CHAPTER FIVE EMPIRICAL ANALYSIS
Trade 5.9. Nigeria’s Intra Industry Trade in Intermediate Products
5.5 Determinants of IIT in intermediate products between selected ECOWAS countries and EU, (Third Objective)
UNIVERSITY OF IBADAN LIBRARY
168
(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
UNIVERSITY OF IBADAN LIBRARY
169
(ii) Factor Endowment and IIT in Intermediate Products
Factor endowment is more important to IIT in intermediate products than in final products. This is because multinationals locate their affiliates in countries where they can take advantages of natural resources, and as such, exchange of similar products between these multinationals and their various affiliates promotes IIT in intermediate products.
The higher the differences in factor endowment of trade partners, the larger the share of VIIT in intermediate products. The result of this study revealed that the difference in natural endowment promotes IIT in intermediate products between EU and ECOWAS.
It further indicates that IIT in intermediate products between EU and Ghana, and between EU and Cote d‘Ivoire are enhanced by differences in natural endowment.
Türkcan (2005) and Türkcan and Ateş (2008) earlier reported positive significant impact of differences in natural endowment on IIT in intermediate products. In the case of IIT between Nigeria and EU in intermediate products, this study found that difference in natural endowment does not promote it. This result is not unexpected as very vast natural resources in Nigeria are yet unexploited.
(iii) Income Distribution and IIT in Intermediate Products
The more dissimilar the per capita income between trading partners in VIIT in intermediate products, the higher the type of trade. The result shows that income distribution does not significant affect VIIT in intermediate products between ECOWAS and EU. However, for the individual ECOWAS countries, the impacts of income distribution on their IIT in intermediate products with EU are significant. While, the significant impact is negative for Nigeria, the effects are positive for Ghana and Cote d‘Ivoire.
(iv) Real Effective Exchange Rate and IIT in Intermediate Products
Negative impact is expected by IIT on real exchange rate. This implies that appreciation of real exchange rate will cause IIT between trade partners to decrease. The empirical result shows that the impact of real effective exchange rate on VIIT in final products between ECOWAS and EU was found to be positive. The implication of this result is that exchange rate appreciation promotes IIT in intermediate products between
UNIVERSITY OF IBADAN LIBRARY
170
ECOWAS and EU. This could be so particularly for intermediate products that have little or no substitutes and are needed by multinationals for productions; higher import cost may not reduce such trade.
As expected, the impact of real effective exchange rate on Nigeria and Cote d‘Ivoire IIT in intermediate products with the EU was negative. This implies that exchange rate appreciation declines IIT in intermediate products in Nigeria and Cote d‘Ivoire. In the case of Ghana, real effective exchange rate has negative and insignificant impact of IIT between Ghana and EU.
(v) Weighted Distance and IIT in Intermediate Products
The result indicates that the weighted distance has negative significant impact on the VIIT in intermediate products between ECOWAS and EU. This implies that distance trade reduces IIT in intermediate products between the two regions. In a similar vein, the weighted distance also exerts negative impact on IIT in intermediate products between Nigeria and EU; and Ghana and EU. Since distance is typically used as a proxy for transport costs, insurance costs, delivery times and market access barriers, it then implies that increase in transport, and other related costs incurred in moving goods from one country to another reduces the extent of IIT in intermediate products between the them.
The negative impact of distance on IIT in intermediate products obtained in this study is in line with Turkan (2005) and Turkan (2009).
(vi) Product Differentiation and IIT in Intermediate Products
Theoretical and empirical studies of IIT identified product differentiation as an important determinant of IIT (Turkan, 2005; Faustino and Leitão, 2007; and Chang, 2009). Product differentiation is a process of distinguishing a product to make it more attractive to a particular target market. It involves differentiating it from competitors‘ products as well as a firm‘s product offerings. The results of the impact of product differentiation on EU‘s VIIT in intermediate products with ECOWAS, show positive impact. Similar result was also obtained for products differentiation impact on EU IIT in intermediate products with Nigeria and Cote d‘Ivoire. Positive significant effect of product differentiation reported for ECOWAS, Nigeria and Cote d‘Ivoire implies that the availability of varieties of
UNIVERSITY OF IBADAN LIBRARY
171
goods to customers is a factor that promotes VIIT in intermediate products between the trade partners. Which means that the more varieties of products are made available, the greater the cases of VIIT between the trade partners. However, earlier studies such as Turkan (2009) reported positive but insignificant effect of product differentiation on vertical IIT.
(vii) Trade Tariff and IIT in Intermediate Products
Every trade barrier including, tariff between trade partners usually has negative impact on IIT. 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 of the impact of trade tariff on VIIT in intermediate products between ECOWAS and EU is positive but not significant. However, trade tariff impact on Nigeria – EU IIT in intermediate products is positive and significant. This implies that increases in tariff does not reduce the products exchanged between Nigeria and EU, but rather increases them. This result could be so if the products have little or no substitution. In the case of Ghana‘s IIT with EU, trade tariff impact is negative. This implies that increases in tariff imposed on intermediate products exchanged between Ghana and EU harms trade flows between them. Only the negative impact of tariff obtained on Nigeria IIT in intermediate products supports earlier result obtained by Türkcan and Ateş (2008).
(viii) Capital-Labour Ratio and IIT in Intermediate Products
Absolute difference in physical capital endowment per worker at industry level between the ECOWAS and EU is particularly very important in explaining the VIIT between them. High capital-labour ratio drives IIT particularly in intermediate products. High absolute difference of physical capital endowment between the EU and ECOWAS suggests that EU has more technological capacity. This could make the EU outsource the labour intensive part of their production to ECOWAS while the intermediate product is returned to EU for further processing. The empirical result of the study shows that the capital-labour ratio decreases IIT in intermediate products between ECOWAS and EU.
The reason for the negative effect of capital-labour ratio on IIT in intermediate products between ECOWAS and EU could be associated with the socio-political factors that do
UNIVERSITY OF IBADAN LIBRARY
172
not encourage FDI inflow, and recent trend in ECOWAS FDI show massive divestment.
Turkan (2005) earlier obtained similar result.
As regards the individual selected ECOWAS countries, only Nigeria obtained positive impact of capital-labour ratio on IIT in intermediate products between her and EU. The positive impact of capital-labour ratio on IIT in intermediate products implies that greater technological differences between the trade partners promote IIT between them.
(ix) Inward FDI and IIT in Intermediate Products
The FDI can have either positive or negative impact on IIT between partners. This depends on whether such inward FDI complements or substitute exports. If the purpose of inward FDI complements exports, then the shares of VIIT in intermediate products will increase. However, if Inward FDI substitutes exports, it will cause VIIT to decline.
Empirical result of this study showed that the impact of FDI on ECOWAS‘ VIIT in intermediate products with EU is positive and significant. This implies that the investment of the multinationals in ECOWAS complements exports hence, promotes IIT in intermediate products. Similar result was recorded by Turkan (2005). As regards Nigeria VIIT with the EU, the impact of FDI is significant and positive. The positive sign of the FDI coefficient suggests that high inward FDI complements trade. This implies that some of the products of the multinationals were been exported. Similarly, the result obtained for the impact of FDI on VIIT between Ghana and EU shows that multinationals‘ presence in Ghana has been trade complementing. The result obtained for Nigeria and Cote d‘Ivoire corroborates earlier result by Türkcan (2005). FDI does not produce significant effect on VIIT in intermediate products between Ghana and EU.
UNIVERSITY OF IBADAN LIBRARY
173
Table 5.22: Stylized Summary: Selected Econometric Study of Determinants of IIT in Intermediate Products.
Study Türkcan (2005)
Leitão, Faustino
and Yoshida
(2009)
Türkcan and Ateş (2008)
Türkcan (2009)
Present Study
Present Study
Present Study
Present Study
Scope Turkey and OECD Countries
Portugal and Trading Partners
USA and Trading Partners
Austria and Trade
Partners
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 DIFFGDP 0.111***
(9.80)
5.60*
(2.26)
3.191 (4.00) ***
-0.928 (-1.39)
2.5920**
(2.50)
0.0006 (0.15)
0.9119***
(5.27)
5.4997***
(12.20)
PRODDIFF 0.722
(0.18)
0.2266**
(2.61)
0.0014**
(3.29)
0.0014 (3.29)
0.0088*
(2.12) DIFFPC -0.023
(-1.48)
0.21**
(0.10)
-0.051 (-1.26)
1.301 (4.17)***
1.9199 (1.47)
0.4788***
10.40
0.2596*
(1.61)
1.5588***
(18.43) AVEP 0.209***
(14.57)
6.751***
(5.32)
0.465**
(2.14)
0.9754 (0.97)
-0.3125***
(-13.72)
0.2830**
(2.89)
0.4951 (6.04)
EXCH -0.01
(0.04)
0.036***
(2.71)
-0.027 (0.75)
0.0920**
(2.50)
-0.0680***
(-2.95)
-0.0006 (-0.15)
-0.5917***
(-5.37) DISTANCE -0.133***
(-14.27)
0.29 (0.21)
-0.242***
(-4.43)
-0.410 (-4.42)***
-3.0869***
(-4.22)
-0.4172***
(-16.37)
-0.4172***
(-16.37)
-0.9974 (-6.33)
TARIFF -0.567
(-4.80)***
0.1190 (0.92)
0.0540*
(2.56)
-0.0439**
(-2.33)
0.0536 (6.12)
CLR -0.006**
(-2.20)
-3.1956*
(-2.29)
0.1262***
(15.49)
0.0191 (0.90)
0.0086 (0.57)
FDI 0.009***
(4.62)
(-7.57) ***
(-0.242)
0.130 (3.95)***
0.0242**
(3.06)
0.0038***
(4.08)
0.004 (0.19)
0.0102**
(3.76) CONSTANT -4.712***
(-14.93)
-290.784***
(-4.86)
-66.7874 (-0.29)
-34.36 (-0.55)
-15.2482 (-0.05)
-55.4122 (-13.58)
Source: Author compilation from the survey of literature
UNIVERSITY OF IBADAN LIBRARY
174