Shooting High or Low: Do Countries Benefit from Entering Unrelated Activities?

Abstract: Countries tend to diversify their exports by entering products that are related to their current exports. Yet this average behavior is not representative of every diversification path. In this paper, we introduce a method to identify periods when countries enter unrelated products. We analyze the economic diversification paths of 93 countries between 1965 and 2014 and find that countries enter unrelated products in only about 7.2% of all observations. We find that countries enter more unrelated products when they are at an intermediate level of economic development, and when they have higher levels of human capital. Finally, we ask whether countries entering more unrelated products grow faster than those entering only related products. The data shows that countries that enter more unrelated activities experience a small but significant increase in future economic growth, compared to countries with a similar level of income, human capital, capital stock per worker, and economic complexity.