New Evidence on the Determinants of Industrial Specialisation

Industrial specialization has important implications for economic performance; therefore, understanding its determinants is of key policy relevance. This paper quantifies the relationship between factor endowments, policies and institutions and patterns of industrial specialisation in production using a new cross-country dataset compiled by WIOD that includes 37 OECD and non-OECD countries and 26 sectors. An advantage of this database –as compared with those used by previous studies- is that makes it possible to look at industrial specialization in terms of value added instead of gross exports, covering both services and manufactures in a panel of advanced and developing economies. The empirical methodology is based on the idea that industries vary in the conditions that they need for production, and countries differ in their ability to provide for these industry-specific requirements. We find that not only cross-country differences in factor endowments, such as capital and labour, but also differences in investment in R&D and policies or institutions, such as financial development, tariffs and taxes, and product and labour market regulation, can explain cross-country differences in industrial structure.