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Relatedness and economic complexity as tools for industrial policy: Insights and limitations

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  • Pinheiro, Cristina

Abstract

The use of relatedness and economic complexity (REC) to advise on industrial policy is expanding. Typically, it leads to the recommendation to (not) support activities that are (un)related to a region’s comparative advantages. Yet, the implications of such use remain largely unaddressed. Drawing on developmental state and innovation studies, I identify two reasons for caution when using REC for policy purposes. First, technological and economic catch-up may require diversification toward unrelated activities. Second, REC focuses exclusively on domestic supply, ignoring demand and international competition. In addition, I highlight conceptual and methodological limitations that are likely to affect REC’s policy implications. Most notably, REC literature might overestimate the magnitude and significance of relatedness, while overlooking the contribution of policy to past diversification outcomes. This paper shows that while REC metrics can provide valuable insights into patterns of structural change, their use in industrial policy requires the concurrent assessment of other crucial elements, including the environmental footprints of diversification options and the dynamics of international supply and demand.

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  • Pinheiro, Cristina, 2025. "Relatedness and economic complexity as tools for industrial policy: Insights and limitations," Structural Change and Economic Dynamics, Elsevier, vol. 72(C), pages 1-10.
    • Handle: RePEc:eee:streco:v:72:y:2025:i:c:p:1-10
    DOI: 10.1016/j.strueco.2024.09.019
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    More about this item

    Keywords

    Economic complexity; Economic fitness; Product space; Related diversification; Industrial policy;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O25 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Industrial Policy

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