INDLINK · Growth and Diversification in the Presence of Industry Linkages

Growth and Diversification in the Presence of Industry Linkages

Countries or regions do not prosper by making more of the same. Instead, the economic growth is often associated with diversification. The diversification process is path-dependent: what a country produces conditions currently what it can produce in the future. The ability to make things evolves by moving from the current set of goods to others that have similar knowledge or physical inputs, which creates linkages between industries. This project investigates the economic consequences of and reasons behind these industry linkages. Dr. Yıldırım embarked on such a study about understanding the economic growth and diversification process in the presence of many disaggregated and interacting industries, which are the building blocks of a country’s economy. Diversification at this detailed level is not the focus of the leading theories of growth or trade which focus on the relative contributions of core productive factors such as capital, labour, human capital and institutions and technological differences and, hence, the transformation cannot be easily predicted with these models. There is both theoretical and empirical gap in the field of economics to understand diversification and growth process and these questions have momentous societal importance. This project investigates the industrial patterns of countries in the presence of linkages in four separate but complementary objectives. In the first objective, using the state-of-the art trade models, we show that the industry linkages indeed shape the evolution of comparative advantage and creates a structure. In the second objective, a new trade dataset is created and using this dataset the diversification pattern of countries are related to the country and product level quality measures. In the third objective, temporal aspects of industry spillovers are captured using Diebold-Yilmaz methodology and these spillovers are related to real and knowledge based networks. Separately, we also identified the ecosystem of a product, which facilitates a new product's emergence in a country, from the trade data and showed that it is an important predictor of diversification. Finally, in the fourth objective, effects of one specific type of spillover, namely the Input-Output linkages, on the trading decision and location choice of industries is explored.

Data: CORDIS, © European Union