Do Knowledge Externalities Lead to Growth in Economic Complexity? Empirical Evidence from Colombia

We live in a complex economic system where externalities play a key role in fostering growth in complexity through increasing interdependence of interacting agents. This study tests this hypothesis for the case of Colombia. We ask whether knowledge externalities lead to growth in economic complexity. If yes, which variety of knowledge externalities - Marshall-Arrow-Romer (MAR), Porter or Jacobs? Results from our empirical investigation uphold the MAR theories of externalities or intra-industrial externalities, which are maximized with high local specialization and local monopoly. A pattern of convergence in economic complexity of Colombian municipalities emerges from our results, supporting Schumpeterian growth theories, which advocate that knowledge externalities drive convergence. This is in line with the recent macroeconomic trends of the Colombian economy, which is suffering from “Dutch disease” leading to a contraction in its domestic economy. We show that knowledge externalities are a mechanism through which convergence dynamics are brought about and fostered in the domestic economy