Determinants of Export Diversification in Resource-Dependent Economies: The Role of Product Relatedness and Macroeconomic Conditions

Export diversification is crucial for economic development, yet many resource-rich countries have struggled to achieve significant progress in diversifying its economic structure. While the lack of capabilities is often highlighted as a primary barrier to diversification, the literature frequently underestimates the significant impact of macroeconomic conditions on diversification potential. This study seeks to bridge the gap between the capabilities literature and macroeconomic factors, particularly in the context of economies heavily dependent on extractive industries. In order to address our question, we initially introduce a novel measure of product relatedness, expanding on the framework developed by Nomaler and Verspagen (2022), and econometrically estimate its relationship with key macroeconomic variables such as international prices, exchange rates, energy and mineral dependency, and GDP per capita. The analysis spans over 5,000 products across multiple countries from 1995 to 2019, with the objective of determining the relative significance of these factors in predicting diversification patterns and assessing how macroeconomic conditions either facilitate or impede diversification, particularly in non-extractive sectors. Product relatedness predicts diversification, especially in extractive industries where path dependence is highly pronounced. However, macroeconomic factors exert a major influence on diversification outcomes. These macroeconomic variables can either constrain or enable diversification, shaping the pathways through which industries evolve and expand their portfolios.