Fragmentation and parts and components trade in the Western Balkan countries

Abstract

As a consequence of the increasing globalisation and integration of the world's markets, there has been an intensive process of international fragmentation of production over the last few decades. This phenomenon whereby previously integrated productive activities are segmented and internationally spread is reflected in the rapid increase in parts and components trade, growing at higher rates than final goods trade. In this process the Western Balkan countries (WBC) have been no exception. With their recent integration into global markets, the WBC have witnessed growth in parts and components trade that has even exceeded the world average. This article examines the determinants of the trade that stems from the international fragmentation of production in the WBC. Using a panel data set of disaggregated bilateral trade flows, we estimate gravity equations for 2000–2009. Our findings support the hypothesis drawn from the theory of fragmentation that trade in parts and components is motivated by labour cost differences and by geographical and proximity reasons. The relevance of additional service link costs, as well as the influence of institutional similarity and infrastructure quality or political–economic agreements is also confirmed by our empirical research.

Acknowledgements

The authors would like to thank the participants at the 1^st Meeting on International Economics, University Jaume I of Castellón, Spain, 20–21 September 2012, for the helpful comments received. They are also grateful for the financial support from the Project ECO 2011-28155 of the National Plan for Research and Development by the Ministry of Science and Innovation of the Spanish Government as well as the Pla de Promoció de la Investigació by Fundació Caixa Castelló-Bancaixa (P1-1A2010-05). The views and conclusions in this article express the personal positions of the authors and not necessarily the official views of their respective institutions.

Notes

 1. See Appendix for greater detail on the data used in this study.

 2. Most empirical research uses bilateral trade in parts and components as an indicator of fragmentation. See, for example, Kaminski and Ng (2005), Athukorola and Yamashita (2006) and Kimura et al. (2007).

 3. Albania submitted its application for EU membership in April 2009 and is currently a potential candidate; Bosnia and Herzegovina is also considered a potential candidate country but a formal application has not yet been submitted; Croatia is set to join the EU in July 2013 and the formal signing of the acceptance process was carried out at the EU summit in December 2011; Macedonia was granted candidate country status for EU membership in 2005 but negotiations with the EU have not yet begun owing to the unresolved ‘name’ issue with Greece; Montenegro started negotiations with the EU in June 2012; finally, Serbia was granted candidate country status at the EU summit in March 2012.

 4. Barriers to trade including non-tariff barriers were removed and customs systems and legal practices were aligned with those in the EU. The trade and transport facilitation programme for South Eastern Europe helped customs reforms and improved coordination between border control agencies, as well as eliminating bottlenecks at border crossings in the region.

 5. The coverage of the parts and components included in the analysis is presented in the code list in the Appendix.

 6. Vertical IIT is defined as the simultaneous exporting and importing of products in the same industry but at different stages of production.

 7. See for example Arndt (1997), Deardorff (2001) or Arndt and Kierzkowski (2001).

 8. Other important contributions to the theory of fragmentation can be found in Arndt (1997), Arndt and Kierzkowski (2001), Jones and Kierzkowski (2001) and Deardorff (2001).

 9. Such as slicing up the value chain (Krugman 1995), outsourcing (Feenstra and Hanson 1997), disintegration of production (Feenstra 1998), intra-product specialisation (Arndt 1997), vertical specialisation (Hummels et al. 2001) or fragmentation (Jones and Kierzkowski 1990, Deardorff 2001).

10. Other studies that highlight the importance of service link and location advantages include Bergstrand and Egger (2006) and Golub et al. (2007).

11. Gravity models have been widely used in the empirical literature on trade in parts and components. See, for instance, Athukorola and Yamashita (2006) and Kimura et al. (2007).

12. Data for 2004 were used for Serbia and Montenegro because data for 2003 were not available.

13. See Hsiao (1986).

14. The Hausman test has been obtained from the models with country-pair effects.

15. The Helpman (1987) similarity of country size index is defined as

where indices i and j refer to home and foreign countries, respectively, t denotes time and GDP is a country's real GDP.

16. See, for instance, Egger and Egger (2005) and Jones et al. (2005).

17. The results of estimating total trade in SITC Rev. 3 groups 7 and 8 are available upon request.