Trade Performance and the Role of R & D, Patents, Investment and Hysteresis: An Analysis

This paper experiments with three different proxy variables - ie, relative patenting activity, R & D expenditure and investment - in an attempt to capture the importance of non-price factors (such as relative product quality, variety and innovation) in the determination of import volumes. The empirical work uses bilateral import volume data for the UK, Germany and Italy - disaggregated to 4-digit ISIC level - together with disaggregated bilateral proxies for quality and innovation. The paper seeks to identify `hysteresis' effects in UK import volumes by testing whether the temporary appreciation of sterling in the early 1980s - which was accompanied by a 27% increase in UK import penetration and a 25% fall in manufacturing employment - resulted in a permanent increase in UK imports (ie, between 1979-81 the sterling effective exchange rate rose by around 30%, but virtually all of the appreciation had been reversed by the end of 1983). The paper concludes: quality and innovation are important determinants of trade shares for certain sectors; the temporary appreciation of sterling at the start of the 1980s was associated with a permanent loss of market share for UK producers partly because the high level of sterling encouraged UK purchasers to try more imported products, particularly imports from the newly-industrialising countries; relative import price elasticities are approximately twice (in some cases, three times) as large as those previously estimated using aggregate data.