Re-Examining the Relationship Between Export Upgrading and Economic Growth: Is there a Threshold Effect?

Abstract

The main objective of this study is to examine the non-linear link between export upgrading and economic growth for 58 advanced and developing countries over the period of 1995-2015. For this purpose, an innovative dynamic panel threshold regression model (CS-ARDL) that allows control for cross-country heterogeneity, cross-sectional dependence, and feedback effects is employed to capture this non-linear relationship. The empirical results indicate that there exist threshold effects in the export upgrading-growth relationship. In particular, our findings suggest an inverted U-shaped relation between export sophistication and output growth. Below a critical level (1.3 for advanced countries and –0.7 for developing countries), more export complexity fosters economic growth. However, excessive export complexity might have adverse spillovers on long-term economic growth. Furthermore, we show that the effect of export sophistication on economic growth is asymmetric to advanced and developing countries when it is above and below the threshold level.