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Technological diversification

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Abstract

Why is GDP so much more volatile in poor countries than in rich ones? To answer this question, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. As in endogenous growth models, technological progress increases the number of varieties, raising average productivity. In our model, the expansion in the number of varieties provides diversification benefits against variety-specific shocks and it hence lowers the volatility of output. Technological complexity evolves endogenously in response to profit incentives. Complexity (and hence output stability) is positively related with the development of the country, the comparative advantage of the sector, and the sector’s skill and technology intensity. Using sector-level data for a broad sample of countries, we provide extensive empirical evidence confirming the cross-country and cross-sectoral predictions of the model.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 551.

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Length: 59 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:ecb:ecbwps:20050551

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Keywords: specialization; technology choice; diversification; economic fluctuations.;

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Citations

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Cited by:
  1. David Cuberes & Michał Jerzmanowski, 2009. "Democracy, Diversification and Growth Reversals," Economic Journal, Royal Economic Society, vol. 119(540), pages 1270-1302, October.
  2. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2006. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Working Papers 12354, National Bureau of Economic Research, Inc.
  3. Jaimovich, Esteban, 2011. "Sectoral differentiation, allocation of talent, and financial development," Journal of Development Economics, Elsevier, vol. 96(1), pages 47-60, September.
  4. Diego A. Comin & Thomas Philippon, 2006. "The Rise in Firm-Level Volatility: Causes and Consequences," NBER Chapters, in: NBER Macroeconomics Annual 2005, Volume 20, pages 167-228 National Bureau of Economic Research, Inc.
  5. claudio Michelacci & Fabiano Schivardi, 2008. "Does Idiosyncratic Business Risk Matter?," EIEF Working Papers Series 0813, Einaudi Institute for Economic and Finance (EIEF), revised Jul 2008.
  6. Miklos Koren & Silvana Tenreyro, 2005. "Volatility and Development," CEP Discussion Papers dp0706, Centre for Economic Performance, LSE.
  7. Dalila NICET- CHENAF (GREThA UMR CNRS 5113) & Eric ROUGIER (GREThA UMR CNRS 5113), 2008. "Recent exports matter: export discoveries, FDI and Growth, an empirical assessment for MENA countries," Cahiers du GREThA 2008-22, Groupe de Recherche en Economie Théorique et Appliquée.
  8. Santacreu, Ana Maria, 2011. "Innovation, Diffusion, and Trade: Theory and Measurement," MPRA Paper 35311, University Library of Munich, Germany.
  9. Ananth Ramanarayanan, 2007. "International Trade Dynamics with Intermediate Inputs," 2007 Meeting Papers 722, Society for Economic Dynamics.
  10. Toseef Azid & Naeem Khali & Toseef Muhammad Jamil, 2006. "Sectoral Volatility, Development, and Governance: A Case Study of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(4), pages 797-817.
  11. Montalbano, Pierluigi, 2011. "Trade Openness and Developing Countries' Vulnerability: Concepts, Misconceptions, and Directions for Research," World Development, Elsevier, vol. 39(9), pages 1489-1502, September.
  12. Ricardo Hausmann & Andrés Rodríguez-Clare & Dani Rodrik, 2005. "Towards a Strategy for Economic Growth in Uruguay," IDB Publications 16718, Inter-American Development Bank.
  13. Catia Batista & Jacques Potin, 2007. "Stages of diversification and specialization in an Heckscher-Ohlin world, 1976-2000," Economics Series Working Papers 356, University of Oxford, Department of Economics.
  14. Olaberria, Eduardo & Rigolini, Jamele, 2009. "Managing East Asia's macroeconomic volatility," Policy Research Working Paper Series 4989, The World Bank.

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