Cultural diversity and export sophistication

By extending the Hausmann et al., (2007)'s theoretical model involving cost discovery, we show that cultural diversity affects export sophistication by increasing the degree of heterogeneity in the economy. Specifically, cultural diversity pushes the technology frontier of the economy outwards, which improves export sophistication level. Our theoretical results suggest that cultural diversity also increases the growth rate of export sophistication by improving the economy's ability to operate closer to its technology frontier. We use panel data that covers 85 countries over the 1995-2014 period to empirically evaluate our theoretical predictions. Pooled and random effects regression results show that cultural diversity and the degree of export sophistication are positively related and this association is statistically significant. However, fixed effects estimation results show that the impact of cultural diversity on growth rate of export sophistication is statistically insignificant. Finally, we find that the impact of cultural diversity on export sophistication does not vary significantly on an annual basis. However, over longer periods, this effect increases in size.