The origins of comparative advantage: economic complexity and industrial inefficiency

In this study, we found out that the degree of complexity of the manufacturing sectors is related to their inefficiency degree and thus affects the comparative advantage. For this purpose, we used data from 4-digit ISIC manufacturing sectors from 28 countries, including 15 developed and 13 developing countries for the period, 2010 to 2019. Using the panel data method, the effect of industry complexity on the degree of inefficiency for each country has been estimated. The Data Envelopment Analysis (DEA) method has been used to estimate the inefficiency index in each industry. The result shows that the relationship between the inefficiency degree and the level of industry complexity in developed countries is hump-shaped, and in developing countries is U-shaped. The findings show that the inefficiency degree in developed countries decreases from the level of industrial complexity threshold of -0.53, while in developing countries increases from -0.19. Therefore, developing countries have a comparative advantage in industries whose level of complexity have in the range of -3 to -0.19 and developed countries in the range of -0.53 to +3. In the case of products whose complexity index is between -0.19 and -0.53, their comparative advantage is unclear.