Can export diversification promote export upgrading? Evidence from an oil-dependent economy

Abstract

This study examines whether export diversification leads to export upgrading in Brunei Darussalam from 1995 to 2019. Many oil-dependent economies have implemented various initiatives to diversify its production structure. Yet not all exports are alike, and exports that are sophisticated provide greater comparative advantages. However, structural upgrading processes induced from diversification take time through the cost discovery mechanism. We begin by constructing an index of export upgrading, export diversification, and export concentration using disaggregated trade data. We employ an autoregressive distributed lag estimator to control for endogeneity and simultaneity. Our results show that export diversification has a positive and significant association with export upgrading in the long run. However, this is insignificant in the short run. Moreover, we find evidence that export diversification positively and significantly affects lower levels of export upgrading processes as opposed to sophisticated exports that are associated with greater technological content. The results imply that the gains from export diversification may only be realised in the long run, which can explain the mixed findings from previous studies and the dynamics of resource-dependent economies. Further policy implications are discussed.