The threshold effect of export sophistication on natural resources-trade diversification nexus

Abstract

This study is an investigation into the influence of export sophistication on the complex nonlinear relationship between natural resources and trade diversification. It aims to explore if export sophistication’s threshold value affects the relationship between natural resources and trade diversification. A panel data of 106 nations was collected for the period of 2000–2018. This study develops its dynamic panel threshold model estimated with the difference GMM model. Our results reveal that natural resources and trade diversification have an inverse U-shaped relationship which is mediated by export sophistication. It implies that abundant natural resources, which give access to various markets, might assist trade diversification in nations with low export sophistication. However, in highly developed economies, resource wealth may prevent trade diversification since horizontal specialization patterns result in high prices, restricting market accessibility. The results of the study also explain the complex interactions between resources abundance, export sophistication, and trade diversification and offer critical insights for effective management of natural resources in emerging and industrialized economies. The study confirms the “resource curse” and the Dutch Disease effect, which demonstrates the means to deal with economic issues through the export sophistication. The research makes useful contribution to the existing literature on economic development and resource management by adding the dynamic threshold model and enhancing the robustness to the existing understanding on the issue.