Industrial and Activity Zones and Economic Diversification: Evidence from Algeria with Comparative Insights from Saudi Arabia and Italy

Abstract

Economic diversification remains a central challenge for hydrocarbon-dependent economies, as growth patterns shaped by extractive industrial activities expose them to external shocks and persistent structural vulnerabilities. This study explores the integration of industrial and activity zones into urban areas as a strategy to foster economic diversification. It examines whether urban integration provides a conducive environment for SMEs and startups by activating inter-firm synergies and complementarities, strengthening the service sector, and reducing export concentration by redirecting industrial activities toward non-extractive activities. The empirical strategy follows a sequential analytical framework. Algeria constitutes the core case study, analyzed through correlation, cointegration and causality analysis. Subsequently, to assess robustness and external validity, the analysis is extended to Saudi Arabia as a structurally similar hydrocarbon-dependent economy and to Italy as a contrasting, highly diversified economy. The results show that urbanization and the expansion of the service sector (hallmarks of developed economies) exert a stronger influence on economic diversification than the industrial sector. Industrial development contributes to diversification only when it is redirected away from extractive dominance and embedded within urban ecosystems that foster strong synergies with the service sector. Overall, the findings indicate that, in less diversified economies, diversification primarily responds to coordinated and multidimensional structural dynamics rather than to isolated sectoral shocks.