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Effect of economic complexity on services export diversification: do foreign direct investment inflows matter?

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  • Sena Kimm Gnangnon

Abstract

Purpose - The purpose of this study is to explore the effect of economic complexity on services export diversification. This study has been built on two arguments. The first one draws from Eichengreen and Gupta (2013b) and states that countries that export complex products would have a high penetration in the international goods market and establish a network that could be exploited to expand their range of services export items. Second, by inducing higher inflows of foreign direct investment (FDI), greater economic complexity could contribute to fostering services export diversification. Design/methodology/approach - The empirical analysis uses a panel data set of 109 countries (both developed and developing countries) over the period of 1985–2014, and in particular, non-overlapping sub-periods of five-year average data. Building on the two-step system Generalized Method of Moments, the empirical analysis has provided support for the above-mentioned two theoretical hypotheses. Findings - The findings indicate that greater economic complexity has been associated with a higher level of services export diversification, and the magnitude of this positive effect is higher for high-income countries than for developing countries. Furthermore, the share of FDI inflows (in percentage of gross domestic product) matters for the effect of economic complexity on services export diversification. Specially, economic complexity exerts a higher positive effect on services export diversification, as the share of net FDI inflows in gross domestic product increases. Research limitations/implications - From a policy perspective, the analysis complements previous works on the effects of economic complexity (e.g. on economic growth, income inequality, poverty, etc.), by showing that economic complexity also matters for fostering the diversification of countries' services export items. Enhancing economic complexity should be at the heart of policymakers' agenda, both at the national and international levels, given its strong positive effect on macroeconomic aggregates, including on services export diversification, the latter being also an important engine for economic growth (Anandet al., 2012; Gnangnon, 2021a; Mishraet al., 2011; Stojkoskiet al., 2016). Practical implications - This study opens an avenue for future research on whether services export diversification influences economic complexity. One avenue for future research could also be to explore the effect of comparative advantage on goods and services (using the Balassa's revealed comparative advantage index) on services export diversification. Future works could also examine how economic complexity affects different categories of services sectors, including traditional services and modern services. Originality/value - To the best of the author’s knowledge, this study is the first to address this topic in the literature.

Suggested Citation

  • Sena Kimm Gnangnon, 2022. "Effect of economic complexity on services export diversification: do foreign direct investment inflows matter?," International Journal of Development Issues, Emerald Group Publishing Limited, vol. 21(3), pages 413-437, June.
  • Handle: RePEc:eme:ijdipp:ijdi-01-2022-0023
    DOI: 10.1108/IJDI-01-2022-0023
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    4. Honoré Tekam Oumbé & Ronald Djeunankan & Alain Mekia Ndzana, 2023. "Does information and communication technologies affect economic complexity?," SN Business & Economics, Springer, vol. 3(4), pages 1-25, April.

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    More about this item

    Keywords

    Economic complexity; Foreign direct investment inflows; Services export diversification; D2; O14; F14;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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