The new paradigm of economic complexity

Pierre-Alexandre Balland, Tom Broekel, Dario Diodato, Elisa Giuliani, Ricardo Hausmann, Neave O’Clery, and David Rigby (2022), Research Policy Vol.51(3)

Economic complexity offers a potentially powerful paradigm to understand key societal issues and challenges of our time. The underlying idea is that growth, development, technological change, income inequality, spatial disparities, and resilience are the visible outcomes of hidden systemic interactions. The study of economic complexity seeks to understand the structure of these interactions and how they shape various socioeconomic processes. This emerging field relies heavily on big data and machine learning techniques. This brief introduction to economic complexity has three aims. The first is to summarize key theoretical foundations and principles of economic complexity. The second is to briefly review the tools and metrics developed in the economic complexity literature that exploit information encoded in the structure of the economy to find new empirical patterns. The final aim is to highlight the insights from economic complexity to improve prediction and political decision-making. Institutions including the World Bank, the European Commission, the World Economic Forum, the OECD, and a range of national and regional organizations have begun to embrace the principles of economic complexity and its analytical framework. We discuss policy implications of this field, in particular the usefulness of building recommendation systems for major public investment decisions in a complex world.

Migration and invention in the age of mass migration

Andrea Morrison, Sergio Petralia, and Dario Diodato (2018), /Journal of Economic Geography Vol.22(2)

More than 30 million people migrated to the US between the 1850s and 1920s. In the order of thousands became inventors and patentees. Drawing on an original dataset of immigrant inventors to the US, we assess the city-level impact of immigrants patenting and their potential crowding out effects on US native inventors. Our study contributes to the different strands of literature in economics, innovation studies and economic geography on the role of immigrants as carriers of knowledge. Our results show that immigrants’ patenting is positively associated with total patenting. We find also that immigrant inventors crowd-in US inventors. The growth in US inventors’ productivity can be explained also in terms of knowledge spill-overs generated by immigrants. Our findings are robust to several checks and to the implementation of an instrumental variable strategy.

 

Why do industries coagglomerate? How Marshallian externalities differ by industry and have evolved over time

Dario Diodato, Frank Neffke, and Neave O’Clery (2018), Journal of Urban Economics Vol.106. 1-26.

The fact that firms benefit from close proximity to other firms with which they can exchange inputs, skilled labor or know-how helps explain why many industrial clusters are so successful. Studying the evolution of coagglomeration patterns, we show that the type of agglomeration that benefits firms has drastically changed over the course of a century and differs markedly across industries. Whereas, at the beginning of the twentieth century, industries tended to colocate with their value chain partners, in more recent decades the importance of this channel has declined and colocation seems to be driven more by similarities in industries’ skill requirements. By calculating industry-specific Marshallian agglomeration forces, we are able to show that, today, skill-sharing is the most salient motive behind the location choices of services, whereas value chain linkages still explain much of the colocation patterns in manufacturing. Moreover, the estimated degrees to which labor and input-output linkages are reflected in an industry’s coagglomeration patterns help improve predictions of city-industry employment growth.

The made-in effect and leapfrogging: A model of leadership change for products with country-of-origin bias

Dario Diodato, Franco Malerba, and Andrea Morrison (2018),  European Economic Review Vol.101. 297-329.

Change in industrial leadership is often explained in terms of technological and costs advantages. However firms in emerging economies not only have to produce high quality, cost-competitive goods, but also win the resistance of consumers in the world market, who are often adverse to purchasing products from countries that yet have to build a reputation. We argue that this country-of-origin bias significantly influences the chances of leadership change.
A model that aims at capturing the endogenous dynamics of demand building and leapfrogging is proposed. We show that in sectors with high monopoly power acquiring a superior technology is not sufficient for a latecomer country to become leader, unless a significant share of consumers is aware of the quality of its products. An extension of the model to multiple sectors shows that a latecomer country remains specialized into low-value undifferentiated goods, even after overtaking the technology of the leading country.

The resilience of regional labour markets to economic shocks: Exploring the role of interactions among firms and workers

Dario Diodato and Anet Weterings (2015), Journal of Economic Geography  Vol.15-4. 723-742.

To date, theoretical and empirical insights in the determinants of regional resilience are still limited. Using a model, we explore how three regional factors jointly contribute to the resilience of regional labour markets to economic shocks. The localization of the supply network (1) is used to model the propagation of the shock, while possibilities for intersectoral (2) and interregional labour mobility (3) to analyse the recovery. An application of the model to Dutch data suggests that labour markets in centrally located and service-oriented regions have, on average, a higher recovery speed, irrespective of the type of shock hitting the economy.

The magnitude and distance decay for trade in goods and services: New evidence for European countries

Martijn Burger, Mark Thissen, Frank van Oort, and Dario Diodato (2014), Spatial Economic Analysis Vol.9-3. 231-259.

Using a newly assembled, consistent and disaggregated dataset (12 goods and 7 services) on internal and bilateral trade for 25 European countries, we analyse the difference between trade in goods and services. The measurement of both trade in goods and trade in services is improved over earlier research, allowing us to compare trade in goods and services in a coherent and systematic way. First, our dataset is made consistent with the domestic demand and production and the total exports and imports at the sector and product levels. Second, we explicitly control for re-exports. We find that, although goods are more often bilaterally traded than services, the volume of bilateral trade in services does not attenuate less with distance than the volume of bilateral trade in goods.

The impact of return migration from the U.S. on employment and wages in Mexican cities

Dario Diodato, Ricardo Hausmann, and Frank Neffke (2020), Papers in Evolutionary Economic Geography n.20.12

We study the effect of return migration from the U.S. to Mexico on the economies of Mexican cities. In principle, returnees increase the local labor supply and therefore put pressure on wages and employment rates of locals. However, having worked in the technologically more advanced US economy, they may also possess skills that complement the skills of local workers or even bring in new organizational and technological know-how that leads to productivity improvements in Mexico. Using an instrument based on involuntary return migration due to deportation by US authorities, we find evidence in support of both effects. Returnees affect wages of locals in different ways: whereas workers who share the returnees’ occupations experience a fall in wages, workers in other occupations see their wages rise. However, the latter, positive, effect is easily overlooked, because it is highly localized: it only affects coworkers within the same city-industry cell. Moreover, both, positive and negative, wage effects are transitory and eventually disappear. In contrast, by raising the employment levels of the industry in which they find jobs, returnees permanently alter a city’s industry composition.

 

Structural accounting: An empirical assessment of cross-country differences in productivity

Dario Diodato (2020), Papers in Evolutionary Economic Geography n.20.20

This paper proposes a method to decompose cross-country differences in productivity (TFP) into a technological component – depending on the overall productivity of a country – and an allocation component, which depends on whether factors of productions are allocated to productive or unproductive industries. Using a sample of over 2 million firms from 30 countries, the analysis estimates that 1/4 of inequality between countries is due to the Composition effect, while 3/4 to the Place effect. Moreover, once accounting for heterogeneity at the subnational level, I find that the Composition effect may be as high as 50%.

 

Technological regimes and the geography of innovation: a long-run perspective on US inventions

Dario Diodato and Andrea Morrison (2019), Papers in Evolutionary Economic Geography n.19.24

The geographical distribution of innovative activities is an emerging subject, but still poorly understood. While previous efforts highlighted that different technologies exhibit different spatial patterns, in this paper we analyse the geography of innovation in the very long run. Using a US patent dataset geocoded for the years 1836-2010, we observe that – while it is true that differences in technologies are strong determinant of spatial patterns – changes within a technology over time is at least as important. In particular, we find that regional entry follows the technology life cycle. Subsequently, innovation becomes less geographical concentrated in the first half of the life cycle, to then re-concentrate in the second half.

 

Is our human capital general enough to withstand the current wave of technological change?

Ljubica Nedelkoska, Dario Diodato, and Frank Neffke (2018), CID Research Fellow and Graduate Student Working Paper n.93

The degree to which modern technologies are able to substitute for groups of job tasks has renewed fears of near-future technological unemployment. We argue that our knowledge, skills and abilities (KSA) go beyond the specific tasks we do at the job, making us potentially more adaptable to technological change than feared. The disruptiveness of new technologies depends on the relationships between the job tasks susceptible to automation and our KSA. Here we first demonstrate that KSA are general human capital features while job tasks are not, suggesting that human capital is more transferrable across occupations than what job tasks would predict. In spite of this, we document a worrying pattern where automation is not randomly distributed across the KSA space – it is concentrated among occupations that share similar KSA. As a result, workers in these occupations are making longer skill transitions when changing occupations and have higher probability of unemployment.