The pattern of structural change: testing the product space framework

Abstract

The set of available local “capabilities” determines what an economy produces today (its static comparative advantage) and, at the same time, defines the trajectories that the process of structural change may take in the future. The product space (PS) framework developed in recent seminal works by economists and physicists suggests that path-dependence characterizes the evolution of the production basket (Hausmann and Klinger, 2007, Harvard University Center for International Development Working Paper #146; Hidalgo et al., 2007, Science Magazine, 317(5837), 482–487). These authors represent economies as sets of productive capabilities that can be combined in different ways to produce different products. Countries progressively change their production baskets and move toward goods that require capabilities that are already available; on the contrary radical structural change rarely happens. In this article, we analyze the evolution over time of the production baskets in 107 Italian provinces (NUTS 3) and perform the first test on the PS hypothesis of path-dependence. We investigate whether new products entering the provincial production baskets are nonrandomly related to initial production baskets. We confirm the general tendency of path-dependence but highlight at the same time that a sizable share of “new products” are an exception to this general pattern. These “random entries” over the PS are particularly interesting for industrial policy, since they represent radical deviations from the initial comparative advantage. In the final part of the article, we investigate using parametric analysis the product and provincial characteristics that determine these deviations from the PS pattern.