The relationship of digitalization, industrialization, financial freedom and institutional quality with economic complexity: A panel data analysis on E−7 countries

Abstract

Economic complexity is an indicator that measures the diversity and sophistication of the production structure of a country's economy. This concept is an important tool for economic development and international competitiveness. This study investigates the long-run effects of digitalization, industrialization, financial freedom, and institutional quality on economic complexity within the E−7 countries (Brazil, China, India, Indonesia, Mexico, Russia, and Türkiye) from 1995 to 2021. Employing panel cointegration analysis through the Durbin-Hausman approach and long-run estimation via the Augmented Mean Group estimator, the study accounts for cross-sectional dependence and slope heterogeneity. The results reveal heterogeneous dynamics across countries: Digitalization increases complexity in China and Türkiye while reducing it in Brazil, Indonesia, and Russia. Industrialization positively contributes to complexity in Brazil and Türkiye, whereas financial freedom exhibits positive effects in Indonesia, Mexico, and Russia but negative in China and India. Institutional quality reduces economic complexity in Brazil and Mexico, but increases it in Turkey. These findings highlight the context-dependent nature of structural transformation and underscore the importance of aligning national digital, industrial, and financial strategies with institutional reforms. The study contributes to the literature by offering a multidimensional empirical assessment of complexity determinants within an emerging economy context. As a policy recommendation, targeted reforms that strengthen institutional governance and enable productive digital and industrial ecosystems are essential to unlocking complexity-driven development in E−7 economies.