The drivers of economic complexity: International evidence from financial development and patents

Abstract

This study investigates the impacts of patents and financial development on economic complexity in a sample of 52 economies (including 32 high-income economies (HIEs) and 20 middle-income economies (MIEs)). Specifically, nine indices of financial development and three variables related to patents are mobilized to identify the major determinants of the economic complexity index captured through two indicators ECI and ECI+. Several econometric techniques are applied for our panel data estimations. Our study firstly documents the existence of a bi-directional causality but also a long-run co-integration between patents, financial development and ECI/ECI+. Our estimations show that the patents have a significant positive impact on the economic complexity of a country but for the financial development, the results are more diversified. Beyond these dissimilarities, our study emphasize some common conclusions: Patents (especially resident patents) directly contribute to the complexity of a country; a too large financial sector does not contribute to the diversification and sophistication of a national economy but the efficiency of financial markets appear to have a positive influence of such processes probably because financial markets offers alternative way of funding patents and knowledge.