Product Diversification and Relatedness: Evidence From Turkish Manufacturing Firms

Abstract

Economic diversification is a critical issue for the sustainability of growth due to its dynamic learning effect and risk-spreading dimension. To understand how the productive structure evolves in the economy, it is important to examine the product diversification behavior of firms in depth. The recent research in product diversification has also paid attention to the relatedness concept that is emerged from the Product Space framework. Principle of relatedness suggest that economic actors tend to diversify towards related products that require capabilities similar to their own.

This thesis emphasizes the role of relatedness and examines the impact of proximity to firm- and place-based capabilities on the product diversification process of firms in Türkiye. Using a large firm-level data between 2012-2017 and logistic regression methodology, this thesis analyze the extent to which a firm's choice of a new product is influenced by (1) the firm's existing export portfolio, (2) the firm's existing import portfolio, (3) the competitive export portfolio of the region in which the firm is located, and (4) the competitive export portfolio of its neighboring regions.

Empirical findings suggest that firms diversify into related products that are aligned with firm- and location-based capabilities when choosing new products. In particular, firm-level capabilities appear to play a more important role in driving new product choices than existing capabilities at the regional level. Regarding the spillover effect across regions, there is no significant effect of capabilities available in neighboring regions on firms' choice of new products. The empirical findings are robust when agglomeration externalities, firm-level control variables and different subsamples are considered. The subsample estimates reveal that the effect of relatedness on product choice varies across different firm size groups and product complexity levels.