Trade sophistication in developing countries: Does export destination matter?

We investigate whether exports to developed economies stimulate export sophistication (represented by UNCTAD’s index of export similarity) in developing countries. Results from fixed-effects estimations suggest that exporting to developed economies enhances the sophistication of exports in the exporting country but there are diminishing returns to this effect. We also find non-linear effects from FDI and income on export sophistication with the effect of income exhibiting diminishing returns which suggests that the gains from exporting to developed economies are higher for lower-income countries; i.e., as income increases, the gains taper off. We discuss the policy implications of these results.