Economic integration and economic complexity: The role of basic resources in absorptive capability in 40 selected developing countries

Abstract

This study investigates the influences of trade openness and FDI inflows on domestic economic complexity. In particular, the study analyses the roles of human capital, Internet usage, and energy poverty in these relationships. The analysis is carried out for two indices of economic complexity (ECI and ECI+) in a sample of 40 selected developing countries from 2002 to 2017. Applying a two-step system generalised method of moments estimate to deal with endogeneity, and predictive margins analysis to analyse the catalytic role of basic resources, four interesting findings emerge. First, trade openness has a positive impact on economic complexity, while FDI inflows have a negative impact. Second, human capital accumulation accelerates the effect of trade openness but does not have a catalytic role in the effect of FDI inflows. Third, the development of the Internet is found to be a new and important resource that boosts the positive impact of trade openness and, notably, turns positive the negative impact of FDI inflows. Fourth, the role of energy poverty reduction is mostly the same as Internet development. The alleviation of energy poverty and Internet development seem to be good policies for enabling developing countries to absorb spillovers from economic integration.