Multifunctional land-use (at regional level) is the distinctive feature.
    Both types of regions are characterised by a diversified regional economy, yet with regards to the first this is based on economically diversified firms while with regards to the latter clusters of specialised firms or sectors (which differ mutually) form the basis of a diversified regional economy. Interesting in that respect was the keynote speech by Prof. Andy Stirling at the ‘Rural potentials for regional development’ conference (see http://www.teresa-eu.info/conference), in which he distinguishes different forms of diversification.

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