nep-int New Economics Papers
on International Trade
Issue of 2013‒01‒12
eight papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. The Home market effect with heterogeneous firms By Ha Nguyen
  2. Brazilian exports : climbing down a competitiveness cliff By Canuto, Otaviano; Cavallari, Matheus; Reis, Jose Guilherme
  3. The Determinants of Outward Processing: Evidence from Offshoring Intermediates by the European Union By Dimitra Petropoulou; Xavier Cirera; Dirk Willenbockel
  4. On the Distribution of Exchange Rate Regime Treatment Effects on International Trade By Dorn, Sabrina; Egger, Peter
  5. Government Size and Trade Openness: Some Additional Insights By Liberati, Paolo
  6. Trade, Economic Geography and the Choice of Product Quality By Pierre M. Picard
  7. Borrowing Locally, Operating Globally? Financing and Trading Patterns of Firms during the 2007/2008 Economic Crisis By Neugebauer, Katja; Spies, Julia
  8. Business cycle determinants of US foreign direct investments By Cavallari, Lilia; D'Addona, Stefano

  1. By: Ha Nguyen (CREA, University of Luxembourg)
    Abstract: This paper examines the home market effect in the framework of heterogeneous firms. The paper finds that not only trade costs but also fixed trade costs cause the home market effect and the reverse home market effect can occur as the fixed trade costs are very low. In addition, the magnitude of the home market effect varies with industry characteristics. Industries with low trade costs, high fixed production costs, low fixed export costs, and high productivity dispersion tend to be more concentrated in large countries. Finally, the negative impact of trade barriers on the home market effect is dampened by the elasticity of substitution which is contrary with the result of the homogeneous firm model. An empirical model is built to test these predictions for developed countries. The empirical results are consistent with the predictions of the theoretical model.
    Keywords: Home market effect, country size, industry characteristics, heterogeneous firms, firm’s location, market structure
    JEL: F1 R1
    Date: 2012
  2. By: Canuto, Otaviano; Cavallari, Matheus; Reis, Jose Guilherme
    Abstract: This note examines in detail Brazil’s export performance over the past 15 years, focusing not only on growth and composition, but also on different performance dimensions, including diversification, sophistication, and firm dynamics. The analysis uses international comparisons to better situate the Brazilian performance, and explores different databases, including firm-level data recently published by the World Bank. The note uses a recent diagnostic toolkit developed by the World Bank in order to suggest some hypotheses about the factors that have been inhibiting exports and industrial production expansion. Among the latter, it is noted how service sectors, as the largest beneficiaries from favorable terms of trade, accommodated larger wage increases and"exported"cost pressures to other sectors of the economy. Furthermore, although a stronger currency can be appointed as one of the elements behind the lower competitiveness in Brazilian exports, sluggish productivity performance and a real wage uptrend explain a significant part of the overall loss of competitiveness. This diagnostic reinforces the importance of resuming the agenda of microeconomic reforms, increasing the investment-to-gross domestic product ratio, and advancing toward better-skilled human capital.
    Keywords: Economic Theory&Research,Free Trade,Currencies and Exchange Rates,Trade Policy,Emerging Markets
    Date: 2013–01–01
  3. By: Dimitra Petropoulou (Department of Economics, University of Sussex, Brighton, United Kingdom); Xavier Cirera (Institute of Development Studies, University of Sussex, Brighton, United Kingdom); Dirk Willenbockel (Institute of Development Studies, University of Sussex, Brighton, United Kingdom)
    Abstract: This paper analyses the determinants of outward processing (OP) trade; specifically, imports of intermediates subsequent to processing abroad. A model where firms choose between OP and importing intermediates directly from a third country (generic offshoring, GO) predicts higher tariffs, lower monitoring costs and higher quality make OP more likely, while better institutions and rule of law abroad lower contractual breakdown risk under GO making OP less likely. Analysis of EU trade data from 2002 to 2008 emphasizes proximity, quality differentiation and weaker rule of law as OP determinants. Results suggest relationship-specific investments and monitoring under OP may offset contractual uncertainty.
    Keywords: Outward processing, offshoring, European Union
    JEL: F14 D23 L23
    Date: 2013–01
  4. By: Dorn, Sabrina; Egger, Peter
    Abstract: This paper provides evidence of heterogeneous treatment effects on trade from switching among three types of de-facto exchange rate regimes: freely floating, currency bands, and pegs or currency unions. A cottage literature at the interface of macroeconomics and international economics focuses on the consequences of exchange rate regimes for economic outcome such as trade. The majority of contributions points to trade-stimulating average effects of tighter exchange rate tying in general and of currency unions in specific. While there is great variability of the estimated quantitative effects across studies, all of the associated work adopted at least two and most of it all of the following three assumptions: assignment of countries to exchange rate regimes is random, the treatment effect of adopting a currency union is independent of the underlying regime transition, and it is homogeneous and hence fully captured by the average. This paper allows for self-selection into exchange rate regimes conditional on observable characteristics and a given regime state prior to a transition and provides evidence of strong impact heterogeneity on bilateral trade among otherwise observationally equivalent country-pairs. --
    JEL: C22 C32 F31
    Date: 2012
  5. By: Liberati, Paolo
    Abstract: This paper provides additional insights on the relationship between government size and trade openness using a panel of countries drawn from the World Development Indicators and the Penn World Tables 7.0 from 1962 to 2009. It is shown that the compensation hypothesis proposed by Rodrik (1998) and revisited by Alesina and Wacziarg (1998) and by Ram (2009) cannot be attributed general validity. Rather, it may be driven by specific geographical areas.
    Keywords: Openness; Compensation hypothesis; Government Consumption; Trade
    JEL: H77 H50 H11
    Date: 2013–01–04
  6. By: Pierre M. Picard (CREA, University of Luxembourg and CORE, Université Catholique de Louvain)
    Abstract: The present paper studies the effect of the choice of product quality on trade and location of firms. We build a quality-augmented model where consumers have preferences for the quality of a set of differentiated varieties. Firms do not only develop and sell manufacturing varieties in a monopolistic competitive market but also determine the quality level of their varieties by investing in research and de- velopment. We explore the price and quality equilibrium properties when firms are immobile. We then consider a footloose capital model where capital is allocated to the manufacturing firms in the region offering the highest return. We show that the larger region produces varieties of higher quality and that the quality gap increases with larger asymmetries in region sizes and with larger trade costs. Finally, the home market effect is mitigated when firms choose their product quality.
    Keywords: Monopolistic Competition, Endogenous Quality, Economic Geography
    Date: 2012
  7. By: Neugebauer, Katja; Spies, Julia
    Abstract: The theory of relationship lending is based on the idea that close ties between borrowers and banks may be economically beneficial. Information asymmetries on the part of the bank introduce adverse selection and moral hazard problems into the lending process and may lead to lengthy decision processes and/or reduce the availability of credit for firms. The recent financial and economic crisis, which has been marked by increased uncertainty about the creditworthiness of firms, has reduced the quantity of available credit or raised its costs. Being able to resort to a main bank might reduce the problem of information asymmetries and enable firms to maintain access to credit in times of economic hardship. However, formal studies investigating the role of main banks in dampening the crisis effect on firms global operations are still missing. This paper seeks to fill this gap by explaining crisis-related trade reductions with the bank type used at the firm-level. We find some evidence that using a local bank for external financing reduces the probability of an export decline. --
    JEL: G20 G21 F14
    Date: 2012
  8. By: Cavallari, Lilia; D'Addona, Stefano
    Abstract: This paper investigates the role of output fluctuations and exchange rate volatility in driving US foreign direct investments (FDI). Using a sample of 46 economies over the period 1982-2009, we provide evidence of a positive relation between US FDI and host country’s cyclical conditions. Allowing for asymmetry over the business cycle, we find that the output elasticity of foreign investments is higher in booms than in recessions. An increase in exchange rate volatility, on the other hand, has a strong deterrent effect on US foreign investments. This effect is fairly stable over the business cycle.
    Keywords: FDI; business cycle; cyclical output; exchange rate volatility
    JEL: E32 F23 C23
    Date: 2012–12

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