Traditional models of international trade flows find that prices explain significant growth in export market shares. In the new international trade theory non-price factors are seen to be of great importance for the explanation of trade. Following Magnier and Toujas-Bernate (1994), this study introduces non-price factors, namely gross fixed investment and technology (number of patents accepted), into the export market share equation. Empirical estimation is carried out on five Asia-Pacific countries for the period 1978 to 1993. Results are similar to those of Magnier and Toujas-Bernate (1994) for the OECD, which show that non-price factors have played an important role in determining export market share during the last decade.

Madden, Gary G

Savage, Scott J

Thong, Su Yin

English

Research Papers in Economics

I. INTRODUCTION
Traditional models of international trade use relative prices as
the  principle  determinant  of  trade  ￿ ows.  Krugman  (1989),
however, suggests that nonprice factors should be introduced
into the modelling framework through the inclusion of supply-
side arguments. An important nonprice factor in the new inter-
national trade theory is innovation and technology  (Magnier
and  Toujas-Bernate,  1994;  Verspagen  and  Wakelin,  1997).
Fagerberg et al. (1997) suggest that recent growth in the world
economy has been stimulated through trade liberalization and
the international diffusion of knowledge and innovation.
Technological spillovers are also important. Glaeser et al.
(1992) postulate that within-￿ rm innovations increase the pro-
ductivity  of  other  ￿ rms. At  the  national  level,  Spencer  and
Brander (1983) observe that strategic research and development
(R&D) rivalry between countries can be crucial in explaining
trade volumes. Coe and Helpman (1995) suggest that trade is an
important  catalyst  for  R&D  spillovers.  In  particular,  they
conclude  that  both  domestic,  and  international  R&D,  affect
domestic country total factor productivity. The production of
traded and nontraded goods and services bring about a more
effective use of existing resources, and hence raises product-
ivity. Indirect bene￿ ts are obtained from imports of goods and
services that are developed by trade partners. Landesmann and
Pfaffermayr (1997) ￿ nd that R&D enables a country to reach a
better position in its quality spectrum of products offered, which
implies a higher export elasticity with respect to income.
Finally, Fagerberg (1988) and Magnier and Toujas-Bernate
(1994) argue that export performance depends on a nation’s
ability to deliver quality products, on time, to the international
market place. When a country is very competitive in terms of
prices and technology, it may not always be able to meet the
demands for its goods due to a capacity constraint. Magnier
and Toujas-Bernate (1994) derive a theoretical model of export
market share which explicitly accounts for capacity constraints
through the inclusion of an aggregate investment variable.
This study  empirically examines  both  price  and  nonprice
determinants of regional export market share for a sample of
￿ ve  Asia–Paci￿ c  countries.  Following  Magnier  and  Toujas-
Bernate  (1994),  speci￿ c  emphasis  is  placed  on  the  role  of
investment  and  technology  in  explaining  growth  in  export
market share. The paper is organized as follows. In Section II,
a theoretical model of export market shares which incorporates
both price and nonprice factors, namely the number of patents
granted and gross ￿ xed capital formation, is proposed. Data
sources and their transformations are described herein. Section
III contains both a description of the estimation method and
the results obtained. Section IV presents conclusions.
II. MODEL AND DATA
An  empirical  model  of  export  market  shares  (MSX)  is
employed here based on the theoretical work of Magnier and
Toujas-Bernate  (1994). The  model  incorporates  explanatory
Applied Economics Letters, 1999, 6, 361–363
Technology, investment and trade: 
empirical evidence for ￿ve Asia–Paci￿c countries
GARY MADDEN, SCOTT J. SAVAGE and SU YIN THONG
Communications Economics Research Program, School of Economics and Finance,
Curtin Business School, Curtin University of Technology, Western Australia
E-mail: maddeng@cbs.curtin.edu.au.
Received 1 December 1997
Traditional models of international trade ￿ ows ￿ nd that prices explain signi￿ cant growth
in export market shares. In the new international trade theory nonprice factors are seen to
be of great importance for the explanation of trade. Following Magnier and Toujas-Bernate
(Weltwirtschaftliches Archiv., 130, 1994), this study introduces nonprice factors, namely
gross ￿ xed investment and technology (number of patents accepted), into the export market
share equation. Empirical estimation is carried out on ￿ ve Asia–Paci￿ c countries for the
period 1978 to 1993. Results are similar to those of Magnier and Toujas-Bernate (1994)
for  the  OECD,  which  show  that  nonprice  factors  have  played  an  important  role  in
determining export market share during the last decade.
1350–5851 © 1999 Routledge 361variables  for  export prices  (P),  investment  (INV), and  tech-
nology (T):
MSXit = a 1 + a 2Pit + a 3INVit + a 4Tit + S b jTit–j + eit (1)
where i indexes ￿ ve countries, t indexes 16 time periods, j = 5
is the number of lags for the technology variable, and eit is a
white noise additive error term.
Model estimation  is  based on ￿ ve Asia–Paci￿ c  countries,
Australia, Hong Kong, Japan, New Zealand and South Korea,
for the period 1978 to 1993. To allow for the initial lag structure
of j = 5 for the technology variable the sample is effectively
reduced to 55 observations; 5 countries multiplied by 11 time
periods  (1983  to  1993).  Annual  data,  in  1987  prices,  are
obtained from the IMF (1984, 1991, 1996), the UN (1981, 1982,
1984, 1987, 1989, 1991, 1994), and the World Bank (1997).
MSX is real exports of country i to the other four countries
in the sample, divided by the real exports of the  other four
countries towards the same region. PC is the export price de￿ a-
tor of the four other competing countries divided by the export
price de￿ ator of country i. INV is gross ￿ xed capital formation
for country i divided by the average gross ￿ xed capital forma-
tion for the four other competing countries. T is the number of
patents accepted by the respective patents of￿ ce in country i
divided by the total patents of the four other competing nations
(smoothed by a three year moving average). Expenditures on
R&D would represent a more appropriate measure on which
to compare the technological level of the ￿ ve countries stud-
ied since R&D expenditure more accurately re￿ ects the inputs
used  for  innovative  activities  (Magnier  and  Toujas-Bernate,
1994). However, since these expenditures are unavailable for
three of the ￿ ve countries contained in the study, the number
of patents accepted is used as a proxy for technology.
III. ESTIMATION RESULTS
Equation  1  is  estimated  on  the  pooled  data  above  using
Kmenta’s  (1986)  GLS  procedure  to  allow  for  groupwise
heteroscedasticity,  cross-sectional  correlation  and  group
speci￿ c autocorrelation.
1 An optimal one period lag length for
technology  is  based  on  the signi￿ cance  of the last included
lagged term in the estimated equation. Estimation results are
presented in Table 1.
All estimated  parameters are correctly signed and signi￿ -
cant at the 1% level, con￿ rming the results of Magnier and
Toujas-Bernate  (1994). An  increase  in  all  explanatory  vari-
ables  would  lead  to  an  increase  in  regional  export  market
share. All responses are inelastic. The positive sign of lagged
technology is sensible due to the time lapse between the of￿ cal
acceptance of patents and the implementation of the resulting
technology into economy production processes.
IV. CONCLUSIONS
The above results  are consistent  with those  of Magnier  and
Toujas-Bernate  (1994) for the OECD. Whilst price competi-
tiveness  plays  an important role in the explanation of inter-
national  trade,  nonprice  factors  such  as  investment  and
technology  are  also  crucial.  Government  policies  which
encourage investment, R&D expenditure, and the widespread
diffusion of new technology can enhance export performance
(Papaconstantinou, 1997). Whilst, this outcome is encouraging
there are two important caveats which must be drawn. First,
the proxy used to measure technology, the number of patents
accepted, is clearly inadequate. However, given the paucity of
these  data  for  the  Asia–Paci￿ c  region  it  is  reasonable  to
include patents in the export market share equation. A second
caveat  concerns  the  countries  included  in  the  sample.
Australia, Japan and New Zealand are OECD member nations,
and  Hong  Kong  and  South  Korea  are  newly  industrialised
economies. Clearly, the sample contains only OECD members,
or ‘OECD-like’ nations  in terms of their level  of economic
development. The strength of our ￿ ndings will be increased
when the results are shown to hold for a more diverse group
of Asia–Paci￿ c countries.
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Technology, investment and Trade 363

Technology, investment and trade: empirical evidence for five Asia-Pacific countries

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