Stochastic Frontier Gravity Model Research Articles

Determinants, efficiency and potential of agri-food exports from Nigeria to the EU: Evidence from the stochastic frontier gravity model

This study uses an extended gravity model to examine the determinants, efficiency and potential of agri-food exports from Nigeria to the EU for the 1995–2019 period. It uses a stochastic frontier analysis (SFA) to estimate the extended gravity model. The results show that the economic size (GDP) of Nigeria and the EU countries, as well as bilateral distance, positively determine agri-food exports from Nigeria to the EU. Also, the results show that Nigeria's agri-food exports to the EU are negatively determined by the income (per capita GDP) of Nigeria and its EU trading countries, bilateral exchange rate and EU new member states (NMS). The results further show that Nigeria scores relatively low in terms of the efficiency of its agri-food exports to the EU countries. On a final note, the study shows that Nigeria's agri-food exports with the EU have a relatively large potential that has not been exploited. We document policy recommendations in this study.

Trade Sustainability and Efficiency under the Belt and Road Initiative: A Stochastic Frontier Analysis of China’s Trade Potential at Industry Level

ABSTRACT This study calculates the export trade potential and trade efficiency of China to countries along the Belt and Road within the HS 2-digit code sectors; the influencing factors are also analyzed using the one-step method. The stochastic frontier gravity model is applied on a dataset including 35 countries during 2009–2017. The results indicated that the trade resistance of China’s export to countries along the Belt and Road has increased over time, while there is still huge trade potential at various industries. Moreover, trade efficiency is high in mechanical and electrical products, iron or steel articles, and furniture and bedding. Low-efficiency products include live animals, cork, vegetable plaiting materials, tin, and arms. To further improve the trade efficiency, it is necessary to strengthen the cooperation with the countries along the Belt and Road in infrastructure construction and investment based on the free trade area. These findings have great significance for the sustainable and high-quality development of the Belt and Road initiative.

Intraregional Export Flows and Export Efficiency in Palm Oil and Palm-Based Products: Southeast Asia and Latin America Regions Compared

ABSTRACT Arguably, leveraging the intraregional market is important for a commodity like palm oil that constantly faces challenges to sustain global demand in extraregional markets. The article, therefore, compares intraregional export potentials for palm oil in two regions that are at the frontier for palm oil expansion, Southeast Asia and Latin America. The study employs a stochastic frontier gravity model to estimate intraregional export performance. The results indicate large untapped potentials and low-efficiency levels in both regions. The evidence further suggests that the export potential limiting factors have increased over time.

The potential for China's outward foreign direct investment and its determinants: A comparative study of carbon-intensive and non-carbon-intensive sectors along the Belt and Road

Ensuring that the Belt and Road Initiative (BRI) is green and low-carbon is crucial to tackling climate change while simultaneously promoting a win-win outcome of BRI countries. In recent years, China has altered its BRI Foreign Direct Investment (FDI) portfolio by reducing investment in carbon-intensive sectors and increasing it in non-carbon-intensive sectors. Therefore, it is particularly important to assess the potential of these two types of sectors in attracting China's FDI, and to identify the major determinants of investment. In our study, the results of a stochastic frontier gravity model and inefficiency model on 2008–2017 data covering 132 countries, including 98 BRI countries, show that the potential for China's FDI in non-carbon-intensive sectors is higher than that in carbon-intensive sectors. Furthermore, the determinants of China's FDI in these two types of sectors are significantly different. The study's results can be used to inform China's investment policy, and render positive contributions to the green BRI based on location and sector information.

Estimating the Impact of Free Trade Agreements on India’s Export Potential

The study examines the role of trade agreements (TA) in determining merchandise export efficiency in India using the stochastic frontier gravity model. We estimate the impact of select trade agreements (bilateral, SAFTA, APTA, ASEAN, and MERCOSUR), regulatory quality, and FDI inflow on India’s export efficiency in the period 2002–2018. Results suggest that TAs have enhanced India’s merchandise export efficiency to its trading partners except for the MERCOSUR bloc. However, substantial potential is still untapped. The study finds that the regulatory quality (RQ) of importing nations does not enhance India’s export efficiency. Moreover, the RQ of India is promising but not significantly promoting exports. The study suggests that India should further liberalize its existing trade agreements, harmonize and improve regulatory standards facilitating cross-border trade and export-oriented FDI, and undertake trade access to top-consuming markets to achieve its full export potential.

Intelligent evaluation of trade efficiency of agricultural products between China and ASEAN: An stochastic frontier approach with noise reduction

As the world’s largest free trade area among developing countries, the China-ASEAN Free Trade Area has gone through 15 years, and the China-ASEAN (Association of Southeast Asian Nations) Free Trade Area cooperation framework with tariff reduction as the core has diminished incentive effects on regional trade, the “21st Century Maritime Silk Road” strategy provide new opportunities for the upgrading and development of the China-ASEAN Free Trade Area. Based on the stochastic frontier gravity model, the random disturbance term was introduced to overcome the inevitable noise problem of macro statistical data, the trade efficiency of agricultural products between China and ASEAN were estimated in this study. The result shows that the potential for trade promotion between China and ASEAN countries is fully tapped. Based on this, it is proposed to strengthen infrastructure construction and smooth maritime trade channels with the help of the “One Road” platform. Strengthen communication and dialogue to weaken the impact of non-tariff barriers on trade, and use the Shanghai Free Trade Zone test plot to enhance the international competitiveness of Chinese agricultural product trade.

Research on the Efficiency and Potential of China's Trade with South Asian Countries-Based on the Stochastic Frontier Gravity Model

In the context of COVID-19, international trade has been strongly impacted, and it is of great significance to accelerate trade exchanges with countries along the "Belt and Road" to achieve trade transformation. This paper uses the time-varying stochastic frontier gravity model to measure trade efficiency based on the data of China and South Asia from 2000 to 2019. The empirical results show that economic scale and population have a positive impact on trade. China's GDP growth is not conducive to the growth of bilateral trade volume, and distance is no longer a factor hindering trade. Trade inefficiency has a great impact on trade. Among them, whether to sign a free trade agreement, the quality of port infrastructure, the simple average tax rate of all products, and political risks have a more significant impact on the trade coefficient. The trade potential between China and South Asian countries is very large and different countries are uneven. China has high trade efficiency with Sri Lanka, Pakistan, India, and Bangladesh, while trade with Bhutan has extremely low efficiency, and trade with Maldives and Nepal is average. Based on the above empirical results and combined with the current epidemic situation, the corresponding conclusions and countermeasures are put forward. For example, exporters should continue to innovate to promote trade transformation and diversified development; combine the western development strategy to promote trade and South Asian exchanges; reduce trade tariff barriers between the two countries; Jointly maintain the security and political situation of the two countries.

Analysis of Factors Affecting Chinese Outward Foreign Direct Investment: An Empirical Study Based on Stochastic Frontier Model

This paper uses panel data of 20 target countries of China’s outward foreign direct investment (OFDI) from 2011-2019 to establish a stochastic frontier gravity model to study the influencing factors of China’s OFDI and to define and measure the investment potential by summarizing and generalizing the relevant literature. The results show that: Chinese GDP, host country GDP, host country trade openness, host country government governance capacity, and host country intellectual property protection level are positively correlated with Chinese OFDI; national investment guidance policies have a very obvious positive effect on the growth of Chinese outward investment. In the post-epidemic era, in order to promote the development of Chinese OFDI and fully exploit the potential of Chinese OFDI, we should strengthen macro and micro regulation to ensure a stable and high-quality economic development, actively introduce national investment policies to cope with changes in the international investment policy environment, optimize the investment industry structure, and avoid investment risks.

Country risk and international trade: evidence from the China-B&R countries

ABSTRACT This study conducts a time-varying stochastic frontier gravity model to explore the interactions between country risk and foreign trade for the Belt and Road countries. By using the data of bilateral trades between 134 countries and China during 2003–2018, empirical results show that reduction of country risk will increase the bilateral trades between China and these countries. Based on these findings, the implementation of the Belt and Road initiative may effectively hedge the country risk of the trade partners and promotes their bilateral trades with China.

Determinants of Vietnam's rice and coffee exports: using stochastic frontier gravity model

PurposeThe paper aims to estimate the factors affecting Vietnam's export in rice and coffee, the two most important agricultural products, especially in exploring the role of “behind-the-border” constraints.Design/methodology/approachThe paper applies the stochastic frontier gravity model, which models the aggregate effect of “behind-the-border” factors for Vietnam's export in rice and coffee.FindingsThe paper finds that the impact of “behind-the-border” constraints is statistically significant, suggesting that Vietnam's exports in rice and coffee may be prevented from reaching their export potential by such factors. Moreover, technical efficiency and potential export suggest that Vietnam has a lot of potential to increase its exports in rice and coffee with its major trading partners. The Association of Southeast Asian Nations group continues to be the major market of Vietnamese rice and coffee. Vietnam can also take advantage of the opportunity to export these commodities to the European Union (EU) (not including the UK), and Comprehensive and Progressive Agreement for Trans-Pacific Partnership, especially in coffee to the EU.Research limitations/implicationsThe study cannot identify specific “behind-the-border” factors due to the limitation of data availability.Originality/valueMany existing studies suggest that export in agricultural products of Vietnam, especially in rice, is significantly affected by natural factors and “explicit beyond-the-border” constraints. They ignore the impact of “behind-the-border” constraints in Vietnam and its trading partners. My study proved the significant impact of such constraints. Therefore, Vietnam needs more policies to remove the “behind-the-border” constraints to promote export in rice and coffee.

The influence of cultural and institutional distance on China's OFDI efficiency: fresh evidence from stochastic frontier gravity model

PurposeCulture and institutions are among the essential sources of comparative advantage in international trade and may influence a country's FDI influx. This paper aims to analyze the impact of cultural distance (CD) and institutional distance (ID) on the efficiency of China's outward foreign direct investment (OFDI) for the panel of 43 countries during 2003–2016.Design/methodology/approachThe stochastic frontier approach (SFA) has been incorporated into the standard gravity model of gravity Kalirajan, 1999; Ravishankar and Stack, 2014). SFA has traditionally been implemented to evaluate the production frontier as the highest yield that could possibly be generated from specified input levels. The production process is viewed to be fully efficient if the real output is performed at frontier level. Otherwise, the production process is assumed technically inefficient, which implies potential scope for enhanced output. This error term is split into two parts, a non-negative term and more standard asymmetrical term. The former identifies inefficiencies in production, while the latter retrieves random disordersFindingsThe outcomes assert a U-shaped relationship between CD and the efficiency of China's OFDI. Put differently, when the CD is minimal, the “liability of foreignness” (LOF) effect plays a dominant role; and CD tends to reduce the efficiency of China's OFDI. On the flip side, when the culture distance is greater than a certain threshold level, the “advantages of foreignness” (AOF) effect plays a predominant role, and CD improves the efficiency of China's OFDI. Institutional distance results in the “LOF” effect significantly reduce the efficiency of China's OFDI.Research limitations/implicationsNotwithstanding these contributions, our study has some limitations which offer directions for future research. The major limitation of this research work is the availability of comprehensive data for a well extended time, in particular for the variable of CD. Further, a firm-level study can shed light on the motivations and performance of China OFDI. Finally, given that our analysis focuses on emerging market multinational enterprises (EMNEs) from China, the findings might not be explicitly generalizable to MNEs from other developing countries. Future studies should concentrate on the comparative study of China's OFDI with other developing countries, to deepen our understanding of the effects of ID and CD on the efficiency of OFDI.Originality/value(1) The work is novel in nature as the authors attempt to explore the effect of ID and CD on efficiency of Chinese FDI. To the best of the authors’ knowledge, no research is conducted in this direction in terms of Chinese FDI. (2) Further, the prior studies employed standard gravity model, which may not correctly evaluate the trade potential viewed as the highest potential value. To overcome the shortcomings of the standard gravity model in estimation of the trade performance and efficiency, the SFA has been incorporated into the standard gravity model of gravity.

Pakistan's export performance and trade potential in central Asian region: Analysis based on constant market share (CMS) and stochastic frontier gravity model

By using statistical tools of revealed comparative advantage, trade complementarity, constant market share, and stochastic frontier gravity model, this study inspects the export performance and trade potential of Pakistan in the Central Asian region. The range of the study is from 2003 to 2017. The study finds that Pakistan has the highest comparative advantage in pharmaceutical merchandises with the central Asian region as a whole, while it has a very low level of trade complementarity. Yet, a massive trade potential is existing between Pakistan and Central Asian countries, especially with Uzbekistan followed by Turkmenistan. The results also show that GDP, trade openness, distance, exchange rate, and tariff rate are the prime determinants of Pakistan's export to the Central Asian region. The empirical analysis also indicated that “behind the border” factors confine the exports of Pakistan from reaching to its potential level. Therefore, Pakistan needs to sign a free trade agreement at the earliest and should focus to secure full tariff concessions on its top exported products.

Empirical Research of Business Development Potentiality of Cross Border E commerce between China and the Belt & Road Countries

Since the financial crisis, the global economy has fallen into a trough and recovered slowly. Under the double impact of the “new normal” of the internal economy and shrinking external demand, the growth rate of China’s traditional foreign trade has shrunk dramatically. In contrast, cross-border e-commerce has become a key support point for China’s foreign trade. In addition, the “Belt and Road” strategy is proposed to provide good development conditions for cross-border e-commerce. This paper takes the “Belt and Road” cross-border e-commerce as the background, builds a systematic cross-border e-commerce impact mechanism evaluation system, and analyzes the potential of cross-border e-commerce export from China to the countries along the “Belt and Road” based on the stochastic frontier gravity model. The conclusion is that improving infrastructure and logistics construction, improving the development of e-commerce environment, strengthening financial services, and depreciating RMB can promote cross-border e-commerce export efficiency, and thereby tap the export potential of cross-border e-commerce. Finally, this essay puts forward specific policy recommendations to help the development of cross-border e-commerce, combining the actual conditions of China and the countries along the “Belt and Road”.

Empirical Analysis on Foreign Economic Trade of Smart City under the Background of Free Trade Agreement

Taking the construction of smart city in Yantai as an opportunity, this paper analyzes the current situation of foreign trade under the background of free trade agreement, explores the main factors affecting the level of trade, and puts forward feasible Suggestions for the development of foreign trade in Yantai based on the construction of smart city. Through the analysis of the trade flow between Yantai and 13 major trading countries(regions), the time-varying attenuation stochastic frontier gravity model is constructed to explore the main factors affecting Yantai’s foreign trade, and the total trade efficiency of Yantai is analyzed. The research shows that the total trade efficiency presents an overall increasing trend, and the trade and population size of Yantai have a significant impact on the trade flow. In the process of building a smart city, the planning and integration of Yantai’s foreign trade should be carried out from various aspects to further improve the trade efficiency.

Trade Performance and Potential of North African Countries: An Application of a Stochastic Frontier Gravity Model

The objective of this paper is to analyze trade potential versus actual realized trade among North African trading partners. Following the literature on production economics, we built a stochastic frontier gravity model. The underlying assumption is that all deviation from trade potential is not due to white noise but could also be due to inefficiencies. Time-variant country-specific trade efficiency estimates are obtained and analyzed. Our results indicate that Mauritania as a country of destination and of origin is where the trading relationship is the least efficient. Conversely, Tunisia, followed by Morocco, faces the fewest “behind” and “beyond” the border effects. Our analysis of market integration and trade efficiency at the disaggregated level indicates that trade efficiency scores exhibit high variability between the categories of products. Moreover, North African market integration is worst when considering the goods from the category “Textiles; Footwear & Headgear”. Our estimates indicate that trade efficiency for agricultural products is relatively low indicating the existence of significant “behind” and “beyond” border inefficiencies. Our estimates also point at the presence of poor and counterproductive regulatory environment and underline the importance of improving domestic policies to encourage entrepreneurial development and business facilities. Our findings confirm the need for the North African countries to improve their trade logistics at the national level to enhance trade efficiency and to implement trade facilitation reform programs.

An Application of Stochastic Frontier Gravity Approach (The Case of Iran's Potential Agricultural Exports)

Agriculture plays a crucial role in Iranian economy in terms of food supply, job creation, food security, and foreign earnings. The main purpose of this study is to provide an estimate of the country's agricultural exports potential and to determine how efficient Iran is in realizing this capacity. Using data for 38 destination countries for the period spanning from 1982 to 2017, proper stochastic frontier gravity model was estimated. Main findings revealed direct and significant impact of trade partners' GDP and population on Iran's agricultural exports, while distance and border barriers imposed by destination countries show significant reverse effect. Furthermore, on average, 69 percent of the country's agricultural export potential has been realized through the study period. Measures to promote competitive exports along with pursuing free bilateral and regional trade agreements for removing border barriers are recommended.

Strengthening of energy security & low-carbon growth in Asia: Role of regional energy cooperation through trade

Prudent demand-supply management of energy is pivotal for the energy security of the countries and transitions towards the sustainable low-carbon energy system. This study empirically investigates the existing demand-supply gaps of energy in the South-though-East Asian (StEA) countries and analyzes how the gaps can be minimized most efficiently through intraregional energy trade. Stochastic Frontier Gravity model extended with the determinants of efficiency models used for both primary energy and Renewable Energy Goods (REG) trade. The result implies that for most of the countries, intraregional export of primary energy, as well as REG, are positively influenced by Gross Domestic Products (GDP) of the exporting and importing countries. Tariff and distance adversely affect the exports while the implication of cross exchange ratio seems minimal in both cases. Regional Trade Agreements (RTA) are also found to have notable positive impact on intraregional trade. Results show that China and Thailand are the most-efficient in this intraregional primary energy export, while Bangladesh and Myanmar remain the least-efficient. China and Japan are the most-efficient in REG exports, while Bangladesh remains the least-efficient. On average, the whole region has the weighted export efficiency of 56.5% in intraregional primary energy trade and 63.1% in REG trade. The determinants of efficiency model reveals that institutional quality, better infrastructure, goods market efficiency, and technological readiness have reasonable impacts to enhance the countries’ intraregional energy trade efficiencies.

THE EFFICIENCY OF MANUFACTURING TRADE BETWEEN TURKEY AND THE EUROPEAN UNION

In this study, the manufacturing trade efficiency of Turkey with the European Union-25 (EU-25) is examined by applying stochastic frontier gravity model over the period of 2006–2016. In addition, this study is analyzed whether there is a convergence in efficiency of manufacturing trade between Turkey and the EU-25. Findings show that Turkey’s average trade efficiency score is 56,3% and it ranged from 0,01% to 92,5% for all countries. Manufacturing trade flow of Turkey is significantly affected by income, market size of the trading partner and the distance between them. The findings also suggest that trade flows are affected by the global financial crisis.

Determinants and efficiency of Pakistan's chemical products' exports: An application of stochastic frontier gravity model.

The estimation of efficiency of industry-specific exports is very important to find exports’ gap and to frame exports promotion policy for targeted industry. This study attempts to investigate the main determinants of chemical products’ exports of Pakistan with 62 trading partners by applying Stochastic Frontier Analysis (SFA) on an augmented gravity model for a period 1995–2015. The results corroborate that chemical products’ exports follow gravity patterns. This study finds a negative and significant impact of import tariff on exports of chemical products while the positive impact of devaluation has been observed. Further, the estimations also take into account the impact of Preferential Trade Agreements (PTA), colonial links, common language, political disputes and contiguity by incorporating dummy variable for each variable and the expected positive effects are found except an insignificant effect of Contiguity. Further, the negative impact of political disputes is observed. The exports’ efficiency analyses reveal that Pakistan’s chemical exports are well below the optimal level and there exists a huge untapped exports’ potential with its neighboring, Middle Eastern and European countries.

Indonesian Export Efficiency : A Stochastic Frontier Gravity Model Approach

Export performance is an important aspect to encourage economic growth and economic prosperity. Export performance can be analysed using export efficiency variable. Export efficiency can be defined as ratio of the actual to potential exports. Knowing the export efficiency and factors affecting it could help policy maker to minimize and mitigate the affects of existing restrictive measures of trade. This study was conducted to analys the efficiency of Indonesia's merchandise exports and the affecting factors using stochastic frontier gravity model. Result of this study shown that Indonesian merchandise export flows with 62 trading partners is significantly positively affected by Gross Domestic Product (GDP) and population, then significantly negatively affected by bilateral distance. The study also found that the average export efficiency of Indonesia to 62 trading partner countries up to 51.35 percent in 2012 and 49.69 percent in 2016. The highest value of export efficiency was in Singapore and the lowest was in Portugal. Result of technical inefficiency model reveals that export inefficiency increased by business freedom, investment freedom, and landlocked dummy, and then export inefficiency decreased by labor freedom, financial freedom, contig dummy and FTA dummy.