Export composition and economic growth: evidence from South Asian countries

Purpose The purpose of this paper is to analyze the impact of export composition (diversification or specialization) on economic growth of South Asian countries, while export diversification is further categorized into horizontal and vertical export diversification. Design/methodology/approach The study uses Cobb-Douglas production function, in which export is augmented in the production function. To analyze the non-linear relationship (inverted U- or U-shape) with economic growth, square term of exports Herfindahl index, horizontal, and vertical export diversification are introduced in the model. Panel data of four countries of South Asia, i.e. Bangladesh, India, Pakistan and Sri Lanka is utilized from 1990 to 2013 at annual frequency under fixed effect model. Findings Exports Herfindahl index represented inverted U-shape relationship with economic growth. An increase in export diversification lead to higher economic growth initially, however, after the threshold level, export specialization have positive impact on economic growth. Horizontal export diversification is not beneficial for economic growth initially, however, after the threshold level, introducing new sector increases economic growth in South Asian countries. Vertical export diversification has insignificant and U-shaped relationship with economic growth. Practical implications Education and skill formation are essential components for creativity and innovation, therefore attention must be paid toward labor training and education. Government must encourage the exporters to increase diversification in their export portfolio as well as provide incentives and technical assistance for research and development in the manufacturing sector. Originality/value This study contributes by analyzing the non-linear relationship between export composition, i.e. diversification (horizontal and vertical) or specialization and economic growth in South Asian countries. The study is useful to boost the potential level of exports on sustainable economic growth of South Asian countries. This study provides the essential evidence, information and better understanding to key stakeholders of exports.