Institutions and Export Specialization: Just Direct Effects?

SUMMARY Many developing countries' exports tend to be highly concentrated in terms of sectors and even products. In particular, they are strongly specialized in self‐contained sectors. Recent economic literature has shown that institutions contribute to explaining this pattern. In this paper, we argue that the degree of self‐containment itself is endogenous to institutions. Ceteris paribus a given sector will therefore have different levels of interactions with the rest of the economy across countries depending on the quality of institutions. We provide supportive evidence using a simultaneous equation approach on data on sectoral trade, country‐specific input‐output linkages, and institutional strength.