Advertisement

Journal of Industry, Competition and Trade

, Volume 11, Issue 2, pp 149–186 | Cite as

Vertical Intra-Industry Trade and Product Fragmentation in the Auto-Parts Industry

  • Kemal Türkcan
Article

Abstract

A distinctive feature of present globalization is the development of international production sharing activities, i.e. production fragmentation. The increased importance of fragmentation in world trade has created an interest among trade economists in explaining the determinants of intra-industry trade (IIT) in intermediate goods. In this study, the extent of IIT in Austria’s auto-parts trade is analyzed by decomposing Austria’s auto-parts trade into one-way trade, vertical IIT, and horizontal intra-industry trade IIT. Then, the development of vertical IIT in the auto-parts industry is examined as an indicator for international fragmentation of the production process between Austria and its 29 trading partners, and various country-specific factors suggested by the fragmentation literature are tested using panel econometrics as well as more recent data from 1996 to 2006. The results show that a substantial portion of IIT in the Austrian auto-parts industry is vertical IIT, and the econometric results mainly support the hypothesis drawn from the fragmentation theory. In particular, the findings show that the extent of Austria’s vertical IIT in auto-parts is positively correlated with average market size, differences in per capita GDP, and foreign direct investment, while it is negatively correlated with distance.

Keywords

vertical intra-industry trade fragmentation Austrian auto-parts industry panel data techniques 

JEL Classification

F-14 F-15 

Notes

Acknowledgements

I would like to thank Martin Falk, Yushi Yoshida, and Aysegul Ates and the conference participants at the European Trade Study Group (ETSG) 10th Annual Conference held in Warsaw for their valuable comments and suggestions. The author started this project as a visiting researcher at the Austrian Institute of Economic Research (WIFO) in summer 2008. I wish to thank WIFO for its hospitality and research support.

References

  1. ABA-Invest in Austria (2002) Austria: a roaring engine for the global automotive industry. Available via ABA-Invest in Austria. http://www.aba.gv.at/uploads/Autoenglish_10692_EN_10692_EN.pdf. Accessed 15 June 2008
  2. Abd-el-Rahman KS (1991) Firms’ competitive and national comparative advantages as joint determinant of trade composition. Weltwirtsch Arch 127(1):83–97CrossRefGoogle Scholar
  3. Alguacil MT, Orts V (2002) A multivariate cointegrated model testing for temporal causality between exports and outward foreign investment: the Spanish case. Appl Econ 34:119–132CrossRefGoogle Scholar
  4. Andersson T, Fredriksson T (2000) Distinction between intermediate and finished products in intra-firm trade. Int J Ind Organ 18:773–792CrossRefGoogle Scholar
  5. Ando M (2006) Fragmentation and vertical intra-industry trade in East Asia. N Am J Econ Finance 17:257–281CrossRefGoogle Scholar
  6. Arndt SW (1997) Globalization and the open economy. N Am J Econ Finance 8(1):71–79CrossRefGoogle Scholar
  7. Arndt SW, Huemer A (2005) Trade, production sharing and the exchange rate: a decade of U.S.-Mexican integration. Lowe Institute of Political Economy Working Paper no. 0502Google Scholar
  8. Balassa B, Bauwens L (1987) Intra-industry specialization in a multi-country and multi-industry framework. Econ J 97(388):923–939CrossRefGoogle Scholar
  9. Baltagi BH, Bresson G, Pirotte A (2003) Fixed effects, random effects or Hausman-Taylor? A pretest estimator. Econ Lett 79:361–369CrossRefGoogle Scholar
  10. Becuwe S, Mathieu C (1992) The determinants of intra-industry trade: the case of the automobile industry. Weltwirtsch Arch 128(1):34–51CrossRefGoogle Scholar
  11. Bhattacharya R (2007) Austria’s deepening economic integration with Central and Eastern Europe. In OECD Economic Surveys: Austria 2007. OECD Publishing, Paris, 63–91Google Scholar
  12. Blonigen BA (2001) In search of substitution between foreign production and exports. J Int Econ 53:81–104CrossRefGoogle Scholar
  13. Borga M, Zeile WJ (2004) International fragmentation of production and the intrafirm trade of U.S. multinational companies. Bureau of Economic Analysis Working Papers no. 013Google Scholar
  14. Campa JM, Goldberg LS (1997) The evolving external orientation of manufacturing industries: evidence from four countries. Fed Reserve Bank New York: Econ Pol Rev 3(4):53–81Google Scholar
  15. Caves RE (1981) Intra-industry trade and market structure in the industrial countries. Oxf Econ Pap 33:203–223Google Scholar
  16. Chen H, Kondratowicz M, Yi K (2005) Vertical specialization and three facts about U.S. international trade. N Am J Econ Finance 16:35–49CrossRefGoogle Scholar
  17. Cooney S, Yacobucci BD (2005) US automotive industry: policy overview and recent history. CRS Report for Congress. Available via The National Council for Science and the Environment. www.ncseonline.org/NLE/CRSreports/05apr/RL32883.pdf. Accessed 15 September 2008
  18. Corswant F, Fredriksson P (2002) Sourcing trends in the car industry. Int J Oper Prod Man 22(7):741–758CrossRefGoogle Scholar
  19. Diehl M (2001) International trade in intermediate inputs: the case of automobile industry. Kiel Working Papers no. 1027Google Scholar
  20. Egger H, Egger P (2005) The determinants of EU processing trade. World Econ 28(2):147–168CrossRefGoogle Scholar
  21. Egger P, Pfaffermayr M (2002) The pure effects of European integration on intra-EU core and periphery trade. University of Innsbruck Working Papers in Economics no. 2002/1Google Scholar
  22. Egger P, Pfaffermayr M (2004) Distance, trade, and fdi: a Hausman-Taylor sur approach. J Appl Econ 19:227–46CrossRefGoogle Scholar
  23. Egger P, Pfaffermayr M, Schnitzer YW (2001) The international fragmentation of the value added chain: the effects of outsourcing to Eastern Europe on productivity and wages in Austrian manufacturing. Austrian Institute of Economic Research (WIFO) Working papers, FebruaryGoogle Scholar
  24. Ethier WJ (1982) National and international returns to scale in the modern theory of international trade. Am Econ Rev 72(3):389–405Google Scholar
  25. Falvey RE, Kierzkowski H (1987) Product quality, intra-industry trade and imperfect competition. In: Kierzkowski H (ed) Protection and competition in international trade: essays in honor of W.M. Corden. Blackwell, Oxford, pp 143–161Google Scholar
  26. Feenstra RC (1998) Integration of trade and disintegration of production in the global economy. J Econ Perspect 12:31–50Google Scholar
  27. Feenstra RC, Hanson GH (1996) Globalization, outsourcing, and wage inequality. Am Econ Rev 86:240–245Google Scholar
  28. Feenstra RC, Hanson GH (1997) Foreign direct investment and relative wages: evidence from Mexico’s maquiladoras. J Int Econ 42:371–393CrossRefGoogle Scholar
  29. Fidrmuc J (2000) Restructuring European Union trade with Central and Eastern European countries. Atl Econ J 28(1):83–92CrossRefGoogle Scholar
  30. Fontagne L, Freudenberg M (1997) Intra-industry trade: methodological issues reconsidered. CEPII Working Papers no. 1997–01Google Scholar
  31. Fontagne L, Freudenberg M, Peridy N (1997) Trade patterns in the single market. CEPII Working Papers no. 1997–07Google Scholar
  32. Fontagne L, Freudenberg M, Gaulier G (2005) Disentangling horizontal and vertical intra-industry trade. CEPII Working Papers no. 2005–10Google Scholar
  33. Fontagne L, Freudenberg M, Gaulier G (2006) A systematic decomposition of world trade into horizontal and vertical iit. Weltwirtsch Arch 142(3):459–475Google Scholar
  34. Gabrisch H, Segnana ML (2007) Vertical and horizontal patterns of intra-industry trade between EU and candidate countries. In: Leoncini R, Montresor S (eds) Dynamic capabilities between firm organization and local systems of production. Routledge, London, pp 324–345Google Scholar
  35. Görg H (2000) Fragmentation and trade: US inward processing trade in the EU. Weltwirtsch Arch 136(3):403–422CrossRefGoogle Scholar
  36. Graziani G (2001) International subcontracting in the textile and clothing industry. In: Arndt SW, Kierzkowski H (eds) Fragmentation: new production patterns in the world economy. Oxford University Press, Oxford, pp 209–231Google Scholar
  37. Greene WH (2003) Econometric analysis, 3rd edn. Prentice-Hall, New JerseyGoogle Scholar
  38. Greenaway D, Hine R, Milner C (1995) Vertical and horizontal intra-industry trade: a cross industry analysis for the United Kingdom. Econ J 105:1505–1519CrossRefGoogle Scholar
  39. Grossman GM, Helpman E (2005) Outsourcing in a global economy. Rev Econ Stud 72:135–159CrossRefGoogle Scholar
  40. Grubel H, Lloyd PJ (1971) The empirical measurement of intra-industry trade. Econ Rec 470:494–517CrossRefGoogle Scholar
  41. Grubel H, Lloyd PJ (1975) Intra industry trade: theory and measurement of international trade in differentiated products. Wiley, New YorkGoogle Scholar
  42. Hausman JA, Taylor WE (1981) Panel data and unobservable individual effects. Econometrica 49:1377–98CrossRefGoogle Scholar
  43. Helpman E (1984) A simple theory of international trade with multinational corporations. J Polit Econ 92(3):451–471CrossRefGoogle Scholar
  44. Helpman E, Krugman P (1985) Market structure and foreign trade: increasing returns, imperfect competition, and the international economy. MIT, CambridgeGoogle Scholar
  45. Hummels D, Rapoport D, Yi K-M (1998) Vertical specialization and the changing nature of world trade. Fed Reserve Bank New York: Econ Pol Rev 4:79–99Google Scholar
  46. Hummels D, Ishii J, Yi K-M (1999) The nature and growth of vertical specialization in world trade. J Int Econ 54(1):75–96CrossRefGoogle Scholar
  47. Jones RW (2001) Globalization and fragmentation of production. Seoul J Econ 14(11):1–13Google Scholar
  48. Jones RW, Kierzkowski H (1990) The role of services in production and international trade: a theoretical framework. In: Jones RW, Krueger A (eds) The political economy of international trade. Blackwells, Cambridge, pp 31–48Google Scholar
  49. Jones RW, Kierzkowski H (2001) A framework for fragmentation. In: Arndt SW, Kierzkowski H (eds) Fragmentation: new production patterns in the world economy. Oxford University Press, Oxford, pp 17–35Google Scholar
  50. Jones RW, Kierzkowski H (2005) International fragmentation and the new economic geography. N Am J Econ Finance 16:1–10CrossRefGoogle Scholar
  51. Jones RW, Kierzkowski H, Leonard G (2002) Fragmentation and intra-industry trade. In: Grubel H, Lee H-H (eds) Frontiers of research on intra-industry trade. Palgrave, London, pp 67–87Google Scholar
  52. Jones RW, Kierzkowski H, Lurong G (2005) What does the evidence tell us about fragmentation and outsourcing. Int Rev Econ Finance 14:305–316CrossRefGoogle Scholar
  53. Ito K, Umemoto M (2004) Intra-industry trade in the Asian region: the case of automotive industry. ICSEAD Working Paper Series no. 2004–23Google Scholar
  54. Kaminski B, Ng F (2005) Production disintegration and integration of Central Europe into global markets. Int Rev Econ Finance 14:377–390CrossRefGoogle Scholar
  55. Kimura F, Ando M (2005) Two-dimensional fragmentation in East Asia: conceptual framework and empirics. Int Rev Econ Finance 14:317–348CrossRefGoogle Scholar
  56. Kimura F, Takahashi Y, Hayakawa K (2007) Fragmentation and parts and components trade: comparison between East Asia and Europe. N Am J Econ Finance 18:23–40CrossRefGoogle Scholar
  57. Klier TL, Rubenstein JM (2006) Competition and trade in the U.S. auto parts sector. Chicago Fed Letter, Federal Reserve Bank of Chicago, no. 222, January: 1–4Google Scholar
  58. Kol J, Rayment P (1989) Allyn-young specialization and intermediate goods in intra-industry trade. In: Tharakan PKM, Kol J (eds) Intra-industry trade: theory, evidence, and extensions. St. Martin’s Press, New York, pp 51–68Google Scholar
  59. Krugman P (1980) Scale economies, product differentiation, and the pattern of trade. Am Econ Rev 70:950–959Google Scholar
  60. Krugman P, Venables AJ (1995) Globalization and the inequality of nations. Q J Econ 110(4):857–880CrossRefGoogle Scholar
  61. Lall S, Albaladejo M, Zhang J (2004) Mapping fragmentation: electronics and automobiles in East Asia and Latin America. Oxf Dev Stud 32(3):407–432CrossRefGoogle Scholar
  62. Lancaster K (1980) Intra-industry trade under perfect monopolistic competition. J Int Econ 10:151–175CrossRefGoogle Scholar
  63. Lloyd PJ (2004) How intra-industry trade changed our perception of the world economy. Singap Econ Rev 49(1):1–17CrossRefGoogle Scholar
  64. Montout S, Mucchielli JL, Zignago S (2002) Horizontal and vertical intra-industry trade of Nafta and Mercosur: the case of the automobile industry. Rég Dév 16:137–160Google Scholar
  65. Mosser A, Bruner G (2007) Automotive Austria: one hundred years of official Austrian vehicle industry representation. Fahrzeugindustrie, ViennaGoogle Scholar
  66. Nunnenkamp P (2005) The German automobile industry and Central Europe’s integration into the international division of labour: foreign production, intra-industry trade, and labour market repercussions. Papeles del Este. Revista electrónica 9, http://www.ucm.es/BUCM/cee/papeles/09/page0404220004a.pdf. Accessed 10 June 2008
  67. Pfaffermayr M (1994) Foreign direct investment and exports: a time series approach. Appl Econ 26(4):337–351CrossRefGoogle Scholar
  68. Sadler D (1999) Internationalization and specialization in the European automotive components sector: implications for the hollowing-out thesis. Reg Stud 33(2):109–119CrossRefGoogle Scholar
  69. Schüler MK (1995) On intra-industry trade in intermediates. Econ Int 48(1):67–84Google Scholar
  70. Swenson DL (2000) Firm outsourcing decisions: evidence from U.S. foreign trade zones. Econ Inq 38(2):175–189Google Scholar
  71. Thorbecke W (2008) The effect of exchange rate volatility on fragmentation in East Asia: evidence from electronics industry. J Jpn Int Econ 22:535–544CrossRefGoogle Scholar
  72. Türkcan K (2007) Outward foreign direct investment and intermediate goods trade: evidence from the USA. Econ Int 112(4):51–71Google Scholar
  73. Türkcan K (2009) Vertical intra-industry trade: an empirical examination of the Austria’s auto-parts industry. FIW working paper no. 30, MayGoogle Scholar
  74. Umemoto M (2005) Development of intra-industry trade between Korea and Japan: the case of automobile parts industry. Yokohoma National University, CITS Working Paper Series no. 2005–03Google Scholar
  75. Venables AJ (1996) Equilibrium locations of vertically linked industries. Int Econ Rev 37(2):341–359CrossRefGoogle Scholar
  76. Wakasugi R (2007) Vertical intra-industry trade and economic integration in East Asia. Asian Econ Pap 6(1):26–36CrossRefGoogle Scholar
  77. Yeats AJ (2001) How big is global production sharing? In: Arndt SW, Kierzkowski H (eds) Fragmentation: new production patterns in the world economy. Oxford University Press, Oxford, pp 108–144Google Scholar
  78. Zeddies G (2007) Determinants of international fragmentation of production in the European Union. Halle Institute for Economic Research Working Papers no. 15, DecemberGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Department of EconomicsAkdeniz UniversityAntalyaTurkey

Personalised recommendations