Reassessing Export Diversification Strategies: A Cross-Country Comparison

Abstract

This article uses a sample of 44 countries to assess their export performance over the period 1988-2012, using the single-index model, a part of the modern portfolio theory. The article builds four clusters of countries classified by the dominance of exports of 1) fuel products, 2) manufactured products, 3) food items and agricultural products and 4) ores and minerals. All countries in the sample obtain a dominant majority of their export earnings from these broad categories of products. The results are that the export portfolios comprised of manufactured products have a superior performance than export portfolios comprised of non-manufactured products. In particular, from a risk-return perspective the export portfolio of manufactured products dominates the export portfolio of food items and agricultural products which in turn dominates the export portfolio of fuel products and of ores and minerals. This domination validates a priori belief that manufacturing goods and exports is the best strategy for development of exports of a country. An important caveat is that this rosy scenario is unlikely to last. The implications for countries and firms are also discussed.