Determinants of Export Diversification: Evidence from Fractional Logit Estimation Model

Date01 May 2022
Published date01 May 2022
Subject MatterOriginal Articles
Determinants of Export
Diversification: Evidence
from Fractional Logit
Estimation Model
Swathi. M1 and P. Sridharan1
This article empirically explores the key drivers of export diversification in a large
panel of 101 countries consisting of 43 high-income, 47 middle-income, and 11
low-income countries from 1995 to 2019. Considering the fractional nature of
the dependent variable (Herfindahl-Hirschman Index), the estimates are obtained
using the fractional logit technique with a set of potential determinants of export
diversification for all country samples and three sub-samples. The results reveal that
human capital accumulation, GDP per capita, population, trade openness, the share
of manufactured output to GDP, and FDI are important determinants of export
diversification. However, the share of agriculture to GDP and official exchange rate
promotes export concentration. Contrary to our all-country estimation, GDP per
capita and population act as deterrents to export diversification in low-income
countries. In addition, the results show that the value-added in agriculture plays a
dominant role in strengthening the export structure of high-income countries. Our
findings suggest that policymakers should implement and reform policies targeting
human capital accumulation, trade openness, investment, and value addition in the
manufacturing sector for diversifying the export structure.
JEL Codes: C33, F14, J24, O1
Export diversification, economic development, Herfindahl Hirschman Index
(HHI), fractional logit
Original Article
1 Department of International Business, Pondicherry University, Puducherry, Tamil Nadu, India.
Corresponding author:
Swathi. M, Department of International Business, Pondicherry University, Puducherry, Tamil Nadu
605014, India.
Foreign Trade Review
57(2) 160–177, 2022
© 2022 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/00157325211072922
Swathi. M and P. Sridharan 161
Structural transformation is the process of transforming an economy along
the path of economic development. It refers to the reallocation of factors of
production and output across different sectors (Giri et al., 2019). The structural
transformation of an economy depends not only on the volume of export but
also on what is exported and the country it is exported to (Anand et al., 2015).
Export Diversication is recognised to be an integral part of the structural
transformation process for developing countries. The argument for export
diversication is evolved based on Prebisch and Singer ’s (1950) thesis, which
criticises traditional trade theories of specialisation and comparative advantage
as the commodity-dependent and resource-abundant countries often face export
instability and deterioration in their terms of trade (Aditya & Acharyya, 2013).
Higher dependence on primary commodities makes a country highly susceptible
to commodity price uctuations due to its negative effect of unfavourable world
demand and supply-side features (Al-Marhubi, 2000; Hesse, 2008). Commodity
dependence acts as a barrier to development for many low-income countries due
to its adverse and volatile terms of trade, low productivity, and low-value addition
(Bebczuk & Berrettoni, 2006). Export diversication is a way ahead for countries
that face signicant macroeconomic challenges and struggle to grow in a low
commodity price environment.
A theoretical argument for a connection between export diversification and
economic growth was originally advanced in the 1950s by Raul Prebisch and
Hans Singer. However, there is no neat theoretical background on the nature of the
potential relationship between export diversification and its determinants on the
empirical side. The benefits of export diversification on economic growth are well
established in the literature, and it is considered an essential aspect of economic
development. Aditya and Acharyya (2013), Agosin (2009), Al-Marhubi (2000),
and Hesse (2008) found evidence for the positive effect of export diversification
on economic growth using panel data. Major international organisations, includ-
ing International Monetary Fund (IMF), World Trade Organization (WTO), and
the World Bank, recommend economic development strategies based on export
diversification (Mania & Rieber, 2019; Siswana & Phiri, 2021). Thus, it demands
an empirical examination of factors that foster export diversification.
Structuralist economists argue that commodity-dependent countries should
diversify their production and export structure from ‘poor-country goods’ to ‘rich-
country goods’ to achieve sustainable export and economic growth (Hesse, 2008).
Many developing economies have adopted export diversification to avert the
external economic shocks to a possible extent by increasing the number of
exporting products or partners. A diversified economic structure helps mitigate
economic uncertainties that may occur due to export and foreign exchange
instabilities. Export product diversification can be achieved by exporting a higher
number of products (extensive margin) or by a more balanced mix of existing
products (intensive margin). A country with a diversified export structure often
has higher profitable investment opportunities through knowledge and
technological spillover. Such countries can open up new sectors with higher factor

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