Bend without breaking: The power of economic flexibility in development

It is well established that, on average, the production structure of a region reacts to changes market access. We show that heterogeneity in responses are important as higher productive flexibility significantly contributes to future economic growth. Cross-country data shows that lack of flexibility can be attributed to specialization in rigid sectors that we characterize as mainly of extractive nature and low capital intensity. Detailed firm-level data from China and Colombia reveals that flexible firms are relatively small, located in large urban areas, relatively intensive in the use of imported inputs and capital. Firms operating in sectors with revealed comparative advantage do not exhibit high flexibility if their sector is itself relatively rigid to changes in market access.