Gravity model by panel data approach: empirical evidence from Nigeria

Abstract

Gravity trade model continues to be coveted for analysis of determinants of trade flows despite its lack of theoretical foundations. The main aim of the paper is to assess the determinants of the flow of Nigeria's exports using longitudinal data from 1999 to 2012. Extrapolating from the empirical literature, the paper constructs Nigeria's gravity trade model comprising nine EU countries, BRICS countries, Canada, Japan and the USA. Results from POOL and panel regressions - fixed and random effects show that market size and price index of destination countries positively drive trade flows in Nigeria, while relative factor endowment, economic similarities and geographical distance negatively affect Nigeria's trade flows. Furthermore, the paper found evidence in support of positive trade flows with the EU countries and negative trade flows with the BRICS countries and on account of cultural differences. Findings show that Nigeria's exports follow Linder hypothesis. These have important implications for economic, socio–cultural and bilateral trade negotiations for better trade performance in Nigeria in the future.