Determinants of Economic Complexity: A Global Evidence of Economic Integration, Institutions, and Internet Usage

Abstract

This study examines the influence of Internet development, institutional quality, and economic integration on economic complexity defined as the productive capabilities of a country and represented by Economic Complexity Index (ECI). Because ECI looks to explain the knowledge accumulation in the population and expressed in economic activities, this indicator is often used as a predication for economic growth. Analyzing a panel of 89 countries over the period 2002–2016, our empirical results show that Internet development, institutional quality, and trade openness are key drivers of economic complexity. Our empirical findings lead us to suggest that for the least developed countries, trade openness would help to boost economic complexity while FDI inflows may not be of any benefit. However, for middle-income countries, their technology absorption capacity is higher; as such, both trade openness and FDI inflows can contribute to their expansion of economic complexity. Nonetheless, for most developed countries, economic integration appears to exert (economically insignificant) negative effects on economic complexity. The results, which are checked by a battery of robustness tests also confirm that institutional quality is the major determinant of production fitness.