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Technology Advantage and Home-market Effect: An Empirical Investigation

Listed author(s):
  • Huang, Yo-Yi


    (Institue of Economics, Academia Sinica)

  • Huang, Deng-Shing


    (Academia Sinica)

Registered author(s):

    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.

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    Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

    Volume (Year): 26 (2011)
    Issue (Month): ()
    Pages: 81-109

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    Handle: RePEc:ris:integr:0531
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