Dr. Nadeem Javaid, Assistant Professor, Karachi School for Business & Leadership (KSBL), along with Pier Paolo Saviotti, University Pierre Mendés & GREDEG-CNRS, France published a research article titled ‘Financial System and Technological Catching Up: An Empirical Analysis; Is there a recipe for Increasing the Export Variety of Nations?’ in The Journal of Evolutionary Economics. It is the first research journal publication from KSBL faculty. Journal of Evolutionary Economics is a well-reputed journal with 1.0 impact factor and serves as an international forum for discussion to emphasize dynamics, changing structures, and disequilibrium processes with an evolutionary perspective of the economy. Evolutionary economics confronts with a higher degree of complexity and strongly contributes to a better understanding of the rich and varied patterns of economic systems and their development.
The authors believe that the gaps in productivity and income per capita across the nations can be narrowed down by technological catching-up; which is defined as creating and assimilating new technologies for the production of new goods and services i.e. variety. There are two types of variety pertaining to the emergence of new commodities (i) related variety, similar to that already present in the economic system and, (ii) unrelated variety, completely different from that already present in the economic system. It is also possible to interpret related variety as mainly due to exploitation activities, while unrelated variety would require a greater content of exploration activities. An increase in the variety of any economic system represents the qualitative changes in its composition. The authors argue that an increase in related export variety (REV)and unrelated export variety (UEV) of a country means that its economic agents are striving to further exploit and explore its available endowments by developing certain capabilities or institutions. If today a country is exporting something new, intuitively this reflects the fact that the country has developed certain technological capabilities to do so. Variety is the outcome of innovation and search activities that in turn crucially depends on knowledge and R&D; each calls for long-term commitment and constant creation of Schumpeterian rents above and beyond risk sharing. As a consequence, the financial system becomes vital to an expansion of the product/export variety of any economic system. Therefore, this research explores the role of the financial system in technological catching-up in the expectation that financing mechanisms affect the production and the exports of new or “new to the market” commodities.
In this research, the authors have empirically analyzed the data about 97 countries’ covering the period from 1992 to 2005 and they have found that the financial system plays an important role to increase both types of export variety for all countries but that, for the most successful developers, the banking system and the stock market play different roles, with the former being relatively more appropriate for related export variety and the latter for unrelated export variety. Such specialization of different forms of the financial system seems to confirm that stock markets are likely to be relatively more appropriate to fund the exploratory type of innovations which are required to increase unrelated export variety. Furthermore, they have found that education system, natural resources, cost of doing business, political system, quality of governance and the degree of openness of the countries do matter in this process of technological catching-up; however their impact varies from country to country depending upon their level of development. Fine details and findings of this research have lot of policy implications for financial sector reforms.
The article is listed at Springer Link and can be accessed HERE.