The Economies’ Ability to Produce Diversified and Complex Goods to Meet the Global Competition: Role of Gross Value Chain, Institutional Quality, and Human Capital

Abstract

The theory of capabilities describes the need for a country to adopt different capabilities to enhance its productivity through the production of diversified and complex goods. These capabilities are not independent of the human, physical, institutional, legal systems, and gross value chain (GVC) of a country. Therefore, the current study analyzed the relationship between GVC, institutional quality, human capital development, and the economic fitness of different countries. This study used panel data from 131 countries for the period of 2007–2019. The generalized method of moments (GMM), fully modified ordinary least square (FMOLS), and quantile regression showed that GVC, institutional quality, and human capital development have a big positive effect on a country’s economic health. The quantile regression results also showed that GVC, institutional quality, and skilled human capital have a positive and significant effect on the economic fitness of all three quantiles (25th, 50th, and 75th). Overall, the study concludes that greater GVC participation, political stability, effective government, good rules of law, high regulatory quality, and good human capital all enhance the country’s capabilities to produce diversified and complex goods that increase its market share in the global competitive market. Thus, the government should formulate policies in such a way that they promote participation in GVC to overcome the limitations of resource availability and poor technology. In addition, it should be ensured that effective policy implementation is in place to facilitate business without unjust means, violence, etc.