Determinants of IIT in Intermediate Products

UNIVERSITY OF IBADAN LIBRARY

78

has considered the impact on bilateral trade in individual industries of the factors affecting inter-industry and intra-industry specialisation, together with that of gravitational factors. The relative capital intensity of exports is positively correlated with relative capital abundance. The results show that trade between any two countries is positively correlated with their average per capita income and country size and negatively correlated with inter-country differences in these variables. Also, product differentiation tends to increase IIT, where as product standardization tends to reduce it.

Finally, offshore assembly has a positive impact on IIT.

Glejser, Goossens and Vandeneede (1981) made a distinction between supply (export) specialisation and demand (import) specialisation, both of which can occur between activity sectors or inside them. It shows that intra-industry export specialisation mostly characterised high-wage countries whereas low-wage nations tended to achieve inter-industry export specialisation. Intra-inter-industry import specialisation on the other hand, was the rule everywhere except in the very low-wage countries. Finally, the drift to intra-industry export specialisation slowed down from 1970 to 1973 as compared to 1959 to 1970 inside (but not outside) the EEC.

Bano (2009) analysed intra-industry and inter industry trade between New Zealand, Australia and selected Asia-Pacific nations during the period 1990 and 2009, (a period of trade liberalization). The Grubel-Lloyd and Aquino indices are used to calculate the intensity of IIT (IIT) at the 3-digit SITC level. IIT index was estimated across industries and trading partners to show the strength of trade relations between New Zealand and the other countries. The results suggest that removal of trade barriers through bilateral and multilateral negotiations has enhanced IIT and the intensity of trade.

UNIVERSITY OF IBADAN LIBRARY

79

IIT in intermediate products. Moreover, Turkcan (2003) ²² is the first attempt to conduct an empirical study of IIT in intermediates. The study focused on determinants of IIT in intermediate products between the US and selected OECD countries. His result shows that VIIT is determined by economies of scale, the size of market, and FDI. Particularly, differences in value added per establishment, a proxy for economies of scale, are found to have a negative impact on VIIT. As regards the HIIT, his result shows that it is positively affected by the size of the two markets and FDI, while it is negatively affected by dissimilarity of human capital endowments and distance variables. These findings are consistent with our expected signs, with the exception of FDI.

Türkcan (2005) also drew out country-specific and industry-specific hypotheses from the IIT literature and put them forward to investigate the IIT in final and intermediates between Turkey and other selected OECD countries between 1985 and 2000. The results indicate that the determinants of IIT for final goods are not significant different from those for intermediate goods. Finally, the results suggest that country-specific rather than industry-specific variables are the central determinants of IIT in final and intermediate goods between Turkey and OECD.

Bouwmeester, and Oosterhaven (2008) analysed the relationship between three types of trade specialisation for 1990 to 2000. For nine East-Asian countries and the United States, the developments in international fragmentation, export specialisation and intra-industry specialisations are investigated. Asian countries, specifically China, now play a larger role in international trade. The formation of production networks and international fragmentation of production processes in this region has not gone unnoticed. This study endeavours tries to establish a link between the extent of international fragmentation, comparative advantage, and intra-industry specialisation using the Asian-Pacific input-output Tables of 1990, 1995 and 2000. The results show an increase in the extent of

22 Türkcan was the first to examine the trend, magnitude and determinants of IIT in intermediate products.

His first study on the topic was a dissertation submitted to the Graduate Faculty of North Carolina State University in partial fulfilment of the requirements for the Degree of Doctor of Philosophy. And subsequently, he has published widely as reflected in this literature review.

UNIVERSITY OF IBADAN LIBRARY

80

international fragmentation in all countries, concentrated in the 1995 to 2000 period.

Relative international fragmentation shares are compared to relative export specialisation shares to test whether international fragmentation can be explained using (neo-) classical trade theory. Evidence is presented of a positive relationship between these two variables. A comparison of international fragmentation with the results of the intra-industry specialisation measure does not indicate a relationship, leaving less room for new trade theory explanations of international fragmentation. These results suggest that international fragmentation follows comparative advantages and takes place when factor cost differentials can be exploited.

Türkcan and Ateş (2009) analysed the extent of IIT in the U.S. auto-industry trade by decomposing the U.S. auto-industry trade into one-way trade, VIIT and HIIT in final and intermediate good categories. Secondly, the paper analysed the development of the U.S.

VIIT in auto part industry, as an indicator for international fragmentation of production, and test empirically, various country-specific factors drawn from fragmentation literature using newly developed panel econometrics techniques and more recent data period from 1989 to 2006. The results show that a substantial part of IIT in U.S. auto-parts industry was VIIT and econometric results support the hypothesis drawn from the fragmentation literature.

Türkcan (2009) examined the extent of IIT in Austria‘s auto-parts trade by decomposing Austria‘s auto-parts trade into one-way trade, VIIT and HIIT. Then development of the VIIT in the auto-parts industry, as an indicator for international fragmentation of production process between Austria and its 29 trading partners, is examined and various country-specific factors suggested by fragmentation literature are tested using newly developed panel econometrics techniques and more recent data from 1996 to 2006. The results show that a substantial part of IIT in the Austrian auto parts industry was VIIT and the econometric results mainly support the hypothesis drawn from the fragmentation results. In particular, the findings show that the extent of Austria‘s VIIT in auto-parts is

UNIVERSITY OF IBADAN LIBRARY

81

positively correlated with average market size, differences in per capita GDP, and foreign direct investment while it is negatively correlated with distance.

Leitão, Faustino, and Yoshida (2010) analysed VIIT within Portugal's automobile parts and components industry, this study adds new empirical evidence for the international fragmentation of the production process. For trade partner countries, they choose the EU countries, the BRICs, and the US between 1995 and 2005. From panel data analysis, the empirical evidence supports the notion that shorter geographical distance, dissimilar income levels, and dissimilar endowments between two economies lead to a higher VIIT of automobile components. In addition, their results also confirm the hypothesis that automobile (assembly) production in each country promotes higher VIIT of auto parts, while economic integration in the style of the EU and similarity in culture do not magnify the VIIT of the parts and components industry. They conclude that income differences between trade partner countries are an important driver via the international fragmentation of production of a higher VIIT.

UNIVERSITY OF IBADAN LIBRARY

82