Neighbors and the Evolution of the Comparative Advantage of Nations: Evidence of International Knowledge Diffusion?

Geography matters for economic development in ways that go beyond natural resources and trade costs. This paper presents evidence that countries tend to develop export capabilities in products that their geographic neighbors already produce, suggesting that proximity facilitates the diffusion of productive knowledge across borders.

We analyze the evolution of export patterns for over 130 countries spanning four decades. The key finding is that after controlling for all standard determinants of trade, a country is significantly more likely to start exporting a product if its neighbors already export that product. This 'neighbor effect' cannot be explained by shared geography, similar factor endowments, or trade agreements—it points to knowledge spillovers.

The implications are significant for understanding economic development. Countries don't develop in isolation; they learn from their neighbors. This explains why successful industries often cluster geographically and why regional development initiatives may be more effective than isolated national strategies. For policymakers, the findings suggest the value of regional cooperation and the importance of being connected to successful economic neighbors.