From macro to micro: Economic complexity indicators for firm growth

TL;DR

This paper explores how the complexity and diversification of a firm's export basket, especially in relation to product sophistication and production ecosystem positioning, predict future growth and profitability.

Contribution

It introduces novel measures of in-block and out-of-block diversification based on economic complexity theory, linking export product characteristics to firm growth.

Findings

Exporting products from wealthier countries correlates with higher firm growth.

Diversification outside the core production area positively impacts future growth.

Diversification within the core production area negatively impacts future growth.

Abstract

A rich theoretical and empirical literature investigated the link between export diversification and firm performance. Prior theoretical works hinted at the key role of capability accumulation in shaping production activities and performance, without however producing product-level indicators able to forecast corporate growth. Building on economic complexity theory and the corporate growth literature, this paper examines which characteristics of a firm's export basket predict future performance. We analyze a unique longitudinal dataset that covers export and financial data for 12,852 Italian firms. We find that firms exporting products typically exported by wealthier countries -- a proxy for greater product sophistication and market value -- tend to experience higher growth and profit per employee. Moreover, we find that diversification outside of a firm's core production area is positively associated with future growth, whereas diversification within the core is negatively associated. This is revealed by introducing novel measures of in-block and out-of-block diversification, based on algorithmically-detected production blocks. Our findings suggest that growth is driven not just by how many products a firm exports, but also by where these products lie within the production ecosystem, at both local and global scales.