Scale economies and trade

Abstract

While previous research has shown that industries with high-scale economies more frequently have low rather than high intra-industry trade shares, this study provides strong support for other predictions of modern trade models. Industries with high-scale economies more frequently have high rather than low export and import shares. A finding that high-scale economies is associated with low net export shares may be due to the role scale economies play in generating both high industry export and import shares. Theoretical and empirical studies should focus attention on relationships among scale economies, trade flows and net exports.

Keywords:

• scale economies and trade
• modern trade models
• intra-industry trade
• trade flows

JEL Classification:

• F12
• F10
• F11

Notes

¹ Other studies reporting a significant negative relationship between scale economies and the intra-industry trade share include Balassa (1986), Balassa and Bauwens (1987) and Clark and Stanley (2003).

² Clark et al. (1992) reported significant positive relationships between Minimum Efficient Scale (MES) and both export shares in total shipments and imports relative to domestic supply for 278 four-digit US SIC industries. Harrigan (1994) examined bilateral imports between ten OECD nations in 26 three-digit ISIC industries and established a significant positive relationship between the log of MES and log of imports divided by adjusted GDP.

³ Support for a RCA measure based upon net exports can be justified by Deardorff's (1980) theoretical finding that this observation is, on average, an indication of true comparative advantage.