The Role of Financial Development in Economic Complexity: An Analysis of Asymmetry and Nonlinearity Perspectives

This study enhances the knowledge base by providing an empirical inquiry into the asymmetric sensitivity of economic complexity (ECI) to changes in financial development (FD), using data from 30 African countries for the period of 1995–2023. To deliver robust estimates in the face of econometric pitfalls, this study employs estimators such as Hatemi-J data decomposition procedures, robust standard-error regression of Driscoll and Kraay, Feasible Generalised Least Squares, Lewbel’s IV-Two-Stage Least Squares, and Quantile regression via moments. The findings from the linear model indicate that FD enhances ECI upgrades in Africa. The findings provide robust evidence of asymmetric structures in ECI’s sensitivity to changes in FD. It highlights that both positive and negative change components (financial sector expansionary and contractionary policies, respectively) in the FD significantly contribute to ECI upgrades. These findings reveal the obscure aspects of how FD change components contribute differently to ECI upgrades in African countries. These findings highlight that expansionary financial sector policies aid the development of knowledge-based productivity, technology diffusion, and manufacturing capabilities, enabling the production of a chain of high-tech, high-quality, and globally competitive products for export. On the other hand, contractionary financial sector policies in African countries spur cumulative reductions in the channelling of financial resources and other technical support to ECI-impeding initiatives, thereby making more resources available to fund ECI-enhancing initiatives that aid the manufacturing of quality, competitive products for exports. This study draws and outlines relevant policy implications of the findings.