Economic complexity of Italian provinces: the role of cognitive and institutional proximity

This study investigates the determinants of economic complexity by examining the extent to which institutional and cognitive proximity influence the sophistication of regional production systems. Grounded in the economic complexity paradigm, which emphasizes the accumulation of tacit knowledge and non-tradable productive capabilities as drivers of sustained growth, the analysis focuses on Italian provinces (NUTS-3) between 2008 and 2018. We use export data from ISTAT’s Coeweb to calculate the Fitness-Complexity Index (FCI), which captures the degree of sophistication of regional economies. The study integrates measures of institutional quality, related variety, technological relatedness, and technological breadth to assess the impact of institutional and cognitive proximity on economic complexity. The main findings indicate that formal and informal institutions significantly enhance economic complexity, consistent with their role in reducing transaction costs and fostering knowledge diffusion. Moreover, sectoral related variety appears to promote innovation and product sophistication through knowledge spillovers. Technological breadth is also positively associated with economic complexity, whereas we find no robust evidence for technological relatedness. These findings extend the proximity-based understanding of regional development by showing how cognitive and institutional forms of proximity jointly shape economic complexity, while also revealing that their relative contribution varies markedly across sectors and institutional dimensions.