Municipal Economic Complexity in Mexico: Productive Capabilities, Wealth, Economic Growth, and Business Sophistication

Abstract

In this study, we calculate the productive capabilities of Mexico’s municipalities (i.e., their Economic Complexity Index, or ECI) and the productive capabilities required for their economic activities to be carried out (i.e., the ECI of their economic activities). We do this in order to determine whether or not the differences in the main municipal economic indicators (such as levels of wealth, economic growth rates, and salaries) are associated with differences in productive capabilities. Specifically, our results illustrate: i) a considerable heterogeneity, in terms of productive capabilities, across municipalities; ii) a positive relationship between the level of economic complexity of municipalities and their level of wealth and rate of economic growth, and iii) a positive relationship between the complexity of economic activities and the average salaries received by those employed in them. Furthermore, by finding that the majority of new firms in complex (non-complex) municipalities generally tend to engage in more sophisticated/higher-value-added (less sophisticated/lower-value-added) economic activities, we provide supporting evidence on the gradual accumulation of productive capabilities within municipalities to the literature on evolutionary economic geography. According to this literature, this is how economies generally develop, i.e., by gradually accumulating productive capabilities so as to become more diverse and be able to engage in more complex economic activities, allowing economies to grow and become wealthier.