Oct 20, 2013

How distance is important for knowledge diffusion and exports

This is an interesting paper by Dany Bahar, Ricardo Hausmann and Cesar A. Hidalgo on the importance of distance in knowledge diffusion and exports. The abstract 
The literature on knowledge diffusion shows that it decays strongly with distance. In this paper we document that the probability that a product is added to a country’s export basket is, on average, 65% larger if a neighboring country is a successful exporter of that same product. For existing products, having a neighbor with comparative advantage in them is associated with a growth of exports that is higher by 1.5 percent per annum. While these results could be driven by a common third factor that escapes our controls, they are what would be expected from the localized character of knowledge diffusion.

From the concluding remarks
This paper has established that neighboring countries are very similar in their patterns of comparative advantage, a similarity that decays with distance. In a classical Heckscher-Ohlin model, this would be a reflection of the similarity in factor endowments. But after taking account of a large set of controls, including similarity in incomes, sizes, conventional factor endowments, culture and institutions, among others, and after excluding goods not pinned down by geology or climate, the resemblance in the composition of the export baskets of neighboring countries remains very strong. The factors causing the similarity we document go beyond the classical ones: physical capital, human capital, labor and land, including geology and climate. 
Moreover, the similarity we document is not obvious as the greater intensity of trade at short distances should have incentivized neighboring countries to specialize in different rather than in similar goods. In fact, our static results show that there is a negative correlation between bilateral trade in- tensity and export similarity.
The authors argue that probably the key variables for knowledge diffusion are trade, foreign direct investment, and migration. 

Yesterday MR linked to this piece. It says that 40 per cent of auto jobs on the continent are in Mexico. According to the article above the geographic distance between Mexico and the US is important for product diversification in Mexico. That might be good news for Central America as well, which might eventually start producing more high-technology products. There are time-lags however and the determinants of the duration are still unclear. 

Wikipedia has a fascinating account on the automobile industry in Mexico. An excerpt
A Short time after the end of the armed struggle, Buick became the first automobile producer to be officially established in Mexico, beginning 1921. In 1925, Ford Motor Company was too established and began manufacturing vehicles in the country, and as of 2011 remains the longest-running brand in the country. 
In 1959, Mexico produced its first fully domestic vehicle, a small truck called the Rural Ramírez, produced by the Ramirez truck company.
HT: Laura Stefanescu

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