In order to arrive at better predictions, investors utilize various methods originally developed by social and economic sciences. One of such methods is known as shift-share analysis, used for identifying what portions of regional economic growth or decline are caused by regional factors and what by national factors. A specialised shift-share analysis is used by investors and financial firms to understand these underlying causes when making investment decisions. Let us look at how investment analysts manage shift-share analysis and extract valuable knowledge through it.
The Emergence of the Shift-Share Analysis
Shift-share analysis has originally been created in order to better understand what makes particular regions diverge from the national economical trends. More precisely, it was created to look at particular industries in specific regions and compare their growth with the national levels. Additionally, the goal was to find the local conditions and resources that are causing this divergence.
Researchers often credit Daniel Creamer with originating the shift-share analysis all the way back in 1942. But it was not until the 1960s that the works of other academics allowed shift- share analysis to emerge as one of the main methods for comparing national and regional aspects of industrial growth and decline. Quite naturally, since then, many new methods have been introduced and developed for similar purposes. However, shift-share analysis remains an important methodical tool in the analysts’ toolbox.
Traditionally, researchers would manage shift share analysis by identifying three key factors to serve as the components of the analysis. These are as follows.
● The national growth effect. Defined as the portion of the change in the regional growth which is attributed to the factors determining the national economic growth.
● The industry mix effect. This is the component of the analysis that describes the portion of the change caused by the performance of a specific industry. It is calculated by subtracting the national growth effect from the theoretical growth of the industry had it performed at the national industry level.
● Local share effect. The final and most important component – the portion of change attributed to the local factors. It is determined by taking away the other two effects from the actual change in the regional variable.
Of course, this was only just the beginning. Throughout the years there have been many changes and additions to the method to shape the way researchers manage shift-share components today. For example, some of the new components would include competitive effect, and measure the portion of change that can be attributed to the specific competitive circumstances in particular regions.
However, this and similar components are more precisely understood as further specifications of the factors making up the local share effect. It allows theorists and investors to find the more exact causes of the different performance levels in the regions of interest. Therefore, it also makes the shift-share analysis all the more useful for investors.
The purpose of looking at the shift-share for investors
Now as we have covered the basis of shift-share analysis, it is time to look at why it matters for the investors and financial firms. The main purpose of this approach to regional economic factors is to figure out why industries in particular locations outperform or underperform when measured against the national trends.
This allows investors to determine whether the upward or downward trends are going to last or not. If an industry in a particular region seems to be growing far faster than anywhere elsewhere it might be tempting to invest in it right away. But when analysts manage shift- share components to determine the underlying factors for this growth it might be revealed that it was caused mainly by temporary circumstances. For example, there may have been a surplus of a particular natural asset in the area that has increased production rates but is about to run out. In this case, it might be wise to hold off the investing until more data is analyzed.
Furthermore, shift-share analysis allows comparing industries against each other. A company that otherwise seems like a good investment might be in an industry that seems to be declining lately as compared to others. However, if the shift-share analysis reveals that this decline is mostly caused by a nationwide recession which is expected to end soon, and not regional problems, such investment might deserve a second consideration. These examples and use cases reveal the importance of shift share analysis when making financial decisions. Understanding the deep-rooted economic reasons for industrial growth in specific regions enables investors to avoid big errors and see the full picture when making crucial decisions.
Tools and assets for the analysis
In order to manage shift-share analysis and its quality, financial experts need to have the right tools and resources that ensure correct and revealing results. As for the latter, clearly, the most important asset is high-quality data. Shift-share analysis requires both national and regional data regarding the key performance metrics of the industries. This means everything from economic growth to employment rates and salaries of the employees. Additionally, historical data helps to put things in perspective and notice the key changes that have affected trends before and might be doing it again. Even less traditional data can be of great service. Such alternative data types as technographics might reveal the key growth factors for particular firms.
When the right data is in place, utilizing data filters and computer modeling should render the analysis easier and much more likely to succeed. The success is, of course, measured by the quality of insights it uncovers.