Measuring Economic Diversification in Hawaii

With a demise of plantation agriculture coupled with limited potential for much further growth in tourism, economic diversification has become a topic of increasing interest in Hawaii economic development effort for promoting economic growth and maintaining stability. Aiming to promote economic diversification and growth and create high paying jobs, recent development efforts in Hawaii have focused on developing high-tech, knowledge-based and other emerging industries. Most aggressive of these efforts in recent years include Act 221 passed in 2001 and amended in 2004 (Act 215), providing qualified Hawaii-based businesses with 100 percent tax credit in new investment and 20 percent tax credit in research and development.

With the development of the State’s Innovation Initiative and passage of Act 148 in 2007, Hawaii has embarked on a series of measures aiming to develop foundations for an innovation economy and nurturing emerging industries. Besides several other programs, the act has mandated READ to create and periodically update a database on defining and measuring Hawaii’s emerging industries and develop appropriate outcome measures to assess the effectiveness of the State’s Innovation Initiative and other development efforts in promoting economic diversification, growth and stability in Hawaii. Against this backdrop, this particular study looks at economic diversification and its impact on economic performance in Hawaii.

To date, there has been no formal study analyzing economic diversification in Hawaii, or a study on the effect of diversification on economic performance and stability. To fill this gap, this study examines the degree of economic diversification in Hawaii and develops some measures of diversity for Hawaii. The study attempts to: (i) present the various measures of economic diversity found in the literature, (ii)estimate some of the key measures of economic diversity for Hawaii and examine the results over time, (iii) determine the effect of diversity on growth and stability, (iv) compute the Hawaii’s ranking in economic diversity, and (v) provide suggestions for future research and some insights into public policy.