Production complexity, adaptability and economic growth

• Production complexity and adaptability explain differences in economic performance.
• Countries in denser areas of the product space grew faster during 1990–2009.
• Partaking in vertical trade networks is associated with higher levels of output.

This paper analyzes the impact of production complexity and its adaptability on the level of output and on its rate of growth. We develop an endogenous growth model where increased complexity raises the rate of economic growth but has an ambiguous effect on the level of output. Our empirical measure of production adaptability captures the proximity of production sectors within the product space, which we modify to reflect intra-industry trade and the international fragmentation of production. We test the model against a sample of 89 countries over the two decades to 2009 and find that its main predictions are validated.