Product relatedness in the extensive margin of bilateral trade

Abstract

I examine the role of product relatedness in the extensive margin of trade at the bilateral level. I adapt an established measure of pair-wise proximities among products to create a measure of product relatedness in bilateral trade. Using trade data for 148 countries and 745 products for the period 1990–2010 and employing a gravity-like specification with a careful set of fixed effects, I find that an exporter is significantly more likely to start exporting a specific new product to a destination the closer the product is to the set of products it already exports to that destination, even after controlling for the product's proximity to the aggregate export basket. The effect is increasing in competition at the destination-product level. The implication: it is not just enough for an exporter to acquire product-specific capabilities to be able to export a product to a destination; it must also acquire product-destination-specific capabilities. The results survive several robustness checks, including a placebo-like test.