---
type: claim
domain: grand-strategy
description: "Countries and firms can only diversify into products that use similar capabilities -- the product space is lumpy, and your position in it determines which futures are reachable"
confidence: proven
source: "Hidalgo and Hausmann (2007), Hidalgo 'Why Information Grows' (2015), Atlas of Economic Complexity (Harvard)"
created: 2026-04-21
secondary_domains: [mechanisms]
related_claims:
  - "economic-path-dependence-means-early-technological-choices-compound-irreversibly-through-dominant-designs-and-industrial-structures"
  - "hill-climbing-gets-trapped-at-local-maxima-because-it-can-only-accept-improvements-and-has-no-way-to-see-beyond-the-nearest-peak"
---

# The product space constrains diversification to adjacent products because knowledge and knowhow accumulate only incrementally through related capabilities

Hidalgo and Hausmann (2007) mapped the "product space" -- a network where products are connected if the same countries tend to export both. The resulting graph is not random: it has a dense core of sophisticated manufactures (machinery, electronics, chemicals) connected by shared capabilities, and a sparse periphery of raw materials and simple manufactures that share few capabilities with other products. The structure of this network determines which development paths are feasible.

The mechanism is capability accumulation. Making shirts requires textile knowledge, supply chains, and labor skills. Making electronic textiles (smart fabrics) requires textile knowledge PLUS electronics knowledge. A shirt-making country can reach smart fabrics because it already has half the capability set. A petroleum-exporting country cannot, because petroleum extraction shares almost no capabilities with textiles or electronics. The country must build capability bridges -- intermediate products that share capabilities with both the current position and the target.

This is why development traps exist. Countries stuck in the sparse periphery of the product space (raw materials, simple agriculture) face a "missing capability" problem: the products they could diversify into require capabilities they cannot build incrementally from their current base. The jump from commodity exports to sophisticated manufacturing requires simultaneous investment in education, infrastructure, institutions, and industrial policy -- a coordination problem that most countries cannot solve, which is why economic complexity is the best predictor of future growth (better than education, institutions, or governance measures alone).

The implication for firms is identical: a company's current knowledge base constrains its diversification options. Google can move from search to email to maps to autonomous driving because all share a common capability (large-scale data processing and machine learning). Google cannot easily move into pharmaceutical manufacturing because the capability overlap is near zero.

## Evidence
- Atlas of Economic Complexity (Harvard) -- economic complexity index predicts GDP growth 10-20 years out with R-squared > 0.7, outperforming all other development indicators
- South Korea development trajectory -- moved from textiles to electronics to semiconductors to displays to smartphones, each step adjacent in product space
- Finland post-Nokia -- attempted diversification into gaming (Supercell, Rovio) succeeded because mobile gaming shares capabilities with mobile telecommunications
- Resource curse -- commodity-exporting countries grow slowly precisely because commodities sit in the sparse periphery with few adjacent diversification options

## Challenges
- The product space is not static -- new products create new connections, and the AI revolution may radically restructure which capabilities are adjacent
- Some countries (China) have diversified faster than product space adjacency would predict, possibly through deliberate industrial policy that builds multiple capabilities simultaneously
