Economic growth is associated with the diversification of economic activities, which can be observed via the evolution of product export baskets. Exporting a new product is dependent on having, and acquiring, a specific set of capabilities, making the diversification process path-dependent. Taking an agnostic view on the identity of the capabilities, here we derive a probabilistic model for the directed dynamical process of capability accumulation and product diversification of countries. Using international trade data, we identify the set of pre-existing products, the product Ecosystem, that enables a product to be exported competitively. We construct a directed network of products, the Eco Space, where the edge weight corresponds to capability overlap. We uncover a modular structure, and show that low- and middle-income countries move from product communities dominated by small Ecosystem products to advanced (large Ecosystem) product clusters over time. Finally, we show that our network model is predictive of product appearances.
Listen to the authors discuss their findings in this Growth Lab Podcast.
The literature extensively discusses the increasing commitment toward comprehensive structural reform of China’s economy as it targets to achieve high quality and sustainable economic growth. This research investigates the inherent relationship between supply-side structural reform (SSSR) and dynamic capital structure adjustment in Chinese-listed firms. Our results show that SSSR’s introduction has significantly improved the adjustment speed toward the optimal debt ratio, especially for firms with high indebtedness and low investment performance. Importantly, China’s bond market plays a crucial role through SSSR for firms’ debt ratio to adjust toward their optimal level. However, there is no such evidence among state-owned enterprises (SOEs), suggesting that the structural reform concerning corporate capital structure for SOEs is more challenging and longstanding when compared with non-SOEs.
This research constructs a simple dynamic model to illustrate the micro‐mechanism of industrial upgrading along the global value chains. Our model predicts that as firms move up from downstream to upstream stages, (a) there is higher profitability if and only if the following three conditions are satisfied. First, the increasing rate of sunk cost (including R&D expenditure) over sequential stages of production cannot be sufficiently large (endogenous sunk cost effect). Second, the decreasing rate of change of intermediate input demand with respect to the price set by firms at a production stage cannot be sufficiently high (intermediate input price effect). Third, the decreasing rate of change of intermediate input demand with respect to the pricing dynamics over the sequential stages of production cannot be sufficiently large (sequential pricing uncertainty effect); (b) total cost is lower if and only if the decreasing rate of change of input demand with respect to the price is sufficiently large; (c) output is higher if and only if and the decreasing rate of change of input demand with respect to the price is not sufficiently large; and (d) the price decreases. We show that the empirical patterns revealed in China are consistent with our model's predictions.