FDI Flows and Export Diversification: Looking at Extensive and Intensive Margins
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goods as the top half of the distribution and nontraditional goods as the bottom half. A problem with this approach is that it cannot account for goods that switch categories. A second possibility would be to consider the goods that make up the top 95 percent of export shares as traditional exports and the bottom 5 percent as nontraditional. A problem with this approach is that it would not identify products that are really new. A third idea would be to define nontraditional export products as “discoveries” (as in Klinger and Lederman 2004). We adopt this approach, identifying as nontraditional exports products whose exports exceeded $1 million in 2003–06 and totaled less than $10,000 in 1990–93. All of these approaches yield essentially the same results (see annex table 2.A.3): FDI reduces concentration through the within component of the Theil index (the intensive margin) but increases concentration through the between component (the extensive margin); high tariffs increase concentration by impeding the development of the extensive margin; and infrastructure, investment, and domestic credit reduce concentration. The only difference concerns the impact of GDP per capita on concentration: In the extended model, the relationship between GDP per capita and export concentration as defined by the between component of the Theil index was not significant. By contrast, when nontraditional exports are defined using the approach in Klinger and Lederman (2004), the relationship between GDP per capita and export concentration follows an inverted U-shaped curve. Using the two other approaches yields the expected U-shaped curve.
Conclusions Export concentration in MENA has declined over time. The change reflects some decrease in the concentration among sectors that initially had the highest shares of exports; reductions in the share of products that initially had the highest share of exports; and some rise in the share of products that were initially small or nonexistent, indicating some success in the development of new export product lines. The results of an econometric model suggest that removing impediments to FDI has been an efficient means of improving export diversification for resource-poor countries in the region. Removal of impediments to FDI should be intensified in resource-abundant countries, to determine whether it has a significant and efficient effect there as well.