The Roots of Export Diversification

Identifying the true determinants of export diversification is difficult as there exists no comprehensive theoretical or empirical framework to capture all potential factors in their entirety. This paper uses Bayesian Model Averaging to uncover the true long-term roots of export diversification among 43 potential determinants, and thus 2^43 potential models. Our results suggest that only four factors are important in predicting export diversification levels: natural resource rents as a percentage of GDP (100 % posterior inclusion probability), primary school enrollment rates (96 %), population size (25 %), and foreign direct investment levels (17 %). Many prominent candidates turn out to be insignificant in determining diversification levels over the long run. Neither policy-related variables (e.g. tariffs, freedom from trade regulations or democracy) nor macroeconomic factors (such as trade openness, terms of trade or domestic investment levels) nor geographical remoteness (whether the country is an island or landlocked) play a role. Various robustness checks confirm our results