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Economic Diversification

How does path dependency affect diversification? Why are some diversification paths more valuable when converging with the technological frontier?

Diversification path models in economics explore the dynamics of economic diversification within an economy. Economic diversification refers to the process by which a country or region broadens its economic base by expanding into new sectors or industries.

Different models and theories have been proposed to understand economic diversification's patterns, determinants, and consequences.

Diversification in an economy refers to the strategy of expanding the range of industries, products, or services to reduce reliance on a single sector, thereby spreading risk and fostering long-term stability and growth.

  • How to enter a market?
  • ¿How to map value chains and supply chains for that market?
  • ¿How to improve the quality of products and services?
    • Certifications
    • Regulations
  • ¿How to promote exports for foreign markets?

Here are some notable diversification path models:

  1. Product Space Models:
    • Hausmann-Klinger Model: Developed by Ricardo Hausmann and Cesar A. Hidalgo, this model uses the concept of product space to analyze the capabilities of economies and predict their future diversification paths.
  2. Structural Transformation Models:
    • Lewis Two-Sector Model: Proposed by economist Arthur Lewis, this model suggests that economic development involves shifting labor from traditional, low-productivity sectors to modern, high-productivity sectors.
    • Kaldor-Verdoorn Law: This law suggests a positive feedback loop between productivity growth and expanding an economy's industrial base.
  3. Export-Led Growth Models:
    • Balassa-Samuelson Model: This model explains the relationship between the structure of an economy, productivity, and the real exchange rate, influencing the pattern of specialization and diversification.
    • Prebisch-Singer Hypothesis: This hypothesis posits a tendency for the prices of primary commodities to fall relative to the prices of manufactured goods over the long term, affecting diversification strategies.
  4. Innovation and Technology Diffusion Models:
    • Product Life Cycle Model: Introduced by Raymond Vernon, this model explains the internationalization of industries based on the life cycle of new products.
    • Romer's Endogenous Growth Model: Developed by Paul Romer, this model emphasizes the role of knowledge and innovation in driving economic growth and diversification.
  5. Institutional and Policy-Driven Models:
    • Institutional Path Dependence: This perspective highlights the influence of historical institutions and policies on shaping the trajectory of economic diversification.
    • Industrial Policy Models: These models emphasize the role of targeted government interventions and industrial policies in fostering economic diversification.

When exploring these models, it's essential to consider that each economy is unique, and the applicability of these models may vary based on specific circumstances. Additionally, interdisciplinary approaches that integrate insights from economics, sociology, political science, and other fields can provide a more comprehensive understanding of economic diversification paths.

Promote Diversification

  • Promote Skill Immigration
  • FDI (Foreign Direct Investment) Targeted
  • Buy a Company with a particular skill set, and see how you can integrate your economy with it.
  • Joint Ventures
  • R&D Schemes
  • Finance
    • Development Banks
    • Pioneers Banks
  • Cluster Policy
  • Diversification Incentive Policies

Public Goods

  • It is a thousand pages of legislation and agencies trying to make things work better.
    • Food Regulation
    • Quality Regulation
    • Roads
    • …
  • …

Smart Specialization

Here's a table summarizing critical economic Smart Specialization Models, including their main concepts and objectives:

Model Main Concepts and Objectives
RIS3 (Research and Innovation Strategies for Smart Specialisation) - A strategic approach to economic development through targeted support for research and innovation.
- Focuses on identifying and exploiting regional strengths and opportunities.
- Aims to enhance competitiveness and growth through innovation-driven activities.
Cluster-Based Model - Encourages the development of regional clusters of interconnected businesses, suppliers, and associated institutions.
- Promotes collaboration and innovation within clusters to drive economic growth.
- Focuses on specialization in specific industries or technologies.
Triple Helix Model - Emphasizes collaboration between universities, industry, and government to foster innovation and economic development.
- Aims to create synergies between different sectors to enhance knowledge transfer and commercialization of research.
Entrepreneurial Discovery Process (EDP) - Involves stakeholders in identifying potential growth and innovation areas through an inclusive and iterative process.
- Encourages experimentation and investment in new ideas and technologies.
- Aims to align regional capabilities with market opportunities.
Innovation Ecosystems Model - Focuses on creating supportive environments for innovation through the integration of various actors, including startups, research institutions, and investors.
- Promotes the development of networks and infrastructures that facilitate innovation and entrepreneurship.
- Aims to create sustainable and dynamic ecosystems that drive economic growth.
Technological Platforms Model - Supports the development of technology platforms that bring together stakeholders to collaborate on R&D and innovation projects.
- Aims to address common technological challenges and opportunities through shared efforts.
- Focuses on fostering technological advancements and commercialization.
Quadruple Helix Model - Extends the Triple Helix Model by incorporating civil society as a key actor in the innovation process.
- Aims to ensure that innovation is socially inclusive and addresses broader societal needs.
- Promotes collaboration between universities, industry, government, and civil society.

These models highlight different approaches to fostering innovation and economic development by leveraging regional strengths, promoting collaboration, and supporting targeted investments in research and innovation.

References

  • Hausmann, Ricardo, Jason Hwang, and Dani Rodrik. “What you export matters.” Journal of economic growth 12 (2007): 1-25.
  • Koren, M. & Tenreyro, S. (2013). Technological diversification. American Economic Review, 103(1), 378-414.
  • Westphal, L., et. al. “Reflections on the Republic of Korea’s Acquisition of Technological Capability.” International Technology Transfer. Edited by Nathan Rosenberg, and C. Frischtak. 1985.
  • Dahlman, C., and F. V. Fonseca. “From Technological Dependence to Technological Development: The Case of Usiminas Steelplant in Brazil.” Technology Generation in Latin American Manufacturing Industries. Edited by J. M. Katz. 1987.
  • Lall, S. Learning to Industrialize: The Acquisition of Technological Capability by India. Hampshire: Macmillan Press, 1987.
  • Amsden, A. H. “The Triumph of Steel.” In *Asia’s Next Giant. * New York: Oxford University Press, 1989.
  • Cramer, C. “Can Africa Industrialize by Processing Primary Commodities? The Case of Mozambican Cashew Nuts.” World Development (July, 1999).
  • Mayer, J. Globalization, Technology Transfer and Skill Accumulation in Low-Income Countries. WIDER, no. 150 (2000).
  • Reinert, Hugo, and Erik S. Reinert. “Creative destruction in economics: Nietzsche, Sombart, schumpeter.” Friedrich Nietzsche (1844–1900) Economy and Society (2006): 55-85.
  • Flying geese paradigm
  • Rodríguez-Pose, Andrés, Lewis Dijkstra, and Hugo Poelman. "The geography of EU discontent and the regional development trap." Economic Geography (2024): 1-33.
  • Di Cataldo, Marco, Vassilis Monastiriotis, and Andrés Rodríguez‐Pose. "How ‘smart’are smart specialization strategies?." JCMS: Journal of Common Market Studies 60.5 (2022): 1272-1298.
  • Foray, Dominique. "The economic fundamentals of smart specialization strategies." Advances in the theory and practice of smart specialization. Academic Press, 2017. 37-50.
  • …

Catch-Up:

  • Technology Catch-Up and Innovation: The Case of China’s Energy Technology Innovation System by X. Liu et al.
  • Romer, P.M. (1990). Endogenous Technological Change. Journal of Political Economy, 98(5), S71-S102.
  • The Innovation Paradox: Developing-Country Capabilities and the Unrealized Promise of Technological Catch-Up - 9781464811609.pdf
  • Technological regimes, catching-up and leapfrogging: findings from the Korean industries in Research Policy - Keun Lee
  • Redding, Stephen. "Path dependence, endogenous innovation, and growth." International Economic Review 43.4 (2002): 1215-1248.
  • Fagerberg, Jan, and Manuel M. Godinho. "Innovation and catching-up." (2006).

Trade:

  • Gallagher, J., and R. Robinson. “The Imperialism of Free Trade.” Economic History Review, no. 1 (1953).
  • Kravis, I. “Trade as an Engine of Growth.” Economic Journal 80 (1970).
  • Crafts, N. F. R.  “Trade as an Engine of Growth: an Alternative View.” Economic Journal 83 (1973).

Join Ventures:

  • Learning through the international joint venture: lessons from the experience.

FI (Foreign Investment):

  • Blomstrom, M., and A. Kokko. “Foreign Investment as a Vehicle for International Technology Transfer.” Creation and Transfer of Knowledge: Institutions and Incentives. Edited by G. Barba Navaretti, et. al. 1998.

  • Joint Ventures