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Technology Advantage and Home-market Effect: An Empirical Investigation

Author

Listed:
  • Huang, Yo-Yi

    (Institue of Economics, Academia Sinica)

  • Huang, Deng-Shing

    (Academia Sinica)

Abstract

According to the conventional home-market effect, free trade tends to shrink the market share for a small economy in differentiated manufacturing goods, and in the extreme leads to a complete hollowing-out of the industry in a small economy. This paper considers the technology difference between countries using the standard Helpman-Krugman model. We will show that the home-market effect can be offset and even reversed if the smaller economy is characterized by better technology. The effect of a technology advantage is composed of two parts: a direct effect from lower unit costs that leads to a higher output level of each firm, and an indirect effect through a change of survival firms after trade. Based on theoretical results we derive the gravity equation to undertake empirical tests on the hypothesis of home-market effect, and direct and indirect technology effects using the stock of each country’s patent registered in US in 2002 for six industries ranging from the most technology-intensive semiconductor industry to the most labor-intensive apparel and clothing industry. Empirical results show that the degree of home-market effect varies from industry to industry. The reversal of the home-market effect due to counteracting direct and indirect technology effects is more likely to occur in technology-intensive industries. In this regards, any technology improving policy like R&D subsidies is always justifiable especially for a small open economy and for high-tech industries to prevent from being marginalized by a large economy.

Suggested Citation

  • Huang, Yo-Yi & Huang, Deng-Shing, 2011. "Technology Advantage and Home-market Effect: An Empirical Investigation," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 26, pages 81-109.
    • Handle: RePEc:ris:integr:0531
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    Cited by:

    1. Iader Giraldo & Fernando Jaramillo, 2018. "Productivity, Demand, and the Home Market Effect," Open Economies Review, Springer, vol. 29(3), pages 517-545, July.

    More about this item

    Keywords

    Home-market Effect; Technology Advantage; Gravity Equation;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration

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