Do Exports to Developed Countries Stimulate Export Sophistication? Evidence from ASEAN Countries

Abstract

—A country’s sophistication of production and exports is important for economic transformation. Theoretically, the export destination influences country’s export sophistication. One of the main mechanisms by which exports to developed countries can have a positive impact on production and export sophistication is skills upgrading. This paper aims to examine the effect of exports to developed countries on the export sophistication of ASEAN countries and relatively shows Indonesia’s position towards other ASEAN countries in terms of export sophistication. The method we used is fixed effect panel data model by using the UNCTAD’s index of comparative diversification vis-a-vis developed countries as dependent variable, which measures the similarity of exports with developed countries’ exports. Empirical results show that higher share of exports to developed countries are significantly associated with higher export sophistication, but there are diminishing returns to this effect. The results also show that the Indonesia’s export sophistication is relatively low compared to some other ASEAN countries, which is still below Malaysia and Thailand. This paper suggests that the Indonesian government needs to encourage Indonesian industries to target developed countries in order to enhance their productivity and product quality that lead to capability in exporting to the developed countries, which in turn will increase Indonesia’s exports in general.