Related Variety, Unrelated Variety and Economic Growth: A Case of South Asian Countries

Abstract

Economic theory suggests that the regions with high R&D intensity and innovative industries located in proximity are likely to benefit the knowledge spill over. This concept is the central idea of the economics of agglomeration. Recent literature on knowledge spill over argue that diversified economic structures are more conducive for knowledge spill over than the specialized structures: a concept that is generally known as Jacobian Externalities. It further argues that diversification can be further decomposed into two forms i.e. related variety and unrelated variety. Related variety is diversification of production in related or similar products which commonly results in intra-industry knowledge spill over resulting in incremental innovation whereas unrelated variety is diversification of production in unrelated or dissimilar products that generally results in interindustry knowledge spill over and results in radical innovation. Research on related and unrelated variety and their impact on growth is scarce in developing countries, particularly in South Asian region. Therefore, this study examines the relationship of related and unrelated variety with economic growth in six South Asian countries using secondary data from 1995 to 2019. Since products at two-digit Standard International Trade Classification (SITC) are unrelated to each other, unrelated variety is calculated at two-digit level and related variety is calculated at fivedigit level because of the similarity among sectors. Using fixed effects regressions on the standard growth model, our findings suggest that related specialization is beneficial for economic growth in South Asian countries and unrelated variety has a positive relationship with growth only when government effectiveness is high.