Self-discovery (a.k.a. cost discovery) is a term I coined with Dani Rodrik and refers the process whereby entrepreneurs invest in activities that expand the set of products a country makes by exploring the feasibility of new products. It is not about inventing products that are new to the world but about finding whether they can be competitively made in a particular place. The discovery is about the place’s capabilities, more than about the product: hence the term. With this concept, Dani Rodrik and I contested the idea that growth will automatically result from the import of foreign technologies and the existence of stable economic institutions. Instead, self-discovery faces market failures that need to be addressed actively through some kind of activist industrial policy.
Pioneer entrepreneurs, i.e. those who make investments in new industries, provide benefits to other entrepreneurs, whether they fail or succeed. In particular, they provide information regarding what works or does not and may solve problems that future imitators need not address. Because of this externality, a market economy may no provide adequate incentives to engage in self-discovery and countries may get stuck in a narrow set of low productivity activities. My paper with Dani Rodrik and later with our student Jason Hwang, allowed us to show a connection between a country’s export mix and its level of development and growth.
At the core of the debate was whether the problem of self-discovery is associated to coordination failures or to the information spillovers we emphasized in our 2003 paper. Subsequent empirical research in which I participated with a team put together by the Inter-American Development Bank showed that coordination failures were more important.
Also, I started to think that the order in which countries diversified could not be random, as we had assumed in the 2003 paper. If the problem is coordination failures due to missing markets, then there has to be a certain logic why some products become feasible before others, given a country’s initial conditions. This insight led to my work on economic complexity and the product space.
Related Publications: Economic development as self-discovery