|-|Financial development, by reducing liquidity constraints may favor entry into international<br>markets and facilitate export diversification.|
|---|---|
|-|The results of Agosin, et al. (2012) suggest that financial development facilitates<br>diversification. Mala and Ulabasoglu (2013) find that countries with more developed<br>financial markets tend to be more diversified.|

2. <u>Structural Factors: Country population, human capital, and the quality of institutions</u>

|_Population_|-<br>-<br>-|Figures are taken from WDI.<br>The larger the population the more diversified a country may be as local firms have access<br>to a larger market and thus benefit from economies of scale.<br>Al-Kawaz (2008) finds that countries with larger population are more diversified.|
|---|---|---|
|_Human_<br>_capital_|-<br>-<br>-|Proxied by net enrolment ratio at the primary school level and is extracted from UNESCO<br>Institute of Statistics.<br>A country’s stock of human capital is expected to have a positive effect on diversification as<br>it may allow economies to change their specialization patterns away from primary<br>commodities towards more knowledge-intensive manufactured goods.<br>The results of Agosin, et al. (2012) show that human capital accumulation affects positively<br>diversification. Mala and Ulabasoglu (2013) find that in countries with relatively more<br>advanced technology, FDI contributes to reduce concentration.|
|_Quality of_<br>_institutions_|-<br>-<br>-|Proxied by the sum of the_Investment Profile_index and_Law and Order_index of<br>International Country Risk Guide (ICRG). These indicators measure institutional quality<br>directly related to property rights, such as expropriation risk; the risk of contract repudiation<br>by the government; the strength and impartiality of the legal and judicial system;<br>observance of the law. The aggregated index ranges from 0 to 12, where higher values<br>indicate better institutions and greater property rights security.<br>It is expected that political and economic institutions that create a friendly investment<br>environment foster business confidence and cultivate the development of new business<br>activities.<br>Al-Kawaz (2008) finds that higher quality institutions encourage the development of new<br>export activities. Mala and Ulabasoglu (2013) find that FDI can help diversify<br>manufacturing activities in countries with flexible labor market regulations.|

|3. Macroeconomic Factors:real exchange rate, inflation, net FDI inflows, the terms of trade and investment as a|
|---|
|share in GDP.|
|The variables are taken from WEO, WDI, and World Bank-IMF country calculations.|

|_Real_<br>_Effective_<br>_Exchange_<br>_Rate_<br>_Variation_<br>_(REER)_|-<br>REER index from WB/IMF: 2005 = 100; annual percentage change used. An increase in a<br>country’s REER represents a currency depreciation, whereas a decrease in a country’s<br>REER represents a currency appreciation. An overvalued exchange rate may reduce<br>investment profitability and discourage investors from new activities.<br>-<br>Agosin, et al. (2012) find that a real overvaluation of the exchange rate leads to some extent<br>to greater export concentration.|
|---|---|
|_Inflation_|-<br>Annual consumer price index (CPI) annual percentage variation. Inflation is also expected<br>to reduce predictability and thus deter private sector development.<br>-<br>Al-Kawaz (2008) finds that higher inflation does not encourage the creation of new export<br>activities.|
|_FDI inflows_|-<br>The sign of the impact of FDI inflows is a matter of empirics. Foreign investors maychoose|

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