Product relatedness and economic diversification in the USA: an analysis at the state level

This paper analyzes the relationship between current industrial structure and the development of new industries in 49 US states in the period 2002–2012. As a measure of product relatedness, we used the proximity index proposed by Hidalgo et al. (Science 317:482–487, 2007) and constructed a density measure, following Hausman and Klinger (2007), which captures the degree of relatedness between each state current industrial structure and exported product. Our econometric results provide evidence that US states tend to diversify into new products that use available capabilities from existing economic activities. Also, we find that the impact of product relatedness on product diversification positively depends on the level of several state-specific economic variables (migration flows within states, cluster strength and R&D). Furthermore, we show that the degree, to which the development of a new product benefits from available capabilities, depends on its initial level of specialization.