The Relationship Between Economic Integration and Economic Complexity: Analysis of EU27 Countries

Abstract

The aim of this study is to examine the effects of the long-term dynamic impacts of economic integration on economic complexity using the annual data for the period 1996-2018 for the EU27 countries. The cointegration relationship between the series was estimated using the Durbin-Hausman cointegration test developed by Westerlund (2008). The AMG test, developed by Eberhardt and Bond (2009) and Eberhardt and Teal (2010), was applied for the estimation of long-term panel cointegration coefficients. According to the findings, institutional quality, economies of scale, and technological progress have a positive and significant impact on economic complexity. While no significant effect of FDI and productivity on economic complexity was found for the overall panel, heterogeneous effects were identified in country-specific results. Based on these findings, it is concluded that integration can help enhance the complexity of the EU27 countries through institutional quality, technological progress, and economies of scale. On the other hand, to benefit from the positive impact of FDI in terms of complexity, it is recommended that FDI decisions be concentrated in relatively less developed countries within the region.

Keywords

• Economic Complexity
• Economic Integration
• Panel Cointegration

Ekonomik Entegrasyon ve Ekonomik Karmaşıklık İlişkisi: AB27 Ülkeleri Analizi

Öz

Bu çalışmanın amacı, AB27 ülkelerine ait 1996-2018 dönemi yıllık verileri ile ekonomik entegrasyonun uzun dönemli dinamik etkilerin ekonomik karmaşıklık üzerindeki etkilerini incelemektir. Seriler arasında eşbütünleşme ilişkisi Westerlund (2008) tarafından geliştirilen Durbin-Hausman eşbütünleşme testi ile tahmin edilmiştir. Uzun dönem panel eşbütünleşme katsayı tahmini için Eberhardt ve Bond (2009), Eberhardt ve Teal (2010) tarafından geliştirilen AMG testi uygulanmıştır. Elde edilen bulgulara göre kurumsal kalite, ölçek ekonomileri ve teknolojik ilerleme etkilerinin ekonomik karmaşıklık üzerinde pozitif ve anlamlı bir etkisi olduğu tespit edilmiştir. Panelin geneli için DYY ve verimlilik etkilerinin ekonomik karmaşıklık üzerinde anlamlı bir etkisi bulunamazken ülke bazlı bulgularda heterojen etkiler tespit edilmiştir. Bu bulgulara göre entegrasyonun kurumsal kalite, teknolojik ilerleme ve ölçek ekonomileri yolu ile AB27 ülkelerinin karmaşıklığının artırılmasında yardımcı olabileceği sonucuna varılmıştır. Öte yandan, DYY etkisinin karmaşıklık bağlamında pozitif etkisinden faydalanmak amacıyla DYY kararlarının bölge içinde yer alan ülkeler arasında nispeten daha az gelişmiş ülkelerde yoğunlaştırılması önerilmektedir.

Anahtar Kelimeler

• Ekonomik Karmaşıklık
• Ekonomik Entegrasyon
• Panel Eşbütünleşme

Kaynakça

1. Ajide, K. B. (2022). Is natural resource curse thesis an empirical regularity for economic complexity in Africa?. Resources Policy, 76, 1-11. https://doi.org/10.1016/j.resourpol.2022.102755
2. Allen, C., Gasiorek, M. ve Smith, A. (1998). The competition effects of the Single Market in Europe. Economic policy, 13(27), 440-486. https://doi.org/10.1111/1468-0327.00038
3. Anderson, P. W., Arrow, K. ve Pines, D. (1988). The economy as an evolving complex system. CRC Press.
4. Antonietti, R. ve Franco, C. (2021). From FDI to economic complexity: a panel Granger causality analysis. Structural Change and Economic Dynamics, 56, 225-239. https://doi.org/10.1016/j.strueco.2020.11.001
5. Arthur, W. B. (1999). Complexity and the economy. Science, 284(5411), 107–109. https://doi.org/10.1126/science.284.5411.107
6. Arthur, W. B. (2009). Complexity and the economy. J. B. Rosser (Ed.), Handbook of research on complexity içinde (s. 12-21). Edward Elgar Publishing. https://doi.org/10.4337/9781781952665.00007
7. Arthur, W. B. (2014). Complexity and the economy. Oxford University Press.
8. Arthur, W. B., Durlauf, S. N. ve Lane, D. (1997). The economy as an evolving complex system II. CRC Press.

9. Bai, J. ve Ng, S. (2004). A PANIC attack on unit roots and cointegration. Econometrica, 72(4), 1127-1177. https://doi.org/10.1111/j.1468-0262.2004.00528.x
10. Balassa, B. (1961). The theory of economic integration. George Allen & Unwin Publishing.
11. Baldwin, R. (1989). The growth effects of 1992. Economic Policy, 4(9), 247-281. https://doi.org/10.2307/1344471
12. Balland, P. A., Broekel, T., Diodato, D., Giuliani, E., Hausmann, R., O'Clery, N. ve Rigby, D. (2022). The new paradigm of economic complexity. Research Policy, 51(3), 1-11. https://doi.org/10.1016/j.respol.2021.104450
13. Beinhocker, E. D. (2006). The origin of wealth: Evolution, complexity, and the radical remaking of economics. Harvard Business School Press.
14. Blomquist, J. ve Westerlund, J. (2013). Testing slope homogeneity in large panels with serial correlation. Economics Letters, 121(3), 374-378. https://doi.org/10.1016/j.econlet.2013.09.012
15. Blomstrom, M. ve Kokko, A. (1997a). Regional integration and foreign direct investment. Working Paper Series in Economics and Finance No. 172. https://www.nber.org/papers/w6019
16. Blomstrom, M. ve Kokko, A. (1997b). Regional integration and foreign direct investment: A conceptual framework and three cases. Policy Research Working Paper No. 1750. https://ssrn.com/abstract=620599
17. Blume, L. E., ve Durlauf, S. N. (2006). The economy as an evolving complex system III. Oxford University Press.
18. Bonfiglioli, A. (2008). Financial integration, productivity and capital accumulation. Journal of International Economics, 76(2), 337-355. https://doi.org/10.1016/j.jinteco.2008.08.001
19. Brada, J. C. ve Mendez, J. A. (1988). An estimate of the dynamic effects of economic integration. The Review of Economics and Statistics, 70(1), 163-168. https://doi.org/10.2307/1928166
20. Breitung, J. (2005). A parametric approach to the estimation of cointegration vectors in panel data. Econometric Reviews, 24(2), 151-173. https://doi.org/10.1081/ETC-200067895
21. Breusch, T. S. ve Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The review of economic studies, 47(1), 239-253. https://doi.org/10.2307/2297111
22. Cavdar, S. C. ve Aydin, A. D. (2015). An empirical analysis about technological development and innovation indicators. Procedia-Social and Behavioral Sciences, 195, 1486-1495. https://doi.org/10.1016/j.sbspro.2015.06.449
23. Cooper, C. A. ve Massell, B. F. (1965). A new look at customs union theory. The economic journal, 75(300), 742-747. https://doi.org/10.2307/2229672
24. DeRosa, D. A. (1998). Regional integration arrangements: Static economic theory, quantitative findings, and policy guidelines. Policy Research Working Papers, https://doi.org/10.1596/1813-9450-2007
25. Durbin, J. ve Watson, G. S. (1950). Testing for serial correlation in least squares regression: I. Biometrika, 37(3/4), 409-428. https://doi.org/10.2307/2332391
26. Durlauf, S. N. (1998). What should policymakers know about economic complexity?. Washington Quarterly, 21(1), 155-165. https://doi.org/10.1080/01636609809550300
27. Eberhardt, M. ve Bond, S. (2009). Cross-section dependence in nonstationary panel models: a novel estimator. MPRAPaperNo. 17692, https://mpra.ub.uni-muenchen.de/id/eprint/17692
28. Eberhardt, M. ve Teal, F.(2008). Modeling technology and technological change in manufacturing: how do countries differ?, CSAE WPS/2008-12, https://ora.ox.ac.uk/objects/uuid:7bc5a08f-3372-4f1c-b721-d6bd8cb1d346
29. Eberhardt, M. ve Teal, F.(2010). Productivity analysis in global manufacturing production. University of Oxford Department of Economics Discussion Paper Series, https://ora.ox.ac.uk/objects/uuid:f9d91b40-d8b7-402d-95eb-75a9cbdcd000
30. Eden, L. ve Li, D. (2004). The new regionalism and foreign direct investment in the Americas. Sidney Weintraub (Ed.), NAFTA’s impact on North America: The first decade içinde (s. 21-68). Center for Strategic and International Studies.
31. Fontana, M. (2010). Can neoclassical economics handle complexity? The fallacy of the oil spot dynamic. Journal of Economic Behavior & Organization, 76(3), 584-596. https://doi.org/10.1016/j.jebo.2010.08.010
32. Foster-McGregor, N., Alcorta, L., Szirmai, A. ve Verspagen, B. (Ed). (2021). New perspectives on structural change: Causes and consequences of structural change in the global economy. Oxford University Press.
33. Gabrielczak, P. ve Serwach, T. (2019). Economic ıntegration and export complexity: The case of Slovakia 1. Ekonomicky Casopis, 67(2), 115-134. https://dspace.uni.lodz.pl:8443/xmlui/handle/11089/20707
34. Gabrielczak, P. ve Serwach, T. (2020). Does the euro increase the complexity of exported goods? The case of Estonia. Journal of Baltic Studies, 51(1), 105-124. https://doi.org/10.1080/01629778.2019.1694551
35. Gehringer, A. (2013). Growth, productivity and capital accumulation: The effects of financial liberalization in the case of European Integration. International Review of Economics & Finance, 25, 291-309. https://doi.org/10.1016/j.iref.2012.07.015
36. Gnangnon, S. K. (2021). Effect of productive capacities on economic complexity. Journal of Economic Integration, 36(4), 626-688. https://doi.org/10.11130/jei.2021.36.4.626
37. Goodman, B. ve Ceyhun, F. (1976). US export performance in manufacturing industries: an empirical investigation. Weltwirtschaftliches Archiv, 112(3), 525-555. https://doi.org/10.1007/BF02696816
38. Gujarati, D.N. (2003). Basic Econometrics (4. Baskı). McGraw-Hill Hausmann, R. ve Hidalgo, C. A. (2011). The network structure of economic output. Journal of economic growth, 16, 309-342. https://doi.org/10.1007/s10887-011-9071-4
39. Hausmann, R., Hidalgo, C., Bustos, S., Coscia, M., Chung, S., Jimenez, J., Simoes, A. ve Yıldırım, M. A. (2013). The atlas of economic complexity: Mapping paths to prosperity. MIT Press.
40. Hausmann, R., Hwang, J. ve Rodrik, D. (2007). What you export matters. Journal of economic growth, 12, 1-25. https://doi.org/10.1007/s10887-006-9009-4
41. Hidalgo, C. A. ve Hausmann, R. (2009). The building blocks of economic complexity. Proceedings of the national academy of sciences, 106(26), 10570-10575. https://doi.org/10.1073/pnas.0900943106
42. Hoang, D. P. ve Chu, L. K. (2023). Progression to higher economic complexity: The role of institutions. Journal of the Knowledge Economy, 14(4), 4339-4366. https://doi.org/10.1007/s13132-022-01059-x
43. Hosny, A. S. (2013). Theories of economic integration: A survey of the economic and political literature. International Journal of Economy, Management and Social Sciences, 2(5), 133-155. https://citeseerx.ist.psu.edu
44. Jaber, T. A. (1970). The relevance of traditional integration theory to less developed countries. Journal of Common Market Studies, 9(3), 254-267. https://doi.org/10.1111/j.1468-5965.1971.tb01001.x
45. Jin, L., Duan, K., Shi, C. ve Ju, X. (2017). The impact of technological progress in the energy sector on carbon emissions: an empirical analysis from China. International journal of environmental research and public health, 14(12), 1505. https://doi.org/10.3390/ijerph14121505
46. Kamguia, B., Keneck‐Massil, J., Njangang, H. ve Tadadjeu, S. (2023). Sophistication gap between countries: The effect of research and development expenditure. Economics of Transition and Institutional Change. 1-40. https://doi.org/10.1111/ecot.12400
47. Kannen, P. (2020). Does foreign direct investment expand the capability set in the host economy? A sectoral analysis. The World Economy, 43(2), 428-457. https://doi.org/10.1111/twec.12869
48. Kao, C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of econometrics, 90(1), 1-44.https://doi.org/10.1016/S0304-4076(98)00023-2
49. Khan, H., Khan, U. ve Khan, M. A. (2020). Causal nexus between economic complexity and FDI: Empirical evidence from time series analysis. The Chinese Economy, 53(5), 374-394. https://doi.org/10.1080/10971475.2020.1730554
50. Kimbugwe, K., Perkidis, N., Yeung, M., Kerr, W. ve Perdikis, N. (Ed.). (2012). Economic development through regional trade: A role for the new East African community? (1. Baskı). Palgrave Macmillan.
51. Kreinin, M. E. (1964). On the dynamic effects of a customs union. Journal of Political Economy, 72(2), 193-195. https://doi.org/10.1086/258889
52. Lapatinas, A. (2019). The effect of the Internet on economic sophistication: An empirical analysis. Economics Letters, 174, 35-38. https://doi.org/10.1016/j.econlet.2018.10.013
53. Leite, D. W. ve Cardoso, L. C. (2023). Human capital and technology in the growth of economic structure. Investigación económica, 82(323), 27-52. https://doi.org/10.22201/fe.01851667p.2023.323.82953
54. Levy Yeyati, E. L., Stein, E. ve Daude, C. (2003). Regional integration and the location of FDI. IDB Working Paper No. 414, http://dx.doi.org/10.2139/ssrn.1818703
55. Mariani, M. S., Vidmer, A., Medo, M. ve Zhang, Y. C. (2015). Measuring economic complexity of countries and products: which metric to use?. The European Physical Journal B, 88, 1-9. https://doi.org/10.1140/epjb/e2015-60298-7
56. Mattli, W. (1999). Explaining regional integration outcomes. Journal of European Public Policy, 6(1), 1-27. https://doi.org/10.1080/135017699343775
57. Méndez-Carbajo, D. ve Thomakos, D. D. (2003). Economic integration, market discipline and productivity growth in Spain. Journal of International Trade & Economic Development, 12(4), 359-375. https://doi.org/10.1080/0963819032000154801
58. Moon, H. R. ve Perron, B. (2004). Testing for a unit root in panels with dynamic factors. Journal of econometrics, 122(1), 81-126. https://doi.org/10.1016/j.jeconom.2003.10.020
59. Moreira, M. M. ve Lopez Cordova, E. (2003). Regional integration and productivity: The experiences of Brazil and Mexico. BID-Intal-ITD-STA Working Paper No. 14, http://dx.doi.org/10.2139/ssrn.422480
60. Moreno‐Casas, V. ve Bagus, P. (2022). Dynamic efficiency and economic complexity. Economic Affairs, 42(1), 115-134. https://doi.org/10.1111/ecaf.12509
61. Mutambara, T. E. (2021). Implications of static and dynamic effects of economic integration for investment inflows and outflows using theories on industrial location: A theoretical debate. International Journal of Business, Economics and Law, 24(6), 17-27. https://ijbel.com
62. Naciri, N. ve Tkiouat, M. (2015). Complex system theory development. International Journal of Latest Research in Science and Technology, 4(6), 93-103. https://www.mnkjournals.com/journal/ijlrst/Article.php?paper_id=10598
63. Nguyen, C. P. ve Su, T. D. (2021). Economic integration and economic complexity: The role of basic resources in absorptive capability in 40 selected developing countries. Economic Analysis and Policy, 71, 609-625. https://doi.org/10.1016/j.eap.2021.07.001
64. Nguyen, C. P., Schinckus, C. ve Su, T. D. (2020). The drivers of economic complexity: International evidence from financial development and patents. International Economics, 164, 140-150. https://doi.org/10.1016/j.inteco.2020.09.004
65. Nguyen, C. P., Schinckus, C. ve Su, T. D. (2023). Determinants of economic complexity: A global evidence of economic integration, institutions, and internet usage. Journal of the Knowledge Economy, 14(4), 4195-4215. https://doi.org/10.1007/s13132-022-01053-3
66. O’Brien, R. M. (2007). A caution regarding rules of thumb for variance inflation factors. Quality & Quantity, 41, 673-690. https://doi.org/10.1007/s11135-006-9018-6
67. O'Connell, P. G. (1998). The overvaluation of purchasing power parity. Journal of international economics, 44(1), 1-19. https://doi.org/10.1016/S0022-1996(97)00017-2
68. OECD (2024). OECD Data. https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm
69. Oumbé, H. T., Djeunankan, R. ve Ndzana, A. M. (2023). Does information and communication technologies affect economic complexity?. SN Business & Economics, 3, https://doi.org/10.1007/s43546-023-00467-8
70. Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61(S1), 653-670. https://doi.org/10.1111/1468-0084.0610s1653
71. Penn World Table (2024), International Comparisons of Production, Income and Prices Version 10.0. https://febpwt.webhosting.rug.nl/Dmn/AggregateXs/PivotShow
72. Perelman, S. (1995). R&D, technological progress and efficiency change in industrial activities. Review of Income and Wealth, 41(3), 349-366. https://doi.org/10.1111/j.1475-4991.1995.tb00124.x
73. Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels. CESifo Working Paper Series 1229, https://ideas.repec.org/p/ces/ceswps/_1229.html
74. Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967-1012. https://doi.org/10.1111/j.1468-0262.2006.00692.x
75. Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross‐section dependence. Journal of applied econometrics, 22(2), 265-312. https://doi.org/10.1002/jae.951
76. Pesaran, M. H. ve Yamagata, T. (2008). Testing slope homogeneity in large panels. Journal of econometrics, 142(1), 50-93. https://doi.org/10.1016/j.jeconom.2007.05.010
77. Pesaran, M. H., Ullah, A. ve Yamagata, T. (2008). A bias‐adjusted LM test of error cross‐section independence. The econometrics journal, 11(1), 105-127. https://doi.org/10.1111/j.1368-423X.2007.00227.x
78. Phillips, P. C. ve Sul, D. (2003). Dynamic panel estimation and homogeneity testing under cross section dependence. The econometrics journal, 6(1), 217-259. https://doi.org/10.1111/1368-423X.00108
79. Plummer, M. G. (1997). ASEAN and the Theory of regional economic integration: A survey. ASEAN Economic Bulletin, 14(2), 202-214. https://www.jstor.org/stable/25773484
80. Robson, P. (1993). The new regionalism and developing countries. Journal of Common Market Studies, 31(3), 329-348. https://doi.org/10.1111/j.1468-5965.1993.tb00467.x
81. Robson, P. (1998). The economics of international integration (5. Baskı). Routledge.
82. Rosamond, B. (2008). Rethinking classical integration theory. A. F. Cooper, C.W. Hughes ve P. De Lombaerde (Ed.), Regionalisation and global governance: The taming of globalisation? içinde (s. 80-96). Routledge.
83. Sapir, A. (1992). Regional integration in Europe. The Economic Journal, 102(415), 1491-1506. https://doi.org/10.2307/2234805
84. Schiff, M. W. ve Winters, L. A. (1998). Dynamics and politics in regional integration arrangements: an introduction. The World Bank Economic Review, 12(2), 177-195. https://doi.org/10.1093/wber/12.2.177
85. Serwach, T. ve Gabrielczak, P. (2021). Does European integration make exports more complex?. Argumenta Oeconomica, 1(46), 155-168. https://www.dbc.wroc.pl/dlibra/publication/152473/edition/110258?language=en
86. Sheer, A. (1981). A survey of the political economy of customs unions. Law and Contemporary Problems, 44(3), 33-53. https://doi.org/10.2307/1191209
87. Terleckyj, N. E. (1980). What do R&D numbers tell us about technological change?. The American Economic Review, 70(2), 55-61. https://www.jstor.org/stable/1815440
88. The Atlas of Economic Complexity (2024). Complexity Rankings. https://atlas.cid.harvard.edu/rankings
89. Torayeh, N. M. (2011). Manufactured exports and economic growth in Egypt: Cointegration and causality analysis. Applied Econometrics and International Development, 11(1), 111-135. https://www.usc.gal/economet/reviews/aeid11110.pdf
90. Tovias, A. (1991). A survey of the theory of economic integration. Journal of European Integration, 15(1), 5-23. https://doi.org/10.1080/07036339108428964
91. UNCTAD (2024). World Investment Report. https://unctad.org/topic/investment/world-investment-report
92. Ünal, B. (2021). Karmaşıklık iktisadı: Teorik bir inceleme. İnsan ve Toplum Bilimleri Araştırmaları Dergisi, 10(1), 12-27. https://doi.org/10.15869/itobiad.803089
93. Viner, J. (1950). The Customs Union Issue. Oxford University Press.
94. Vu, T. V. (2022). Does institutional quality foster economic complexity? The fundamental drivers of productive capabilities. Empirical Economics, 63(3), 1571-1604. https://doi.org/10.1007/s00181-021-02175-4
95. Walz, U. (1997). Dynamic effects of economic integration: A survey. Open economies review, 8(3), 309-326. https://doi.org/10.1023/A:1008298900468
96. Walz, U. (1999). Dynamics of regional integration. Physica Heidelberg.
97. Westerlund, J. (2008). Panel cointegration tests of the Fisher effect. Journal of applied econometrics, 23(2), 193-233. https://doi.org/10.2307/2297111
98. White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48(4), 817-838. https://doi.org/10.2307/1912934
99. World Bank (2024). World Development Indicators. https://databank.worldbank.org/source/world-development-indicators#
100. World Bank (2024). World Governance Indicators. https://www.govindicators.org/#:~:text=Voice%20and%20Accountability,Government%20Effectiveness
101. Wu, Y. (2000). Productivity, growth and economic integration in the Southern China region. Asian Economic Journal, 14(1), 39-54. https://doi.org/10.1111/1467-8381.00099