Do countries benefit from jumping into unrelated varieties?

It is well established that countries, regions and institutions tend to develop towards related activities. This implies that, for instance, countries are more likely to enter a new activity that is closer/related with the activities it has already developed. An empirical fact that results from the overlapping of the necessary knowledge of each activity. In this context, the product space—a network relating countries economic activities—has been instrumental in capturing the role of relatedness in the economic development of countries. But, although relatedness seems to be a major driver for the diversification of countries exports and research activities, there are many instances when countries deviate from this norm, but to what extent do they benefit from such actions? Is it possible to pinpoint a particular stage of development of a country in which these exceptions are more likely to occur or are they purely at random?

Using 50 years of trade date we have analyzed how countries diversify their products portfolios in the context of the Economic Complexity and Product Space10. We have shown that 1) there is an intermediate and non-trivial stage of economic development at which countries are more likely to develop towards unrelated activities; that 2) countries that do so achieve a faster economic growth; and 3) that low and high developed economies are the ones that are more likely to diversify towards related varieties.

These results have significant implications in the literature of regional development. For instance, recently the European Union presented a regional plan of development, coined as Smart Specialization, which advocates for a one rule that fits all: regions should develop the most related and highest reward activities. Our results suggest more caution. Indeed, our findings point out that the development stage of a country, or a region, plays a determinant role in devising a development strategy. For instance, while low and highly developed regions should look forward to developing related activities, regions at an intermediate level of development should be incentivized to pursue the development of unrelated activities and diversify. These results build up to the conclusions of the previous project (2.1), in the sense that economies should adopt dynamical diversification strategies in which the big challenge is to identify the narrow window for unrelated diversification.

Research Topics
#networks #social science