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Information barriers, export promotion institutions, and the extensive margin of trade

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.

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Notes

  1. 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.

  2. Furthermore, Nitsch (2007a) reports that state visits have on average a positive impact on bilateral exports. Moreover, Rose (2004, 2005) and Nitsch (2007b) analyze the influence of international organizations and country groupings such as the G7 on trade flows, respectively.

  3. 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.

  4. 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).

  5. 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.

  6. 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.

  7. Similar considerations can be made on preferential trade arrangements.

  8. 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.

  9. In particular, we use mirror values (i.e., imports from Latin American and Caribbean countries).

  10. 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.

  11. Estimation results based on the conservative classification coincide with those presented here and are available from the authors upon request.

  12. 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.

  13. 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.

  14. 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.

  15. 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).

  16. A table presenting sector-specific estimates is available from the authors upon request.

  17. 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.

  18. Lack of diversification can be potentially costly in terms of economic growth (e.g., Lederman and Maloney 2003; and Herzer and Nowak-Lehnmann 2006).

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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.

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Correspondence to Christian Volpe Martincus.

Appendix

Appendix

See Tables 6, 7, 8, 9 and 10.

Table 6 The impact of gravity variables on the extensive margin of countries’ sectoral exports—OLS estimates
Table 7 The impact of export promotion institutions on the extensive margin of countries’ sectoral exports—OLS estimates, year-specific country fixed effects
Table 8 The impact of export promotion institutions on the extensive margin of countries’ sectoral exports by good categories—OLS estimates, year-specific country fixed effects
Table 9 The impact of export promotion institutions on the extensive margin of countries’ sectoral exports—Poisson estimates
Table 10 The impact of export promotion institutions on the extensive margin of countries’ sectoral exports by good categories—Poisson estimates

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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

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Keywords

  • Information barriers
  • Export promotion institutions
  • Latin America and the Caribbean

JEL Classification

  • F13
  • O17
  • C23