28
Gourdon
A dummy variable for the time trend is included to pick up the impact of the growth of world trade over time. The impact of world trade growth on diversification is ambiguous: the availability of a larger number of final goods through imports could promote specialization of domestic production and export, or the increase in the bundle of intermediate goods available through trade could encourage the production and exports of new domestic goods, thus increasing diversification. The model includes several additional variables, which control for the influence on diversification of factors that are not the primary goals of the study: • Access to credit, the quality of infrastructure, and the gross investment ratio are indicators of macroeconomic efficiency that enhance the growth prospects of firms (the implications for export diversification remain an open theoretical question). • The size of GDP and population are included because larger countries tend to have more diversified economic structures. Krugman (1981) and Helpman and Krugman (1985) argue that market size directly affects the degree of product differentiation. Models of monopolistic competition imply that larger countries can produce a wider range of products. Hummels and Klenow (2005) find that economic size is positively related to the degree of specialization. • The distance from major markets (New York, Rotterdam, and Tokyo) and the climate zone (latitude) are included as proxies for transport costs that may affect a country’s ability to diversify. Economic geographers (Amiti and Venables 2002; Venables and Limao 2002) suggest that proximity to world markets and other geographical characteristics are important in determining economic structure. The influence of distance on trade has been shown through the long empirical tradition of gravity models (Deardorff 1984; Brun and others 2005). • A measure of spatial correlation captures the impact of proximity to potential trade partners. Spatial correlation may affect trade patterns because countries in close proximity may share a common institutional framework (as a result of “cultural spillovers” and integration agreements) (Greene 2008). Each country’s specialization pattern is assumed to depend substantially on the degree of specialization of other countries. This influence is more pronounced in geographically closer countries. An index was constructed using a