Operationalizing the Product Space: A Road Map to Export Diversification

Much of industrial development is a gradual and path-dependent process. Countries move from the products that they already produce to others that are similar, in terms of capital requirements, knowledge and skills. Not all the feasible new products however contribute in the same way to aggregate value added and growth. A key challenge along the diversification process is the identification of those sectors and goods that are feasible and at the same time have a higher potential to sustain economic development. This paper proposes a methodology that operationalizes the notion of product space, developed by Hausmann and Klinger (2007), Hausmann et al. (2007), and Hidalgo et al. (2007), in order to assist countries to identify those new products that could augment aggregate value using the existing productive capabilities embedded in the current production structure.