Linder Hypothesis Research Articles

Quality and trade with many countries and industries

This paper investigates a trade model with horizontal and vertical product differentations, many goods and many countries. It studies the impact of productivity, population changes and trade costs on the quality composition of exports. The analysis embeds within the same tractable model a series of empirical results, including Linder hypothesis and high-income countries’ specialization in high quality good production. It also shows that high-quality goods exhibiting a high degree of differentiation are traded only by high-income countries.

Linder hypothesis and India’s services

This study examines the empirical validity of the Linder hypothesis for India’s service sector exports from 2005 to 2021, focusing on 35 major importing countries. We use a gravity model trade, applying Feasible Generalised Least Squares (FGLS) and two-step system generalised method of moments (GMM), incorporating country- and time-fixed effects. Our results confirm that the Linder hypothesis does not hold for Indian service exports, revealing an increase in trade intensity between countries with dissimilar income levels. The study finds that distance has a positive and significant impact on Indian service exports. Exchange rates have a negative and significant impact on India’s service exports, while the results for the RTA dummy variable are inconclusive. Sharing a common border, a common colony, and a language has a positive and significant effect on Indian service exports.

Analysis of Albania’s Trade Direction: Is the Open Balkan a New Center of Gravity?

Trade is considered one of the main drivers of a country’s economic growth and development. Therefore, a successful analysis that identifies the bilateral trade flows, their determinants, and the regional integration costs and benefits opens new horizons for international trade perspectives. This study examines the effects of new and existing regional agreements on the international trade patterns of Western Balkan countries based on the Albanian case. In this regard, an extended trade gravity model is applied with a panel data set of trade flows between Albania and 43 of its regional strategic partners during the period of 2008 to 2022. This work considers two different similarity indexes to explain the effect of the economic structures of partner countries on their trade volumes: the relative factor endowment and the absolute factor endowment. The first is used to test the Linder Hypothesis, and the latter is used to test the effect of similarity in economic size between trading partners. Empirical results indicate that the effect of the selected explanatory variables, such as transportation costs, economic size, economic strength, exchange rate, and their relative as well as absolute endowment, is within expectations. Unexpectedly, the domestic economic size and strength are found to be insignificant in explaining the import flows and inversely proportional to the exports of Albania. Finally, it is indicated that trade flows are clearly dependent on traditional ties rather than on new incentives like the Open Balkan, which cannot offer a new regional center of gravity. To the best of our knowledge, this is the first time that the gravity of the Open Balkan initiative has been tested for one of the participating countries. The study concludes that while the Open Balkan initiative shows potential, the Berlin Process remains a more reliable path toward EU integration for Albania.

The Linder hypothesis for foreign direct investment revisited

AbstractThis article investigates the Linder hypothesis for foreign direct investment (FDI) within the three‐way gravity framework, utilizing a newly compiled and extensive dataset encompassing greenfield and brownfield investment activities across diverse sectors from 2003 to 2018. The Linder hypothesis posits that multinational firms invest in countries with comparable income levels to their home country. Our primary findings affirm the relevance of the Linder hypothesis in the context of horizontal FDI. The influence of the Linder effect varies among sectors, with the service sector exhibiting the most pronounced effect, while no detectable effect is observable for the manufacturing sector. We also find that the Linder effect depends on the sector's position within the value chain and the degree of quality differentiation. Sectors closer to final consumer demand and those characterized by higher product differentiation exhibit greater exposure to the Linder effect. Additionally, our analysis reveals that the Linder effect is subject to variations based on the income levels of the host country and highlights the significance of consumer preferences in shaping FDI patterns. Our article underscores the pivotal role of industry dynamics, product quality considerations, and value chain positioning in influencing the Linder effect on FDI.

식품무역의 린더효과분석

Recently, consumers’ interest in food safety has increased rapidly, and it may affect consumer preference and the food production process. Considering that high-income countries have stricter regulations on food production and greater consumer preferences for safe food products, countries’income level might have an important role in determining the quality of food products. Therefore, higher-income countries have possibly been exporting their food products to similar-income-level countries because of the greater consumer preference for safer food products. In this paper, we examine how income similarity between countries affects the trade flow of food products using a large-panel data set covering 2000 to 2018. We found that income similarity has an important role in the trade of food products and the Linder effect is larger than in the other industries we consider in this study. These results support the Linder hypothesis and imply that we need to consider income similarity an important variable in future research in food trade and when establishing a food exporting strategy.

An Empirical Analysis of the Linder Theory of International Trade for South Asian Countries.

This paper presents empirical evidence in support of the Linder theory of international trade for three of the South Asian countries, Bangladesh, India, and Pakistan. This finding implies that these countries trade more intensively with countries of other regions, which may have similar per capita income levels, as predicted by Linder in his hypothesis. The contribution of this research is threefold: first, there is new information on the Linder hypothesis by focusing on South Asian countries; second, this is one of very few analyses to capture both time-series and cross-section elements of the trade relationship by employing a panel data set; third, the empirical methodology used in this analysis corrects a major shortcoming in the existing literature by using a censored dependent variable in estimation.

Intra-Industry Trade in Services: Testing the Linder Hypothesis

Intra-Industry Trade in Services: Testing the Linder Hypothesis

Does the Linder hypothesis hold? Recent Japanese case

The theory of comparative advantage has for a long time played one of the most important roles among the theories of international economics. The theory says that a country has to specialize in producing and exporting goods and services that the country can produce at lower opportunity cost than other goods and services. Achieving this, both countries can benefit. The Linder hypothesis focuses on internal demand in a country. It states that the pattern of export goods is determined by internal demand structure. This study empirically analyzes this Linder hypothesis for the recent case of Japan. The Gravity model can be used to obtain theory-consistent estimates of the Linder hypothesis. This model can estimate bilateral international trade on the basis of cross-section data. The results show that the Linder effect has been holding well. Also, FTA (Free Trade Agreement) has been having positive impacts on international trade.

Institutional distance and China's horizontal outward foreign direct investment

Using a theoretical model, we develop an institution-based version of the Linder hypothesis for horizontal FDI; FDI is more likely to occur among countries with smaller institutional distance. We then use firm-level data to estimate the effect of institutional distance between China and the countries that host its FDI on horizontal outward FDI (OFDI) of Chinese multinational enterprises (MNEs). High-dimensional fixed effects (HDFE) estimation shows that the overall institutional distance has a positive effect on China's OFDI, which does not support the institution-based version of the Linder hypothesis. The positive effect of institutional distance on OFDI does not vary significantly across China's state-owned enterprises (SOEs) and private-owned enterprises (POEs). Further analysis based on four sectoral institutional distances shows that the effect of public sector and labour market institutional distances on OFDI of MNEs is negative and this effect is stronger for POEs than SOEs, which supports the institution-based version of the Linder hypothesis for horizontal FDI. However, the effect of the goods and services sector institutional distance and capital market institutional distance on horizontal OFDI is positive. The impact of the goods and services sector institutional distance on OFDI of SOEs is stronger than for POEs. While unravelling the black box of institutional effects, we find significant asymmetries in the effect of sectoral institutions on OFDI. We also find that the effect varies in size across ownership structures.

Determinants of the Russia and Asia–Pacific energy trade

Asia remained the largest energy consumer in 2020. The Russian Federation hopes to gain a greater share of the Asian energy market. This study examined the Russian Federation–Asia and Pacific energy trade patterns using gravity trade theory and GMM panel estimation for 17 selected Asia and Pacific economies. We found that the Russian Federation's energy exports to the Asia–Pacific region (APR) followed the Linder hypothesis, and economic growth positively influenced Russian energy exports in the region. Furthermore, The results indicated that the sanctions against Russia since 2014 stimulated an increase in Russian energy exports to the APR. To improve the region's energy security, we recommend developing an energy trading hub in the APR to increase regional pricing power.

PROCESSED FOOD TRADE OF EUROPEAN UNION COUNTRIES – THE GRAVITY APPROAC

A significant feature of world trade development is the diminishing role of developed countries in the international agri-food market. The share of the European Union in processed food export has been reducing steadily from 2000, giving place to developing countries at the same time. Considering studies devoted to the factors influencing bilateral trade, the question to what extent the trade of processed food depends on consumer preferences represented by absolute differences of GDP per capita (Linder hypothesis), geography, and trade liberalization remains open. It is interesting in the context of the new demand-oriented trade theory and the globalization process that causes a shrinking distance. The main purpose of the paper is to indicate the impact of consumer preferences and geography on the export value of processed food of EU countries in 2000-2019. To achieve this goal, the gravity model was constructed and estimated via Hausman-Taylor panel regression. The dependent variable was the bilateral export value of processed food of EU countries. The independent variables included GDP, geographical distance between partners, differences of GDP per capita of exporters and importers as a proxy of the Linder hypothesis, membership in a preferential trade agreement, and being landlocked. Research confirmed the validity of the Linder hypothesis and the significance of geography and regional trade integration in shaping the export value of processed food of EU countries.

Revisiting High Development Theory to Explain Upgrading Prospects in Business Services Global Value Chains

The article revisits two classical approaches to development and trade, and offers an alternative account of the emergence of global value chains (GVCs) involving business services (BS), to trade-in-tasks theory. Based on this account, we propose what we call the Hirschman–Linder hypothesis (HLH), which predicts the need for an adequate ‘representative domestic’ (intermediate) demand for BS for countries to enter and upgrade in BS GVCs. We review the quantitative and qualitative empirical evidence supporting the HLH and find two main results: (i) countries with a substantial manufacturing core are more likely to participate (and eventually to upgrade) in BS GVCs, and (ii) countries endowed or specialized in natural resource industry (NRI), either the primary or extractive sectors are also likely to be part of BS GVCs. If BS GVCs represent globalization’s third unbundling for developing countries, the HLH suggests that on the one hand a core manufacturing sector is essential for entering and upgrading in BS GVCs, and on the other hand that if countries can diversify into BS and upgrade in BS GVCs specialization in natural resources might not necessarily be a curse.

The Linder hypothesis during the globalization era

This paper investigates the impact of globalization on the Linder hypothesis. My theory-consistent general equilibrium estimates offer evidence that the Linder hypothesis has been phasing out during the globalization era. My results also refute the aggregation bias of the Linder effect but unveil that the time-span selection could justify its magnitude.

Three decades of narrow globalization: Evaluating India's exports between 1991 and 2017

Thirty years of globalization has bolstered India's exports. Although globalization has been a contributor to India's growth, experiments with globalization have been regional, not global. The study examines the impact of globalization on India's exports to 154 exporting destinations for 1991–2017. Poisson pseudo‐maximum likelihood estimator is used to estimate the gravity model of trade. The study shows evidence of slowbalization, defining narrow and broad globalization. The empirical evidence presented in the paper also validates Linder's hypothesis. The analysis of speed and rate of convergence points to a trade potential with 102 trading partners of India.

Linder hypothesis revisited: Does it hold for services trade?

This article examines how differences in the income level and income inequality of trading partners impact their bilateral trade in services. Results show that the Linder hypothesis holds at the aggregate level. Both similar levels of per capita income and income inequality in two countries increase services trade. However, the precise impact varies with the particular service sector, which highlights the importance of addressing the heterogeneity of service sectors.

Trade Potential of India against BRCS Economies: An Empirical Analysis based on Gravity Model

This article sheds light on the potential of trade of India against BRCS economies by employing the Gravity Model. The study period is covering 22 years from 1995-2016. The gravity models for both 1995 and 2016 fit the data well and explain 75 percent and 76 percent of the variation in bilateral trade across sample of countries, respectively. The results are hetero-corrected, multicollinearity and auto correlation free. The coefficient of product of GDP, per capita GDP, and openness variable are positive and highly significant as expected whereas the dummy variable, RTA, is not found significant. The per capita GDP differential has negative and statistically significant effect on bilateral trade flows for both 2016 and 1995 data and support the Linder hypothesis. The results show that considerable potential exists on individual country basis. Thus, India needs to concentrate on trade from emerging countries that are liberalizing their markets for economic expansion.

Revisiting the sectoral Linder hypothesis: Aggregation bias or fixed costs?

AbstractThis paper reassesses and revisits the Sectoral Linder Hypothesis due to Hallak, which posits that similar tastes for quality lead to more intensive trade between similar countries at the sectoral level. First, the measure of demand similarity used in this paper is based on the distribution of income estimated from household surveys. The paper finds that a similarity measure based on the income distribution produces stronger results than the traditionally used measure based on GDP per capita. Moreover, the country/product level extensive margin is taken into account. This is important because similarity is likely to affect the fixed costs of trade and the fixed costs of alternative means of servicing a market (i.e., licensing and FDI). Fixed costs, in turn, affect the number and average productivity of firms that engage in bilateral trade and hence the overall volume of trade. This paper employs the method by Helpman et al. to control for the extensive margin. Heteroskedasticity is addressed using a feasible generalized least squares (FGLS) approach. The findings show that once controlling for the effect of similarity on the extensive margin, the Linder hypothesis holds at more aggregate levels. Other robustness checks suggest that results are not confined to products that are vertically differentiated.

Comments on Assessment of the Trade Integration Pattern Between the Russian Federation and East/Southeast Asian Economies Using the Panel Gravity Framework

Comments on Assessment of the Trade Integration Pattern Between the Russian Federation and East/Southeast Asian Economies Using the Panel Gravity Framework

Assessment of the Trade Integration Pattern Between the Russian Federation and East/Southeast Asian Economies Using the Panel Gravity Framework

This study is the first attempt to investigate the patterns of imports and exports between the Russian Federation and East/Southeast Asian economies, namely, the People's Republic of China; Hong Kong, China; Macau, China; Japan; the Republic of Korea; Mongolia; Cambodia; Lao People's Democratic Republic; Brunei; Indonesia; Malaysia; Myanmar; the Philippines; Singapore; Thailand; and Vietnam. To this end, a panel gravity trade model with series from 2001 to 2017 is provided to estimate the gravity variables in our models. The results reveal that GDP and income are more important in the export pattern from the Russian Federation to the East Asian region, meaning that the economic size and the income of the population in East Asian economies are more important in this pattern than other variables. Moreover, Russia's export pattern with the East Asian region follows the Heckscher–Ohlin hypothesis, while Russia's import pattern with this region is in line with the Linder hypothesis.

Gravity, Borders, and Regionalism: A Canada–US Sub-National Analysis

ABSTRACTThis article examines the extent to which trade costs influence the magnitude and direction of both east-west and north-south trade in Canada and the United States. With the aid of an alternative framework which pays attention to key estimation issues in the gravity literature, we garner further evidence in support of a decline, over time, in the home bias syndrome. Our results uphold the Linder hypothesis but refute the Heckscher-Ohlin factor endowment proposition. In light of the recently modernized trilateral trade agreement in North America, we conclude with policy lessons on buffering the Canadian economy from asymmetric trade shocks from its southern neighbor.