Abstract

     Using dynamic panel data techniques, we find that a country’s corporate governance practices have a positive effect on the sophistication of its exported products. We also find that higher dispersion of governance across firms leads to lower economic complexity.

Introduction

     Traditional growth theories suggest that development materializes through the economic complexity that emerges from the interaction of agents operating in an economy (Romer 1990; Grossman and Helpman 1991). One of the expressions of such complexity is the degree of product diversity and sophistication embedded in a country’s productive structure. While least developed countries produce a small quantity of goods, developed nations have higher aggregate production and a more diverse set of products (Hidalgo et al. 2007). Therefore, government policies aiming to fight market failures have a potentially important positive role to play in shaping a country’s production structure (Hausmann, Hwang, and Rodrik 2007).

     One example of such market failure is generated by the existence of asymmetric information inside companies, exacerbating conflicts of interests between individuals working in the same firm. Those agency problems (Fama and Jensen 1983) hinder a country’s development and, therefore, may work as barriers to economic complexity. In this environment, corporate governance principles and laws act to mitigate these negative effects through the improvement of rules and procedures governing decision making in corporate affairs.

Conclusion

     We document a positive effect of corporate governance practices on economic sophistication, and a negative association between within-country governance inequality across firms and economic complexity. These findings suggest that a country’s degree of product sophistication accelerates through policies that improve the overall governance level and/or that alleviate the inequality of governance practices across companies.

     Future research could advance in two directions. First, exploring the mechanisms behind the relationship between economic complexity and corporate governance could generate new insightful policy recommendations. Second, one could evaluate the robustness of the association between corporate governance and economic complexity by using other datasets that contain corporate governance information, such as Thomson Reuters’ ASSET4 ESG data (Cheng, Ioannou, and Serafeim 2014; Duong, Kang, and Salter 2016).