Implications of Increased Regional Economic Complexity

Abstract

Within the Solow-Swan neo-classical framework for growth, economic growth is driven by physical capital, raw materials, labour and technology. It disregards the role of knowledge in the product itself. In recent years, inspired by Kaldor (1967)’s theory of structural transformation and Romer (1986)’s new growth theory with endogenous knowledge, scholars studying international trade and economic growth began to pay attention to how knowledge and capability impact on the economic growth of a nation or region. Theories on product space and the evolution of comparative advantage put forward by Hausmann and Rodrik (2003) emphasise that products are output by individuals and groups using productive knowledge. The product itself reflects that the economic agent possesses this kind of production capacity. For a country or a region, economic development and structural transformation means that firms are discovering the products they are good at producing, and the process in learning and accumulating the capability for producing those products.