Capabilities' Substitutability and the "S" Curve of Export Diversity

TL;DR

This paper identifies an empirical S-shaped relationship between a country's economic size and export diversity, and introduces substitutability as a key factor explaining the diversity ceiling in international trade.

Contribution

It proposes a new parameter called substitutability within a capability-based model to explain the S-shaped curve of export diversity.

Findings

Export diversity follows an S-shaped curve with respect to economic size.

Substitutability explains the diversity ceiling effect.

Model with substitutability fits empirical data better.

Abstract

Product diversity, which is highly important in economic systems, has been highlighted by recent studies on international trade. We found an empirical pattern, designated as the "S-shaped curve", that models the relationship between economic size (logarithmic GDP) and export diversity (the number of varieties of export products) on the detailed international trade data. As the economic size of a country begins to increase, its export diversity initially increases in an exponential manner, but overtime, this diversity growth slows and eventually reaches an upper limit. The interdependence between size and diversity takes the shape of an S-shaped curve that an be fitted by a logistic equation. To explain this phenomenon, we introduce a new parameter called "substitutability" into the list of capabilities or factors of products in the tri-partite network model (i.e., the country-capability-product model) of Hidalgo et al. As we observe, when the substitutability is zero, the model returns to Hidalgo's original model but failed to reproduce the S-shaped curve. However, in a plot of data, the data increasingly resembles an the S-shaped curve as the substitutability expands. Therefore, the diversity ceiling effect can be explained by the substitutability of different capabilities.