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Expanding RTAs, trade flows, and the multinational enterprise

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Abstract

We test the relationship between the size of regional trade agreements (RTAs) and openness by using a gravity equation with multilateral trade factors. Our sample includes 11 RTAs, seven with constant membership and four with expanding membership. Regional trade bias declines with the size of the club; three of the four expanding RTAs have already surpassed their “optimal” size. We also explore the link between openness of the RTA and the geographic strategy of the multinational enterprise. We find strong evidence in favor of the regionalization strategy, which has been enhanced by the presence of RTAs.

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Notes

  1. It should be noted that some are bilateral and of little importance for trade flows (Pomfret, 2006: 42).

  2. The terminology of building and stumbling blocs was first introduced by Bhagwati (1991). For relevant literature on this topic, see Section 7 in Panagariya (2000).

  3. Many political economy models of RTAs emphasize trade diversion; see Panagariya (2000).

  4. With homothetic preferences, consumers with different incomes but facing the same prices demand goods in the same proportions.

  5. The restriction β1=β2 appears to be consistent with Viner's (1950: 43) definition of pure trade. For more details, see Magee (2008), especially his Eq. (7) and accompanying text on pages 353–354.

  6. The third dummy permits us to distinguish intra-bloc export increases from RTA-induced export increases occurring at the expense of exports to non-member countries. Welfare is better measured by non-members’ imports or bloc exports than by non-members’ exports or bloc imports: see Soloaga and Winters (2001: 5–6).

  7. The modern derivations of the GE equation embedding relative prices and relative trade costs, except in the limiting case of σ=1, solve Bikker's concern that the GE ignores price adjustments: see Deardorff (1998) and Anderson and van Wincoop (2003). At the empirical implementation, the identifying restrictions that need to be imposed on the allocation equations are likely to make the three-component model (i.e., Bikker's model) less general than the GE: see Merkies and van der Meer (1988: 16–17).

  8. It should be noted that country-pair fixed (random) effects and year fixed effects provide a more flexible error term structure (i.e., u ijt =h ij +z t +ɛ ijt ) than Bikker's (i.e., u ij =v i +w j +ɛ ij ; p 327, notations have been adjusted to compare two models.).

  9. Frankel (1997: 134–136) also reports no significant difference between the “exogenous” specification and a specification with the lagged dependent variable, which is the simplest way to control for possible endogeneity.

  10. Regression results are not shown, but are available upon request. Similar findings are reported by Baldwin and Taglioni (2007).

  11. The export trade diversion effect is not statistically significant at the 10% level.

  12. The export trade diversion effect is significant at the 10% level.

  13. The list of firms is available upon request.

  14. Note that the coefficient of ASEAN, which is dropped because of multicollinearity, is equal to the RTA coefficient.

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Acknowledgements

We thank, for comments and suggestions, the participants at a seminar at the Bank of Greece, at the Academy of International Business Annual Conference 2008 in Milan, Francesco Marchionne, Journal of International Business Studies Editor Arjen van Witteloostuijn, and three anonymous reviewers of the same journal.

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Authors and Affiliations

  1. Kelley School of Business, Indiana University, Bloomington, USA

    Michele Fratianni

  2. Department of Economics, Università Politecnica delle Marche, Ancona, Italy

    Michele Fratianni

  3. Faculty of Business, Brock University, St Catharines, Ontario, Canada

    Chang Hoon Oh

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  1. Michele Fratianni
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Correspondence to Chang Hoon Oh.

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Accepted by Arjen van Witteloostuijn, Area Editor, 14 September 2008. This paper has been with the authors for three revisions.

Appendices

APPENDIX A

See Table A1.

Table a1 Macro-level data description
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APPENDIX B

See Table B1.

Table b1 Country list
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APPENDIX C

See Table C1.

Table c1 Eleven regional trade agreements in the sample
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APPENDIX D

See Table D1.

Table d1 Firm-level data description
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APPENDIX E

See Table E1.

Table e1 Summary statistics and correlation matrix of firm-level data
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Fratianni, M., Oh, C. Expanding RTAs, trade flows, and the multinational enterprise. J Int Bus Stud 40, 1206–1227 (2009). https://doi.org/10.1057/jibs.2009.8

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