Summary. This paper provides an analysis of the export potential and export diversification of Montenegro. Based on this analysis as well as a review of international experience and field discussions, the paper also provides policy recommendations for exploiting its considerable export potential and engendering export diversification. The Product Space (PS) methodology is used to identify prospective comparative advantage by making inferences from the revealed pattern of trade. The indicated products in which Product Space meth odology points to export potential have links to information available to entrepreneurs and producers that can be expected to be reflected in private investment decisions and decisions regarding entry into export markets. The analysis shows that Montenegro currently has a limited and highly concentrated export base but it is also in the middle of a major transformation towards a much more tourism and services based economy. The policy challenge is how to foster this process to fully tap into its potential for exports and diversifica tion. Exports allow entrepreneurs and producers in small economies to expand beyond the limitations of the domestic market size. Successful export potential has been realized in other countries through openness in international trade and allowing the private sector to judge profitable opportunities. Thanks to its superior geographic location, adequate human capi tal and infrastructure base, and natural resources, Montenegro has been found to possess substantial export potential, which could turn into its major growth engine. To convert this potential into success, Montenegro will need to rebalance the role of government policy and improve local incentives towards entrepreneurship and exports. The important policy role of government in Montenegro is to correct