Economic Complexity and Innovation

The classical complexity index doesn't explicitly measure the technological diversity and innovation intensity of countries. To fill the gap in the complexity measure regarding the link it makes between innovation and growth, I propose a new innovation-adjusted economic complexity index, namely i-ECI+. This paper contributes to economic literature in two ways: i) My index accounts for the value-added exports through innovation and does not arbitrarily assign a scaling parameter unlike the previous papers, which enables me to derive a more accurate complexity measure, ii) I explore the differential effect of the innovation-adjusted complexity through the institutional quality index. The main findings are as follows: Although the classical ECI and i-ECI+ are highly correlated, the panel regression outputs show that using i-ECI+ is a robust measure that increases the regressions R-squared by 8 percentage points. The effect of the newly-created index is through more complex and innovative countries which probably have better quality institutions. The impact of the innovation-adjusted complexity measure on growth increases with increasing levels of institutional quality.