In this paper, we seek to analyze the impact that the ability to produce more sophisticated goods has on the economic performance of the Western Balkan region and to determine the factors fostering this process. To do so, we elaborate an export sophistication index, à la Hausmann. The outcomes obtained show that export sophistication has a positive and significant effect on growth in these economies. Additionally, we found that this process is driven more by the sophistication in medium-skill and technology-intensive manufactures goods rather than through sophistication in high-skill goods. Our findings also confirm that a greater participation in international production networks and a better institutional environment stimulates the upgrading of exports, and the subsequent economic growth of these economies.

The recent globalization of the world economy has given rise to new trade patterns through intensification of international production networks (IPN). This phenomenon has enabled countries to undergo a more in-depth specialization in niche parts of the production chain, with important benefits for their economic activity and growth. In this process, the Western Balkan countries (WBC) have proven to be no exception. With their recent integration into the global markets, an increasingly large share of their trade flows entails intermediate goods that are eventually processed and exported. The purpose of this work is to analyze the impact that the different degree of participation in IPN has on the economic performance of the WBC. In doing so, we test the hypothesis that trade created by international fragmentation of production may generate effects on economic growth beyond the beneficial influence of total or final goods trade. Given the availability of data, we focus on the period 2002-2013. Our results, using a set of panel data models, show that the degree of involvement in IPN significantly affects the economic performance of the WBC, which partly explains the observed differences in their growth rates. We also find that the positive influence of processing trade on economic growth are over the traditional gains of an increase in foreign demand. JEL classifications: C33; F14; F15

As a consequence of the increasing globalization and integration of the world's markets, there has been an intensive process of international fragmentation of the production over the last few decades. This phenomenon whereby previously integrated productive activities are segmented and internationally spread is reflected in the rapid increase in parts and components trade, growing at higher rates than final goods trade. In this process, the Western Balkan countries (WBC) have not been an exception. With their recent integration into the global markets, the WBC have witnessed growth in parts and components trade that has even exceeded the world average. This paper examines the determinants of the trade that stems from the international fragmentation of production in the WBC. Using a panel data set of disaggregated bilateral trade flows, we estimate gravity equations for the period 2000-2009. Our findings support the hypothesis drawn from the theory of fragmentation that trade in parts and components is motivated by labor cost differences and by geographical and proximity reasons. The relevance of additional service link costs, as well as the influence of institutional similarity and infrastructure quality or political-economic agreements is also confirmed by our empirical research.

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