Market Structure and Integration - Essays on Trade, Specialisation and Foreign Direct Investment

Abstract: The study analyses various aspects of international economics related to foreign direct investment, trade and specialisation. These issues are considered in view of the increased internationalisation - through trade and foreign direct investment - in recent decades. Special interest is devoted to the effects of economic integration. Chapter two examines the importance of FDI and country capabilities for economic growth. In a cross-country analysis, FDI is allowed to interact with openness, human capital, property rights protection and the efficiency of the bureaucracy. The results suggest that countries that have experienced an increase in their stock of FDI also have higher growth rates. Moreover, countries with an efficient bureaucracy and sufficient level of property rights protection are more likely to benefit from a given amount of FDI. On the other hand, we find no support for the results in previous studies emphasising the importance of openness and human capital. In chapter three, the welfare effects of regional and global integration are analysed in a model where market size matters. Regional integration leads to higher welfare in the countries of a preferential trading arrangement (PTA), but to lower welfare outside. In case the countries also decide to form a customs union (CU), both countries will experience further gains if the creation of the CU means that the average external trade barriers are raised. The outside country will in this case experience further welfare losses. If it retaliates and creates a trade war, this will lower welfare in all three countries. In contrast, global integration will, in most cases, benefit both PTA and outside countries. Finally, chapter four investigates the empirical importance of increasing returns to scale (IRS) as a determinant of specialisation and international trade. In contrast to earlier studies, this paper focuses on how the impact of IRS varies over time and across industries. We test the hypothesis that the impact of scale economies is determined by the relative market size of the trading countries, using data on production and trade in 17 OECD countries over the period 1970-93. We find support in favour of the hypothesis that economies of scale have a significant effect on trade patterns, specifically a positive effect on net exports from large countries and a negative effect in small countries. Furthermore, the results indicate that the role of scale economies is declining over time. Finally, the importance of IRS as a determinant of trade differs widely across industries and the results suggest that scale economies, to some extent, have a larger effect on trade in industries at a medium technology level.