CHAPTER FIVE EMPIRICAL ANALYSIS
Trade 5.9. Nigeria’s Intra Industry Trade in Intermediate Products
5.4 Determinants of IIT in final products between selected ECOWAS countries and EU (Objective Two)
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5.4 Determinants of IIT in final products between selected ECOWAS countries and
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what was obtainable in ECOWAS, the reason attributable to this result is that the poor quality of products produced by these countries may only be needed by a negligible part of the EU population. However, relative market size has positive significant impact on IIT in final product between Ghana and EU. While it does not mean that Ghana is more populous than Nigeria and Cote d‘Ivoire, the result simply suggests that the products Ghana is exchanging with EU seems to be preferred and hence witness more patronage from EU compared to those of Nigeria and Cote d‘Ivoire. The result of the impact of relative market size on Ghana‘s IIT with EU obtained in this study is similar to that of Balassa and Bauwens (1987) and Stone and Lee (1995). The two studies examined the impact of relative market size on IIT between developed and developing counties.
(ii) Factor Endowment and IIT in Final Products
The theory states that the greater the relative difference in factor endowment between trading nations, the larger will be the share of vertical IIT. This implies that countries that differ in relative factor endowments will have larger share of vertical IIT as the potential gains from trade in quality products are greater. On the other hand, the potential gains from trading variety products are reduced when relative factor endowment is large.
Just as the significant impact was reported for the effect of factor endowment on IIT in final products between ECOWAS and EU, similarly it also was found to be major driver of IIT in the individual selected ECOWAS countries. The empirical results in these three counties and ECOWAS as a group are in line with theoretical models for explaining VIIT. The intuitive reason why differences in factor endowment drive vertical IIT is clear from the theory of North-South trade with product differentiation. The low quality of products that the ECOWAS countries have capacity to produce are equally needed by the poor population of EU34 countries.
34 The rate of poverty is around 23 per cent in the countries of European Union. The rate poverty tends to be higher in the Mediterranean and the Baltic states. Altogether around 75 million people in the EU are poor. Countries with the highest poor population include France, Germany, Italy, Poland, Spain and the UK. Incidentally, these countries are the highest ECOWAS trading partners in EU. In fact they account for over 75 per cent of trade flows between the two regions.
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Most of the studies on vertical IIT between Developed and developing countries found similar results. Such studies include Balassa and Bauwens (1987), Nilsson (1999), Clark and Stanley (1999) and Damoense (2007). Factor endowment was found to drive vertical IIT in final products in Cote d‘Ivoire and Ghana than in Nigeria.
(iii) Income Distribution and IIT in Final Products
Income distribution (similarity or dissimilarity) is one of the most important factors in model of North-South trade with product differentiation. Differences in per capita income of the trading partners were used as proxy to income distribution in this study.
The more dissimilar the per capita income between trading partners in VIIT, the higher the type of trade. Conversely, the higher the dissimilarity in per capita income of trade partners in HIIT the lower the IIT.
The result of ECOWAS at aggregate level shows that differences in income distribution cause vertical IIT between ECOWAS and EU to grow. Very wide difference exists in the capita income of ECOWAS and EU, therefore the result is not be unexpected. Mixed results have been obtained in previous studies. Specifically, the result obtained in this study is in consonance with that of Balassa and Bauwens (1987) and Clark and Stanley (1999). In a similar vein, income distribution enhances vertical IIT between Ghana and EU. However, though income distribution has positive significant impact on vertical IIT in final products in Nigeria and Cote d‘Ivoire, the impact is insignificant. The result suggests that there are other socio-economic factors that drive the demand pattern of the people in the two countries are other than income.
(iv) Real Effective Exchange Rate and IIT in Final Products
Real exchange rate between trade partners has the capacity to decrease VIIT between trade partners. For vertical IIT in final products between ECOWAS and EU, the impact of real effective exchange rate is found to be negative. When exchange rate depreciation takes place, products become relatively cheaper and vice versa. The implication of the negative effect of real effective exchange rate on IIT between ECOWAS and EU is that, it is either EU countries find ECOWAS products relatively costlier or ECOWAS
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countries find EU products relatively costlier. Damoense Jordaan (2007) and Oguro, Fukao, and Khatri (2008) found similar results in their respective studies.
In the case of Nigeria, the impact of real effective exchange rate on vertical IIT in final products is positive and significant. This implies that real effective exchange rate promotes IIT between Nigeria and EU. Stone and Lee (1995) equally got positive relationship between real effective exchange rate and IIT. The impact of real effective exchange rate on Ghana and Cote d‘Ivoire‘s vertical IIT with the EU is not significant.
(v) Weighted Distance and IIT in Final Products
The trade theory posits that the greater the geographical distance between trading partners, the lower the shares of all IIT. Geographic distance is typically used as a proxy for transport costs, insurance costs, delivery times and market access barriers. Many studies use kilometres or miles to measure geographic distance between the capital cities of trading partners. The empirical results for aggregate ECOWAS indicated that weighted distance between ECOWAS and EU has negative significant impact on VIIT in final products between the two regions. This implies that the distance between the two regions discourages IIT between them. Similarly in Nigeria, the weighted distance is a disincentive to VIIT in final products between Nigeria and EU. All the previous studies that used distance as a determinant of IIT obtained negative relationship. Such studies include Balassa and Bauwens (1987), Nilsson (1999) and Damoense (1987). For Ghana, although the impact of weighted distance on VIIT between Ghana and EU is significant, it is however positive. The impact of weighted distance on VIIT between Cote d‘Ivoire is positive but not significant.
(vi) Product Differentiation and IIT in Final Products
The North-South trade model with products differentiation states that the greater the degree of product differentiation, the larger the share of VIIT. According to theoretical and empirical studies of IIT, product differentiation is an important determinant of IIT (Byun and Lee, 2005; Faustino and Leitão, 2007; Chang, 2009). The index provides an average unit value dispersion of export unit values for a given product k aggregated over
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the sum of all products within a given industry and is a measure of vertical differentiation of a product. Product differentiation is one of the major factors that drive VIIT in final products between ECOWAS and EU. Positive significant effect of product differentiation on IIT was obtained for ECOWAS. This implies that availability of varieties of goods to costumers is a factor that fosters vertical IIT. And more varieties of products are made available, the greater the cases of VIIT between ECOWAS and EU.
The earlier empirical results of the impact of products differentiation on VIIT are mixed.
However, the positive impact of product differentiation on vertical differentiation obtained in this study is in consonance with Clark and Stanley (1999). For the three selected ECOWAS countries, product differentiation was also found to drive VIIT in final products.
(vii) Trade Tariff and IIT in Final Products
Trade theory has predicted that the lower the level of tariffs between trade partners, the greater the shares of trade between them. Typically, a negative relationship between trade barriers and IIT is predicted by Sharma, (2004) that a reduction in trade barriers (tariffs) increased IIT. Thus, trade agreements serve to reduce trade barriers thereby resulting in trade-creating effects between trading countries and are likely to result in rising IIT levels. In this study, the tariff variable used is calculated as the bilateral average level applied MFN tariff rates for HS 6 digit level (WTO, 2011). The result shows that tariff has negative but insignificant effect on IIT final products between ECOWAS and EU. This implies that trade tariff discourages VIIT in intermediate products. The results obtained by Manrique (1987) and Sharma, (2004) are corroborated by this study. Although, two studies reveal a positive relationship between trade barriers and IIT (Kind & Hathcote, 2004; Al- Mawali, 2005).
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Table 5.21: Selected Econometric Study of Determinants of IIT in Final Products between Developed and Developing Countries
Study Balassa and Bauwens (1987)
Stone and Lee (1995)
Nilsson (1999)
Clark and Stanley (1999)
Damoense Jordaan (2007)
Manrique (1987)
Present Study
Present Study
Present Study
Present Study
Scope Developed Countries and Less
Developed Countries
68 Developed Countries and Less Developed Countries
12 European Union and 108 Less Developed Countries
Developing Countries and the United States
South Africa and
Developed Countries
8 Developed and
Developing Countries
ECOWAS and EU
NIGERIA and EU
GHANA and EU
COTE DI‘VOIRE and EU
Dependent Variables
Grubel Lloyd Grubel Lloyd
Grubel Lloyd Grubel Lloyd Grubel Lloyd Grubel Lloyd
Grubel Lloyd
Grubel Lloyd
Grubel Lloyd
Grubel Lloyd
DIFFGDP 0.698* 0.08* 2.18* 0.075* 3.1996* -16.368
(-0.06)
0.7459***
(14.41)
2.7005***
(2.40)
2.0109***
(15.82)
PRODDIFF 0.0910* -0.4162 -1.4591 0.3540***
(6.32)
0.0028**
(3.26)
0.1307**
(2.20)
0.0061**
(1.17)
DIFFPC 0.761* -0.46* 0.774* -0.0703* +0.1230 0.0994***
(7.91)
11.0420 (0.70)
12.3146***
(3.79)
-0.1309 (-2.71)
AVEP 0.286* 0.259* 3.25 0.475* -0.8810* 12.8248
(0.06)
-3.9820 (-0.62)
11.3435***
(4.10)
0.1004 (2.19)
EXCH 0.432* -0.1782* -0.0392***
(-5.27)
0.2382***
(7.02)
0.1899 (2.88)
0.1334 (2.08)
DISTANCE - 0.265 -5.53* -0.7047* -0.0289*
(-2.29)
-0.5454***
(-19.14)
0.7286***
(20.83)
0.0160 (2.77)
FDI -0.2898*** 0.1112***
(2.51)
0.1219***
(2.45)
0.2918***
(2.33)
1.9101***
(4.03)
TARIFF -0.2005 -0.1390* -0.0068*
(-1.74)
-0.2887 (-0.06)
-0.0431 (-0.04)
-0.0297 -4.20
CONSTANT 12.0822
(0.00)
19.3130 (0.15)
-50.8501 (-0.49)
40.4522 (0.14)
Source: Author compilation from the survey of literature and empirical analysis
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(viii) FDI and IIT in Final Products
Greater levels of efficiency-seeking FDI, the larger the shares of VIIT. Alternately, greater levels of market-seeking FDI, the smaller the shares of VIIT. Empirical result of this study showed that the impact of FDI on ECOWAS‘ VIIT in final products with EU is positive and significant. This implies that the investment of the multinationals in ECOWAS complements the result. Damoense Jordaan (2007) had earlier obtained a negative impact of FDI on IIT. FDI on VIIT between Ghana and EU shows that multinationals‘ presence in Ghana has been trade-FDI complementing. The result for Nigeria and Cote d‘Ivoire were not different as FDI promotes IIT.
5.5 Determinants of IIT in intermediate products between selected ECOWAS