Does Ethnic Diversity Reduce Economic Complexity?

Ethnic diversity is a phenomenon that exists in many modern countries around the world. Although it is typically hailed for its cultural diversity and capacity for innovation, there has been some controversy about its impact on economic development. This article aims to contribute to this debate by investigating the causal effect of ethnic diversity on economic complexity for a global sample of 116 countries. Using cross‐country OLS and the instrumental variables approach, we show that economic complexity is inversely related to ethnic diversity. Additionally, we find out that ethnic fractionalization has a negative effect on economic complexity in lower and middle income countries, but it is insignificant in high‐income countries. These results are robust to additional controls, alternative measures of key variables, and the use of a panel specification. This effect is primarily attributed to their link to other economic complexity‐related activities (i.e., human capital, governance, and internal conflict).