Differences In Relative Factor Endowments Research Articles

Differences in Total Factor Productivity and the Pattern of International Trade

In this work, we develop a trade model that explains the pattern of trade between countries based on differences in total factor productivity (TFP) while also accounting for differences in relative factor endowments. The novelty stems from the introduction of production functions derived by combining the Ricardian and Heckscher–Ohlin–Samuelson (H-O-S) theories, with TFP differences serving as the basis of comparative advantage. To this end, a testable hypothesis is derived. For the empirical measurement of the TFP in each industry and country, a constant elasticity of substitution (CES)-type production function was employed, and the TFP was calculated as the Solow residual from the production function’s fixed term. To offer a better understanding, the model was tested for the bilateral trade between Germany and Russia, and Germany and the Czech Republic. It was found that TFP differences can be used as a basis for explaining comparative advantages and, consequently, the bilateral pattern of trade between two countries.

European Integration and International M&As: The Case of Poland

This paper studies determinants of international mergers and acquisitions (M&As) in Poland using the predictions of the knowledge capital model of multinational enterprise. The empirical implementation of the theory is based on the negative binomial model and the bilateral dataset covering 143 countries over the period 1995–2015. Our estimation results indicate that M&As in Poland are explained by both differences in relative factor endowments and in market size which confirms the importance of both market seeking and efficiency seeking motives. Moreover, the efficiency seeking motive is losing its importance over time while the market seeking motive becomes more important.

What attracts multinational enterprises from the new EU member states to Poland?

The main goal of this study is to examine empirically the determinants of multinational activity of firms from the new EU-12 member states in Poland during the period 1990–2014 using the negative binomial model. In particular, we test the predictions of competing theoretical models of the multinational enterprise to identify the investment motives for undertaking foreign direct investment in Poland. In addition to traditional country-pair characteristics such as absolute and relative market size and differences in relative factor endowments, in this study we account for cultural differences between the host and partner countries that may affect the cost of foreign investment. The assembled empirical evidence points to both market access and efficiency seeking as the main reasons for undertaking foreign direct investment in Poland by multinational enterprises based in the new EU-12 member states. However, cultural proximity does not seem to be an important factor in explaining the extent of multinational activity in Poland.

MNE Activity in Poland: Horizontal, Vertical or Both?

ABSTRACT The purpose of this article is to validate empirically the theoretical predictions of the knowledge capital model of multinational enterprise and identify the reasons for undertaking international production in Poland. This model allows taking into account both horizontal and vertical reasons for foreign direct investment (FDI). The empirical implementation of the theoretical framework is based on the negative binomial model and the bilateral dataset covering 143 countries over the period 1995–2015 which yields a total of 3003 observations. In contrast to previous studies the actual data on differences in human capital per worker that come from the most recent edition of PennWorld Table 9.0 are employed as the measures of differences in relative factor endowments. The empirical evidence confirms the predictions of the knowledge capital model and points to the horizontal as well as vertical motives for undertaking FDI in Poland. In particular, our estimation results show that MNE activity in Poland is related to both differences in relative factor endowments and in market size which confirms the importance of both reasons for undertaking FDI in Poland. However, these reasons are different for different groups of parent countries.

Determinants of MNE Activity in Poland: The Case of Firms from EU-15

Objective : The main purpose of this paper is to validate empirically the theoretical predictions of the modified knowledge capital model of multinational enterprise and identify the main reasons for undertaking international production in Poland by foreign firms from the EU-15 countries. Research Design & Methods : Our theoretical framework refers to the physical capital augmented knowledge capital model that combines both horizontal and vertical reasons for foreign direct investment. The empirical implementation of the theoretical framework is based on the negative binomial model and the bilateral dataset covering 15 old EU member states over the period 1989-2014 which yields a total of 390 observations. Findings: Our estimation results indicate that the extent of multinational activity in Poland is positively related to both differences in relative factor endowments and similarity in the relative country size which confirms the importance of both reasons for undertaking foreign direct investment in Poland. Implications & Recommendations: The empirical evidence confirms the predictions of the modified knowledge capital model and points to the horizontal as well as vertical motives for undertaking foreign direct investment in Poland. These findings suggest that government should not try to attract only one type of FDI. Contribution & Value Added: The originality of this work lies in the empirical implementation of the theoretical framework that allows distinguishing between horizontal and vertical reasons for foreign direct investment.

Growth, Factor Endowment and Trade of India - A Review of Literatures

The factor endowment theorem better known as the Heckscher - Ohlin Theorem has been much been researched topic in the arena of International Trade. The H-O theorem envisages that trade between different countries is caused due to differences in relative factor endowments of those countries. H-O theorem is a theorem of long term general equilibrium in which the two factors are mobile between sectors. Leontief was the first to find that despite the fact that the USA was capital-abundant country it was exporting labour-intensive products. This clearly indicated factor reversal in the case of USA and popularly came to be known as Leontief paradox. This very study instigated the researchers all over the world to test H-O theorem for other countries. This paper is an attempt to review literatures related to the studies on growth, factor endowment and trade of India.

RCA indices, multinational production and the Ricardian trade model

The practice of using Revealed Comparative Advantage (RCA) Indices to determine the flow of goods trade among countries is well established. But an important issue that demands attention is whether the RCA indices reflect the essentials of comparative advantage theory. Deb and Basu Foreign Trade Rev 46(3):3–28, (2011) examined the consistency of alternative RCA indices with the Heckscher-Ohlin theory of comparative advantage, leaving scope for re-examination of the indices in the context of the Ricardian comparative advantage theory, which insists on relative factor productivity differences among countries contrary to Heckscher-Ohlin’s relative factor endowment differences. The other issue which has been overlooked in much of the existing literature is the importance of value-added trade. With the growing importance of global production chains, RCA indices based on gross export values may not portray an accurate picture of the underlying comparative advantage of countries. In this context, adjusting the RCA indices to incorporate domestic value-added in exports seems to be quite relevant. This paper explores the consistency of RCA indices based on domestic value-added in exports with the Ricardian theory of comparative advantage using a panel data approach. A brief review on the structures of alternative RCA indices is also provided. The Log-of-Balassa index is found to be the best performer in this empirical examination, although the deficiencies of the index for cross-country or cross-commodity comparison must be acknowledged. The index of Yu et al. Ann Reg Sci 43(1):267–282, (2009) does possess the latter feature but in our study its performance is quite poor and hence its consistency with the Ricardian theory of comparative advantage is questionable.

Impact of Regional Trade Agreements in East Asia on Members’ Trade Flows

Using an unbalanced panel dataset of bilateral trade flows, we study the determinants of two-way trade for Australia, China, India, Japan, New Zealand, Korea and the ten ASEAN countries from 1990 to 2009. We find that bilateral trade flow is positively related to the sum of the GDP of trading countries, and similarity in GDP size, but inversely related to relative factor endowment differences, transportation costs and import tariffs. Our empirical results suggest that formulating an East Asian Free Trade Area is important for promoting intraregional trade. Furthermore, there is a need to provide a range of instruments to assist least-developed ASEAN countries in designing and implementing appropriate trade integration policies through the provision of technical and financial assistance as well as analytical support.

Shouldn't Physical Capital Also Matter for Multinational Enterprise Activity?

AbstractThe foreign direct investment (FDI) literature has generally failed to find strong systematic evidence of “vertical” motivations in bilateral aggregate FDI and foreign affiliate sales (FAS) data, despite recent evidence of vertical FDI in firm‐level data. Moreover, a Bayesian analysis of the empirical determinants of FDI (and FAS) flows reveals that the parent country's physical capital per worker has a strong positive effect on FDI alongside typical gravity‐equation variables; however, this variable is ignored in the knowledge‐capital (KC) model and most empirical work. We address these two puzzles by introducing relative factor endowment differences into the three‐factor, three‐country knowledge and physical capital extension of the 2 × 2 × 2 KC model. Using a numerical version of our model, we show that horizontal and vertical multinational enterprises' (MNEs') headquarters surface in different parts of the Edgeworth box relating the parent country's skilled labor share relative to its physical capital share (of the parent's and host's endowments). The key economic insight is that horizontal MNE headquarters will be relatively more abundant than vertical MNE headquarters in countries that are abundant in physical capital relative to skilled labor, because of the multi‐plant (single‐plant) structure of horizontal (vertical) MNEs—assuming plants (headquarters) use physical capital (skilled labor) relatively intensively in their setups. The theoretical relationships suggest augmenting empirical FAS gravity equations with (polynomials of) the parent's skilled labor share alongside the parent's physical capital share to explain in aggregate bilateral data the coexistence of horizontal and vertical FAS. The theoretical and empirical results shed light on the positive effect of parent's physical capital share on FAS flows, but also suggest that MNE headquarters may be prominent in parent countries with relatively high and low skilled labor shares—once physical capital is accounted for—a result not suggested by the two‐factor KC model.

POTENTIAL IMPACTS OF REGIONAL TRADE ENLARGEMENT IN EAST ASIA ON LAOS’ TRADE

Using an unbalanced panel dataset of bilateral trade flows from 1992-2009, we assess the potential impacts of the formation of ASEAN+3 and ASEAN+6 free trade areas (FTAs) on Laos’ trade. We find that bilateral trade flows between Laos and its trade partners are positively related to the sum of bilateral gross domestic product (GDP) and the degree of similarity in GDP size between Laos and the partner, and inversely related to relative factor endowment differences, transportation costs, and import tariff rates. Our simulation results show that Laos stands to gain from the formation of ASEAN+3 and ASEAN+6 FTAs if tariff barriers are gradually decreased. However, such examples of regional integration could harm Laos’ economy if all tariff barriers were completely removed due to Laos’ lack of competitiveness.

Trade Interactions of China-Latin America Vis-À-Vis Asean-Latin America: The Relevance of the Center-Periphery Relations?

This paper compares the role of relative factor endowment differences in driving bilateral trade flows between China and six selected ASEAN economies with Latin America. The findings reveal that relative factor endowment differences are consistently positive and significant for increasing export flows between China and Latin America, suggesting that complementary comparative advantages are developing along the lines of center-periphery relations. Contrary to China-Latin America, specific individual ASEAN countries trade in manufactures with Latin America offer prospects for trade specialization beyond the traditional view of comparative advantages, which is based on similarities in factor endowments. Taken together, these findings suggest that the ASEAN region can plausibly be a game changer to the existing patterns of interregional Asia-Latin America relationship, namely that of China-Latin America, by capitalizing on intra-industry trade flows with their Latin American counterparts.

Modelling the factor content of agricultural trade

This article examines the factor content of agricultural trade in the Central and East European (CEE) transition countries. It relates the factor content of agricultural trade to the cross-country differences in technology stemming from different farm organisations between the CEE countries agricultural sectors and to the differences in relative factor endowments. The relative factor endowments alone do not satisfactorily explain agricultural trade flows in the CEE countries. We find that transaction costs and market imperfections that affect the organisation of production also distort farm specialisation and hence V the actor content of agricultural trade.

China, India and the Commodity Boom: Economic and Environmental Implications for Low-income Countries

The international role of China has risen steadily for two decades – and has become even more important in the current global recession. The growing supply of labour-intensive manufactured exports from China has been accompanied by a huge expansion in its imports both of raw materials and of skill-intensive manufactured parts and components. This ‘offshoring’ of intermediates production by a large, labour-abundant economy has economic and environmental implications for other developing economies. More recently, the rapid expansion of the Indian economy and trade indicates that it too will soon exert similar effects on global markets. We sketch a model showing how the growth of these developing-country ‘giants’ generates adjustment pressures on other developing economies. We discuss in particular how differences in relative factor endowments of resource-rich economies can produce quite different outcomes in the context of product fragmentation and expanding commodity trade. We also explore the effects on production, trade, environment and prospects for future growth in resource-rich economies, particularly in the context of weak institutions and other market failures. We illustrate these different impacts by considering the cases of Indonesia, Malaysia and Thailand and highlight implications for growth, development and policy.

The Rise of China and India and the Commodity Boom: Economic and Environmental Implications for Low-Income Countries

The rapid growth of China and, more recently, of India, is having major effects on every facet of the global economy. The supply of labor-intensive manufactured exports (from China in particular) has been accompanied by a huge expansion in their imports both of raw materials and of skill-intensive manufactured parts and components. This ‘offshoring’ of intermediates production by large, labor-abundant economies has economic and environmental implications for other developing economies drawn into their trade networks. We sketch a trade-theoretic model showing how the growth of the ‘giants’ generates adjustment pressures on their trading partners and competitors among developing economies. We discuss in particular how differences in relative factor endowments of resource-rich economies can produce quite different outcomes in the context of product fragmentation and expanding commodity trade. We also explore the effects on production, trade, environment and prospects for future growth, recognizing that commodity extraction and production can have strong environmental impacts, particularly in the context of weak institutions and other market failures. We illustrate these different impacts by considering the cases of Indonesia, Malaysia and Thailand and highlight implications for growth, development and policy.

The rise of China and India and the commodity boom : economics and environmental implications for low-income countries

The rapid growth of China and, more recently, of India, is having major effects on every facet of the global economy. The supply of labor-intensive manufactured exports (from China in particular) has been accompanied by a huge expansion in their imports both of raw materials and of skill-intensive manufactured parts and components. This 'offshoring' of intermediates production by large, labor-abundant economies has economic and environmental implications for other developing economies drawn into their trade networks. We sketch a trade-theoretic model showing how the growth of the 'giants' generates adjustment pressures on their trading partners and competitors among developing economies. We discuss in particular how differences in relative factor endowments of resource-rich economies can produce quite different outcomes in the context of product fragmentation and expanding commodity trade. We also explore the effects on production, trade, environment and prospects for future growth, recognizing that commodity extraction and production can have strong environmental impacts, particularly in the context of weak institutions and other market failures. We illustrate these different impacts by considering the cases of Indonesia, Malaysia and Thailand and highlight implications for growth, development and policy.

Bilateral versus Multilateral Trade and Investment Liberalisation

To assess the welfare effects of bilateral versus multilateral trade and/or investment liberalisation in general equilibrium, we set up a three‐country and three‐factor knowledge‐capital model of trade and multinational activity. Numerical simulation results indicate that multilateral liberalisation tends to dominate bilateral liberalisation in welfare terms. A transition economy tends to prefer bilateral over multilateral liberalisation to avoid plant relocation. For similar reasons, a developed country may prefer bilateral over multilateral liberalisation, if the other economies exhibit big relative factor endowment differences.

Study of the Measurement and Determinants of Intra-industry Trade in East Asia*

The present paper investigates the development of intra-industry trade (IIT) among the East Asian economies over the 1970–1996 period. A dynamic index is used to capture the changes in the structure of trade flows. Based on this approach, IIT is decomposed into horizontal (HIIT) and vertical components (VIIT) and the determinants of each are investigated. The results show that both HIIT and VIIT have exhibited increased importance over the sample period in manufacturing. Using pooled panel data the two-way trade in all measures of IIT is found to be positively related to the country-specific variables, such as the market size, exhange rate depreciation, the levels of development and income, and negatively to the geographic proximity of the partners. Economies of scale are seen to have a positive influence on IIT and HIIT, but a negative relationship with VIIT. Although the relative openness of a country's trade regime shows no significant relationship with any form of IIT, a trade imbalance does affect IIT and HIIT flows. The findings have implications for assessing the structural adjustment costs associated with the trade liberalization process as HIIT is associated with demand for variety and relates to two-way trade in goods of similar quality, while VIIT is driven by international specialization and differences in relative factor endowments.

Alliances, Imperfect Markets, and Major-Power Trade

The “new” trade theory and standard trade theory make different predictions about the composition and distribution of trade flows. Empirical evidence suggests that an increasing share of international trade consists of differentiated products, a consequence of increasing returns to scale. Nonetheless, the existing political science literature typically assumes that the conditions of standard theory hold. As such, the literature ignores the dynamic-inconsistency problem that imperfect markets can create. In doing so, it also ignores the fact that imperfect markets can shift the political prerequisites of open international markets. In this article we examine these shifts. We argue that alliances can support an optimal level of trade when scale economies rather than differences in relative factor endowments motivate it. Our empirical results support this argument, indicating that alliances exert a stronger influence on trade in goods produced under conditions of increasing rather than constant returns to scale.Earlier versions of this article were presented at the 2002 Annual Meeting of the American Political Science Association, Boston; the 2002 Annual Convention of the International Studies Association, New Orleans; and seminars at the University of Chicago (PIPES), the University of Colorado, Cornell University, Dartmouth College, New York University, the University of Pennsylvania, and Yale University. For helpful comments and suggestions, we are grateful to participants in these seminars and to Regina Baker, Bruce Bueno de Mesquita, William Clark, Benjamin Cohen, Christina Davis, Eric Fisher, Avery Goldstein, Stephen Kobrin, Lisa Martin, Patrick McDonald, Helen Milner, Robert Powell, Dan Reiter, Anne Sartori, Branislav Slantchev, and Beth Yarbrough. We are also grateful to Regina Baker and Patrick McDonald for research assistance.

Determinants of Intraindustry Trade Between the United States and Industrial Nations

This paper investigates determinants of intraindustry trade between the United States and twenty-two industrial nations. Included here are country-level characteristics suggested by modern models of monopolistic competition and trade and industry-level variables relating to imperfect competition, scale economies, and product differentiation. Country-level determinants of intraindustry trade include relative factor endowment differences, relative country size differences, distance, trade orientation, and the trade balance. Measures of factor intensity, scale economies, market structure, and product differentiation are included as country-level variables. Findings generally support predictions of modern trade theories. [F1]

On Tariff Preferences and Delegation Decisions in Customs Unions: A Heckscher–Ohlin Approach

This paper studies preferences of customs union (CU) members over common external tariff (CET) levels and extends the literature on delegation decisions over trade policy in models with production. In a model with similar CU members, we prove that most-preferred CETs can be ranked with the help of compensated price elasticities of import demand functions. In the Heckscher–Ohlin trade model, we show these elasticities depend on inter-country differences in relative factor endowments and inter-sectoral differences in technology. This helps identify the optimal policy maker in a CU and demonstrates delegation decisions over trade policy can be integrated into mainstream trade theory. The proliferation of preferential trade agreements (PTAs) in the 1990s has presented policy analysts with a dual challenge: to identify how these arrangements affect policy makers’ incentives to intervene in trade and to predict their implications for welfare. Economists responded to this challenge vigorously. Thanks to their research efforts, a substantial body of work is now available addressing these issues under alternative assumptions regarding the theoretical environment considered – including the objectives of policy makers, the nature of their interactions, the (GATT) rules that might constrain these interactions, market structure, the process of coalition formation, etc. 1 Still, while undeniably valuable, the recent literature on regionalism has shed limited light on an important issue: how heterogeneity among partners in a PTA shapes their national preferences over external tariff levels and how these preferences in turn manifest themselves in the formation of actual trade