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2018 | OriginalPaper | Chapter

10. Is Intra-industry Trade Gainful? Evidence from Manufacturing Industries of India

Author : Sagnik Bagchi

Published in: Globalisation of Technology

Publisher: Springer Singapore

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Abstract

Considering a range of both static and dynamic indices to measure magnitude of intra-industry trade (IIT), this paper demonstrates that the liberalization process has led to increase in dominance of India’s trade in products of similar or different technologies. According to OECD classification of industries, we find major share of India’s IIT has evolved from industries of India that are categorized into high, medium-high and medium-low technology groups. Decomposing IIT of these industries into its varied forms, we find that India’s export of low technological products to be more dominant in India’s IIT than export of similar or high technological goods—indicating a downward trend in the terms of trade. Econometric estimates reveal that product differentiation representing consumer’s preference for range of varieties turn out to positively affect trade in both similar and different technologies of the same product. Furthermore, we also find increased competition from imports have resulted in the shift of specialization by industries of India from low technological products (yet dominant) to high and similar technological products. Our result also suggests that the magnitude of total IIT has gained impetus with the shift in productive resources from inefficient to efficient product lines within an industry. However, with disentangling total IIT one observes that much of the explanation behind the result is owed to dominance of India’s export of low technological product. Alongside, we also identify that protectionism in the form of anti-dumping initiations initiated by foreign firms allows them to leapfrog Indian firm’s export of superior technological variant.

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For instance, empirical studies on Australia, India, Spain, and other cross-country comparisons have shown that trade reforms have a positive impact on the magnitude of total IIT; see, Balassa and Bauwens (1987), Veeramani (2002), Sharma (2004) and Ito and Okubo (2012).

The study argues that the rise in IIT has largely been vertical in nature because of two main reasons: (i) India’s growing GNP with a wide income gap gave rise to country’s demand for varieties of the same product; and (ii) the co-existence of both traditional and modern methods of production in the country gave way to production of different technological variant of the same product.

In the facet of import competition, firms compete by specializing and producing a subset of varieties within an industry so as to exploit internal scale economies such as to reduce adjustment cost.

Considering alternative indices allow us to counter the problem of biasedness occurring from ‘trade imbalances’ on the measurement of IIT. Different levels of data disaggregation conducts the ‘categorical aggregation’ test.

Both GL _ij and GLC _ij would have downward and upward bias, respectively for their measurements of IIT. GL _ij would have a downward bias because trade imbalance is associated with each commodity. GLC _ij would be upward biased since each commodity (or industry) does not have equiproportional trade imbalance.

Theoretically, Aquino (1978) finds his index to be exactly equal to the index of Michaely (1962).

The average size of the bias at HS-2, 4 and 6 digit classification levels for GL _ij and GLC _ij are 6.86, −1.64, 1.47 and −7.81, −13.69, −13.84, respectively.

In the paper we report only the values obtained using Greenaway et al. (1994) measure at α = 0.15. We also check the sensitivity of our results by considering α at 10, 25 and 35%. In all such cases our results did not change qualitatively from that reported.

In order to avoid problem of multicollinearity, Net Exports and Trade Share are taken alternatively in different model specifications.

Considering Pesaran (2007) panel unit root test, we find the reported variables are all stationary.

The average growth rate for share of products engaged in low vertical IIT has been around 1.28% while for high vertical and horizontal IIT it is around 16 and 13%, respectively.

Our result also indicates that anti-dumping initiations made by Indian firms are not being sufficient for them to leapfrog the foreign firm’s technologically superior good.

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Title: Is Intra-industry Trade Gainful? Evidence from Manufacturing Industries of India
Author: Sagnik Bagchi
Publisher: Springer Singapore
Book: Globalisation of Technology
Print ISBN: 978-981-10-5423-5

Electronic ISBN: 978-981-10-5424-2

Copyright Year: 2018
DOI: https://doi.org/10.1007/978-981-10-5424-2_10