Horizontal and Vertical Intra-industry Trade and Firm's Investment Strategies: Evidence from the IT Industry in the Asian, EU and US Markets

Abstract

This study investigates the features and determinants of the horizontal and vertical intra-industry trade (HIIT and VIIT, respectively) and firms’ investment strategies of the information technology (IT) industry in the Asian, European Union (EU) and US markets from 1996 to 2005. The respective evolutions of the HIIT and VIIT of the IT industry indicate that HIIT has often dominated VIIT in the IT industry, which is obviously contrary to the present pattern of world trade. The empirical results further reveal the principal pattern of the IT firms’ foreign direct investment strategies as facilitating the market rather than seeking efficiency in the host regions. The effect of revealed comparative advantage in relation to VIIT and HIIT demonstrates that vertical specialization is significant between Asia and the EU whereas horizontal specialization plays a key role between Asia and the US. The Asian financial crisis significantly promoted VIIT in regard to Asian IT firms in the US market. Finally, regional trade associations such as the EU and Association of South East Asian Nations (ASEAN) have strengthened the vertical specialization of EU IT firms in Asian countries.