Letters in Economic Research Updates
When the Stock Market Shapes the Economy: Effects of Market Capitalization on Economic Complexity in Developing Countries
Abstract
Michel Wilfried Zanga Mbarga and Dieudonné Mignamissi
The interaction between market capitalization and economic complexity in emerging and developing countries (EDCs) has been identified as a key factor in the pursuit of sustainable economic growth. The objective of this paper is to explore the effects of market capitalization on economic complexity in 65 EDCs, over the period 1995-2023. More spe- cifically, the study examines how market capitalization influences the Economic Complexity Index (ECI). After applying the Generalized Method of Moments (GMM) and various robustness tests, the results show that market capitalization has a positive and significant impact on economic complexity. These results translate into diversification of production structures, innovation, and the shift towards more technologically sophisticated sectors. However, the effect is contin- gent upon the institutional, socio-cultural, and economic context of the countries: countries with strong institutions and a stable macro-financial environment benefit more from this dynamic, while the effect is mitigated in economies dependent on natural resources or characterized by high social fragmentation. Based on these findings, economic pol- icy recommendations are proposed, including strengthening the institutional framework, effectively regulating financial markets, promoting capital allocation towards high-value-added sectors, and developing human capital.