*2.1. Economic Diversification*

The economy with a dominant industry is destined to create unsustainable economic development. The decline of Detroit's economy because of its over-reliance on the automotive industry is an example. Therefore, scholars have proposed the need for economic diversification, a strategy to transform an economy from relying on a single source to having multiple sources of monetary income spread over primary, secondary and tertiary industries [16]. Conceptually, Nourse [6] and Hackbert and Anderson [4] stated that economic diversification can build resilience against fluctuations in extra-regional economic activity and reduce dramatic reactions to external influence, such as changes in demand for one product. Empirically, measures of economic diversification include entropy measures [4,33], portfolio variance measure [34] and the Ogive index [35]. As a test of such measures, higher industrial diversification, as measured by entropy measures and the portfolio variance measure, was shown to lead to lower economic instability using samples of US [33,34].

International bodies, for example, the International Monetary Fund and United Nations, have committed to promoting economic diversification for sustainable economic development in resource-rich countries (i.e., countries within the Gulf Cooperation Council) [15,36] and Asian Landlocked Developing Countries [37] to reduce their economic volatility. However, since Macao is neither a resource-rich region nor a landlocked region, its case for moderate economic diversification will be a good example.

#### *2.2. Moderate Economic Diversification and Sustainable Development in Macao*

Macao's economic development has been dominated by the gambling industry. First, is manifested in its proportion of GDP. After the end of the monopoly system of the gambling industry in 2002, the proportion of GDP attributable to the gaming industry increased from 40.9% in 2006 to 63% in 2011. Although the proportion of GDP decreased from 63% in 2011 to 47.2% in 2016, the gambling industry still dominated a large percentage of Macao's economy [8]. The dominant industry raises a threat to Macao's economy [11]. Second, since labor is a key determinant of tourism efficiency and productivity [38], the gambling industry of Macao employs the largest percentage of the working population. From 2007 to 2016, the gambling industry employed about 23% to 26% of the working population [8]. Such a domination in gambling makes Macao vulnerable to a decline in the demand for gambling, which may arise from competing destinations such as Phnom Penh in Cambodia, Singapore and Japan, community alienation, slower growth of China's economy and Chinese government policies [11]. The decline in gambling demand in 2015 and 2016 following a crackdown by the Chinese government on corruption involving junket operators contributed to a corresponding plunge in Macao's GDP [8]. This situation makes economic diversification and sustainable development of Macao a vital issue.

Apart from economic volatility, negative externalities, for example, inflation, the rise of rental and property prices, increases in the cost of living, traffic problems, an increase in criminal cases and gambling-related crimes were identified by Macao's citizens [39–41]. Because of the high volume of tourists, as measured by the Tourism Intensity Index and negative externalities, there may be increasing negative aspects of resident–tourist relations that detrimentally affect the gambling and tourism industries [42]. This makes sustainable development in Macao less viable.

Considering the disadvantages of the heavy reliance on the gambling industry for economic development, the Macao government has realized the need for moderate economic diversification and is currently facilitating the development of other industries such as MICE, Traditional Chinese Medicine, Cultural and Creative Industries and featured financial services.

#### *2.3. Agglomeration Economies*

Agglomeration economies are the benefits that arise when firms and people are located near one another in cities and industrial clusters [43]. Marshall [44] pioneered this concept, suggesting that the benefits of agglomeration economies include labor market pooling, the sharing of inputs and knowledge spill-overs. Scholars after Marshall continued to conduct research on agglomeration economies. While most of the studies have focused on manufacturing industries [24,25], the benefits of agglomeration economies are similar across industries. They include the sharing of common resources (i.e., technology and labor), lower unit costs, better innovations for increasing returns to scale, proximity to suppliers and customers, knowledge spill-overs, enhancement of the strength of related clusters and the creation of new industries if there is a strong regional cluster [20–22,24,25,45].

The source of agglomeration is different between manufacturing industries and service industries [25]. The source of manufacturing industry agglomeration is the proximity to and concentration of supporting industries, while the source of service agglomeration is the proximity to and concentration of customers [25].
