Abstract
This paper assesses the role played by export promotion institutions in shaping the extensive margin of Latin American and Caribbean countries’ exports over the period 1995–2004. We find that the presence of offices of export promotion agencies abroad favors an increase in the number of differentiated goods that are exported, whereas a larger number of diplomatic representations in the importer countries seem to be associated with exports of a larger number of homogeneous goods.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Strictly speaking, these market failures are not a sufficient condition to justify public interventions since their costs might be lager than their benefits. More concretely, there would be a case for trade promotion policies if the social benefits generated by the market failure correcting intervention would exceed the corresponding social costs they might cause.
This estimation equation can be formally derived from a theoretical model similar to that developed by Helpman et al. (2008) by introducing trade promotion organizations as information cost- and thereby trade cost-reducing mechanisms and imposing a few additional assumptions. This derivation is included in an appendix available from the authors upon request.
Our survey suggests that trade promotion agencies operate abroad either directly through own offices or, in some cases, through embassies and consulates. Further, some countries have both offices of their agencies and diplomatic representations in certain importing economies. In particular, with only a few exceptions, offices of trade promotion organizations are located in countries where there is at least one diplomatic representation, which most likely has been opened before. Hence, these offices are in fact an additional presence of trade promotion institutions in the importer country and therefore their impact on trade is most properly compared to that of additional diplomatic missions as opposed to the existence of such missions at all (i.e., a count variable instead of a binary variable).
Consistently, the existent empirical evidence indicates that the trade reducing effect of communication costs is larger for differentiated goods (see Fink et al. 2005). Similarly, Portes et al. (2001) find that information flows are more important for less standardized financial assets such as portfolio equity or corporate bonds, as opposite to more homogeneous products such as treasury bonds.
Feenstra and Hanson (2004) examine the role of Hong Kong as intermediary for Chinese goods. They show that the markups on re-export of these goods are higher for differentiated products and products with higher variance in export prices, i.e., goods for which quality is relatively difficult to observe or verify and thus services of middlemen to resolve information problems involved in exchange are likely to be required.
Similar considerations can be made on preferential trade arrangements.
Exports in certain sectors to particular partners may account for large shares of countries’ total exports and also consist of a relatively large number of products. This is the case of the exports of wearing apparel from El Salvador, Honduras, Guatemala, Nicaragua, and Dominican Republic to the United States. Although less diversified in terms of products, bilateral sectoral exports of natural resources such as petroleum and gas also explain large shares of total exports in some countries. Examples in this regard are the exports from Venezuela and Trinidad and Tobago to the United States. Admittedly, these sectoral exports might influence the establishment of foreign missions. Notice, however, that these export patterns are concentrated in a few sectors, primarily the two mentioned above. Hence, even though endogeneity biases cannot be entirely ruled out, their potential existence will not significantly affect the conclusions drawn based on the whole distribution of sectoral estimates as obtained by performing sector-by-sector estimations. Furthermore, results from GMM estimations using the procedure proposed by Blundell and Bond (1998) on the whole sample (i.e., pooling over sectors) do not significantly differ from our OLS estimates. These results are available from the authors upon request.
In particular, we use mirror values (i.e., imports from Latin American and Caribbean countries).
Rauch’s (1999) original classification is based on the 4-digit SITC Revision 2. We have mapped this classification into our 6-digit HS classification using conversion tables available in COMTRADE.
Estimation results based on the conservative classification coincide with those presented here and are available from the authors upon request.
We use two alternative definitions of offices of export promotion offices: a conservative definition, which only considers commercial offices and a liberal definition which also includes representation offices, and promotion and distribution centers. Estimates reported below are based on the former definition. Results obtained with the latter are almost identical and are available from the authors upon request. In addition, we should mention that, due to lack of precise date information, offices of export promotion agencies are assumed to be opened the same year these agencies started to operate. The index t on TPO in Eq. (1) then reflects the fact that some agencies began their operations after our initial sample year. Finally, following Rose (2007), the number of embassies and consulates is determined excluding honorary consulates. This number is assumed to remain constant over the period. This seems to be a sensible assumption as changes in the number of diplomatic foreign missions have not been substantial.
Estimations results are robust to using alternative specifications including binary variables accounting for membership in the WTO and common currencies. These estimation results are available from the authors upon request.
Table 6 in the appendix presents both pooled estimates and summary measures of the estimated coefficients on these variables over sectors. A table with detailed sectoral estimates is available from the authors upon request.
Notice that the total number of sectors differs across goods categories. The reason is that trade in specific good categories may not be observed in some sectors (or the number of observations with positive trade is not large enough to perform an estimation).
A table presenting sector-specific estimates is available from the authors upon request.
Notice, further, that the share of sectors where positive effects are registered reverses in this case. Thus, embassies and consulates affect the number of products exported in 48.3% of the sectors, while offices of trade promotion organizations do it only in 10.2% of the sectors.
References
Álvarez, R., & Crespi, G. (2000). Exporter performance and promotion instruments: The Chilean empirical evidence. Estudios de Economía, 27(2), 225–241.
Anderson, J.E., & van Wincoop, E. (2003). Gravity with gravitas: A solution to the border puzzle. American Economic Review, 93(1), 170–192.
Anderson, J., & van Wincoop, E. (2004). Trade costs. Journal of Economic Literature, 42(3), 691–751.
Baldwin, R. (1988). Hysteresis in import prices: The beachhead effect. American Economic Review, 78(4), 773–785.
Baldwin, R., & Taglioni, D. (2006). Gravity for dummies and dummies for gravity. (NBER Working Paper 12516). Cambridge, MA: National Bureau of Economic Research.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143.
Broto, C., Ruiz, J, & Vilarrubia, J. (2006). Firm heterogeneity and selection bias: Estimating trade potentials in the Euromed region. Paper presented at the 8th annual conference of the European trade study group, Vienna.
Bun, M., & Klaassen, F. (2002). The importance of dynamics in panel gravity models of trade. (UvA Econometrics Discussion Paper 2002/18).
Copeland, B. (2007). Is there a case for trade and investment promotion policy? (Trade policy research 2007). Ottawa: Department of Foreign Affairs and International Trade.
Delgado, M., Fariñas, J., & Ruano, S. (2002). Firm productivity and export markets: A non-parametric approach. Journal of International Economics, 57(2), 397–422.
Feenstra, R. C., & Hanson, G. H. (2004). Intermediaries in entrepot trade: Hong Kong re-exports of Chinese goods. Journal of Economics and Management Strategy, 13, 3–35.
Fink, C., Mattoo, A., & Neagu, I. (2005). Assessing the impact of communication costs on international trade. Journal of International Economics, 67(2), 428–445.
Gil, S., Llorca, R., & Martinez Serrano, J. (2008). Measuring the impact of regional export promotion: The Spanish case. Papers in Regional Science, 87(1), 139–146.
Glick, R., & Rose, A. (2002). Does a CU affect trade? The time series evidence. European Economic Review, 46(6), 1125–1151.
Greene, W. (1997). Econometric analysis. Englewood Cliffs, NJ: Prentice Hall.
Hallak, J. (2006). Product quality and the direction of trade. Journal of International Economics, 68(1), 238–265.
Harris, R. (1995). Trade and communication costs. Canadian Journal of Economics, 28, S46–S75.
Helpman, E., Melitz, M., & Rubinstein, Y. (2008). Estimating trade flows: Trading partners and trading volumes. Quarterly Journal of Economics, 123(2), 441–487.
Herzer, D., & Nowak-Lehnmann, F. (2006). What does export diversification do for growth? Applied Economics, 38, 1825–1838.
Jordana, J., Volpe Martincus, C., & Gallo, A. (2010). Export promotion organizations in Latin America: An institutional portrait. Inter-American Development Bank Working Paper (in press).
Lederman, D., & Maloney, W. (2003). Trade structure and growth. (World Bank Policy Research Working Paper 3025). Washington, DC: The World Bank.
Lederman, D., Olarreaga, M., & Payton, L. (2006). Export promotion agencies: What works and what doesn’t. (World Bank Policy Research Working Paper 4044). Washington, DC: The World Bank.
Nitsch, V. (2007a). State visits and international trade. The World Economy, 30(12), 1797–1816.
Nitsch, V. (2007b). Does the G7/G8 promote trade? Economics Letters, 94(1), 136–140.
Portes, R., Rey, H., & Oh, Y. (2001). Information and capital flows: The determinants of transactions in financial assets. European Economic Review, 45(4–6), 783–796.
Rangan, S., & Lawrence, R. (1999). Search and deliberation in international exchange: Learning from international trade about lags, distance effects, and home bias. (NBER Working Paper 7012). Cambridge, MA: National Bureau of Economic Research.
Rauch, J. (1996). Trade and search: Social capital, Sogo Shosha, and spillovers. (NBER Working Paper 5618). Cambridge, MA: National Bureau of Economic Research.
Rauch, J. (1999). Networks versus markets in international trade. Journal of International Economics, 48(1), 7–35.
Rauch, J., & Trindade, V. (2002). Ethnic Chinese networks in international trade. Review of Economics and Statistics, 84(1), 114–130.
Rose, A. (2004). Do we really know that the WTO increases trade? American Economic Review, 94(1), 98–114.
Rose, A. (2005). Which international institutions promote international trade? Review of International Economics, 13(4), 682–698.
Rose, A. (2007). The Foreign Service and foreign trade: Embassies as export promotion. The World Economy, 30(1), 22–38.
Ruiz, J., & Vilarrubia, J. (2007). The wise use of dummies in gravity models: Export potentials in the Euromed region. (Documento de Trabajo 720). Madrid: Banco de España.
Santos Silva, S., & Tenreyro, S. (2006). The log of gravity. Review of Economics and Statistics, 88(4), 641–658.
Vettas, N. (2000). Investment dynamics in markets with endogenous demand. Journal of Industrial Economics, 48(2), 189–203.
Volpe Martincus, C., & Carballo, J. (2008). Is export promotion effective in developing countries? Firm-level evidence on the intensive and extensive margins of exports. Journal of International Economics, 76(1), 89–106.
Volpe Martincus, C., Carballo, J., & Gallo, A. (2010). The impact of export promotion institutions on trade: Is it the intensive or the extensive margin? Applied Economic Letters (in press).
Webster, F., & Wind, Y. (1972). Organizational buying behavior. Englewood Cliffs, NJ: Prentice Hall.
Acknowledgments
We would like to thank Jerónimo Carballo, Paulo Rodrigues Bastos, and Pedro Martínez Alanís for excellent research assistance. We also thank the editor, an anonymous referee, Maria Priscila Ramos, and participants at the 9th and 10th Annual Meetings of the Iberoamerican Network of Trade Promotion Organizations (Buenos Aires and Costa Rica, respectively) for helpful and insightful comments. The views and interpretation in this document are strictly those of the authors and should not be attributed to the Inter-American Development Bank, its executive directors, or its member countries. Other usual disclaimers also apply.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
About this article
Cite this article
Volpe Martincus, C., Estevadeordal, A., Gallo, A. et al. Information barriers, export promotion institutions, and the extensive margin of trade. Rev World Econ 146, 91–111 (2010). https://doi.org/10.1007/s10290-009-0043-0
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10290-009-0043-0