Intra-Industry Trade in the Food Processing Sector: The Portuguese Case

Abstract

ABSTRACT This paper analyses the determinants of intra-industry trade (IIT) in the Portuguese food processing sector. The study uses both industry and country-specific characteristics as explanatory variables. The results indicate that IIT in this sector is a positive function of the difference in GDP per capita between Portugal and its European trade partners. Statistically strong evidence is also found that this trade is influenced by the geographical distance between trading partners. Using industry-specific characteristics, the results also show that this type of trade is negatively influenced by industrial concentration. In addition, the foreign direct investment inflows have a positive influence on Portuguese bilateral IIT, although this variable is not statistically significant. INTRODUCTION In general, there are two types of trade: inter-industry and intra-industry trade (IIT). Nowadays in the developed world, most trade is of the IIT type - the simultaneous export and import of products within the same industry. The traditional theories on trade, based on constant returns to scale, homogeneous product and perfect competition, could explain inter-industry trade (Ricardian trade theory and Heckscher-Ohlin trade theory). Theoretical explanations of IIT started to appear in the late 1970s. The pioneering models in IIT are due to Krugman (1979), Lancaster (1980), Helpman (1981), Eaton and Kierzkowski (1984) and Helpman and Krugman (1985). All these models consider that products are differentiated and emphasize the imperfect competition in industrial markets, particularly the scale economies and industrial concentration. Linder (1961) considered that consumers' tastes are conditioned by their income levels. These tastes yield demands for products and this demand structure generates a production response. Hence, countries with similar per-capita incomes will have similar demand structures and will export similar goods. The Linder theory of overlapping demands proposes that goods must first be produced for home markets and then exported to similar countries. Numerous empirical studies have attempted to identify the determinants of IIT. Following Greenaway et al. (1994, 1995), we can divide these studies into two groups: country-specific studies and industry-specific studies. The country-specific studies explain IIT through the macroeconomic variables in each country, such as per-capita income, economic dimension, distance, relative factor endowments and foreign direct investment. Industry-specific studies explain IIT as a function of industry-specific variables, such as scale economies, product differentiation and firm concentration ratio. It is a fact that most of the empirical studies on IIT find more empirical support for country-specific determinants than for industry-specific determinants. The present paper, as other studies, combines both country and industry variables to explain IIT. Most studies of intra-industry trade (IIT) exclude the food processing sector. Empirical studies on the IIT in this sector have been limited, with some exceptions (see, for example, Pelzman, 1977; McCorriston and Sheldon, 1991; Hirschberg et al., 1994; Neff et al., 1996; Qasmi and Fausti, 2001; Sharma, 2002). Pelzman (1977) was the first to investigate the question of intra-industry trade among centrally planned economies. More recently Bojnec (2001) studied this type of trade for Central and Eastern European countries (CEECs). McCorriston and Sheldon (1991) conducted a study on IIT for U.S agricultural products. The aIIThors found that U.S and world trade in processed agricultural products was essentially of the inter-industry type. For EC trade, McCorriston and Sheldon (1991) concluded that this trade was also essentially of the IIT type. Sharma (2002) concluded that product differentiation and scale economies contribIITe positively to IIT, and trade protection discourages IIT. The studies of Sharma (2002) and Qasmi and Fausti (2001) show that inter-industry trade is predominant in this sector. …

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