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Explaining the Shifts of International Trade in Pulp and Paper Industry
Abstract
The pulp and paper industry is currently facing broad structural changes because of global shifts in demand and supply. These changes have significant impacts on national economies worldwide. In this article, we describe the recent trends in pulp and recovered paper (RP) production and estimate augmented gravity models of bilateral trade for chemical pulp and RP exports with panel data. According to our results, there is some variation in the effects of the traditional gravity model variables between pulp grades and RP. The results imply also that, in comparison with export supply, import demand plays a larger role in determining the volume of exports. Finally, it is evident that Asia, particularly China, is the most important driver of chemical pulp and RP trade: China is hungry for fiber and must import to satisfy its growing needs. Moreover, the speed of China's growth in chemical pulp and RP imports has been driving the increased significance of planted forests in the export of hardwood pulp as well.
... For example, Asia's economy has been developing rapidly since the 1980s. With this growing market, the focal point of global paper and paperboard production has transferred to Asian countries like China and Asia has been a net importer (Hujala et al. 2013). Meanwhile, major Asian currencies have been appreciating against the US dollar. ...
... Zhang and Li (2009) explored determinants of China's wood products trade from 1995 to 2004. Hujala et al. (2013) estimated augmented gravity models of trade flows for chemical pulp and recovered paper exports. In short, a variety of explanatory variables have been selected specific to each trade and different results have been founded for different regions or products. ...
... Common explanatory variables include gross domestic product, population, geographical distance, and trade preference factors. A detailed discussion of gravity models is beyond the scope of this study but can be found inHujala et al. (2013).4 Bahmani-Oskooee and Hegerty(2007)summarized various measures of exchange rate volatility. ...
Using cointegration analyses, we examined the econometric relationship between the US exports of selected forest products (roundwood, sawnwood, and paper and paper board) and a group of microeconomic factors. Overall, we found a positive impact of economic growth of importing countries on total US export of forest products, but mixed results for exchange rate risk and relative price by model specifications, by exchange rate risk measures, and across forest products.
... This interdependence resonates with the insight of configuration theory, which underscores the aggregated and systemic aspects of organizational phenomena (Miller, 1986;1996). The configurational approach has therefore been the preferred choice for research on organizational design despite being under different labels, such as typologies, taxonomies, generic strategies, or archetypes (e.g., Burns and Stalker, 1961;Furnari et al., 2020;Hofer and Schendel, 1978;Miles and Snow, 1978;Miles and Snow, 2003;Mintzberg, 1979;Mintzberg, 1983;Porter, 1980). Building on the interdependent nature of configurational thinking, the notion of complementarities (Milgrom and Roberts, 1995;Whittington et al., 1999) highlights the risk of transitioning between configurations of organizational attributes. ...
... Before the 1990s, the industry was relatively stagnant. Primary competitive advantages originated on a Chandlerian (1990) scale and scope mechanisms conjoined with investments in gradually improving paper machines (Toivanen, 2005) and pulp chemistry (Hujala et al., 2013). The demand for the main products printing papers and packaging materialscorrelated very strongly with GDP growth (Diesen, 1998), making strategic planning relatively simple (Carlsson et al., 2009;Davis et al., 1992;Kald, 2003) compared to more volatile industries. ...
Industry transformation requires strategic renewal at the level of individual firms. Executives then face the dilemma of choosing renewal paths in the face of uncertainty over the competitive environment of the future, and hence the profitability of potential strategies. This dilemma motivates us to study industry transformation from the perspective of strategic renewal among 208 large firms in the global pulp and paper industry. The findings of our qualitative comparative analysis show that only a minority of firms in our sample succeeded in profitable proactive renewal. Content-wise, there were similarities in the pursued strategies over the wider population, but only a few maintained superior profitability while proactively renewing. Our results, overall, highlight the importance of understanding the processual nature and execution of strategic renewal.
... This interdependence resonates with the insight of configuration theory, which underscores the aggregated and systemic aspects of organizational phenomena (Miller, 1986;1996). The configurational approach has therefore been the preferred choice for research on organizational design despite being under different labels, such as typologies, taxonomies, generic strategies, or archetypes (e.g., Burns and Stalker, 1961;Furnari et al., 2020;Hofer and Schendel, 1978;Miles and Snow, 1978;Miles and Snow, 2003;Mintzberg, 1979;Mintzberg, 1983;Porter, 1980). Building on the interdependent nature of configurational thinking, the notion of complementarities (Milgrom and Roberts, 1995;Whittington et al., 1999) highlights the risk of transitioning between configurations of organizational attributes. ...
... Before the 1990s, the industry was relatively stagnant. Primary competitive advantages originated on a Chandlerian (1990) scale and scope mechanisms conjoined with investments in gradually improving paper machines (Toivanen, 2005) and pulp chemistry (Hujala et al., 2013). The demand for the main products printing papers and packaging materialscorrelated very strongly with GDP growth (Diesen, 1998), making strategic planning relatively simple (Carlsson et al., 2009;Davis et al., 1992;Kald, 2003) compared to more volatile industries. ...
... In the 2000s, China with its low labour and energy costs and booming paper and board consumption has become a particularly important player in the industry, while several paper machines and mills have been closed in Western Europe, where the industry has suffered from overcapacity and profitability problems (Valtonen, 2008). South America, especially Brazil, has become one of the most important wood pulp exporters due to its eucalyptus plantations (see, e.g., Hujala et al., 2013). Yet another significant structural change is that the operating environment of the PPI has become more complex, cross-sectoral and interlinked with other sectors (Hurmekoski and Hetemäki, 2013). ...
... The PPI's purchases from the chemical industry almost doubled in Brazil between 1995 and 2005. This is consistent with the rapidly increased production of wood pulp from eucalyptus trees (see, e.g., Hujala et al., 2013). Instead, in Finland purchases from the chemical industry increased between 1995 and 2005 and decreased between 2000 and 2005. ...
The global business environment of the pulp and paper industry (PPI) has changed drastically during past decades. This paper focuses on analysing the linkages between PPI and other industries in Brazil, Finland, and the USA. We identified the most important inter-industry linkages and analysed possible differences between countries, and over time. We also predicted Finland's input-output structure using fuzzy linear models. The results suggest that there are distinct differences across countries and also over time. It seems that the global changes in pulp and paper markets have changed the purchase 'recipe' of PPI in all of the countries investigated. Fuzzy input-output analysis was found to be a useful forecast method, although further research is needed prior to any generalisations.
... At the same time there has been a major shift to using eucalyptus pulp for fine papers, and in this the South American producers had significant comparative advantage, which also led to the decline of North American producers. Thus North American and European cellulose production has stagnated in the past few decades, just as demand was increasing in Asia, and as the volume and quality of the South America factories have become highly valued in the world market (Hetemäki et al. 2013;Hujala et al. 2013). Chemical wood pulp production grew at 6% per annum between 1990 and 2019 in South America, compared to a steady decline of −0.2% in North America and 0.7% for European producers. ...
Brazil, Chile, and Uruguay today account for well over a third of world exports of cellulose, yet this industry only came into existence in the late twentieth century. The evolution of this industry across the three countries is the object of this study. This nascent industry required direct government support in all three countries to be successful. Forestry laws and government investments in research, education, and factory construction were all needed to encourage local and foreign capital. There were differences among these countries in their linkages to other economic sectors as well as their export mix. But in all three countries, the forestry industry was part of a general modernization of agriculture that allowed for successful competition in world markets.
... Therefore, such countries are importing more pulp and paper products than exporting. In the total pulp consumption of the world, the proportions of virgin fiber, recovered fiber and other fiber Polymers 2020, 12, 3030 2 of 16 (non-wood) are 42, 55, and 3%, respectively [3]. Population growth, increasing literacy rate, industrial revolution and booming e-commerce sector in developing countries are some of the key projected reasons for increase in paper and pulp demand per annum globally. ...
The modern-day paper industry is highly capital-intensive industries in the core sector. Though there are several uses of paper for currency, packaging, education, information, communication, trade and hygiene, the flip side of this industry is the impact on the forest resources and other ecosystems which leads to increasing pollution in water and air, influencing several local communities. In the present paper, the authors have tried to explore potential and alternate source of industrial pulp through ruminant animal dung, which is widely available as a rural resource in India. Three types of undigested animal dung fibers from Indigenous cow (IDF), Jersey cow (JDF), and Buffalo (BDF) were taken. Wheat straw (WS) was the main diet of all animals. The cellulose, hemicellulose and lignin content for all animal dung samples were found in a range of (29-31.50%), (21-23.50%), and (11-13%), respectively. The abundant holocellulose and low lignin contents are suitable for handmade pulp and paper. Surface characteristics of fodder (WS) and all dung fibers have been investigated using Fourier Transform Infrared Spectroscopy (FTIR), scanning electron microscopy (SEM), and SEM-Energy dispersive X-ray spectroscopy (SEM-EDX). To increase paper production without damaging forest cover, it is essential to explore unconventional natural resources, such as dung fiber, which have the huge potential to produce pulp and paper, reinforcement components, etc.
... In addition, demand for paper is currently decreasing because many people now read the newspapers, pay bills, etc., via the Internet; this behavioural change has created overcapacities in the pulp and paper industry, inspiring searches for new business opportunities. Paper yarn could help to solve this problem (Hujala et al. 2013). ...
Cotton and oil-based fibre consumption is highly problematic because the growth of these materials often requires fertilisers and toxic pesticides. Less environmentally damaging alternative fibres are urgently required. This study investigates Manila-hemp paper-yarn textile fabrics. Manila-hemp (abacá) is a species of banana grown as a commercial crop in the Philippines, Ecuador, and Costa Rica. Knitted structures of paper, cotton, viscose, and polyester yarns are tested and compared. Tensile strength tests are also performed. Paper yarn shows low shrinkage and no pilling, which are excellent characteristics for use in the textile and clothing industries. However, its poor handleability/knittability, high stiffness, and hard grip must be resolved for the widespread application of paper yarn in the textile industry in the future.
... Contributing factors include the substitution of paper by electronics [49], the increasing use of recovered fibre [50] and growing international competition [51]. The production of paper and paperboard has decreased in Western countries over the past decade, while it has increased in the emerging economies of Asian and Latin American countries [51,52]. The consequences of this trend, such as mill closures leading to increased unemployment in various sectors (e.g. ...
In Canada, the annual allowable cut (AAC) sets the harvest limit of roundwood and aims to maintain the long-term productive capacity of the forest while taking into account other values such as biodiversity and needs of stakeholders. Current harvest levels in the province of Quebec, which feed an industrial network dominated by the production of lumber, panels and pulp, average only 55% of the AAC, which may cause a gradual depletion of the forest resource if stands that have the highest value are preferably selected. In this context, using surplus forest growth consisting of low quality trees and less desirable stands as bioenergy feedstock could help improve both silvicultural practices and wood value chain profitability. The aim of this study was to identify biophysical and socio-economic factors that affect the proportion of the AAC that is harvested in Quebec's 74 management units. Results from the analysis of AAC and harvesting data for the period 2008–2013 showed the harvested proportion of the AAC was particularly low for hardwood species, with the proportions for poplar, birch and maple ranging between 19 and 38%. The distance to the nearest pulp or particle board mill was confirmed as the prime factor determining the harvest/AAC ratio for deciduous species. For softwoods, the presence of deciduous stands in a given region affected the harvest/AAC ratio. Low quality hardwoods could be used as an important source of feedstock for the bioenergy sector. Developing a synergy between conventional and bioenergy products could facilitate the application of sound silvicultural practices and increase profitability along the entire wood value chain.
... A few scholars (e.g., Buongiorno 1978, Baudin and Lundberg 1987, Li and Zhang 2008, Hujala et al. 2013) have studied the demand and trade flows of paper products without considering tariffs. There have been many studies on the effect of tariff and other trade measures on forest product trade besides paper products, notably softwood lumber related to the softwood lumber war between the United States and Canada (e.g., Zhang 2007, Nagubadi and Zhang 2013, Parajuli and Zhang 2016 and wood furniture associated with antidumping activities in the United States (e.g., Luo et al. 2015). ...
In this paper we use the gravity model to study the effects of tariff on U.S. exports and imports of paper products that include paper, paperboard, and wood pulp. The results show that an increase in tariff would have a small, significant, and asymmetric impact on U.S. exports and imports of paper products. Furthermore, exchange rates, economic sizes of the U.S. and its trade partners, and internet use rates are found to be significant factors influencing U.S. paper products trade. These results show that the U.S. has some leverage in promoting free trade in paper products.
... Firstly, there is presence of time invariant variable in the model, such as distance and secondly, the main variable in the model, Regulatory Quality has a very subtle change over time. Hujala et al. (2013) also hold this view for their analysis. Though the data is only for five years, the Breusch-Pagan Lagrange multiplier (LM) and the Hausmann test ratio recommend the use of random effects model, we have also run a Random Effects Generalized Least Squares (GLS) regression and a population average Feasible Generalized Least Squares (FGLS) regression. ...
The value of aggregate forest products exports to India has increased from about $1.5 billion in 2003 to about $5.4 billion in 2013. While many of the forest products resources can be sourced from within India, the subcontinent must also source forest products from trading partners, in the form of wood product exports. This presents many economic challenges and opportunities for wood products markets and trade as India is the second largest importer of wood products in the world. In this study, we focus on the effect of regulatory quality on forest products exports by partner countries to India. Using a panel of trade flows during 2009-2013 of 143 partner countries exporting forest products to India, we estimate an augmented gravity trade model to capture the effect of relevant variables on the outflow of aggregate forest products and disaggregate paper & paperboard, wood-pulp, fiberboard, veneers, sawn-wood, industrial round-wood and plywood products from partner countries to India. Results from the analysis are mixed, regulatory quality is found to have positive correlation with exports to India in some cases (paper and paperboard products and wood pulps) and no correlation in few instances (fiberboard, veneer sheets, sawn wood, industrial round wood and plywood). Other explanatory variables such as the distance between the partner country and India, forest area of partner country relative to forest area of India, GDP, population and trade agreements are mostly found to have positive or negative significant effects on trade varying across different sectors.
... Hetemaki and Mikkola (2005) predicted printing and writing paper import in Germany with several econometric models. More recently, Hujala et al. (2013) examined the trend and driving force in the pulp and paper sector by estimating an augmented gravity model of bilateral trade worldwide. Overall, previous studies related to paper and allied products trade have mainly focused on intermediate products (e.g., pulp) or paper products at the aggregate level. ...
This study measures the impact of Trade Dispute on Import Demand for Coated Graphic Printing Paper Products in the U.S.
... Hetemaki and Mikkola (2005) predicted printing and writing paper import in Germany with several econometric models. More recently, Hujala et al. (2013) examined the trend and driving force in the pulp and paper sector by estimating an augmented gravity model of bilateral trade worldwide. Overall, previous studies related to paper and allied products trade have mainly focused on intermediate products (e.g., pulp) or paper products at the aggregate level. ...
Up to 40% of the total consumption of coated paper products in the United States has been met by imports in recent years. To protect domestic industry, two sequential antidumping and countervailing investigations against several major supplying countries (e.g., China) were conducted in 2006 and 2009. In this study, the effectiveness of these trade interventions is evaluated with the almost ideal demand system and cointegration techniques. Three types of trade effects are found through the analysis: trade investigation effect during the 15-month investigation process, trade depression effect on targeted countries subject to duty collection, and positive trade diversion effect on non-targeted suppliers. Imports from China and Indonesia have been suppressed since the duties were levied in 2010. However, other suppliers (i.e., Korea and Germany) have filled the market gap and gained a larger market share over time. The findings reveal that market competition in a specific sector has become more complicated within the increasingly globalized world economy, and sequential trade interventions can generate unpredictable results.
... The forest industries in Western Europe, North America and Japan are undergoing its most fundamental transformation since the creation of the modern pulp and paper industry in the early 1900s.The two main reasons behind the large structural change are changing media habits and a steep reduction in the demand for printing paper. Both factors caused a radical erosion of profitability whose consequence has been reduction of Western economies' 50% share of the global paper, paper-board, sawn-goods and panel production markets in the 1990s to a mere 30% nowadays (Hurmekoski and Hetem€ aki, 2013;Hujala et al., 2013). These effects have been especially dramatic in Finland from 1998 to 2008 as the forest industry's share of exports has fallen from 29% to 18% in 2013. ...
There is increasing interest in the development of a bio-based economy in Europe with decreased profitability and sustainability of materials as driving forces. The research is a study of SMEs in South-East Finland. The objective of this paper is to analyze the main factors challenging new SME companies to find or develop new business opportunities in the bio-based economy. As Finland has a well-established forest industry in the midst of structural change, the results of this study are likely to be implemented in other countries and innovation environments as well. The study consisted of a Webpropol-based enquiry sent to South-East Finland SMEs active in the bio-economy and of the analysis of their answers obtained from 66 companies. The important role of SMEs as creating new sustainable businesses and jobs has been identified. The results show that key factors influencing the successfulness of SME companies are: Customer value-added, collaboration in R&D and supply chain. Knowledge of markets, products and processes are very important for SMEs entering into the new bio-based market, either as actors within the value chain, or as suppliers of raw materials or intermediary products to larger companies.
... Market demand of forest products and forest resource availability were also considered as important determinants influencing the international trade of forest products (e.g. Bonnefoi and Buongiorno 1990;Hujala et al. 2013). ...
... With strongly increasing consumption growth in China, moderately increasing growth in Latin America and Africa, and existing production capacity for pulp and paper in Europe and North America, the transportation of intermediate and final products between these regions has been intensifying in relative and absolute terms, and currently accounts for approximately one third of total production (e.g. . Some countries, such as Finland and Sweden, have specialized in the manufacturing of paper and paperboard products due to their rich forest resources, and are globally among the largest exporting countries; and due to the recent capacity reductions in North America, the demand for softwood pulp from European coniferous forests is increasing in global markets (Hujala et al., 2011). Transportation to global markets from Northern Europe typically calls for the shipping of products over long distances, due to product bulkiness. ...
... In another recent paper, Hujala et al. (2013) focused on the trade of pulp and used various explanatory variables that reflect its import demand, export supply and the costs of trade. ...
The international recovered paper trade serves two important functions: increasing raw material availability in the paper and board industry and providing economic incentives to recycle. The purpose of this paper is to shed further light on emerging patterns in this trade by empirically analysing the changes in the bilateral trade flows of recycled paper between 1992 and 2008. According to our estimations, two important changes occurred in the 1990s and 2000s. First, the growing importance of developing economies in global recycled paper trade plays a significant role in import demand as a determinant of trade flows. Second, the changes in global trade patterns necessitate investigating the transportation cost measures used in applied research.
... Although production of certain traditional wood products (e.g., pulp and paper) has indeed been declining since 2000 (Hujala et al. 2013), the likelihood of there being large numbers of abandoned plantations contradicts national and global projections of increasing demand for traditional wood products (Ince et al. 2011, Daigneault et al. 2012, Nepal et al. 2012, Latta et al. 2013). If, however, there are plantations abandoned due to regional deviations from global trends for which the no-harvest baseline is an unrealistic scenario, then for such plantations the appropriate baseline for forest bioenergy scenario is deforestation followed by LUC. ...
Critical errors exist in some methodologies applied to evaluate the effects of using forest biomass for bioenergy on atmospheric greenhouse gas emissions. The most common error is failing to consider the fate of forest carbon stocks in the absence of demand for bioenergy. Without this
demand, forests will either continue to grow or will be harvested for other wood products. Our goal is to illustrate why correct accounting requires that the difference in stored forest carbon between harvest and no-harvest scenarios be accounted for when forest biomass is used for bioenergy.
Among the flawed methodologies evaluated in this review, we address the rationale for accounting for the fate of forest carbon in the absence of demand for bioenergy for forests harvested on a sustained yield basis. We also discuss why the same accounting principles apply to individual stands
and forest landscapes.
... The most likely explanation to the reversal is the prolonged period of oversupply of communication papers (newsprint, printing and writing papers) in the European markets. In Western Europe, paper markets saturated in early 2000, and paper consumption has stagnated, or even decreased, in many Western European countries during the past decade (see e.g., Hetemäki, 2005;Hujala et al., 2012). Although several machines and mills have been closed or idled in Finland, new mills have gone on-stream elsewhere in Europe (Valtonen, 2008). ...
In this paper, we analyse econometrically the Finnish inventory to
value added ratios (i.e., inventory intensities) within manufacturing and two
subcategories, the wood and paper industry and manufacture of electrical
products. The focus is on the period 1980–2009. In addition to revealing the
statistically significant break points in the inventory intensity, we estimate the
numbers, timings and magnitudes of the structural breaks. After determining
the break points, we connect them to transaction, buffering and speculative
motives for holding inventories. The properties of the break points observed
suggest that the motives continue to play a role in modern small open
economies and, therefore, they can be utilised by managers when trying to
forecast the behaviour of inventories.
Maine faces a period of socio-economic transition as it contends with a shift in natural resource utilization. From the declining contribution of natural resource industries to the rise of conservation lands, the state’s relationship with its natural capital is increasingly influenced by a multitude of factors. Meanwhile, Maine’s rural communities may struggle to adapt. In order to gain better insight, a statewide web-based survey was used to collect data on perceptions of community resilience, natural resource industries, and conservation. Analysis revealed divergences largely based on demographic characteristics. Politically conservative respondents expressed a belief that their communities are resilient but are concerned that conservation lands reduce economic productivity. Rural residents tend to believe natural resource industries remain important but do not perceive their communities to be economically diverse. Respondents in urban areas instead perceive a lack of social cohesion and trustworthiness of local elected leadership. Communities across the state contend with a diverse array of vulnerabilities for which no single resilience building solution will suffice.
Intraregional trade of forest products is a critical component of regional and sub-regional timber markets in terms of supply chain planning and locating forest product manufacturing facilities. Based on a gravity trade model, we evaluate the various factors driving the interstate flows of softwood sawlog and roundwood pulpwood in the 13 southern United States: AL, AR, FL, GA, KY, LA, MS, NC, OK, SC, TN, TX and VA. Biennial state-level panel data from 2011 to 2019 in 13 southern states are employed to estimate empirical sawlog and pulpwood trade models. Results suggest that state gross domestic product (GDP) of importing states, exporter and importer production, importer consumption, the distance between the trading partners, and the electronic logging device mandate are influential factors of softwood sawlog trade between the states. Similarly, state GDP, exporter pulpwood production, importer consumption, the distance between the trading partners, delivered timber prices, and pellet mill capacity in each state are found to be significant determinants of softwood pulpwood trade between the partners across the state borderlines. The findings provide forest managers and policy makers with additional insights on the growing bilateral timber trade dynamics in regional and sub-regional markets in the southern United States.
This article examines the impact of environmental stringency on the pattern of intra-industry trade (IIT) flows of four pollution-intensive industries, that is, pulp and waste paper, lime, cement, and construction materials, iron ore and concentrates, and dyeing and tanning extracts, by utilizing a balanced panel dataset comprising of 36 countries over the period 1990 to 2019. The environmental stringency variable has been estimated from the energy intensity of the trading countries. The results show that the environmental stringency coefficients are highly statistically significant, implying that environmental regulation emerges as an essential indicator of the IIT flows between two trading countries.
The gravity model was used in this paper to clarify the influencing factors of the export value of non-timber forest products (NTFPs) for Vietnam from 2003 to 2017. The estimates of this model indicate the importance of the size of economies, distance, common borders, exchange rates, average forest area, natural forest closing (NFC) policy of the Vietnamese government, sanitary and phytosanitary measures (SPS), and the interaction of SPS and importers’ GDP (SPS-GDP) as determinants of NTFP export of Vietnam. The main result of this study is the distinct and contradictory effect of NFC policy and SPS measures. While, the NFC policy increase the value of Vietnam's NTFP exports, SPS measures significantly decrease the exportation. Using the SPS-GDP interaction variable yields a noticeable result: the negative impact of SPS on NTFP trade decreases with increasing income of NTFP importers. Furthermore, the NFC needs to continue to implement policies to increase investments in the NTFPs trade, increase the quality of NTFP products from planting, harvesting, to processing, to meet the requirements of future importers. The findings offer several implications both in theory and in practice for trade policies, economic development theory based on Vietnam's forest resources.
This study applied a gravity model estimation using panel data in order to analyze the impact of the determinants of Vietnam’s wood products trade from 2001 to 2016.The gravity estimates imply the importance of size of the economies, distance, level of openness of the economy, population, forest resource endowments of Vietnam’s trade partners, Vietnam’s logging restrictions policy, common border, free trade agreement, and exchange rates as determinants of Vietnam’s wood products trade. These variables were found to have different effects on the export and import of wood products. Vietnam’s access to the WTO and APEC did not help either its imports or exports in wood products. The results of this study also indicate that the Government of Vietnam needs to implement policies to increase investment in the wood processing industry, develop high quality wood materials from domestic plantations, and take advantage of trade preferences from new free trade agreements in order to promote wood product trade. The results of this study have implications for trade policy, resource-based economic development, and Vietnam’s forest resource conservation.
In this article, we used the gravity model to study the effects of tariffs on US exports and imports of paper products that include paper, paperboard, and wood pulp. The results show that an increase in tariffs would have a small, significant, and asymmetric impact on US exports and imports of paper products. Furthermore, exchange rates, economic sizes of the United States and its trade partners, and internet use rates are found to be significant factors influencing US paper products trade. These results show that the United States has some leverage in promoting free trade in paper products.
Production and consumption trends of China's pulp and paper products are discussed as well as imports of two principal raw materials: wood pulp and recovered paper. We developed an augmented gravity model to understand trade behavior between China and its trading partners using panel data from 1995 to 2012. The results show that China's economic growth is an important driver for wood pulp and recovered paper imports. Exporters' economic size has positive impacts on wood pulp exports and is also a significant factor in determining recovered paper exports. Distance has a significant negative impact on China's wood pulp and recovered paper imports. Finally, China's accession to the World Trade Organization increased both its wood pulp and recovered paper imports.
Purpose
– European paper industry has been struggling with margins and profitability for more than decade time period. At typical in markets of west, paper product demand is at long-term decline, mostly driven by continuously increasing internet use. However, in emerging markets demand still exists, and in Europe numerous small markets in east have even some growth available. The paper aims to discuss these issues.
Design/methodology/approach
– The authors analyse in this research work with longitudinal data (period of 2002-2009) from one large Finnish paper mill and data envelopment analysis (DEA) approach, how distribution efficiency to selected eight East European markets has evolved.
Findings
– In general distribution efficiency has improved, but this has taken place in step-wise manner rather than being linear year-to-year development (year 2006 found to be the threshold). Reason is mostly in better management of transportation costs, and in particular lower monthly deviation of these costs. It is surprising that case paper mill has been able to manage transportation costs in rapidly increasing energy cost environment so efficiently. Maybe European Union enlargement of 2004 and 2007 has had its effects on distribution efficiency.
Research limitations/implications
– The research is limited to the deliveries of one paper mill located in Finland. Also East European markets in the early periods of this study were emerging papers markets, and distribution practices were clearly evolving.
Practical implications
– Based on the study East European paper market distribution should give more attention on transportation cost control, and trying to find solutions to minimize it with low monthly fluctuation.
Originality/value
– Very few studies exist from East European distribution issues, and particularly that of paper industry. Also used quantitative method of DEA is relatively new in this context and gives valuable insights for the distribution efficiency development.
Block polymers (BPs) derived from biomass (biobased) are necessary components of a sustainable future that relies minimally on petroleum-based plastics for applications ranging from thermoplastic elastomers and pressure-sensitive adhesives to blend compatibilizers. To facilitate their adoption, renewable BPs must be affordable, durable, processable, versatile, and reasonably benign. Their desirability further depends on the relative sustainability of the renewable resources and the methods employed in the monomer and polymer syntheses. Various strategies allow these BPs' characteristics to be tuned and enhanced for commercial applications, and many of these techniques also can be applied to manipulate the wide-ranging mechanical and thermal properties of biobased and self-assembling block polymers. From feedstock to application, this review article highlights promising renewable BPs, plus their material and assembly properties, in support of de novo design strategies that could revolutionize material sustainability.
Interregional trade of roundwood products is an important factor of regional roundwood markets. Until now, regional and subregional forest sector models did not account for the spatial aspects of roundwood markets. This article explores ways to model interregional trade of roundwood products. It compares the performance of different specifications of a gravity model (the model widely used in the analysis of international trade) and a fixed gravity coefficient model (common in regional input-output analysis) to forecast pulpwood trade between the states of the United States South. The gravity model estimated using nonlinear least-squares with fixed effects (NLS FEM) and the fixed gravity coefficient model (FGCM) showed the best results. Another important result of this study is the finding that the fixed gravity coefficients for pulpwood trade in the United States South are temporally stable. This suggests the possibility of using the FGCM for modeling roundwood trade in the absence of time series data.
The success of getting in the foreign trade forms one of the basic stones of economic development for countries. The current and potential trading volume among countries and determining the main factors affecting trade are quite important. The trade currents of the European Union (EU) countries and Turkey in the forest products industry field were analyzed by the gravity model in this study. For this reason, the panel data method was used for 2000 -2006 periods. The results show the existence of a high degree of trade integration between Turkey and EU. The estimated gravity models explained 63% of the variation regarding the volume of bilateral trade flows in the EU and Turkey. Furthermore, it was determined that GDP had a positive effect on the amount of foreign trade while distance had a negative effect; and Turkey has lower trading volume with the EU countries than its potential regarding the forest products industry field.
This article deals with econometric developments for the estimation of gravity model, which allow to get convergent parameter estimates even when a correlation exists between the explanatory variables and the specific unobservable characteristics of each individual. We implement panel data econometric techniques to characterize bilateral trade flows between heterogeneous economies. Our econometric results based on a sample of 4 Central and Eastern European countries (CEEC-4) and 19 OECD countries over a 18-year period highlight the importance by taking into account the unobservable heterogeneity to obtain a robust empirical specification and unbiased coefficients.
In this research study, a gravity model approach was used in order to analyze the main factors affecting the trade flows of wine in the EU. The empirical model was applied using data for the first twelve EU countries for the period 1989–97. It has been clearly shown in the empirical literature that gravity models can be successfully applied to a single commodity market. The present study utilized pooled cross-sectional and time series data in a one-way fixed effects model that accounted for country-pair heterogeneity. The results revealed that wine trade was positively influenced by an increase in GDP per capita, since greater income promotes trade. The remoteness of one country from another influenced exports positively and imports negatively, and the quantities traded did not prove to be very sensitive to wine prices. The depreciation of EU currencies and the high production of wine in the EU increased exports and reduced imports, while EU integration enhanced trade among members.
Conventionally, paper demand is modelled by using only gross domestic product and the price of paper as explanatory variables. However, one factor affecting the demand of printing and writing papers is presumably the diffusion of information and communication technologies (ICT). In this paper, the regression analysis model and large global scale panel data sets from 1990-2007 are used to analyse the effect of ICT on paper demand for three paper grades: newsprint, office paper and magazine paper. Results show that the internet is a substitute for newsprint and possibly for magazine paper and mobile telephones are complementary and a growing number of personal computers increase office paper consumption.
In this paper we study the effect of the single currency across industries for euro area members. This analysis may help to shed light on the main factors influencing the euro effect on trade flows. We intend to verify whether these factors are specific to individual sectors and/or countries or common to the entire euro area. We use a dynamic specification of an augmented gravity equation. Following the most recent econometric literature, we apply the ?System GMM? dynamic panel data estimator of Blundell and Bond to avoid inconsistency and biases in the estimates, and introduce controls for heterogeneity. Aggregate sector results average out country-level behaviours that, on their turn, are affected by different (unobserved) responses of firms, endowed with diverse production costs, to the enhancing and dampening impacts due to the euro. Due to this reason, the cancelling out at aggregate level of heterogenous behaviours induces an aggregation bias. So it is not surprising that when moving from sector to sector/country analysis the picture becomes much more variegated, with the emergence of a whole range of winners and lossers among industries in the different nation. Our empirical results are in line with theoretical framework we assumed as reference that considers the possibility of both stimulative and dampening effects coming from trade integration and points out the fact that sector exports impacts are the aggregation results of firm-level heterogenous behaviours.
Although economists have long been aware of Jensen's inequality, many econometric applications have neglected an important implication of it: under heteroskedasticity, the parameters of log-linearized models estimated by OLS lead to biased estimates of the true elasticities. We explain why this problem arises and propose an appropriate estimator. Our criticism of conventional practices and the proposed solution extend to a broad range of applications where log-linearized equations are estimated. We develop the argument using one particular illustration, the gravity equation for trade. We find significant differences between estimates obtained with the proposed estimator and those obtained with the traditional method. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
A general equilibrium model of world trade with two differentiated-product industries and two factors is developed to illustrate how the gravity equation, including exporter and importer populations, as well as incomes, "fits in" with the Heckscher-Ohlin model of interindustry trade and the Helpman-Krugman-Markusen models of intraindustry trade. The study extends the microeconomic foundations for a generalized gravity equation in Bergstrand (1985) to incorporate relative factor-endowment differences and nonhomothetic tastes. Empirical estimates of this generalized gravity equation for single-digit Standard Industrial Trade Classification industry groups yield plausible inferences of their capital-labor intensities. Copyright 1989 by MIT Press.
Despite the gravity equations' empirical successes in "explaining" trade flows, the model's predictive potential has been inhibited by an absence of strong theoretical foundations. A general equilibrium world trade model is presented from which a gravity equation is derived by making certain assumptions, including perfect international product substitutability. If, however, trade flows are differentiated by origin as evidence suggests, the typical gravity equation is misspecified, omitting certain price variables. The last section presents empirical evidence supporting the notion that the gravity equation is a reduced form from a partial equilibrium subsystem of a general equilibrium model with nationally differentiated products.
By applying a gravity model, the study confirms that devalued currencies of Asian exporters of textile products and liberalization of trade policies have significantly contributed to the increased imports of textile products to the U.S. Implications are derived from the abroagation of the WTO Agreement on Textiles and Clothing (ATC).
The estimated coefficient of distance on the volume of trade is generally found to increase rather than decrease through time using the traditional gravity model of trade. This distance puzzle proved robust to several ad hoc versions of the model using data for 1962--96 for a large sample of 130 countries. The introduction of an "augmented" barrier to trade function removes the paradox, yielding a decline in the estimate of the elasticity of trade to distance of about 11 percent over the 35-year period for the whole sample. However, the "death of distance" is shown to be largely confined to bilateral trade between rich countries, with poor countries becoming marginalized. Copyright 2005, Oxford University Press.
This paper compares various specifications of the gravity model of trade as nested versions of a general specification that uses bilateral country-pair fixed effects to control for heterogeneity. For each specification, we show that the atheoretical restrictions used to obtain them from the general model are not supported statistically. Because the gravity model has become the "workhorse" baseline model for estimating the effects of international integration, this has important empirical implications. In particular, we show that, unless heterogeneity is accounted for correctly, gravity models can greatly overestimate the effects of integration on the volume of trade.
The measured effect of national borders on trade seems too large to be explained by the apparently small border-related trade barriers. This puzzle was first presented by McCallum (1995) and has gone on to spawn a large and growing literature on so-called border effects. We argue in this paper that, because distances are always mismeasured in the existing literature, the border effects may have been mismeasured in a way that leads to a systematic overstatement. Our goal here is to develop a correct measure of distance that would be consistent for international as well as intra-national trade flows. We show how use of the existing methods for calculating distance leads to "illusory" border and adjacency effects. We then apply our methods to data on interstate trade in the United States and inter-member trade in the European Union. We find that our new distance measure reduces the estimated border and adjacency effects but does not eliminate them. Thus, while we do not solve the border effect puzzle, we do show a way to shrink it.
This paper surveys the measurement of trade costs: what we know and don't know but may usefully attempt to learn. Partial and incomplete data on direct measures of costs go with inference on implicit costs from trade flows and prices. Total trade costs in rich countries are large. The ad valorem tax equivalent is about 170 percent when pushing the data hard. Poor countries face even higher trade costs. There is a lot of variation across countries and across goods within countries, much of which makes economic sense. In our survey, theory provides interpretation and perspective and suggests improvements for the future. Some new results are presented to properly apply and interpret gravity theory and handle aggregation.
Theoretical rationales for the robust empirical relationships between the share of intraindustry trade between two countries and the average levels of, and inequalities between, their GDPs, per capita GDPs, and tariffs have either varied or not been demonstrated formally within a unified analytical framework. This study motivates theoretically the relationships between these six determinants, as well as the average level of, and inequality between, two countries' capital-labor endowment ratios and their share of intraindustry trade. Regression analysis supports, among other results, the presence of both demand and supply roles for per capita income influencing intraindustry trade. Copyright 1990 by Royal Economic Society.
Gravity equations have been widely used to infer trade flow effects of various institutional arrangements. We show that estimated gravity equations do not have a theoretical foundation. This implies both that estimation suffers from omitted variables bias and that comparative statics analysis is unfounded. We develop a method that (i) consistently and efficiently estimates a theoretical gravity equation and (ii) correctly calculates the comparative statics of trade frictions. We apply the method to solve the famous McCallum border puzzle. Applying our method, we find that national borders reduce trade between industrialized countries by moderate amounts of 20-50 percent.
Estimating Gains from Panel Data: Endogenous Human Capital and Selection Effects,
by Yves Guillotin and Patrick Sevestre.
The purpose of this article is to analyze two of the problems encountered when empirically testing gains functions using panel data. First of all, the biases resulting from the correlation between the initial human capital, experience and the unobserved individual characteristics (personal capacities, family-acquired skills, etc.) are contemplated. Secondly, cylinder sampling effects, such as those in the selection process for the individuals in the sample, are also studied. These two problems are illustrated by distinct gains function estimates, obtained using different methods, based on cylinder samples and non-cylinder samples taken from ENSEE's annual wage and salary return panel. The estimates show that appreciable biases can result from not taking the characteristics of the model and the data into account.
Most of the studies that describe the building of innovation capability in emerging and developing economies have focused on the ways in which latecomer firms develop continuously towards advanced capability levels along existing technological trajectories, particularly for the assembled products industries, especially in Asia. A slightly different approach is adopted herein by focusing on pathways of discontinuous capability building of firms in natural resource-processing industries. By drawing on evidence from a variety of case studies taken from 13 forestry, pulp, and paper firms in Brazil in the period 1950–2007, it was found that: (1) in contrast with the majority of case studies reported in the literature, the pathways followed by firms in their accumulation of innovation capability involved a qualitative departure from the established technological trajectory at an early stage in the development of their capability; (2) the pathways of firms along the new technological trajectories were nevertheless characterised by a high degree of variability (from intermediate to world leading innovators) in terms of the levels and speeds of the accumulation of innovation capability; (3) firms that have attained progressively higher levels of innovative performance have more rapidly developed a combination of internal and external research-based arrangements in order to undertake increasingly complex, but firm-centred innovation efforts. This paper sheds some light on some of the discussions that relate to the role of natural resources in the patterns of industrial progress and growth in those countries endowed with particular natural resource-based industries. It also provides a methodological contribution to the study of the long-term innovation strategies that make use of the dynamics of capability building, especially within natural resource-processing industries.
The conventional gravity model is revised for a single commodity and applied to wheat markets to determine factors affecting trade flows of wheat. This study demonstrates the gravity model can be parameterized more effectively by using time series and cross-section data rather than cross-section data alone.
The study reveals that all independent variables, including production capacities, income, import and export unit value indexes, and trade policies used in wheat trade play an important role in determining trade flows of wheat. Long-term agreements achieve highest performance toward enhancing international wheat trade. Credit sales also contribute to increased wheat movements. The U.S. Export Enhancement Program and the EC Export Refund program are less effective in stimulating the world wheat trade. On the import side, protectionist policies of supporting domestic prices greatly impair wheat trade.
Le modèle gravitationnel classique, adapté ici à un produit particulier, est utilisé pour cerner les facteurs influant sur les courants d'échanges internationaux du blé. L'étude démontre que le modèle de gravité peut être paramètrisé plus efficacement si on utilise à la fois les séries chronologiques et les données transversales, plutôt que ces dernières seulement.
L'étude révèle que toutes les variables indépendantes, y compris les moyens de production, le revenu, les indices de valeur unitaire des importations et des exportations et les politiques d'échanges extérieurs ont une action déterminante sur les courants d'échanges internationaux du blé. Les accords à long terme sont les facteurs qui contribuent le plus à stimuler les échanges internationaux. Les ventes à crédit ont également un effet stimulant. Le programme américain de subvention aux exportations et le programme de restitution a l'exportation de la CE sont moins efficaces à cet égard. Côté importation, les politiques protectionnistes de soutien des prix intérieurs sont une grave entrave au commerce du blé.
Market Structure and Foreign Trade presents a coherent theory of trade in the presence of market structures other than perfect competition. The theory it develops explains trade patterns, especially of industrial countries, and provides an integration between trade and the role of multinational enterprises. Relating current theoretical work to the main body of trade theory, Helpman and Krugman review and restate known results and also offer entirely new material on contestable markets, oligopolies, welfare, and multinational corporations, and new insights on external economies, intermediate inputs, and trade composition.
This paper uses a gravity model to assess ex-post regional trade agreements. The model includes 130 countries and is estimated with panel data over the period 1962–1996. The introduction of the correct number of dummy variables allows for identification of Vinerian trade creation and trade diversion effects, while the estimation method takes into account the unobservable characteristics of each pairs of trade partner countries, the endogeneity of some of the explanatory variables as well as a potential selection bias. In contrast to previous estimates, results show that regional agreements have generated a significant increase in trade between members, often at the expense of the rest of the world.
The conventional gravity model is revised for a single commodity and applied to meat markets to determine factors affecting trade flows of meat. This study demonstrates that the gravity model for a single agricultural commodity can be parameterized more effectively by using time series and cross-section data rather than cross-section data alone. This study reveals that trade policies and subsidies used by exporting and importing countries, livestock production capacity in countries, and distances play an important role in determining trade flows of meat. Long-term agreements achieve the highest performance toward enhancing international meat trade. Import quotas and the hoof-and-mouth disease on beef greatly impair meat trade.
The pulp and paper industry has experienced dramatic changes during the past several decades with large variations in world regional market shares of production capacity and consumption patterns. Based on panel data available (1961–2000) from the United Nations Food and Agricultural Organization, this paper estimates dynamic demand models for pulp and paper products in four major trading regions: Asia, Europe, the North American Free Trade Agreement Area, and South America. With or without price in the model, short-run demands are generally output inelastic. However, without price in the model, long-run output elasticities were more elastic, particularly in the Paper/Paperboard, Printing/Writing, and Household/Sanitary sectors with most elasticities greater than 1. With price included in the model, long-run demands were generally output inelastic, with primary exceptions being the Paper/Paperboard sector for all but the NAFTA region and Wrapping/Packaging for Asia and South America. Price was generally significant with long-run elasticities, in absolute value, in the (0.05, 0.11) range. And as a measure of urbanization, the percent of the population living in urban areas significantly affects consumption in total and in the Pulp and Printing/Writing sectors.
Patterns in forest products trade between European Union and Central and Eastern European access candidates were studied. The results indicated that both production and trade of forest products in Central and Eastern European countries in transition have considerably increased during the 1990s. The European Union has been the most important trading partner for CEE countries, even though the EU share from the external trade has been quite stable. The gravity models estimated explained approximately 66% of the variation in volume of bilateral trade flows in EU and CEE countries in 1997. Results indicated that trade between EU and CEE countries was below the level that would be expected on the basis of income and distance. A model separating the trade flows according to direction suggested that this is due to the low intensity of West–East trade, which probably originates in low levels of consumption of higher value-added products in CEE countries. East–West trade did not significantly differ from the average pattern.
In spite of many changes in European forest sector markets and industries since the 1990s, a comprehensive synthesis on the econometric and forest sector modelling research conducted in the European market context is missing. In this survey, we attempt to remedy this defect by investigating the scope and focus of the research done during 1998–2007, and identifying the gaps and areas for future research. The main avenues of econometric market analysis are methodologically and thematically found to be focused on the following five themes: 1) modelling of product demand and supply, 2) price analysis and testing of market integration, 3) market demand and price forecasting, 4) modelling industry location and 5) production technology and factor demand. Within forest sector modelling, studies on Europe can be classified into three categories: those studying the effects on the future development of the forest sector of assumptions concerning GDP growth, forest growth and technological changes; those studying the effects of forest conservation; and finally, those that are concerned with forest bio-energy. In conclusion, the application of time series econometrics in the forestry sector has in the recent years become less common in Europe in general, and little or no research has been carried out in many important fields, e.g., modelling the linkages between different market levels and multi-country market studies. This also casts some doubt on the structure and parameters of the currently more actively applied numerical partial equilibrium models, which must consider multi-level, multi-region market issues.
This paper uses the gravity model to investigate determinants of China's wood products trade from 1995 to 2004. The results suggest that trade partners' forest resource endowment and China's own logging restrictions policy affect its wood products imports and exports. China's exported wood products are shown to be inferior goods while China's imported wood products are labor intensive for the exporting countries. Due to rises in Chinese currency against other major currency, transportation costs, and foreign trade actions, China's wood products exports and imports may slow down. The results may have implications on trade and global forest resource conservation.
This paper derives bilateral trade from two cases of the Heckscher-Ohlin Model, both also representing a variety of other models as well. First is frictionless trade, in which the absence of all impediments to trade in homogeneous products causes producers and consumers to be indifferent among trading partners. Resolving this indifference randomly, expected trade flows correspond exactly to the simple frictionless gravity equation if preferences are identical and homothetic, or if demands are uncorrelated with supplies, and they depart from the gravity equation systematically when there are such correlations. In the second case, countries produce distinct goods, as in the H-O Model with complete specialization or a variety of other models, and preferences are either Cobb-Douglas or CES. Here trade tends to the standard gravity equation with trade declining in distance, with departures from it that depend on relative transport costs. Conclusions are, first, that even a simple gravity equation can be derived from standard trade theories, and second, that because the gravity equation characterizes many models, its use to test any of them is suspect.
We follow recent developments of panel data studies and allow for the existence of both observed and unobserved common factors where their individual responses are allowed to be heterogeneous. We then develop a generalized Hausman-Taylor estimation methodology, and apply our proposed estimation technique to an analysis of the gravity equation of bilateral trade flows among 15 European countries over 1960-2001. Empirical results demonstrate that our proposed approach provides more sensible results than the conventional approach based on fixed time dummies. These findings may highlight the importance of allowing for a certain degree of cross-section dependence through unobserved heterogeneous time-specific effects; the resulting estimates would otherwise be severely biased. Copyright © 2007 John Wiley & Sons, Ltd.
Trade effect
The euro’s trade impact is clearly important for the nations that have already joined euroland. But the size and nature of the trade effects are even more important for the EU members who have not joined the euro: the UK, Denmark, Sweden and the ten new nations scheduled to join next year. What are they missing? Will they face trade diversion if they do not join? For example, the debate on whether or not to join the euro is raging in the UK where it has been polarized to an extraordinary degree. This debate is in desperate need of economic analysis, in order to help clarify the potential impact of the euro on a number of dimensions, one of which is trade. This paper, we hope, will contribute to the debate, by providing estimates of the currency union effect on trade, for the specific case of the countries in the European Union. For this purpose, we use a panel data set that includes the most recent information on bilateral trade for 22 developed countries from 1992 to 2002. During this period 12 European nations formally entered into a currency union. This unique event allows us to study the effect of currency union on trade among a relatively homogeneous group of industrial countries. Controlling for a host of other factors, we find that the effect of EMU on bilateral trade between member countries ranges between 4 and 10%, when compared to trade between all other pairs of countries, and between 8 and 16%, when compared to trade among non-EMU countries. In addition, we find no evidence of trade diversion. If anything, our results suggest that the monetary union increases trade not just with EMU countries, but also with the rest of the world.
– Alejandro Micco, Ernesto Stein and Guillermo Ordoñez
This paper studies the effect of institutions on trade flows, using a gravity model approach. Standard gravity equations incorporate factors such as geographical proximity, language, trade policy and common history as explanatory factors for variation in bilateral trade that reflect the costs of trade across geographical and cultural distance. We extend this type of analysis by focusing on the relevance of the quality of governance and the extent of familiarity with the resulting framework of rules and norms in explaining variation in bilateral trade patterns. More specifically, we test whether institutional homogeneity and institutional quality have an independent impact on the trade volume between pairs of countries. We find that having a similar institutional framework promotes bilateral trade by 13%, on average. Furthermore, a better quality of formal institutions tends to coincide with more trade. Depending on being either importer or exporter, an increase in overall institutional quality of one standard deviation from the mean leads to an estimated increase of 30-44% in bilateral trade. Copyright WWZ and Helbing & Lichtenhahn Verlag AG 2004.
This paper proposes efficient instrumental-variable estimators for an error-components model considering alternative assumptions about the sources of endogeneity and the variance-covariance properties of disturbances. The analysis develops a general result that provides for the construction of asymptotically efficient estimators when there exist variables that are predetermined for only a subset of the equations making up a structural model.
This paper investigates the impact of international migration on technical efficiency, resource allocation and income from agricultural production of family farming in Albania. The results suggest that migration is used by rural households as a pathway out of agriculture: migration is negatively associated with both labour and non-labour input allocation in agriculture, while no significant differences can be detected in terms of farm technical efficiency or agricultural income. Whether the rapid demographic changes in rural areas triggered by massive migration, possibly combined with propitious land and rural development policies, will ultimately produce the conditions for a more viable, high-return agriculture attracting larger investments remains to be seen.
An important purpose in pooling time-series and cross-section data is to control for individual-specific unobservable effects which may be correlated with other explanatory variables, e.g. latent ability in measuring returns to schooling in earnings equations or managerial ability in measuring returns to scale in firm cost functions. Using instrumental variables and the time-invariant characteristics of the latent variable, we derive: 1. (1) a test for the presence of this effect and for the over-identifying restriction we use;2. (2) necessary and sufficient conditions for identification of all the parameters in the model; and3. (3) the asymptotically efficient instrumental variables estimator and conditions under which it differs from the within-groups estimator.
We calculate efficient estimates of a wage equation from the Michigan income dynamics data which indicate substantial differences from within-groups and Balestra-Nerlove estimates — particularly a significantly higher estimate of the returns to schooling.
Using the result that under the null hypothesis of no misspecification an asymptotically efficient estimator must have zero asymptotic covariance with its difference from a consistent but asymptotically inefficient estimator, specification tests are devised for a number of model specifications in econometrics. Local power is calculated for small departures from the null hypothesis. An instrumental variable test as well as tests for a time series cross section model and the simultaneous equation model are presented. An empirical model provides evidence that unobserved individual factors are present which are not orthogonal to the included right-hand-side variable in a common econometric specification of an individual wage equation.
This paper presents an AR(1) model in the spirit of Hausman and Taylor zero differences between actual and in-sample predicted trade flows. Large systematic differences between observed and in-sample predicted trade flows only indicate model misspecification and econometric problems. Out-of-sample predictions make sense if countries of interest are in an early stage of the transformation process. The gravity model remains an interesting tool for the calculation of counterfactuals (e.g. the impact of catching up in GDP per capita in the CEEC or of the reduction of trade costs via infrastructure investments or tariffs on bilateral trade, etc.). For this line of research, the difference between short-term and long-term influences could provide interesting insights. Copyright Blackwell Publishers Ltd 2002.
This paper studies the intangible costs of international trade by extending the basic gravity equation with measures of cultural and institutional distance, and institutional quality. Analyzing a sample of bilateral trade flows between 92 countries in 1999, we find that institutional distance has a negative effect on bilateral trade, presumably because the transaction costs of trade between partners from dissimilar institutional settings are high. In contrast, we find that cultural distance has a positive effect on bilateral trade. A potential explanation for this finding is that firms prefer trade to host-country production in culturally distant countries. Finally, we find that the institutional quality of both the importer and exporter increases the amount of bilateral trade.
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