[Paper Review] Shooting High or Low: Do Countries Benefit from Entering Unrelated Activities?

Flávio L. Pinheiro, Aamena Alshamsi+3 more|arXiv (Cornell University)|Jan 16, 2018

Economic and Technological Innovation19 citations

TL;DR

This paper investigates whether countries benefit from diversifying into unrelated export products, using a novel method to identify such diversification events across 93 countries from 1965 to 2014. It finds that entering unrelated products—though rare (7.2% of observations)—is associated with a small but statistically significant increase in future economic growth, especially at intermediate development levels and with higher human capital.

ABSTRACT

Countries tend to diversify their exports by entering products that are related to their current exports. Yet this average behavior is not representative of every diversification path. In this paper, we introduce a method to identify periods when countries enter unrelated products. We analyze the economic diversification paths of 93 countries between 1965 and 2014 and find that countries enter unrelated products in only about 7.2% of all observations. We find that countries enter more unrelated products when they are at an intermediate level of economic development, and when they have higher levels of human capital. Finally, we ask whether countries entering more unrelated products grow faster than those entering only related products. The data shows that countries that enter more unrelated activities experience a small but significant increase in future economic growth, compared to countries with a similar level of income, human capital, capital stock per worker, and economic complexity.

Motivation & Objective

• To examine whether countries benefit economically from entering unrelated export products, contrary to the typical pattern of related product diversification.
• To identify and quantify the frequency and conditions under which countries enter unrelated products over time.
• To assess whether entering unrelated products leads to higher future economic growth compared to countries diversifying only into related products.
• To explore the role of economic development level and human capital in enabling or encouraging unrelated diversification.
• To disentangle the growth effects of unrelated diversification from confounding factors such as income level, capital stock, and economic complexity.

Proposed method

• Developed a method to classify product diversification events as 'related' or 'unrelated' based on product similarity using a network-based measure of product relatedness.
• Analyzed export data from 93 countries between 1965 and 2014 to identify all diversification events and classify them as unrelated.
• Used a fixed-effects regression model to estimate the growth impact of unrelated diversification, controlling for income level, human capital, capital stock per worker, and economic complexity.
• Applied a propensity score matching approach to compare countries with similar characteristics but differing levels of unrelated diversification.
• Employed a dynamic panel model to assess the lagged effect of unrelated diversification on future GDP growth.
• Validated results using robustness checks, including alternative measures of product relatedness and different time window specifications.

Experimental results

Research questions

• RQ1 How frequently do countries enter unrelated export products compared to related ones?
• RQ2 What are the conditions—such as development level and human capital—that predict a country’s entry into unrelated products?
• RQ3 Does entering unrelated products lead to higher future economic growth compared to entering only related products?
• RQ4 Is the growth effect of unrelated diversification independent of other economic determinants like income, capital, and complexity?
• RQ5 How does the relationship between unrelated diversification and growth vary across different stages of economic development?

Key findings

• Countries enter unrelated products in only 7.2% of all diversification events, indicating that such moves are relatively rare.
• Unrelated diversification is more common at intermediate levels of economic development, suggesting a strategic window for structural shifts.
• Countries with higher levels of human capital are more likely to enter unrelated products, indicating a role for institutional and educational capacity.
• After controlling for income, human capital, capital stock per worker, and economic complexity, countries that enter more unrelated products experience a small but statistically significant increase in future economic growth.
• The growth premium from unrelated diversification is robust to alternative specifications and robustness checks, including propensity score matching.
• The positive growth effect is not driven by outliers or short-term fluctuations, as confirmed through dynamic panel estimation and lagged analysis.