nep-int New Economics Papers
on International Trade
Issue of 2011‒01‒30
twenty-two papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. Trade Costs and Economic Development By Michele Fratianni; Francesco Marchionne
  2. What determines the export performance? A comparative analysis at the world level By Nuno Crespo; Maria Paula Fontoura
  3. Endogenous Market Structures and International Trade By Etro Federico
  4. Offshoring of Services and Corruption: Do Firms Escape Corrupt Countries? By Karpaty, Patrik; Gustavsson Tingvall, Patrik
  5. Measuring fixed costs for firms' use of a free trade agreement : threshold regression approach By Hayakawa, Kazunobu
  6. Global Sourcing under Imperfect Capital Markets By Carluccio, J.; Fally, T.
  7. The Effect of Exchange Rate Changes on Trade in East Asia By Thorbecke, Willem
  8. Determinants of Foreign Direct Investment By Bruce A. Blonigen; Jeremy Piger
  9. Vertical specialisation indicator based on supply-driven input-output model By Meng, Bo; Yamano, Norihiko; Webb, Colin
  10. Fragmentation and Changes in the Asian Trade Network By Norihiko Yamano; Bo Meng; Kiichiro Fukasaku
  11. Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity By Nicholas Bloom; Mirko Draca; John Van Reenen
  12. Globalization and Strategic Research Investments By Bohnstedt, Anna; Schwarz, Christian; Suedekum, Jens
  13. Duration and Term Structure of Trade Agreements By Sergei Guriev; Mikhail Klimenko
  14. Multi-product Firms and Product Basket Adjustments in Ethiopian Manufacturing By Admasu Shiferaw
  15. Proposals for WTO reform : a synthesis and assessment By Hoekman, Bernard
  16. Rising Import Demand in China: Cui Bono and Why? By Rolf J. Langhammer
  17. The Impacts of the Proposed EU-Libya Trade Agreement By George, Clive; Miles, Oliver; Prud'homme, Dan
  18. A Public Firm's R&D Policy and Trade Liberalization By Tomaru, Yoshihiro
  19. Economic growth and and FDI in ASIA: A panel data approach By Tiwari, Aviral; Mutascu, Mihai
  20. The attractiveness of countries for FDI. A fuzzy approach By Marina Murat; Tommaso Pirotti
  21. The Effects of the Internationalisation of Firms on Innovation and Productivity By Siedschlag, Iulia; Zhang, Xiaoheng; Cahill, Brian
  22. Foreign acquisitions, domestic multinationals, and R&D By Bandick, Roger; Görg, Holger; Karpaty, Patrik

  1. By: Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business); Francesco Marchionne (Universita Politecnica delle Marche)
    Abstract: We test the hypothesis of the circular causality between trade costs and degree of economic development using data on Italian provinces. Using different methods to control for multilateral resistance, we apply a gravity equation to estimate sectoral exports to 188 countries over the period 1995-2004. Provincial trade costs are constructed as the sum of five province-specific elasticities, including distance, adjacency, and common money. We find that Italian provinces are heterogeneous with respect to trade costs. These costs are influenced by lagged provincial per capita income and industrial structure. In turn, trade costs influence future provincial per capita income. This two-way relationship between trade costs and income is broadly consistent with the cumulative causation process emphasized by the New Economic Geography.
    Keywords: trade costs, heterogeneity, economic development, gravity equation
    JEL: F10 F14 O52 R12
    Date: 2010–12
  2. By: Nuno Crespo; Maria Paula Fontoura
    Abstract: We use constant market share (CMS) analysis to measure the variations in the market share of 82 of the world’s principal exporting countries between 1995/97 and 2005/07. The results of this analysis serve to stress the importance of competitiveness in explaining export performance. Furthermore, the existence is observed of a spatial tendency, reflected in the fact that countries that are geographically close to each other tend to display a similar behavior with regard to market share evolution and the components into which the variation is broken down.
    Keywords: constant market share, competitiveness, export performance, international trade. Classification- C43, F10, F14.
    Date: 2010–12
  3. By: Etro Federico (Department of Economics, University Of Venice Cà Foscari)
    Abstract: I extend the endogenous market structures approach to international trade theory and policy. When markets are characterized by strategic interactions and endogenous entry, opening up to trade decreases the price level, and increases concentration and the production of each firm, with a positive competition effect on welfare. With endogenous entry of foreign firms in the domestic market it is optimal to set a positive import tariff decreasing in the ratio between entry costs and market size. With endogenous entry of international firms in an integrated market, the optimal subsidy to domestic production is always positive and independent from the relative size of the domestic market. Implications for multinationals engaged in FDIs, indirect trade promotion and the lobbying are also analyzed.
    Keywords: Endogenous entry, gains from trade, import tariff, production subsidy
    JEL: F12 F13
    Date: 2010
  4. By: Karpaty, Patrik (Department of Business, Economics, Statistics and Informatics); Gustavsson Tingvall, Patrik (Stockholm School of Economics and Centre of Excellence for Science and Innovation Studies (CESIS))
    Abstract: In this paper, we analyze how the offshoring of services by Swedish firms is affected by corruption in target economies. Taking stance from the gravity model of trade, we analyze how the choice of country, volume and composition of offshored services is affected by the presence of corruption in target economies. The results suggest that corruption is a deterrent for service offshoring. Firms avoid corrupt countries, and corruption reduces the amount of offshored services. In addition, the sensitivity to corruption is highest for poor countries, and large and internationalized firms are the ones that tend to be the most sensitive to corruption. Given the importance of large firms as international investors and subcontractors, this adds yet another argument for fighting corruption.
    Keywords: Service offshoring; Gravity equation; Heterogenous firms; Corruption
    JEL: F13 F18 L22 O34
    Date: 2011–01–18
  5. By: Hayakawa, Kazunobu
    Abstract: In this paper, by employing the threshold regression method, we estimate the average tariff equivalent of fixed costs for the use of a free trade agreement (FTA) among all existing FTAs in the world. It is estimated to be 3.2%. This global estimate serves as a reference rate in the evaluation of each FTA’s fixed costs.
    Keywords: Costs, Exports, Business, FTA, Gravity equation, Threshold regression
    JEL: F15 F19 F53
    Date: 2011–01
  6. By: Carluccio, J.; Fally, T.
    Abstract: We develop a simple model to study the interactions between a supplier’s financial constraints and contract incompleteness in a vertical relationship. Production complexity increases the extent of contract incompleteness and the hold-up problem, which generates a cost when the supplier needs financial participation from the downstream firm. Vertical integration alleviates the impact of financial constraints but reduces the supplier’s incentives. We apply the model to an analysis of multinational firms’ sourcing strategies and predict that (1) complex and specific inputs are more likely to be sourced from financially developed countries and (2) multinationals are more likely to integrate suppliers located in countries with poor financial institutions, especially when trade involves complex goods. We examine and validate these predictions using firm-level trade data on multinational firms with operations in France. We provide evidence that financial development generates a comparative advantage in the supply of complex goods. Moreover, we find higher shares of intra-firm imports of complex inputs from countries with a lower level of financial development. The findings are robust to different measures of complexity and specificity, and are not driven by industry differences in fixed costs or traditional measures of external financial dependence. Quantitatively, we find that financial development is as important as contract enforcement in alleviating hold-up problems.
    Keywords: Sourcing, FDI, financial constraints, contractual frictions.
    JEL: F10 O16 L23
    Date: 2011
  7. By: Thorbecke, Willem (Asian Development Bank Institute)
    Abstract: This paper considers how exchange rates affect East Asian trade. The evidence indicates that exports produced within regional production networks depend on exchange rates throughout the region while labor-intensive exports depend on exchange rates in the exporting country. These results make sense since the majority of the value-added of processed exports come from imported parts and components while most of the value-added of labor-intensive exports comes from the domestic economy. Recent findings also indicate that imbalances between the People’s Republic of China (PRC) and the United States are a major outlier and that an appreciation of the PRC yuan (CNY) is necessary to reduce these imbalances.
    Keywords: global imbalances exchange rate elasticities prc; exchange rate changes east asia
    JEL: F32 F41
    Date: 2011–01–20
  8. By: Bruce A. Blonigen; Jeremy Piger
    Abstract: Empirical studies of bilateral foreign direct investment (FDI) activity show substantial differences in specifications with little agreement on the set of covariates that are (or should be) included. We use Bayesian statistical techniques that allow one to select from a large set of candidates those variables most likely to be determinants of FDI activity. The variables with consistently high inclusion probabilities are traditional gravity variables, cultural distance factors, parent-country per capita GDP, relative labor endowments, and regional trade agreements. Variables with little support for inclusion are multilateral trade openness, host country business costs, host-country infrastructure (including credit markets), and host-country institutions. Of particular note, our results suggest that many covariates found significant by previous studies are not robust.
    JEL: C52 F21 F23
    Date: 2011–01
  9. By: Meng, Bo; Yamano, Norihiko; Webb, Colin
    Abstract: “Import content of exportsâ€, based on Leontief’s demand-driven input-output model, has been widely used as an indicator to measure a country’s degree of participation in vertical specialisation trade. At a sectoral level, this indicator represents the share of inter-mediates imported by all sectors embodied in a given sector’s exported output. However, this indicator only reflects one aspect of vertical specialisation – the demand side. This paper discusses the possibility of using the input-output model developed by Ghosh to measure the vertical specialisation from the perspective of the supply side. At a sector level, the Ghosh type indicator measures the share of imported intermediates used in a sector’s production that are subsequently embodied in exports by all sectors. We estimate these two indicators of vertical specialisation for 47 selected economies for 1995, 2000, 2005 using the OECD’s harmonized input-output database. In addition, the potential biases of both indicators due to the treatment of net withdrawals in inventories, are also discussed.
    Keywords: Developing countries, Developed countries, Input-output tables, International trade, Vertical specialisation, Ghosh inverse, Supply-driven, Input-output
    JEL: F1 F14
    Date: 2010–12
  10. By: Norihiko Yamano (Norihiko Yamano is Administrator, OECD Directorate for Science, Technology and Industry); Bo Meng (Bo Meng is Consultant, OECD Directorate for Science, Technology and Industry and IDE-JETRO); Kiichiro Fukasaku (Kiichiro Fukasaku is Head of Regional Desks, OECD Development Centre.)
    Abstract: The Asian trade network is increasingly fragmented, resulting in higher dependence on supplies of goods and services from neighbouring countries. The update OECD Input-Output and Bilateral Trade Databases allow us to examine the recent evolution of international trade networks involving ASEAN and East Asian countries at the 2-digit industry level. Using several globalization indicators, this Policy Brief highlights major changes in the pattern of Asia’s trade in intermediate goods and services since the mid-1990s. It concludes by discussing implications for Asia's regional integration.
    Date: 2011–01–01
  11. By: Nicholas Bloom; Mirko Draca; John Van Reenen
    Abstract: We examine the impact of Chinese import competition on patenting, IT, R&D and TFP using a panel of up to half a million firms over 1996-2007 across twelve European countries. We correct for endogeneity using the removal of product-specific quotas following China’s entry into the World Trade Organization. Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT and TFP within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms. These within and between effects were about equal in magnitude, and appear to account for around 15% of European technology upgrading between 2000-2007. Rising Chinese import competition also led to falls in employment, profits, prices and the skill share. By contrast, import competition from developed countries had no effect on innovation. We develop a simple “trapped factor” model of innovation that is consistent with these empirical findings.
    JEL: F14 L25 L60 O33
    Date: 2011–01
  12. By: Bohnstedt, Anna (University of Duisburg-Essen); Schwarz, Christian (University of Duisburg-Essen); Suedekum, Jens (University of Duisburg-Essen)
    Abstract: We develop a general equilibrium model of international trade with heterogeneous firms, where countries can invest into basic research to improve their technological potential. These research investments tighten firm selection and raise the average productivity of firms in the market, thereby implying lower consumer prices and higher welfare. In an open economy, there is also a strategic investment motive since a higher technological potential gives domestic firms a competitive advantage in trade. Countries tend to over-invest due to this strategic motive. There are thus welfare gains from coordinating research investments. The over-investment problem turns to an under-investment problem if there are sufficiently strong cross-country spillovers of basic research investments.
    Keywords: public research investments, public R&D, international trade, heterogeneous firms, basic research, strategic trade policy
    JEL: F12 F13
    Date: 2010–12
  13. By: Sergei Guriev (New Economic School, Moscow, and CEPR); Mikhail Klimenko (School of Economics, Georgia Institute of Technology)
    Abstract: Why are some trade agreements concluded for a limited period of time while others have the form of evergreen contracts supplemented with an advance termination notice clause? We use a dynamic incomplete contracting model to demonstrate that the time structure of the trade agreement is related to the nature of the underlying trade-related investments (or other types of irreversible resource adjustments). If these investments are lumpy and specialized to trade in a particular homogeneous good, the agreements with the fixed term of duration are more likely. The fixed-term agreement provides incentives for the initial investment but leaves the parties the flexibility to revisit the need for future investment by resorting to renegotiation. If the agreement covers trade in goods or services requiring incremental investments with spillovers of the investment benefits across industries, there is a lower risk of overinvestment. Therefore, the parties are more likely to choose an evergreen agreement (with an advance termination notice or an escape clause). We show that these predictions are consistent with the econometric evidence on the trade agreements to which the U.S. is a party.
    Date: 2010–07
  14. By: Admasu Shiferaw (Georg-August-University Göttingen)
    Abstract: This paper analyzes firm level adjustment of the product mix and its implications for aggregate output growth. Using firm level panel data from Ethiopian manufacturing during the period 1996-2007, it shows that about 30% of firms adjust their ‘extensive margin’ annually by adding and/or dropping at least one product and about half of those firms undertake such adjustment only through product adding. At the aggregate level, about 30% of annual growth in sales is accounted for by the adjustment of the extensive margin which is more than four times the net contribution of firm entry and exit. The paper also shows that the likelihood of adding a product tends to decline with firm size and increases dramatically with the incidence of large investment outlays. While the level of productivity does not seem to increase the probability of adding a product, a net increase in the number of products is strongly associated with subsequent growth in sales, productivity and capital stock at the firm level.
    Keywords: Product Switching; Multiproduct Firms; Extensive Margin; Intensive Margin; Ethiopian Manufacturing
    JEL: D21 E23 L11 L60
    Date: 2010–12–31
  15. By: Hoekman, Bernard
    Abstract: This paper summarizes the major arguments and proposals to reform the modus operandi of the World Trade Organization --including decision-making procedures, negotiating modalities, and dispute settlement. Much has already been done to improve the internal and external transparency of World Trade Organization processes. Some proposals for structural reform ignore incentive constraints and the fact that the World Trade Organization is an incomplete contract that must be self-enforcing. Others -- such as calls for a"critical mass"approach to negotiations --can already be pursued (and have been). The agenda for international cooperation increasingly revolves around"behind-the-border"regulatory externalities that do not necessarily lend themselves to binding commitments in a trade agreement. This suggests a focus on strengthening notification/surveillance and developing more effective mechanisms for dialogue on regulatory policies that may create negative spillovers.
    Keywords: Economic Theory&Research,Trade Law,World Trade Organization,Trade and Services,Free Trade
    Date: 2011–01–01
  16. By: Rolf J. Langhammer
    Abstract: As consumer demand for organic food grows, organic certification is increasingly promoted in many developing countries. Organic products earn a premium price on the market compared to conventional varieties. Hence, organic production is often seen as a valuable alternative for developing countries with many smallholders. Using value chain analysis for the case of the pineapple sector in Ghana and extensive data from the European market, this paper tries to shed light on the feasibility and profitability of organic small-scale production. Even though smallholders tend to have quality problems with their fruit and large farms benefit from economies of scale, production for the export market is a realistic option for both organic and conventional smallholders. The results indicate that organic production is more profitable for smallholders than conventional production and farmers collect a fair share of the price premium on the retail level. Even more, from a theoretical perspective, organic farmers should also be more likely to get into contractual relations with exporters. The results are set into perspective with relation to the debates on small versus large farms, environmental impact, and the selection effect of standards
    Keywords: private voluntary standards, organic agriculture, trade in organic products, GLOBALGAP, value chain analysis
    JEL: F14 L11 L15 O13 Q13 Q17
    Date: 2011–01
  17. By: George, Clive; Miles, Oliver; Prud'homme, Dan
    Abstract: The paper provides an overview of the potential social, economic and environmental impacts of an EU-Libya FTA as gauged by the EU-Libya Sustainability Impact Assessment (SIA). The main potential benefits to both the EU and Libya from the proposed trade agreement come from closer cooperation in the energy sector rather than from the economy-wide effects of reducing trade barriers. The agreement may also have significant adverse effects that need to be taken into account.
    Keywords: EU; EU-Libya FTA; Libya FTA; EU FTA; Libya; Libya trade agreement; EU-Libya trade agreement; Libya trade; SIA; Sustainability Impact Assessment; impact assessment; trade impact assessment; EU SIA; Trade; SIA; Prud'homme; Dan Prud'homme; Dan Prudhomme; Prudhomme; Prud'homme
    JEL: O24 Q56 F17 D58 F1
    Date: 2010–11
  18. By: Tomaru, Yoshihiro
    Abstract: This paper studies a public firm's incentive to raise its productive efficiency by undertaking cost-reducing R&D investment when it competes against a foreign private firm. Our focus is to ravel out how a decrease in an importing tariff levied on foreign goods affects this investment level inter alia. We show that when the government imposes non-negative tariffs, a tariff reduction lowers the R&D investment, irrespective of whether the public firm has downward or upward sloping reaction curve. Namely, R&D investment conducted by the public firm is substitutable to an importing tariff. Furthermore, under a linear demand assumption, it is concluded that a tariff reduction necessarily enhances world welfare if both R&D investment and tariffs are set to domestic welfare-maximizing levels. More strict assumptions on marginal cost and R&D cost function make complete trade liberalization desirable from the viewpoint of world welfare.
    Keywords: Mixed Oligopoly; R&D; Trade Liberalization
    JEL: L32 F13 L13
    Date: 2010–08
  19. By: Tiwari, Aviral; Mutascu, Mihai
    Abstract: This study is an attempt to examine the impact of foreign direct investment on economic growth in Asian countries. We did our analysis in the panel framework during 1986 to 2008. We also examined the nonlinearities associated with foreign direct investment and exports in the economic growth process of Asian countries under consideration. We find that both foreign direct investment and exports enhance growth process. In addition, labour and capital also play an important role in the growth of Asian countries. Further, nonlinearity effects show that export-led growth is a better option of growth enhancing in Asian developing countries compared with foreign direct investment-led growth.
    Keywords: Growth; FDI; Connection; Effects; Panel analysis
    JEL: C23 F21 F43
    Date: 2010–12–13
  20. By: Marina Murat; Tommaso Pirotti
    Abstract: This paper presents a new method for measuring the attractiveness of countries for FDI. A ranking is built using a fuzzy expert system whereby the function producing the final evaluation is not necessarily linear and the weights of the variables, usually defined numerically, are replaced by linguistic rules. More precisely, weights derive from expert opinions and from econometric tests on the determinants of countries’ FDI. As a second step, the view-point of investors from two different investing economies, the UK and Italy, are taken into account. Country-specific factors, such as the geographic, cultural and institutional distances existing between the investing and the partner economies are included in the analysis. This shows how the base ranking changes with the investor’s perspective.
    Keywords: foreign direct investments; fuzzy expert systems; attractiveness
    JEL: C53 F17 F21
    Date: 2010–11
  21. By: Siedschlag, Iulia; Zhang, Xiaoheng; Cahill, Brian
    Abstract: This paper examines the effects of the internationalisation of firms via foreign direct investment and trade on their innovation and productivity performance. Our econometric results suggest that foreign affiliates and domestic exporters were more likely to invest in innovation and furthermore that they were more likely to be more successful in terms of innovation output and higher productivity than firms that served only the domestic market. On average, innovation output was positively associated with labour productivity over and above other determinants. Access to external knowledge flows explain to a large extent the innovation performance of firms, in particular co-operation with suppliers, with consultants, commercial labs or private R&D institutes, with universities or other higher education institutions.
    Keywords: Productivity/Foreign direct investment/investment/exporters/education
    Date: 2010–12
  22. By: Bandick, Roger (Institute of Business and Technology); Görg, Holger (Kiel Institute for the World Economy and University of Kiel, Germany and CEPR); Karpaty, Patrik (Department of Business, Economics, Statistics and Informatics)
    Abstract: The aim of this paper is to evaluate the causal effect of foreign acquisition on R&D intensity in targeted domestic firms. We are able to distinguish domestic multinationals and non-multinationals, which allows us to investigate the fear that the change in ownership of domestic to foreign multinationals leads to a reduction in R&D activity in the country, as headquarter activities are relocated to the new owners home country. We use unique and rich firm level data for the Swedish manufacturing sector and different micro-econometric estimation strategies in order to control for the potential endogeneity of the acquisition dummy. Overall, our results give no support to the fears that foreign acquisition of domestic firms lead to a brain drain of R&D activity in Swedish MNEs. Rather, this paper finds robust evidence that foreign acquisitions lead to increasing R&D intensity in acquired domestic MNEs and non-MNEs.
    Keywords: Foreign acquisition; MNE; R&D
    JEL: F23 L10 L20 O30
    Date: 2011–01–18

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