Product space, unrelated diversification, and economic development

Product Space methodology introduced in 2007 initiated a new perspective in diversification studies. It finds out stylized facts that generally developed countries mainly export core product (metal, machinery, chemicals), while developing countries mainly export periphery products (agriculture, primary goods). Besides, these two types of products have very low proximity. They do not share many common capabilities with each other. Core industries have merits in three aspects, 1) more capabilities embedded, 2) higher export value, and 3) more potential to diversify to others. Consequently, if developing countries are willing to enjoy the merits, they have to diversify from periphery products to core products, and the diversification process is naturally unrelated. Thus, here comes the research question which has been neglected by most diversification studies, that how developing countries can diversify to unrelated core industries. This paper does not intend to answer this big question. Instead, it uses South Korea, one of the most successful countries in economic growth and product diversification, to highlight some possible mechanisms for its intense diversification through case studies. However, product space method is data-driven, so this paper also argues Evolutionary Economic Geography could complement it by providing micro foundations. This paper finds out firstly, Korea indeed experienced a sharp unrelated diversification, from periphery to core products. Secondly, by three case studies, this paper finds out, chaebol’s interaction with supportive government, stepping-stone industries by import substitution, and public-private R&D cooperation all could explain Korea’s strong unrelated diversification. Meanwhile, three cases also indicate governmental involvement functioned delicately in special institutional arrangements. This paper supports government intervention to help create capabilities to facilitate unrelated diversification, so developing countries can possibly reach core products and get developed. Finally, this paper also indicates further studies in unrelated diversification for developing countries as well as some challenges for EEG