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Does comparative advantage explain countries’ diversification level?

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Abstract

This paper analyses whether the products in which a country has comparative advantage can explain its exports’ diversification level. We argue that specialisation endows countries with some specific skills and assets; in some cases those skills and assets can easily be redeployed in other products and facilitate diversification, whereas in other cases skills and assets are more difficult to redeploy and offer scant diversification possibilities. Based on countries’ comparative advantage and an index of product proximity, we construct a metric for countries’ diversification possibilities. Using non-parametric and parametric techniques, we show that this metric is a very strong and robust predictor of countries’ actual diversification level, even when we control for differences in income across countries. These results point out that diversification may not be an automatic outcome of development.

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Notes

  1. It is important to indicate that there are differences across studies with respect to the diversification index used and its absolute or relative nature.

  2. As Cadot et al. (2007) point out, the diversification level may increase, temporarily, even when a country moves to a new diversification cone that encompasses the same number of goods. This may occur if incumbency advantages make the phasing-out of old products slower than the addition of new products to the export basket.

  3. We exclude from the sample countries with a population of less than 3 million.

  4. The Theil index is derived from Shannon's measure of information entropy.

  5. Due its very large PPP GDP per capita, United Arab Emirates behaves as an outlier and, hence, is excluded from the sample.

  6. To analyse whether the differences in results were driven by the non-parametric technique used in the analyses, following these later authors, we also estimated a generalized additive regression model (GAM), with no changes in the shape of the fitted curves.

  7. We do not present the results for the random-effects model because the Hausmann test rejects the null hypothesis of no correlation between the independent variables and country random effects.

  8. Other less time-variant variables that may also influence diversification possibilities, such as rent-seeking or geography, are control for in the fixed-effects model estimation.

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Acknowledgments

I am grateful to César Hidalgo, the editor and two anonymous referees for many helpful suggestions. Any errors or omissions remain the author’s own responsibility.

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Authors and Affiliations

  1. Deusto Business School, University of Deusto, Camino De Mundaiz, 50, 20012, San Sebastián, Spain

    Asier Minondo

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  1. Asier Minondo
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Correspondence to Asier Minondo.

Appendix

Appendix

See Tables 3, 4, 5, 6, 7 and 8.

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Minondo, A. Does comparative advantage explain countries’ diversification level?. Rev World Econ 147, 507–526 (2011). https://doi.org/10.1007/s10290-011-0097-7

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