Networks of export markets and export market diversification

In the era of globalization, policy makers in both developing and developed countries have sought to expand their export destinations, with the expectation that export market diversification can boost export upgrading and economic development. Although extant literature has confirmed that exporters search for new markets in two distinct ways: direct search underpinned by the gravity effect and remote search driven by the extended gravity effect, it has not advanced very far due to the lack of adequate measures of those effects. This article presents a technique that uses available export data to develop measures of those two effects that capture a larger range of factors and thus allow us to more easily predict export market diversification. Our new indicator also simplifies the prediction by combining gravity and extended gravity effects. Empirical results show that the explanatory and predictive power of our new method is better than that of the traditional one based on gravity and extended gravity models.