An Empirical Investigation on the Validity of Linder Hypothesis for Manufacturing Exports from Turkey to Eurozone Countries

Abstract

Linder's hypothesis expresses that non-homogenous manufacturing trade has been determined by the consumers’ tastes and preferences rather than production cost differences between countries. Also, it is claimed that the consumers’ tastes and preferences relate positively to the level of per capita income of the relevant country. Accordingly, the country pairs which have similar levels of per capita income trade each other more than other country pairs.
 This study analyses the validity of the Linder hypothesis in manufacturing exports from Turkey to 19 Eurozone countries for the period of 2002-2018. In compliance with the bilateral trade structure, an augmented gravity model is constructed with variables representing the Linder effect. Generally, convergence between country pairs in terms of per capita income is taken while testing the Linder hypothesis into account. Therefore, while testing the Linder hypothesis, the study considers per capita gross domestic product differences between Turkey and Eurozone countries. Besides, as a more salient and efficient tool, a similarity index representing the Linder effect is constructed. By doing so, whether the Linder hypothesis is valid or not can be demonstrated more robustly.
 Empirical results prove the existence of the Linder effect for Turkey's manufacturing exports to Eurozone countries. In other words, on the contrary of factor endowment differences, demand similarities between Turkey and Eurozone countries encourage this type of trade. In this regard, the exporters who target more manufacturing exports should monitor the course of consumer behaviors and adapt their product structure according to consumer's tastes and preferences in Eurozone countries.