How do countries accumulate productive knowhow they did not previously have? If the product is new it may require knowhow that nobody in the country possesses. If this involves too many different people, such a product may not be feasible. As a consequence, countries tend to move from the products they know how to make to others that are not too far away in terms of knowhow. The Product Space is a theoretical concept in which the distance between any two products is related to the distance in the capabilities required to make them. As a tool, it can help us determine which products require productive knowhow that is similar to the knowhow a country already possesses.
Empirically, we estimate the knowhow distance between any two products as the probability that a country that makes one successfully also makes the other. Our research has shown that countries diversify by moving preferentially into “nearby” products as captured by the Product Space. We can get a sense of the Product Space by visualizing it as a network. Products are depicted as nodes and are connected if they require similar knowhow. The intensity of the similarity is expressed in the shade of the links. The color of the node expresses the type of product it is (garments, machinery…) and its size expresses global trade in that product. Here is a visualization of the product space using international trade data for the years 2006-2008 that comes from the Atlas of Economic Complexity.
Each country has a certain set of products it is already producing: that is its current position in the Product Space. Checking the direct surroundings of a country’s position suggests which products are nearby in what could be called the “adjacent possible”. With Bailey Klinger, I developed a quantitative measure of how close a country is to a particular product, which we call density. It does a really good job at predicting which products a country will add to its basket of exports, presumably because it can discern which products require only small leaps of new knowhow (see our 2006 and 2007 papers on this topic). We also developed a measure of how well positioned is a country in the product space by calculating how far are all the products it is not making to the products that it is, weighted by how complex are those products. We call this measure the Complexity Outlook Index; it is a great tool for predicting how quickly countries will add to their knowhow and how rapidly they will grow in the future.
You can get a more intuitive understanding of what is going on by examining visually where countries fall in The Product Space (see the Country Pages of the Atlas). The visualization, together with our quantitative measures, serves as a map of possibilities that can guide pioneering entrepreneurs in venturing into industries that are new to the country by informing them about their feasibility, given a country’s existing knowhow. It can also help governments in deciding on policies that can facilitate diversification.
Networks, Product Space