When sophistication matters: productive competitiveness and capital market development

Julio Villavicencio

Journal of Economics, Finance and Administrative Science, 2026, vol. 31, issue 62, 353-365

Abstract: PurposeThis study aims to examine the role of productive competitiveness in capital market development, emphasizing its importance in countries with weaker institutional environments. Productive competitiveness is defined as a country's capability to produce a diverse range of complex products, measured through the economic fitness index (EFI).Design/methodology/approachUsing panel data for 98 countries during 1997–2022, the analysis applies fixed-effect instrumental variable regressions to assess the effect of EFI on capital market development and tests the interaction between EFI and institutional quality. The economic complexity index is used as a robustness check.FindingsResults show that productive competitiveness is a key driver of financial deepening. The interaction term indicates that the effect of the EFI becomes more important in countries with weaker institutional quality, suggesting that productive sophistication plays a comparatively stronger role in explaining capital market development when institutional conditions are less favorable.Practical implicationsEFI can guide firm-level diversification strategies and serve as an information-signaling metric for investors by revealing the sophistication and scalability of firms' productive capabilities. For policymakers, EFI enables the prioritization of high-complexity sectors and helps attract long-term capital, broadening market participation and strengthening financial system resilience. These strategies should be coordinated with institutional improvements, given the interaction between EFI and institutional quality.Originality/valueThis study suggests that productive competitiveness, measured through the EFI, is a significant driver of capital market development and becomes more important where institutional quality is weak. These results are grounded in the evolutionary and sequential view of financial development, in which productive sophistication precedes financial sophistication.

Keywords: Capital market development; Economic fitness index (EFI); Economic complexity index (ECI); Institutional quality (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jefasp:jefas-10-2025-0355

DOI: 10.1108/JEFAS-10-2025-0355

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