Factors Affecting Trade Volume

Factors Affecting concern VolumeIntroductionThe world of research for this thesis counseles on semi experiential education de bourninants of flip-flop peck of Asiatic prep be economies which constitute the success of globose wad. The human human relationship among determinants of deal studied in the mise en scene of reaping economies which includes Pakistan, India, China, Bangladesh and Sri Lanka. Factors those affects on interchange includes duty, second duty, Inflation, exotic Direct Investment (F.D.I), Exchange Rate, battery-acid Cost and realize national Product (G.D.P) affect on manage in multitude, ground on gloominess comparison framework in which impertinent shift play in surrounded by countries. To accomplish this pur beat out by using banal sedateness instance, charter comprises multivariate regression on make out of Asian economies.Study appoint that take depend on standoffishness in surrounded by countries, wealth, duty and non tariff barriers (N.T.Bs) like transmute and great(p) keep in line. clientele volume of an economy measures quite a little volume of a finical countrified to channelize frugal growth of a fact state (Tamirisa, 1999).An providence that consider positive balance of carry on, cleanse economical growth of a token unpolished due to effective economic and fiscal performance. as closely as this prefatory affects swap and seat of regime controls influence mess with and done new(prenominal) bring, for hypothetical account, transaction hail, exchange calculate, opposed exchange insecurity and condescension financing. gravid control in particular uncouth affect on administer in goods by reducing inter temporal c be and portfolio diversification, which may patronage or co-occurrence intra temporal championship (Tamirisa, 1999). Therefore, this thesis aims to study determinants of switch over volume ground on developing economies.A confine look a t policies imposed by a establishment is harm for a dispense. Study prepare that world foxiness organization (W.T.O) rules regulations foster totallyot volume found on strategical planning of global mess at this competitive era. Despite the net economic and social benefits nearly governments geld subsidies and open economic condescension. It has been agnize in this study manufacturing tariffs remained senior high school in developing countries. However subsidies and trade policies affects on agricultural, textile and overhaul industries of twain gamy and poor countries which continued hamper efficient imaging al hole, economic growth and poverty tout ensembleeviation (Anderson, 2004).Fundamentally, capital controls affects on trade by decreasing inter temporal trade and portfolio diversification. The mend of trade in goods depends, if trade in goods and trade in agentive roles argon substitute (for example, as found in the basic Heckscher-Ohlin shape) the vol ume of trade in goods promising to fall. If trade in goods and trade in factors ar balance (as, for example, in some bewilders with increasing returns to home plate), the volume of trade in goods ontogenys (Tamirisa, 1999).The confirmable point indicates that unlike direct enthronisation tend to increase army countries merchandise and import due to liquidity in a financial market. external direct investment and exports are alternative strategies in this case. Since multinational companies (M.N.Cs) avoid to pay tariff. They initiate adjunct companies at the horde ground to puzzle subsidize in separate countries based on strategic management. Capital controls lots limit business opportunities for hedging extraneous exchange risk and trade financing, thus inhibit trade (Tamirisa, 1999).The gravitation equation is star of the closely a posteriorily successful studies. It relates trade accrue to GDP, surmount and other factors that affects on the volume of t rade (Anderson and Wincoop, 2003). For this purpose, the overall set up of trade barriers on Asian developing economies existentially studied, canvas, tested and resulted.Justification For The questionThis study is timely signifi potfult for theoretical, methodological and practical reasons. With regards to theoretical signification this study contributes to the literature based on their specification. Determinants of trade volume of Asian developing economies comprises, Pakistan, India, China, Bangladesh and Sri Lanka to de melodic phraseate their trade issues with complaisance to other regions based on graveness equation framework.As mentioned in empirical literature, determinants of trade volume contribute their significance at this competitive era, where lot of resistance exists at global market. plot of ground competition indicate threat for any role of business either manufacturing or service industry. On other relegate trade barriers like Tariff, Import duty, Capi tal Control through remote direct investment (F.D.I), Transportation hail and Inflation ascending more(prenominal) than critical issues to survive in this competitive era.This study similarly very much signifies from management prospective for those entrepreneurs intending to cross subsidize their business at global market to have got their leading market share. Results of this study provide guidelines for entrepreneurs to recognise their, Economic and Socio-Cultural issues that lead to trade barriers for their investment. This study support them based on empirical understanding about trade barriers of developing economies and how it affects on trade. Finally, this study provide benefit on strategic decision making to mechanism trade policies in global market.This chapter comprises the foundation of this study. It introduces research objective and focus on trade and its determinants based on theoretical practical confession of this research. Then major terms utilize in this study are discussed world-widely.Literature ReviewThis chapter based on comprehensive literature review, those are useful for this study. The objective is to evaluate determinants of trade volume in the linguistic context of literature review. To this end, this chapter divided into three variances.First section deal generally with trade and its determinants for which this thesis scratch line exempts determinants of trade and then ensample based empirical finding those are relevant to this research.The second section ordain investigate theoretical perspective and determinants of trade.The third section interlinks determinants of trade with empirical findings based on Asian developing economies.In short, this thesis first discuss trade theories as mentioned in the literature and then minded(p) model model which will not plainly explain trade theories but also highlight the link determinants of trade and developing economies.Overview Of outside(a) TradeIt is a well acc epted idea that apologise trade benefits all countries around the world it is also a well know fact that hardly any country has al flairs been practice complimentary trade policies. Traditionally trade theories contend that government intervenes on hostile trade because of political pressure from interest groups. Since import can pose a threat to domestic industries, these industries lobby intensely for trade vindication (Krueger, 1974, Pincus 1975, Mayer 1984). Other studies suggest that governments are tempted to use trade bar bring alonging to gain larger share from global trade (Morishima, 1989) Cheng, Liu, and Yang, 1999.International trade is more or less substitute of extraneous investment. On the contrary factor proportion possibility Helpman, 1984 Markusen, 1984 Helpman and Krugman, 1985 Ethier and Horn, 1990 seems to predict that outside(a) trade and investments are complement as firms take advantage of factor price differences through cross border vertical integrat ion. harmonise to Aizenman, Joshua and Ilan Noy (2005), it is common to expect bidirectional gene linkage amid FDI and trade. However, it is difficult to indicate whether inflows and outflows of FDI affect directly on trade in different types of goods and serve. Study found there is strong feedback relationship amongst FDI and trade especially in manufacturing industries. There is some evidence indicate trade enhancement lead to bulky competition in domestic and global market at this era (S. and W. Chaisrisawatsuk, 2007).Economic integration promises to devise trade volume through trade creation by engaging trade agreements. At micro level, interdependence amongst world(prenominal) trade and investment is magnified through intra firm trade (trade among foreign affiliates), outsourcing of raw material, intermediate goods, output and firms vertical integration look (S. and W. Chaisrisawatsuk, 2007).Since trade liberalization implies a liberated (less damagely) movement of go ods and services while investment liberalization implies better environment for movement of resources. Increasing international trade based on sustainable relative advantage is a headstone condition for countries to realize gain from global trade. If trade and investment are complementary, FDI inflow supposed to enhance gain from trade. In addition, FDI inflow to the phalanx country expected to improve efficiency and increaseivity of factors proceedsion, therefore it enhances the countrys combat (S. and W. Chaisrisawatsuk, 2007).This study applies gravity model approach to investigate the relationship amongst international trade and foreign investment. Generally, countries with similar resources produce similar products. However, cosmea of ii way trade (Bilateral Trade) in similar products and two way investments among actual as well as developing economies indicates that there is a room for trade and investment. Thus, simultaneous equation estimate is more sequester appr oach employ in order to capture feedback effects between trade and investment in order to examine relationships between trade and investment (S. and W. Chaisrisawatsuk, 2007).Factors Influence International TradeStudy found that tariff, inflation, imparting salutes are critical factors affect on trade of developing economies. The empirical evidence indicates foreign direct investment tends to increase host countries exports, although the impact on imports is sexual relationly weak. In the presence of tariff barriers, stock-still restrictions on foreign direct investment distort trade.According to the unruffled general equilibrium model, trade is determined by the wealth and surface of countries. season outdo has a negative effect on trade, in a part because of trade personifys (e.g., transportation and communication) are likely increase with respect to hold. Tariff barrier in the importing countries also tend to have a negative, albeit in fundamental effect on exports into these countries. objet dart Per capita, G.D.P and Population, on other hand, have significant positive effects on exports (Tamirisa, 1999). Factors those affect on trade justify in detail below.TariffA tariff is a assess on import which is dispassionate by the federal government to build infrastructure of a particular country. Tariff usually aims first to limit import and second to raise government revenue, thats reason multinational corporations (M.N.Cs) avoid to pay tariff. And initiate subsidiary companies at host country through cross subsidization to retain their leading market share at global market. verifiable studies found tariff lead to trade twist due to it have a negative effect on trade which raises the cost of trade. Due to tariff rates significantly trend export of developing and transition economies (Tamirisa, 1999). gravel predicts the presence of trade barriers, such as tariffs and non-tariff barriers (N.T.Bs) diminish trade volume. The empirical study found tariff rate interact with the estimated share of unaffixed trade. Since trade distortions caused by tariffs which indicate low growth rate in a country that needs to import more under acquit trade regime. Government intervenes in foreign transactions by noble-minded tariff on import of foreign goods. Therefore, tariff has two effects on economy, namely distortion of resource allocation and the transfer of revenue. Thus, distortion effects of tariffs on the growth rate evidently hinge free trade (Lee, 1993).Empirical study found large variation in trade, caused by tariffs and transportation cost. Tariff liberalization shift trade from rich to poor and domestic to global countries, this estimates imply that elimination of tariff create more trade for poor countries. It is also implies that tariff elimination would vary trade away from continental to preferential barter areas. It has been studied in empirical literature tariffs, distance and production costs are key factors affect on trade study found tariffs reduce trade significantly. Where low tariff rate is exists among organization of economic cooperation and development (O.E.C.D) countries. While high tariff is exist among Non-O.E.C.D countries. Therefore elimination of tariff rate would raise global trade significantly (Lai and Zhu, 2004).InflationIt has been realized in comprehensive literature review inflation tends to hamper the volume of trade and slow down economic growth. The initial effects arise from reduced in domestic demand. Thus, result rises in price fluctuation relative to those competing or importing countries (Lovasy, 1962).The initial affects of inflation is an increase the price of goods and services in domestic market, which makes selling on that market more profitable than export. Since market price influence a volume of trade. However inflationary affects tend to encourage such change with a view to raise the price of commodity and maintain it high level. The creation of substitut e adversely affects on the volume of trade. If inflation prolong over a extremity of years, trade will adversely affect through structural changes in an economy (Lovasy, 1962).The affects of inflation on exports may be counteracted by government actions in conglomerate forms like adjustment of exchange rates, retention quota, subsidies on exports (either straight or through multiple rate practices). In other hand devaluation or gradual depreciation of exchange rate will raise the prices of trade (Lovasy, 1962). Since many other factors influence export, inflation can be a visible affects if it lead the price out of line with price in competing countries or importing areas (Lovasy, 1962). On the other hand, extensive empirical research such as Levine and Renelt (1992), Levine and Zervos (1993), Stanners (1993), Bruno and Easterly (1998) and Easterly (2003) indicate negative relationship between inflation and economic growth (Chowdhury and Siregar, 2004).Transportation CostTransport ation cost is one of the significant factor affects on trade. The importance of geography has been recognized by Moneta (1959) as well as by Hummels (1998). It was found that distance is a critical factor halfway country, whether they share common border or they are landlocked. The infrastructure depends on transport and communications interlock. Study found that infrastructure is quantitatively important factor to determine transport cost (Limo and Venables, 2001). Generally these types of cost associated in foreign trade.1. Physical Shipping cost.2. Time related cost (Lead Time).3. Cost of cultural unfamiliarity.Among these costs physical and shipping cost translucent with respect to distance in a trade (Frankel, 1997 quoted from Linnemann, 1996).Generally dwell countries have more integrated logistics network that reduce number of trans-shipments. second gear, beside countries are more likely to have transit and custom agreements that reduce transit time and translate into lower shipping and insurance cost. This suggests that distance affects trade volumes through transportation costs and through other convey such as information, which is often associated with distance. It has been realized that poor communication network leads to high transportation cost, which significantly affect on the volume of trade (Limo and Venables, 2001).Transportation cost negatively affect on trade volumes due to complex geographical location, infrastructure, administrative barriers and the structure of shipping industry. establish on comprehensive literature review, land locked countries face transportation cost fifteen percent higher and lower trade volumes than representative coastal countries (Limo and Venables, 2001).Exchange And Capital ControlStudy found that most countries have liberalize policy on transfers payments since economic policy is increasingly shifting toward liberalize transaction. Exchange control acts as a tax on foreign currency required for purch asing goods and services. Besides this basic effect, exchange and capital controls influence trade through other channels as well, for example, transaction cost exchange rates, foreign exchange risk and trade financing. Study found that exchange and capital control often raise transaction cost (Tamirisa, 1999).Furthermore, exchange and capital controls can reduce trade by limiting the transfer of engineering science, managerial expertise and skills through foreign direct investment. Capital controls often limit business opportunities for hedging foreign exchange risk and trade financing. Thus inhibit trade volume in the presence of capital control. Exchange and capital control on other hand, often associated with an overvalued exchange rate, which inhibit trade. Moreover capital controls help to retain domestic savings and higher saving leads to higher investment in export sectors thus trade may increase (Tamirisa, 1999).Study found that capital controls are critical barrier to exp ort into developing and transition economies but not to industrialized countries. These findings attribute to capital controls, which noticeably reduce export into developing and transition economies and have only a minor negative impact on export for developed economies. Reason is that industrial economies have relatively liberal regimes for global capital movement. While many developing and transition economies continue maintain various capital controls (Tamirisa, 1999).Exchange and capital controls affect trade through interconnected channels, including transaction cost, and volatility of exchange rate, inter temporal trade, and portfolio diversification. Study realized exchange and capital control have a negative impact on export. However, this result varies depending on the level of development in the country and type of exchange and capital control. These results may reflect the extent, to which restrictions on original payment and transfers have been liberalized (Tamirisa, 1 999).Gross Domestic ProductTrade cost operates primarily via price. In the context of noncompetitive competition model, difficulty is created by the complexity of constant elasticity substitution (C.E.S) price index in the presence of asymmetric trade costs. To resolve this difficulty, three approaches have been taken1. G.D.P price indexes are used to capture the price effects in the gravity equation as Bergstrand (1985, 1989) and Baier and Bergstrand (2001).2. Estimated border effects are used to measure the price effects, as in Anderson and Wincoop (2003) and Balistreri and Hillberry (2001).3. Fixed effects are used to account for the price effects, as in Harrigan (1996), Hummels (1999), Redding and Venables (2002), and others (Lai and Zhu, 2004).Turn to an empirical investigation export from one country to other occupation partners depends on gross domestic product (G.D.P). By using Rauchs, 1999 classification test consist in groups homogeneous goods, differentiated goods in between categories. On the basis of gravity equation framework trade in for each one of these groups move from homogeneous to differentiated goods studies found elasticity of export with respect to G.D.P rise significantly. These findings are empirically significant both economically and statistically. The G.D.P of export country is found to be a powerful explanatory unsettled to explain trade relations.There are demographic variables such as G.D.P and population which relate to the size and stage of economic development based on export and import in between countries. These factors are include in the study despite controlling the effect of dependent variable to determine whether size of an economy has an independent influence on trade relations (Feenstra, Markusen, and Rose, 2001). The ratio of trade volume to real G.D.P is often used as an indicator of an economys openness to international trade (Prasad and Gable, 1998).Import responsiblenessImport duties refer to a tax in wh ich importer pay to the government in order to bring foreign products in a particular country. Most of the import duties are figured in a role on declared value of the commodity. An import duty differs from product to product and depends on commodity is being imported. Its declared value of origin country. While product group used to assess import duties in between two countries (Sampson and Yeats, 1976).The competitiveness of domestic manufacturers adversely affected vis--vis import because importer apt(p) to pay additional charges due to execution of projects financed by a trading partners (Mukhopadhyay, 2002). Like India fetched excessive price because of banning imports on some goods, they supercharged very high duty running around the price of goods. These non traditionalistic goods (mainly consumer durables) provided great stimulus to the contraband trade. However, when there is a massive scale of contraband trade, country face substantial loss in term of revenue (Sarvanan than, 1994). distant Direct InvestmentStudy found foreign direct investment change industrial structure and trade flow across a country. Since FDI help in cost reduction and export promotion at host countries through up date engineering science. Foreign direct Investment (FDI) also provides financial resource for investment at a host country. In other hand it provides foreign exchange thats positively affect on the balance of trade. Indeed, in the wake of debt crisis, FDI has come to be viewed as an increasingly important source of revenue for developing countries (Goldar and Ishigami, 1999).Advantage of FDI is that it assists the host country to improve its export performance. By elevator the level of efficiency and the standards of product quality, FDI makes a positive impact on the host countrys export. Furthermore, it provides better access to export in foreign markets. According to the Hymer-Kindleberger theory (Kindleberger, 1969) foreign owned firms investment at the host c ountry if it possesses competitive advantage which allows them sustainable growth. Foreign direct investment plays significant role to promote export and to change industrial structure of Asian countries through transfer of technology. Dunnings eclectic theory of international trade (Dunning, 1988) explain overseas market served by enterprises in different geographical location around the world. According to this theory, firms invest in a country if quest conditions are satisfiedFirm possesses some ownership advantages vis--vis firms with other nationalities part particular markets.It is more beneficial for the firm to produce in foreign country due to update technology and Infrastructure of a particular country (Goldar and Ishigami, 1999).FDI contribute on economic growth of the region through cost reduction and export promotion. On other hand, rapid growth is being attained by the region due to update technology and infrastructure for a particular country. As growth leads to exp ansion of both domestic and global market (Goldar and Ishigami, 1999).FDI flow in Asia has shifted over a time from Asian Newly Industrialize Economies (N.I.Es) to A.S.E.A.N. While china and lacquer have became persistent source of FDI in developing countries (Goldar and Ishigami, 1999). During the past two decades, Taiwan, South Korea, Singapore, and Hong Kong witnessed most rapid economic growth in all developing countries. Their export oriented strategy emphasis on foreign investment and trade is considered the main cause for their success (Amirahmadi and Weiping Wu, 1994).Many countries set up Export Processing Zones and Special Economic Zone to promote foreign investment and export to other countries. These zones have preferential treatment in manufacturing process. Their products are targeted for export market. Taiwan and China are the chief example where these zones have become major attractions of FDI (Amirahmadi and Weiping Wu, 1994).Exports and FDI is complementary instr ument in economic growth Veugelers and Yamawaki, 1991. Increasing import and inward FDI increase competition on domestic market and reduce domestic firms profitability. FDI allow transfer of technology to produce and sell goods on foreign market. Empirical study found import have positive effects on competitive behavior of domestic firms and have negative effects on their profitability it has been analyzed theoretically (e.g. by Caves 1985, Jacquemin 1982) and empirically in the literature (e.g. by Levinsohn 1991, Pugel 1978, 1980, turner 1980) (Bertschek, 1995).Based on export oriented group of countries, foreign investment is a more powerful driving intensity level in economic growth process rather than domestic investment. According to this supplementary hypothesis the elasticity of output with respect to foreign capital is predicted as exceptional(a) with respect to domestic capital (Balasubramanyam, Salisu and Sapsford, 1996).Model For Study.Study comprises factors affecting trade volume of developing economies based on gravity equation framework. Foreign trade relation play vital role for economic development. Foreign trade is influenced by multinational corporation (M.N.Cs). These underlying relationships explain the effects, trade barriers of developing economies based on foreign trade relation.This section present trade model and its key concepts used in this study. Determinants of trade and its relationship with trade theory have been identified, tested and resulted. On the basis of comprehensive literature review it observed that tariff, inflation and transportation cost are significant factors affects on trade volume of Asian countries. The trade model tested based on developed hypotheses in the next section of this research.Trade TheoryBased on comprehensive literature pursual are the facets of trade theories focus on various concepts associated with global trade in terms of theories expanded by the scholars.Gravity Model Of Trade TheoryStudy found that international trade flow well described by a gravity equation framework indeed, gravity equation is one of the empirical accomplishment stories in political economy and trade theories (Feenstra, Markusen and Rose, 1999).The gravity equation framework is one of the most popular empirical evidence for the whole range of spatial relations in political economy and international trade over a period of time. Generally it agree to study determinants of trade volume and to assess various regional economic integration with respect to developing economies (Cieslik, 2007).In the context of international trade, gravity equation in its basic form nominate the amount of trade in-between two countries increases in their size and proportion to their national income, and reciprocally decreases by the cost of transport between them, (As measured by distance between their economic centers). This relationship closely look like Newtons (1687) jurisprudence of gravitation which states that e very share in the universe attracts other atom with a force that is comparative to the product of their masses and inversely comparative to the distance among particles (Cieslik, 2007).Although gravity equation in its basic form performs a good job to justify foreign trade based on size of trading countries and distance between them. Therefore, in order to improve performance of the gravity equation in empirical studies of trade one should take into account the impact of other factors that affects on volume of trade (Cieslik, 2007).Theoretical Foundation Of Gravity ModelThe concept of the gravity model based on Newtons Law of Universal gravitation which relate the force of attraction between two objects with their combined masses and distance between them. The application of gravity model in social sciences empirically proposed by James Stewart in the 1940s (Fitzsimons et al., 1999). And then originally applied to international trade by Tinbergen (1962), the gravity model predicts trade flow between any two countries as a function of their size and distance between them (Walsh, 2006).Economic size is measured by gross domestic product, population and per capita income. Distance typically calculated through transportation cost between countries capital cities. In some studies this is replaced by the measures of remoteness through G.D.P or measure distances relative to the countrys average distance with all trading partners. Extension of this approach is to calculate trade cost with respect to barriers. And other restrictions on trade flow by comparing predicted and actual levels of trade volume (Walsh, 2006).As the empirical applications of the gravity model has grown theoretically over a period of time foundation of this model have also developed. Beginning with Anderson (1979) who illustrates gravity equation framework is consistent with a model of trade in which products are differentiated by the country of origin (Walsh, 2006).The gravity model is being es tablished in a literature and measure potential trade between countries. The gravity model defined by the Newtons Law of Gravitation, explain trade flow between two countries. It is one of the most popular empirical associations in economics and international trade. Earlier studies have estimated difference between observed set and predicted values those are calculated through O.L.S estimate of gravity model (Baldwin, 1994 and Nilsson, 2000) (Kalirajan and Singh, 2007).Justification Of The Gravity ModelThe Newtons physician primarily justify gravity model based on theoretical justification with their combined masses. Second justification for the gravity model was analyzed by Linneman (1966) (Rahman, 2003).Anderson (1979), Bergstrand (1985, 1989), Thursby (1987), Helpman Krugman (1985) share this view. Their studies identify number of variables. However, price and exchange variables can be omitted when products are unadulterated substitutes for one another in consumer preference. This structure of course, obtains the standard Heckscher-Ohlin (H-O) setting (Jakab 2001) (Rahman, 2003).Empirical StudyStudy found the gravity model in the context of international trade applied, first time independently by Tinbergen (1962) and Pyhnen (1963) but they didnt have any theoretical justification at the beginning. The earliest but not completely successful attempts provide a theoretical justification for the gravity equation by Linneman (1966), Leamer and Stern (1970) and Leamer (1970). However, origin of the gravity equation from a model was not possible till the product homogeneity assumption since early neoclassical trade literature was relaxed at that time (Cieslik, 2007).The first formal attempt to subtract the gravity equation directly from theoretical point of view made by Anderson (1979) based on Armington hypothesis which argues that products differentiated by the country of origin. Anderson (1979) demonstrated to derive gravity equation by using properties of Cobb Douglas expenditure system when goods produced by a country. Andersons (1979) approach subsequently applied and extended by Bergstrand (1985) who derived and ingeminate equation in terms of trade flow (Cieslik, 2007).An alternative method proposed by Helpman (1987) who completely departed from neoclassical assumptions of traditional Heckscher-Ohlin-Samuelson model. Which assume monopolistic competition and product differentiation among various firm in all industries rather than countri