Economic Diversity and Growth: Empirical Investigation on the Transmission Channels

Abstract This paper empirically assesses the total effect of economic diversity on growth and the contribution of some indirect transmission channels through which part of this effect is carried. Economic diversity, measured by the level of diversity in exports, is found to have a negative direct effect on growth in developing countries that is outweighed by the positive indirect effects through transmission channels, leading to a positive total effect. Overall, higher levels of diversity appear to have a greater positive influence on growth in developing countries in comparison to more advanced economies. For this latter group, although greater diversity tends to favor growth both directly and through some channels, it is also associated with lower openness to trade and contraction in physical capital accumulation, which are detrimental to growth. Human capital and foreign exchange reserve buildup are found to be the most influential transmission channels in the growth and diversity relationship.