Cross-country variations in economic complexity: The role of individualism

Abstract

Does a society's culture affect its ability to achieve economic complexity? In this paper, we analyze the effect of individualism, one of the most significant dimensions of culture, on economic complexity. Individualistic societies stress the importance of freedom and of rewarding high achievers, which creates a conducive environment for the emergence of economic complexity. We conduct a cross-country analysis based on a global sample of 81 countries using an individualism score and an economic complexity index. Further, we establish a causal relationship by using the historical prevalence of infectious disease and a pronoun drop indicator as instruments for individualism. Our findings indicate that individualism has a strong, significant, and positive effect on economic complexity; and this relation is strengthened in countries with higher levels of innovation and democracy. These results are robust to the addition of various controls and sensitivity checks.