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Intra-Industry Trade: The

Pakistan Experience

Muhammad Shahbaz

and Nuno Carlos Leito

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Introduction

Empirical work done on IIT has mostly focusedon developed countries.

Trade between developed and developing

countries is usually explained by comparativeadvantage or the H-O model.

The study tests the determinants of IIT

between Pakistan and its main 10 tradingpartners using an unbalanced panel from1980 to 2006.

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The trading partners includeUnited States

United KingdomJapan

Germany

Saudi-ArabiaCanada

France

ItalyNetherlands

Norway

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Vertical vs. Horizontal IIT

In the international trade literature, a distinction

is made between vertical and horizontaldifferentiated IIT.

This distinction is important to make becausethere are different theoretical underpinnings and

determinants applicable to each type of IIT(Greenaway et al., 1995).

Vertical IIT relates to two-way trade of differentvarieties of quality products (Falvey, 1981; Shaked

& Sutton, 1984).

Horizontal IIT refers to two-way trade of similarquality products with different attributes.

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Methodology

The Grubel and Lloyd (1975) index is used to

measure the level of IIT:

The index is equal to 1 if all trade is of the IIT

type; if the index is equal to zero all trade is ofthe inter industry type.

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Data Source:

Explanatory variables: World Bank, World

Development Indicators 2008 Dependant variables: Federal Bureau of Statistics

(FBS)

The model is specified as follows:

The authors use the fixed effects model forestimation. The explanatory variables have

been chosen in accordance with the theory.

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Economic differences between countries

(DGDP): this is difference in GDP between

Pakistan and its partner country. The literaturereveals both positive and negative signs.

MinGDP: this is the lowest value of GDP per

capita between Pakistan and the partnercountries

MaxGDP: this is the higher/highest value of

GDP per capita between Pakistan and the

partner countries

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DIM: the average of GDP per capita between

Pakistan and the partner country.

DIST: this is the geographical distancebetween Pakistan and the partner country.

TIMB: it is the trade imbalance between

Pakistan and country j. It represents net tradeas a share of total trade and ranges from 0 to

1. Empirical evidence suggests a negative sign.

FDI: stands for foreign direct investment. Thesign is ambiguous.

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Results