From adaptive rural upgrading to economic upgrading through endogenous financing as the missing mechanism in peripheral mountain economies

Abstract Peripheral rural economies increasingly face a development paradox whereby diversification expands livelihood opportunities without necessarily generating economic upgrading. Despite growing participation in tourism, multifunctional agriculture, and biodiversity-based activities, substantial disparities persist in commercialization, investment accumulation, and enterprise scaling. This study examines whether adaptive diversification contributes to economic upgrading in peripheral mountain economies and identifies the structural conditions under which diversification is transformed into productive economic change. Using primary survey data from 80 rural households and enterprises in Northern Albania, the study develops two original Principal Component Analysis (PCA)-based indices: the Adaptive Rural Upgrading Index (ARUI), capturing diversification intensity and restructuring complexity, and the Economic Upgrading Index (EUI), measuring commercialization, investment accumulation, and tourism-capacity expansion. The empirical analysis combines heteroskedasticity-robust regression models, quantile regression, Propensity Score Matching (PSM), and alternative specification tests. The results reveal a positive association between adaptive diversification and economic upgrading; however, this relationship weakens considerably once structural characteristics are incorporated. Endogenous financing capacity exhibits the strongest positive association with economic upgrading, followed by enterprise scale, whereas evidence for its moderating role in the diversification–upgrading relationship remains positive but statistically inconclusive under robust estimation. Quantile estimates indicate heterogeneity in the associations with economic upgrading across the conditional distribution, whereas PSM and robustness tests support the stability of the main findings. The study advances rural structural transformation research by distinguishing adaptive diversification from economic upgrading and demonstrating that diversification alone is insufficient to generate transformative economic outcomes. Economic upgrading is associated primarily with endogenous accumulation capacity, enterprise expansion, and deeper market integration, providing a framework for understanding uneven upgrading trajectories in peripheral regions.