Accepted Manuscript

Title: Trade Sophistication in Developing Countries: Does

Export Destination Matter?

Author: Mina Baliamoune-Lutz

PII: S0161-8938(18)30145-5
DOI: https://doi.org/10.1016/j.jpolmod.2018.09.003
Reference: JPO 6470

To appear in: Journal of Policy Modeling

Received date: 22 March 2018

Revised date: 12 August 2018
Accepted date: 12 September 2018

Please cite this article as: & Baliamoune-Lutz, Mina., Trade Sophistication in
Developing Countries: Does Export Destination Matter?.Journal of Policy Modeling
(2018), https://doi.org/10.1016/j.jpolmod.2018.09.003

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Trade Sophistication in Developing Countries:
Does Export Destination Matter?

Mina Baliamoune-Lutz1

1 Richard de Raismes Kip professor of Economics, University of North Florida, 1 UNF

Drive, Jacksonville, FL 32224, USA; Senior Research Fellow, African Center for Economic

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Transformation; Research Fellow, Economic Research Forum
Phone: +1(904) 6201223
Email: mbaliamo@unf.edu

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Abstract

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We investigate whether exports to developed economies stimulate export sophistication
(represented by UNCTAD’s index of export similarity) in developing countries. Results from
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fixed-effects estimations suggest that exporting to developed economies enhances the
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sophistication of exports in the exporting country but there are diminishing returns to this effect.
We also find non-linear effects from FDI and income on export sophistication with the effect of
income exhibiting diminishing returns which suggests that the gains from exporting to developed
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economies are higher for lower-income countries; i.e., as income increases, the gains taper off.
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We discuss the policy implications of these results.

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JEL classification: F10, F14, O10, O30

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Keywords: Destination of exports, export sophistication, gains from trade, developed economies,
developing economies

1. Introduction

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A country’s Sophistication of production (and exports) is important for its economic

transformation (Hausmann et al., 2007; ACET, 2014), as sophisticated production is generally

associated with higher productivity, which in turn can lead to higher wages and incomes and

improved wellbeing.

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In an insightful recent study, Brambilla, Depetris-Chauvin and Porto (2015) develop a theoretical

framework and use it along with firm and industry-level data from developing countries to explore

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the potential gains from export opportunities and identify the channels through which trade

effects operate. The results obtained by the authors support a causal link between export

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destination and higher wages in the sense that “industries that ship products to high-income

destinations do pay higher average wages.” In addition, the study shows that industries that

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export to high-income countries export higher-quality products and use higher-wage skilled labor

more intensively.
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Baliamoune-Lutz (2011) performs Arellano-Bond GMM estimations on African panel data for the

period 1995–2008 and examines the growth effects of Africa’s trade with China and developed
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(OECD) countries, controlling for the role of export concentration and distinguishing between the
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effect of imports and the effect of exports. The author did not find any evidence that exports to

China lead to higher growth in African countries unconditionally, while the results of her study
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indicate that export concentration enhances the growth effects of exporting to China. This last

result suggests that countries which export one major commodity to China benefit more than do
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countries that have more diversified exports. On the other hand, the author finds that “contrary

to the widely held view that increasing imports from China would have a negative effect, the
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empirical results show that the share of China in a country’s total imports has a robust positive

effect on growth.” In addition, and related to the issue we address in this paper, Baliamoune-Lutz

(2011) obtains results suggesting that there is an inverted-U relationship between exports to

developed countries and growth in Africa. The author concludes that the empirical results of her

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study support the proposition of ‘growth by destination’, that is, the destination of a country’s

exports matters for the exporting country’s growth and development.

Both these studies point to the importance of the destination of exports. More specifically,

developing countries’ exports to developed economies seem to have positive impacts on income

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growth (Baliamoune-Lutz, 2011) and on wages and skill premia (Brambilla, Depetris-Chauvin and

Porto, 2015; and also Brambilla, Lederman, and Porto, 2012). The induced skill upgrading may

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be a key channel through which trade can influence production and export sophistication and

possibly income. In addition, Mendoza (2010) also argues that “whom you trade with matters, as

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richer and more technologically advanced trading partners offer more scope for trade-induced

learning.”

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This paper aims to draw on these studies and look into the impact of trade with developed
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countries on export sophistication, at the macroeconomic level, using data from a group of
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developing countries. The main hypothesis we test is whether exports to developed countries have

a positive effect on the sophistication of the exporting country’s products. This question is highly
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pertinent given the significantly growing export flows from developing countries (African
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countries in particular) to China and other emerging markets. Exploring the effects of exports to

developed countries on export sophistication in developing countries can potentially make a

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significant contribution to research on the impact of trade policies on wages and employment

gains in developing economies, especially by providing macro-level empirical evidence.

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We use fixed-effects estimation on macro-level panel data from a large group of developing and
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emerging economies and examine the impact of exporting to developed economies on export

sophistication. Export sophistication is represented by UNCTAD’s index of comparative

diversification vis-à-vis developed countries, which measures export similarity with developed

economies products.

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The empirical results suggest that exporting to developed economies is associated with higher

export sophistication but with diminishing returns. We identify an inverted-U effect with the

turning point occurring at a share of exports to developed countries of approximately 53%. In

addition, we find that the interplay of exports to developed countries with the exporting country’s

per-capita income, openness to trade and FDI does not have a statistically significant effect. On

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the other hand, both per-capita income and FDI have non-linear effects on product sophistication.

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2. A Brief Review of Related Literature

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Numerous studies have explored the links between trade and export sophistication and the

important role of export sophistication in economic growth, focusing in particular on the role of

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specialization, composition of exports, and technology. These determinants of export
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sophistication in turn tend to be influenced by other factors such as human capital, institutions,
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infrastructure, and financial development.
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The seminal studies of Hausmann and Rodrick (2003) and Hausmann et al. (2007) highlight the
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important role of cost discovery in influencing the existence of high-productivity exports and the
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impact of trade on economic growth. Hausmann et al. (2007) argue that “growth is the result of

transferring resources from lower-productivity activities to the higher-productivity goods

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identified by the entrepreneurial cost-discovery process.” The cost discovery can determine what

a country ends up specializing in and in turn the type of goods that the country specializes in
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producing can predict subsequent economic growth. Consequently, economic policy and

institutions have a crucial role to play for promoting entrepreneurship, innovation and the
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exploitation of new activities,1 and in particular should focus on activities that can create

information spillovers for emulators (Hoff, 1997; Hausmann and Rodrick, 2003). Overall, the

1For useful discussions of innovation and export composition (and trade competitiveness), see Wakelin
(1997), Weifens et al. (2000), and DiPietro and Anoruo (2006).

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evidence obtained in these studies as well as others (Farberger, 2000; Minondo, 2010; Jarreau

and Poncet, 2012) indicates that countries or regions which export more sophisticated goods grow

faster relative to those with less sophisticated exports.

Given the documented evidence on the positive effects of export sophistication on economic

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growth, recent studies have also focused on the determinants of export sophistication. Some of

the factors that have been found to influence export sophistication include, foreign direct

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investment (FDI), export processing zones, human capital, and technology (Xu and Lu, 2009;

Wang and Wei, 2010; Harding and Javorcik, 2011, Iwamoto and Nabeshima, 2012; Anand et al.,

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2012; Zhu and Fu, 2013; Weldemicael, 2012).

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Anand et al. (2012) note that “[s]ophisticated sectors are more likely to act as a catalyst for broad-

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based economic growth, rather than turn into isolated enclaves, when the economy is liberalized,
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the exchange rate is not overvalued, and there are good information flows.” Zhu and Fu (2013)
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investigate the determinants of export upgrading in a cross-country panel dataset and find that

the level of sophistication of a country’s exports increases as a result of improved institutional

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quality, more capital deepening, engagement in knowledge creation, transfers via investment in
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education and R&D, and foreign direct investment and imports. However, the authors note that

the effects of these factors vary according to the income group (low, middle, and high income
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groups). The evidence on the impact of institutions, however, is rather mixed as Hausmann et al.

(2007) did not find significant association between institutional quality and export sophistication.
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Weldemicael (2012) finds that FDI has a positive effect on export sophistication and this effect is

greater in countries with weaker institutions, while institutional quality has a positive impact only
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on manufactured exports.

Additionally, trade liberalization can help enhance product quality upgrading and export

sophistication. For example, Fernandes (2013) focuses on the role of increased import

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competition on Chilean firms’ engagement in product upgrading. The author obtains evidence

suggesting that imports’ competition causes quality upgrading, although the benefits depend on

firms’ industrial specialization. Importantly, easier access to intermediate inputs was found to

foster quality upgrading.

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One of the main channels through which exporting to higher-income (developed) economies can

exert a positive effect on a country’s production and export sophistication is skill upgrading. The

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theoretical literature identified two main mechanisms that could explain a positive effect. First,

as described in the models by Verhoogen (2008) and Brambilla et al. (2012, 2015), developed

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economies require quality upgrades which are skill-intensive. Exporting to developed countries

induces firms to upgrade skills (causing sophistication to improve) and pay higher wages. This

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has been empirically documented in Brambilla et al. (2015) who find a skill-bias in export
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destinations using data from Argentine firms and in Rankin and Schöer (2013), using firm data
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from South Africa. The latter authors find that workers in South African firms that export
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outside the region earn more than either domestic-market producers or firms exporting only to

the region. They note that the premium different types of exporters pay for skills can explain the
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difference in wages, and conclude that their results support the proposition that “export
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destination is related to product quality which in turn is related to worker quality and therefore

wages.”
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The second mechanism operates through the services and activities (logistics, advertising,
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networking, etc.) required for exporting, which are intensive in the use of skilled labor

(Matsuyama, 2007; Arkolakis, 2010). To the extent that developed countries’ markets demand
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more of these skill-intensive services and the products exported are also skill-intensive, we would

expect a positive link between exporting to developed countries and export sophistication.

However, skilled labor can be required for marketing and logistics activities even for unskilled-

labor intensive manufacturing, which makes the link between exporting to developed countries

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and export (product) sophistication more of an empirical question, unless there is a strong skill-

spillover effects from these services and activities to some industries that also export to developed

economies (in which case the effect of exporting to developed economies would be rather

indirect).

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Finally, this paper is also related to the vast literature on ‘learning by exporting’ (Mengistae and

Pattillo, 2004; Van Biesebroeck, 2005; Bastos and Silva, 2010; Manova and Zhang, 2012;

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Mulangu and Olarinde, 2016). However, it is important to note that learning by exporting does

not necessarily lead to skill upgrading or export sophistication, as countries may end up

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specializing in low-skill-labor-intensive products, at least in the early stages of exporting. For

example, Diao et al. (2006) argue that Thailand’s long high-growth experience from early-1960s

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to late-1990s was not directly associated with technology or high-skill intensity (both of which are
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generally key elements for producing more sophisticated products/exports); rather, it was “based
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on learning by exporting and labor-intensive manufacturing with expanding domestic backward
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linkages” (Diao et al., 2006: 293).

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3. Empirical Analysis
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3.1 data and methodology

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The empirical analysis focuses mainly on estimating the impact of trade with developed countries2
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on the export sophistication of 76 developing and emerging economies, covering the period 1995-

2013. As noted earlier, we proxy for export sophistication using UNCTAD’s (UNCTAD 2015) index
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of comparative diversification vis-à-vis developed countries—which measures export similarity

with developed economies’ products—and reflects the degree to which the structure of a country’s

exports by product differs from the structure of exports of the trading partners. We refer to this

2We use the UNCTAD classification of countries which excludes some OECD countries (such as South
Korea and Mexico from the list of developed countries).

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variable as ‘simdex’. Obviously, we assume that exports of developed countries are highly

sophisticated. This is consistent with the view that “the world’s most skill- and capital-abundant

economies will specialize in the most sophisticated varieties within product markets even as

production of low-end varieties is ceded to less-developed economies” (Schott, 2008:10).3

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It is important to note that another measure of export sophistication that has been used in many

studies is the Hausmann et al. (2007) export sophistication (EXPY) index. However, we do not

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use this index due to its documented limitations. Indeed, the EXPY index was found to have

several weaknesses (Minondo, 2010; Xu, 2010; Wang et al., 2010). One criticism is that basing

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the EXPY index on income is problematic since some natural-resource exporting countries may

have significantly higher income during years of high-commodity prices without any increases in

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actual product diversification and sophistication. In addition, as noted in Wang et al. (2010), the
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index does not capture processing trade, where a large share of sophisticated exports is based on
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processing sophisticated product parts (e.g., China’s exports).
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Our main variable of interest on the right-hand-side (RHS) is exports to developed economies
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(referred to in this paper as expdevped), which is also from UNCTAD. This variable measures the
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share of a country’s merchandise exports to developed countries in its total exports. In addition,

we control for other factors4 using several relevant variables, including (from the World Bank’s
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World Development Indicators online database) per-capita income, foreign direct investment

(FDI), openness to international trade, and dummy variables for Sub Saharan Africa, Latin
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America, and emerging economies. We also include, on the RHS) the interplay between some of

the control variables and exports to developed countries. A summary of descriptive statistics of
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3 An export similarity index was first developed by Finger and Kreinin (1979). Several studies used the
similarity index to measure export sophistication; see for example, Islam (2014), Schott (2008), Zhu and
Fu (2013), and Wang et al. (2010).
4 Some of the factors cited in the literature, such as education, technology and R&D are not included

either due to lack of data or due to their high correlation with income (e.g., education).

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the main variables is provided in Table 1.

[TABLE 1 ABOUT HERE]

Given that these are panel data and there is need to control for fixed effects we perform fixed-

effects estimations using the following equation.

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yit = βxit + αi + μit (1)

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Where yit is the indicator of export sophistication in country i at time t, α and β are parameters

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to be estimated, xit is a vector of explanatory (RHS) variables, αi represents country-specific

effects, and μit is the error term.

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In addition, given that export sophistication may influence income, FDI and the destination of a
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country’s exports, there is a potential endogeneity problem which warrants the use of estimators
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that would take endogeneity into account, such as instrumental-variable (IV) estimation.
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Unfortunately, we were not able to find appropriate instruments and had to resort to the use, on

the RHS, of lagged values for FDI, income, and expdevped.

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3.2. Empirical results

Table 2 presents pairwise (linear) correlations between relevant variables. We note that the linear
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association between exports to developed countries and the similarity index, though positive and
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statistically significant, is weak (0.14). Regarding the correlations between the export

sophistication and the control variables, we find a positive and statistically significant correlation
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with income and a negative correlation with openness and FDI.

[TABLE 2 ABOUT HERE]

Figure 1 displays a scatter plot depicting the relationship between exports to developed countries

(as a share of a country’s total exports) and the degree of similarity between the country’s exports

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and the exports of the receiving (destination) developed countries. The (fitted) relationship

between exports to developed countries and export sophistication (of the exporting developing

economy) is nonlinear but seems to be positive for the most part.

[FIGURE 1 ABOUT HERE]

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Table 3 displays the results from fixed-effects estimations, with standard errors clustered at the

country level. The results show a positive and statistically significant coefficient on exports to

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developed countries (expdevped, lagged), suggesting that countries which send a larger share of

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their exports to developed economies experience higher export sophistication. However, there is

evidence of non-linearity in this relationship as the coefficient on the square form of the variable

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expdevped is negative. The turning point for the effect of expdevped on export sophistication

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occurs at a value of 52.8% when using the results in column 3 and a value of 53.03% when using
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the results shown in column 5. Thus, we consider 53% as the turning point; i.e., the point at which
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the effects from exporting to developed economies (on export sophistication) change from being

positive to being negative.

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[TABLE 3 ABOUT HERE]

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The coefficients on per-capita income (lagged) and its squared form are statistically significant, at
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the 1-percent level (columns 4 and 5), indicating an inverted-U effect on export sophistication.

The turning point occurs at a per-capita income of approximately $7,772, which is significantly
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above the average per-capita income in our sample ($2,420) but several countries, including in

SSA, have per-capita incomes near or above the critical point. On the other hand, the impact of
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FDI is shown to have a U-shaped effect on export sophistication; with the threshold point

occurring at a value of FDI of 4.85% of GDP, which is slightly higher than the mean value of 4.3%

(Table 1). We also find the coefficient on the lagged dependent variable to be positive and

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consistently significant, implying past (recent) export sophistication is associated with higher

current export sophistication; possibly through learning by exporting effects.

On the other hand, we do not find statistical evidence in support of an impact from openness or

from the interplay of exports to developed countries with income, openness to international trade

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and FDI.

Failing to find evidence that the interplay of FDI and exports to developed countries has a positive

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effect seems at odds with the "global chain value" argument that FDI is an important channel

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through which exporting influences export sophistication (Rodrik, 2006; Xu and Lu, 2009).

Finally, the coefficients on time and the dummy variable for Latin America (LATA) are generally

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statistically nonsignificant5 but the dummy variable for emerging economies has a positive
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coefficient while the one for sub-Saharan Africa (SSA) has a negative coefficient. The latter result
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suggests that, compared with other regions, SSA has overall lower levels of export sophistication,
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a feature that has been documented in the literature and was recently highlighted in the inaugural

Africa Transformation Report published by the African Center for Economic Transformation
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(ACET, 2014).
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4. Policy Discussion
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We investigate whether exports to developed economies stimulate product sophistication of the

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exporting developing country. Results from fixed-effects estimations suggest that exporting to

developed economies seems to enhance export sophistication but there are diminishing returns
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to this effect. We identify a turning point at a value of the share of a developing country’s exports

destined for developed economies of about 53%. The interplay of exports to developed countries

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Other specifications (not shown but will be provided by the author upon request) included ‘year’ dummy variables
but the coefficients on the dummies were generally nonsignificant.

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with the exporting country’s per-capita income, openness to trade, and inward FDI does not seem

to exert an influence, suggesting that interactions with other factors could be more important. We

plan to investigate the impact of the interplay of exports to developed countries with some of these

factors (such as exporting country’s science and technology-focused education) in future work, as

more reliable data become available.

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The findings related to the relationship of exports to developed countries with export

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sophistication (measured by export similarity with developed economies) seem to be consistent

with data on countries with medium shares (close to the critical or turning point of 53%) and those

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with high shares of exports to developed countries, as reported in Tables A1 and A2 (Appendix A),

respectively. Table A1 shows 10 countries (from our sample) with values for expdevped in the

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neighborhood of the turning point. The four countries with the closest values to 53% (turning
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point) and also below the average value for simdex are all in SSA, including Liberia which has a
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markedly low sophistication index (0.17 in 2012). In the same vein, all the countries in Table A2
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which have values for expdevped significantly higher than 53% have lower than average

sophistication index, except Mexico and Algeria (with a simdex value of approx. 0.53 which is
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right at the mean). Mexico is a member of NAFTA and has a large share of its exports destined to
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Canada and the United States, while Algeria has an important portion (about 67% in 2013) of its

exports destined to Europe and North America and concentrated (97% of its exports in 2013) in
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natural gas, petroleum and electronics products, some of which have a relatively moderate
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sophistication

A number of studies have documented the existence of positive links between export
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sophistication and productivity and skill upgrading (ACET, 2014; Brambilla et al., 2012 and 2015;

Pellandra, 2013). As noted earlier, Brambilla et al. (2015) show that industries that export to high-

income countries export higher-quality products and use higher-wage skilled labor more

intensively. Using firm data from Chile, Pellandra (2013) finds that “exporting has on average a

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10% positive effect on high-skill wages, and as predicted by the theoretical model, skill upgrading

is stronger for firms exporting to high-income destinations.” Thus, our results are generally

consistent with these conclusions and with the findings in Baliamoune-Lutz (2011) of an inverted-

U relationship between exporting to developed economies and income growth in Africa (to the

extent that export sophistication is associated with higher income).

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Although we do not investigate the direct links of trade and sophistication with skills and wages,

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we hope that broadening our understanding of export sophistication and what influences it can

contribute to a greater understanding of the effects of trade liberalization and sectoral shifts on

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wages and employment. As noted above, imports of intermediate inputs were found to have a

positive impact on export sophistication (Fernandes, 2013), suggesting that trade liberalization

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that facilitates access to intermediate inputs may have a positive impact on labor markets via its
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effects on skill upgrading and higher productivity (higher wages) that result from greater
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product/export sophistication.
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We must, however, note that the results have an important caveat, notwithstanding the use of the
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lagged value of exports to developed countries. Theoretical models such as heterogeneous firms à
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la Melitz (2003) could explain a reverse causality (self-selection of firms/countries): higher

productivity within a country can explain both higher share of sophisticated products in exports
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and entry in new developed export destinations. Unfortunately, we were not able to eliminate the

part of the relationship that is due to self-selection. We should, however, point out that many
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studies have documented the existence of both, learning by exporting (consistent with our finding

and the literature cited above) and self-selection of firms (Greenaway and Yu, 2004; Milner and
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Tandrayen, 2004; Hansson and Lundin, 2004; Álvarez and López, 2005; Van Biesebroeck, 2005).

Notwithstanding this caveat, from the perspective of the exporting (developing) country these

results have at least four important policy implications. First, trade policies and incentive schemes

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aimed at promoting exports to developed economies must take into account the diminishing

benefits for export sophistication. To the extent that the destination of exports (and export

sophistication) is positively correlated with higher skilled-labor wages, as a result of trade-

induced skill upgrading, policymakers should expect the wage (income) increases to taper off as

the country reaches higher levels (in the present study, this corresponds to a level slightly above

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50%) of exports to developed economies. Thus, if the goal of promoting exports to developed

economies is to promote investment in the country’s skilled labor (in response to higher demand

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for skilled labor), it is important to have supporting policies that could continue this trend once

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the diminishing returns have been reached.

Second, developing countries that export mainly non-sophisticated products; say countries with

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shares of exports to developed economies significantly lower than 50% of total exports (although
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this may depend on the specific exporting country, product, and destination), in general should
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benefit, in terms of enhanced sophistication, when increasing their exports to developed
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countries. This means that in these countries, moving up the value chains in production and

exports could benefit them more than it would in countries that have already achieved relatively
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high export sophistication. Such is the case of many African countries where the benefits from
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exporting agricultural products would be more substantial if they could capture greater shares of

agri-business value chains through, for example, development of more advanced (complex) agro-
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processing industries. Government policies that would create incentives aimed at achieving this
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may go a long way towards ensuring structural and overall economic transformation in these

countries (ACET, 2014 and 2017; AfDB 2016 and 2017).

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Third, inequality between skilled- and unskilled-workers’ wages may be high in early stages of

expanding exports to developed economies but may go down at higher levels of incomes and

exports to developed countries. Thus, policymakers may need to address inequality issues at the

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early stages of increased exports to developed economies but not so much when these exports and

export sophistication are sufficiently high.

Fourth, policymakers should be aware of the possibility that increased export sophistication and

skill upgrading may be accompanied by increased use of labor-saving technologies, especially

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when the associated innovations are radical (Boucekkine et al., 2016).6 This means that trade

liberalization with the aim to promote exports to developed markets, in particular, may have a

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negative effect on employment at the macro-level. Consequently, policymakers need to have in

place policies and mechanisms to help create more jobs or otherwise protect workers’ against a

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trade-induced surge in unemployment.

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In addition to these four implications, it is important to stress that several channels could explain

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the impact of trading with advanced economies on the sophistication of goods (and services)
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produced and exported by developing economies. These include easing access to more advanced
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For an interesting survey of the literature on innovation and employment, see Vivarelli (2007).
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Acknowledgements
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The author gratefully acknowledges support from the R4D program for Research on
Global Issues for Development funded by Swiss National Science Foundation and the
Swiss Development Cooperation. The author is also thankful for helpful comments and
suggestion, on an earlier version of the paper, by participants in the session on ‘Trade
and Development’ at the DEGIT XX Conference, held at the University of Geneva on
September 3-4, 2015.

15
technologies, investment in human capital (especially higher education), innovation, productive

entrepreneurship and creative activities (Wakelin, 1997; DiPietro and Anoruo, 2006). For

example, DiPietro and Anoruo find that higher levels of creativity and its components (innovation,

technology, technology transfer, and business startups) “lead to a larger share of manufacturing

exports to total exports, and to a larger share of technological products as a share of

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manufacturing exports themselves” (DiPietro and Anoruo, 2006:138).

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Figure 1. Exports to developed countries and similarity of exported products
.55

PT
.5

RI
.45

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U
N
.4

0 20 40 60 80 100
A
Share of exports destined to developed countries
M

Source of data: See text

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TE
EP
CC
A

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Table 1. Descriptive statistics
Variable Obs Mean Std. Dev. Min Max
simdex 1436 0.532 0.093 0.097 0.785
expdevped 1436 56.865 21.734 1.821 98.426
income 1425 2419.76 3179.45 50.04 23875.2
fdi 1420 4.285 8.908 -82.892 161.824
open 1422 77.229 46.579 0.309 531.737
Details on source of data and variable description are in the text.

PT
RI
SC
U
N
A
M
D
TE
EP
CC
A

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Table 2. Linear correlations
Simdex expdevped income fdi
expdevped 0.141
[0.00]
income 0.498 0.079
[0.00] [0.00]
fdi -0.268 0.052 -0.012
[0.00] [0.05] [0.65]

PT
open -0.186 0.048 0.280 0.356
[0.00] [0.07] [0.00] [0.00]
Details on source of data and variable description are in the text.

RI
SC
U
N
A
M
D
TE
EP
CC
A

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Table 3
Trade with developed countries (expdevped) and export sophistication (simdex)
Fixed-effect estimates
(Standard errors are shown in parentheses)
(1) (2) (3) (4) (5)
Simdex (lagged) 0.376*** 0.393*** 0.395*** 0.396*** 0.395***
(0.013) (0.014) (0.014) (0.012) (0.012)
expdevped (lagged) 0.006*** 0.007*** 0.031*** 0.031*** 0.033***
(0.001) (0.001) (0.007) (0.007) (0.007)

PT
income (lagged) 0.021*** 0.026*** 0.025*** 0.201*** 0.215***
(0.004) (0.004) (0.004) (0.004) (0.003)
fdi (lagged) -0.006 -0.039** -0.043*** -0.024** -0.029**

RI
(0.01) (0.016) (0.015) (0.011) (0.012)
open -0.019* -0.004 -0.051 -0.05 -0.003
(0.01) (0.003) (0.008) (0.06) (0.007)

SC
Year (time effect) -0.0008 -0.0007 -0.0007 -0.0008 -0.0008
(0.0007) (0.0005) (0.0006) (0.0006) (0.0005)
fdi_squared 0.0028*** 0.0027*** 0.003*** 0.003***
(0.009) (0.010) (0.007) (0.007)

U
open_squared -0.002 -0.0019
(0.003) (0.002)
expdevped_squared N
-0.0039*** -0.0043***
(0.001) (0.001)
-0.0042***
(0.001)
A
income_squared -0.011*** -0.012***
(0.003) (0.001)
M

expdevped x income -0.002 -0.003

(0.002) (0.0029)
Expdevped x fdi -0.032 -0.030
(0.058) (0.057)
D

Expdevped x open -0.007 -0.007

(0.021) (0.022)
TE

SSA -0.124*** -0.126***

(0.009) (0.009)
LATA 0.003
EP

(0.005)
EMEC 0.025***
(0.007)
R-sq: within 0.13 0.12 0.13 0.17 0.19
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between 0.56 0.55 0.58 0.61 0.61

overall 0.43 0.44 0.46 0.46 0.49
Standards errors are clustered at the country level.
Number of observation: 1306.
A

* indicates significance at 0.10 ** indicates significance at 0.05 and *** indicates significance at
0.01.
SSA: Dummy variable for sub-Saharan Africa.
LATA: Dummy variable for Latin America.
EMEC: Emerging economies

25
Appendix A

Table A1. 10 countries with share of exports to developed countries close to the critical point of
53% (2012)

Country Expdevped simdex

Costa Rica 54.66219 0.60695

PT
El Salvador 54.63288 0.586992
Guatemala 54.48487 0.554835
Liberia 54.32415 0.17924
Guinea 53.55358 0.470265

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Niger 52.25491 0.455293
Côte d'Ivoire 51.32486 0.520456

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Viet Nam 51.00443 0.534037
Namibia 50.97289 0.56258
Cameroon 49.77342 0.574751

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N
Table A2. Top 7 exporters to developed countries with export share significantly greater than the
critical point of 53% (2012).
A
Country Expdevped simdex
M

Eritrea 95.18815 0.477087

Chad 89.0397 0.504806
Mexico 87.92794 0.644823
D

Seychelles 82.1937 0.440254

Bangladesh 82.18865 0.42181
Algeria 79.57083 0.531725
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Botswana 79.35844 0.501117

EP
CC
A

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