# WPS 3872

## **Diversification, Innovation, and Imitation inside the Global Technological Frontier***

## Bailey Klinger Daniel Lederman

**Abstract:** Recent research highlights the relationship between economic development and productive diversification, which may be hindered by market failures. After identifying stages of diversification in disaggregated export data, the authors develop a metric for the flows of export “discoveries,” or inside-the-frontier innovations in developing countries. The authors then explore the empirical relationship between economic development and (1) inside-the-frontier-innovation as reflected by the introduction of new export products, (2) export diversification measured by an index of export-revenue concentration, and (3) on-the-frontier innovation as reflected in patents. The data suggest that inside-the-frontier innovation is more common among poor countries for whom export growth entails diversification, whereas on-the-frontier innovation and specialization characterize the export growth of highly developed economies. The data also suggest that the relationship between the frequency of export discoveries and economic development is not due to changes in the industrial composition of exports. The authors utilize a simple model of innovation and imitation to test the hypothesis that the threat of imitation inhibits the discovery of new exports. Econometric evidence suggests that the frequency of export discoveries across countries rises with the returns of export activities (proxied by exogenous export growth during the sample period), but the magnitude of this effect increases with barriers to entry. The count-data estimations deal with unobserved international heterogeneity, and the results are robust to various changes in the specification of the empirical model. This finding supports the hypothesis that market failures inhibit inside-the-frontier innovation.

World Bank Policy Research Working Paper 3872, April 2006 _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._

*This paper is an extension of previous work (Klinger and Lederman 2004). We are grateful for the valuable feedback provided by Caroline Freund, Andrés Rodríguez-Clare, Guillermo Perry, William F. Maloney, Ricardo Hausmann, Dani Rodrik, Ana-María Oviedo, and Jim Lahey. The authors are responsible for all remaining errors. This research was funded by the Office of the Chief Economist for Latin America and the Caribbean. Klinger is a Ph.D. candidate at Harvard University. Lederman is a Senior Economist with the Development Economics Research Group (DECRG) of the World Bank. All comments are welcome and should be sent to: dlederman@worldbank.org & bailey_klinger@ksgphd.harvard.edu