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Board of Governors of the Federal Reserve System

International Finance Discussion Papers

Number 861

May 2006

Exchange-Rate Effects on China's Trade: An Interim Report

Jaime Marquez

and

John W. Schindler

NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate
discussion and critical comment. References in publications to International Finance Discussion Papers
(other than an acknowledgment that the writer has had access to unpublished material) should be cleared
with the author or authors. Recent IFDPs are available on the Web at www.federalreserve.gov/pubs/ifdp/.
Exchange-Rate Effects on China's Trade: An Interim Report

Jaime Marquez*

and

John W. Schindler

Abstract: Though China's share of world trade is comparable to that of Japan, little is known about the
response of China's trade to changes in exchange rates. The few estimates available suffer from two
limitations. First, the data for trade prices are based on proxies for prices from other countries. Second, the
estimation sample includes the period of China's transformation from a centrally-planned economy to a
market-oriented system. To address these limitations, this paper develops an empirical model explaining the
shares of China's exports and imports in world trade in terms of the real effective value of the renminbi. The
specifications control for foreign direct investment and for the role of imports of parts to assemble
merchandise exports. Parameter estimation uses disaggregated monthly trade data and excludes the period
during which most of China's decentralization occurred. The estimation results suggest that a ten-percent real
appreciation of the renminbi lowers the share of aggregate Chinese exports by a half of a percentage point.
The same appreciation lowers the share of aggregate imports by about a tenth of a percentage point.

JEL classifications: F41, C51,C52

Keywords: Renminbi, Foreign Direct Investment, Income Elasticity, Trade Shares, Automated
Specification.

* Corresponding author. E-mail address is jaime.marquez@frb.gov. The calculations are based on
PcGets; see Hendry and Krolzig (2001) and PcGive; see Doornik and Hendry (2000). We are grateful to
Dale Henderson for detailed comments on this paper. Also, comments on an earlier version of this paper
from David Bowman, Neil Ericsson, Joe Gagnon, Bill Helkie, and Steve Kamin are gratefully
acknowledged. We also thank participants at the Fall 2004 Midwest International Economics Group and
at the Federal Reserve Board's Workshop series for their observations. Finally, we thank Menzie Chinn
for pointing out key references and Koichiro Kamada for providing unpublished details on the paper by
Kamada and Takagawa (2005). The views in this paper are solely the responsibility of the authors and
should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System
or of any other person associated with the Federal Reserve System. This paper can be downloaded
without charge from the Social Science Research Network electronic library at http://www.ssrn.com/ .
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Figure 1

Export Shares in World Exports Import Shares in World Imports
Percent Percent
20 20

United States
United States 16 16

12 12

Japan 8 Japan 8

China 4 4
China

0 0
1950 1960 1970 1980 1990 2000 1950 1960 1970 1980 1990 2000

Trade as Percent of Global Total* Exports by Ownership
Percent $ Billions
6 240
State Owned Enterprises
5 Joint Ventures
Foreign-Owned
China Other 180
4

Mexico 3 120
Korea
2
Taiwan 60
1
Brazil
0 0
1980 1985 1990 1995 2000 1995 1999 2004
*Sum of exports and imports; dollar values.

Assembly Trade WTO Accession
$ Billions $ Billions
350 600
WTO accession
300 500

250
400
Exports of
Assembled Goods 200
300
150
Exports
200
100
Imports
Imported Components 50 100
for Assembly
0 0
1993 1995 1997 1999 2001 2003 1991 1996 2001

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vljqlfdqw frh!flhqw rq wkh h{fkdqjh udwh/ exw wkh uhvxowv iurp wkh htxdwlrqv vxjjhvw
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vkduh ri X1V1 lpsruwv iurp Fklqd1 Iru wkh uvw vshflfdwlrq/ Hfndxv grhv qrw lqglfdwh
zkhwkhu wkh ghshqghqw yduldeoh lv phdvxuhg lq qrplqdo ru uhdo whupv dqg/ li wkh odwwhu/

wkh sdshu grhv qrw lqglfdwh zklfk gh dwru lv ehlqj xvhg wr hvwlpdwh wkh yroxph ri
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phdvxuh wkh yroxph ri elodwhudo h{sruwv1 Wkh vshflfdwlrq lq whupv ri vkduhv dyrlgv

wkh xvh ri sur{lhv dqg wkh dvvrfldwhg uhvxowv vxjjhvw wkdw h{fkdqjh udwhv gr qrw kdyh
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lpsruw xqlw ydoxh gdwd/ uhvshfwlyho|1 Wkh| dovr hvwlpdwh vhsdudwh htxdwlrqv iru Fklqhvh
wrwdo lpsruwv dqg lpsruwv iru grphvwlf xvh1 Wkhlu uhvxowv iru h{sruwv zhuh ri wkh

h{shfwhg vljq dqg vwdwlvwlfdoo| vljqlfdqw/ exw wkh uhvxowv iru wkhlu lpsruw htxdwlrqv glg
qrw |lhog vwdwlvwlfdoo| vljqlfdqw uhvxowv1 Ehfdxvh vrph ri Fklqhvh wudgh jrhv wkurxjk
Krqj Nrqj/ rqh frxog dujxh wkdw wkhlu sur{| lv wkh ehvw rqh1 Exw hyhq li wkh fkrlfh ri
wklv sur{| zhuh uhdvrqdeoh iru wkhlu vwxg|/ wkh hyroxwlrq ri Fklqd*v wudgh lv xqghuplqlqj
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frpsrvlwlrq ri lpsruwv ri Fklqd1 Lqghhg/ wkh vkduh ri Fklqhvh lpsruwv vklsshg wkurxjk
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ydoxh ri wkhvh wudgh rzv lqwr wkhlu uhdo frxqwhusduwv/ wkh sdshu xvhv wkh X1V1 frq0
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frpprglw| frpsrvlwlrq ri Fklqd*v h{sruwv lv deryh wkdw irxqg lq frxqwulhv zlwk sur0
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wr xvh gdwd vwduwlqj lq wkh 4<<3v dqg h{foxgh wkh shulrg zkhq Fklqd*v wudgh uhjlph
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jhqhudwhg e| gh dwlqj wkh ydoxh ri wudgh dqg wkh ydoxh ri lqfrph e| wkh fruuhvsrqglqj

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h{fkdqjh udwh1 Wkh h{shfwdwlrq lv iru d uhdo dssuhfldwlrq wr udlvh wkh yroxph ri Fklqd*v
lpsruwv dqg iru vxfk dq lqfuhdvh wr udlvh Fklqd*v lpsruw vkduh1 Wklv uhvsrqvh ghshqgv/

krzhyhu/ qrw mxvw rq wkh uhvsrqvh ri wkh yroxph ri lpsruwv exw dovr rq wkh uhvsrqvh ri
9
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15
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lq dgydqfh1 Vshflfdoo|/ dsshqgl{ +<14, vkrzv wkdw

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zkhuh Ct i p
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ri wkh uhvw ri wkh zruog1 Wkh uvw whup fdswxuhv wkh gudzedfn ri qrw kdylqj sulfh gdwd=
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uhgxfh wkh qxpehu ri idfwruv dhfwlqj Cz p
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ghshqgv rq wkh uhvsrqvh ri wkh groodu lpsruw sulfh ri Fklqd dqg rq wkh pdjqlwxgh ri

wkh sulfh hodvwlflw| ri Fklqd*v lpsruwv1 Li rqh lv zloolqj wr dvvxph ixuwkhu wkdw Fklqd*v
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Csp A f, wkhq
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Ct i %p '3 A f= dq dssuhfldwlrq ri wkh uhqplqel udlvhv Fklqd*v lpsruw vkduh ri zruog
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815 H{sruwv

Iru h{sruwv/ wkh wudgh vkduh lv

s{w  {w
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zkhuh s{ lv Fklqd*v groodu h{sruw sulfh/ {w lv wkh yroxph ri h{sruwv/ {W lv wkh yroxph ri
h{sruwv ri wkh uhvw ri zruog/ dqg sW{ lv wkh groodu sulfh ri wkrvh h{sruwv1 Djdlq/ qhlwkhu

s{ qru { duh revhuyhg gluhfwo|/ exw wkhlu surgxfw lv uhfrughg e| Fklqhvh vwdwlvwlfdo
djhqflhv1 Qrwh wkdw wkh dowhuqdwlyh ri uh0vfdolqj e| wkh groodu ydoxh ri zruog wudgh
lv qrw khosixo iurp d iruhfdvwlqj vwdqgsrlqw dv rqh zrxog eh frqglwlrqlqj rq zkdw lv
ehlqj iruhfdvwhg1
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uhdo h{fkdqjh udwh dv h{sodqdwru| idfwruv lpsolhv wkdw wudgh rzv duh gulyhq e| ghpdqg
frqvlghudwlrqv1 Wkh irupxodwlrq dovr frqwurov iru wkh uroh ri lpsruwv ri sduwv wkdw duh

xvhg wr dvvhpeoh h{sruwv1 Lqghhg/ dv qrwhg e| Odx/ Pr/ dqg Ol +5337, dqg grfxphqwhg
lq jxuh 4/ d vxevwdqwldo iudfwlrq ri Fklqd*v lpsruwv duh xvhg iru surgxflqj jrrgv iru
h{sruwv1; Ilqdoo|/ dv Odug| +5338,/ grfxphqwv/ Fklqd kdv h{shulhqfhg udslg lqfuhdvhv
lq IGL iurp upv wkdw xvh Fklqd dv d sodwirup iru wkhlu h{sruwv1

Wkh hvwlpdwlqj htxdwlrq wkdw zh srvwxodwh lv

s
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pdwlyh iru suhglfwlqj h{sruwv ri sduwv exw qrw wkh rwkhu zd| durxqg1

17
s
zkhuh | W lv wkh zruog*v lqgxvwuldo surgxfwlrq/ zpw lv wkh vkduh ri lpsruwv ri sduwv
dqg dvvhpeo|/ dqg x{ lv d udqgrp glvwxuedqfh1 Wkh htxdwlrq dovr lqfoxghv gxpp|
yduldeohv wr frqwuro iru prqwko| vhdvrqdolw| dorqj zlwk Fklqd*v Qhz \hdu dqg Fklqd*v
dffhvvlrq wr wkh ZWR1 Wkh orqj0uxq frh!flhqwv duh ec E f E

E iru lqgxvwuldo surgxfwlrq> c E

iru lpsruwv ri sduwv dqg dvvhpeo| surgxfwv> gc E iru iruhljq gluhfw lqyhvwphqw> dqg hc E
 E  E

iru wkh uhdo h{fkdqjh udwh1
Zh h{shfw wkdw e A f phdqlqj wkdw dq lqfuhdvh lq wkh zruog*v lqgxvwuldo surgxfwlrq
zloo udlvh wkh ghpdqg iru Fklqhvh h{sruwv= Zh h{shfw wkdw f A f phdqlqj wkdw dq
lqfuhdvhg dydlodelolw| ri lpsruwv ri sduwv iru dvvhpeo| idflolwdwhv h{sruwv1 Wkh lqfoxvlrq

ri iruhljq gluhfw lqyhvwphqw lq wkh vshflfdwlrq lv frqwuryhuvldo dv lw frxog eh lqwhusuhwhg
dv vxjjhvwlqj wkdw vxsso| fuhdwhv lwv rzq ghpdqg1 Qhyhuwkhohvv/ zh h{shfw wkdw g A f
wr uh hfw wkh lqfuhdvlqj uroh ri Dvldq upv xvlqj Fklqd dv d sodwirup iru wkhlu h{sruwv
+Odug|/ 5338,1

Wkh frh!flhqw h ghqrwhv wkh uhvsrqvh ri wkh h{sruw vkduh wr fkdqjhv lq wkh uhdo
h{fkdqjh udwh1 Wkh h{shfwdwlrq lv iru d uhdo dssuhfldwlrq wr orzhu wkh yroxph ri Fklqd*v
h{sruwv dqg iru vxfk d ghfolqh wr orzhu Fklqd*v h{sruw vkduhwkdw lv/ e ? f= Dv lq
wkh fdvh ri lpsruwv/ wklv uhvsrqvh ghshqgv qrw mxvw rq wkh uhvsrqvh ri wkh yroxph ri

h{sruwv exw dovr rq wkh uhvsrqvh ri sulfhv dqg wkxv/ zlwkrxw lqirupdwlrq derxw wkhvh
pdjqlwxghv/ wkh hhfw ri wkh h{fkdqjh0udwh fkdqjhv rq wkh h{sruw vkduh lv qrw nqrzq
lq dgydqfh1 Vshflfdoo|/ dsshqgl{ +<15, vkrzv wkdw

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Cz{ Es{  {  Cs{ Es{  { Cs
'  {  E n %{    {W  {  E n %W{  B f>
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U U U
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18
Krzhyhu/ li rqh lv zloolqj wr dvvxph wkdw %W{ ' / wkhq

  % &
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+%{ ? , dqg wkdw dq dssuhfldwlrq ri wkh uhqplqel udlvhv Fklqd*v groodu h{sruw sulfhv
Cs{ A f, wkhq Cz{ m W
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U U
Cs{ A f lv qrw zduudqwhg/
vkduh ri zruog wudgh1 Frqghqfh lq wkh dvvxpswlrq wkdw Ct i U
krzhyhu1 Vshflfdoo|/ dq dssuhfldwlrq ri wkh uhqplqel orzhuv wkh frvw ri lpsruwv ri udz
pdwhuldov dqg ri pdfklqhu| dqg frxog ohdg wr d ghfolqh lq surgxfwlrq frvwv1 Vxfk d
ghfolqh frxog wkhq eh iroorzhg e| hlwkhu dq h{sdqvlrq lq surw pdujlqv zlwk frqvwdqw
h{sruw sulfhv ru e| dq xqfkdqjhg surw pdujlq zlwk d ghfolqh lq h{sruw sulfhv1 Zklfk

ri wkhvh rxwfrphv zloo pdwhuldol}h lv qrw nqrzq lq dgydqfh exw/ lpsruwdqwo|/ rqh fdqqrw
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Zh glvdjjuhjdwh qrq0rlo wudgh lqwr qlvkhg surgxfwv dqg frpsrqhqwv iru dvvhpeo|1 E|
wudgh lq qlvkhg surgxfwv zh uhihu wr jrrgv lpsruwhg lqwr ru h{sruwhg iurp Fklqd wkdw
duh +4, qrw vxemhfw wr ixuwkhu surfhvvlqj dqg +5,/ lq wkh fdvh ri h{sruwv/ qrw dvvhpeohg

iurp lpsruwhg frpsrqhqwv1 Wkhvh rzv duh odehohg e| Fklqhvh vwdwlvwlfdo djhqflhv
dv cruglqdu|* dqg zh iroorz wkhlu frqyhqwlrq1 E| wudgh lq frpsrqhqwv iru dvvhpeo|
zh uhihu wr wkuhh w|shv ri rzv= +4, h{sruwv ri frpsrqhqwv iru dvvhpeo| rxwvlgh ri
Fklqd> +5, lpsruwv ri frpsrqhqwv iru dvvhpeo| lqwr h{sruwdeohv> dqg +6, h{sruwv ri
jrrgv dvvhpeohg xvlqj lpsruwhg frpsrqhqwv1 Wkhvh surgxfwv duh odehohg e| Fklqhvh

19
vwdwlvwlfdo djhqflhv dv csurfhvvlqj dqg dvvhpeo|* dqg zh iroorz wkdw frqyhqwlrq1 Iljxuhv
5 dqg 6 vkrz wkh ghfrpsrvlwlrq ri Fklqd*v wudgh lqwr wkhvh fdwhjrulhv xvlqj prqwko|
gdwd vlqfh 4<<5> wkh revhuydwlrqv duh qrw vhdvrqdoo| dgmxvwhg dqg duh vfdohg e| wkh
ydoxh ri zruog phufkdqglvh wudgh h{foxglqj Fklqd*v wudgh1 Gdwd iru Fklqd*v h{sruwv

dqg lpsruwv frph iurp FHLF> gdwd iru zruog wudgh frph iurp wkh LPI1
Iru wkh vkduh ri djjuhjdwh h{sruwv/ wkh gdwd vkrz dq lqfuhdvh iurp irxu shufhqw lq
5333 wr hljkw shufhqw e| 5337 +jxuh 5,1 Lq whupv ri wkh frpsrvlwlrq ri h{sruwv/ wkh
vkduh ri surgxfwv iru surfhvvlqj dqg dvvhpeo| kdv lqfuhdvhg idvwhu wkdq wkh vkduh ri
ruglqdu| surgxfwv1 Iru lpsruwv/ wkh gdwd vkrz dq lqfuhdvh iurp wkuhh shufhqw lq 5333

wr qhduo| vhyhq shufhqw e| wkh hqg ri 5337 +jxuh 6,1 Lq whupv ri wkh frpsrvlwlrq ri
lpsruwv/ wkh vkduh iru ruglqdu| surgxfwv h{shulhqfh wkh odujhvw lqfuhdvh1 Lpsruwv ri rlo
duh d uhodwlyho| vpdoo iudfwlrq ri Fklqd*v vkduh ri uhvw ri wkh zruog lpsruwv1

Percent
Total
8 Chineses Export Shares

7

6

5 Processing and
Assembly

4

3

2 Ordinary

1

1995 2000 2005

Iljxuh 5= Vkduhv ri Fklqd*v H{sruwv lq Uhvw ri Zruog H{sruwvVhohfwhg Fdwhjrulhv

20
7 Percent
Chinese Import Shares
6

Total
5

4 Ordinary

3

2 Processing and
Assembly

1
Oil

1995 2000 2005

Iljxuh 6= Vkduhv ri Fklqd*v Lpsruwv lq Uhvw ri Zruog LpsruwvVhohfwhg Fdwhjrulhv

Uhdo Hhfwlyh H{fkdqjh Udwhv Rxu dqdo|vlv xvhv wkh LPI*v phdvxuh ri wkh

uhdo hhfwlyh h{fkdqjh udwh zklfk lv frqvwuxfwhg dv

lpi 
QT $lpi
l
lpi
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l >w >
upe l' upe

zkhuh Qlpi lv wkh qxpehu ri fxuuhqflhv lqfoxghg lq wkh lqgh{> $ lpi
l lv wkh zhljkw
iru wkh lwk fxuuhqf|> dqg t lpi
l lv wkh elodwhudo/ uhdo h{fkdqjh udwh xvhg e| wkh LPI>
upe >w
vhh Ed|rxpl hw do1 +5338, iru wkh fkrlfh ri zhljkwv dqg olvw ri frxqwulhv1 Wkh gdwd
uhyhdo wkdw wkh uhqplqel dssuhfldwhg lq uhdo whupv iurp 4<<6 wr 5335 dqg wkdw lw kdv
ghsuhfldwhg vlqfh wkhq +jxuh 7,1

21
110

105

100

95

90

85

80

75

70

65

1993 1995 1997 1999 2001 2003 2005

Iljxuh 7= LPI*v Phdvxuh ri Fklqd*v Uhdo Hhfwlyh H{fkdqjh Udwh

915 Hfrqrplf Dfwlylw|

Wr phdvxuh Fklqd*v hfrqrplf dfwlylw|/ zh xvh wkh lqgh{ ri lqgxvwuldo surgxfwlrq> wkh

gdwd duh dvvhpeohg iurp vhulhv dydlodeoh lq FHLF1 Dv jxuh 8 vkrzv/ Fklqd*v h{sdqvlrq
ri lqgxvwuldo surgxfwlrq kdv ehhq vwhdg| gxulqj wkh vdpsoh shulrg zlwkrxw h{shulhqflqj
d vlqjoh f|folfdo frqwudfwlrq1
Gdwd iru zruog*v hfrqrplf dfwlylw|/ |W > duh frqvwuxfwhg dv d zhljkwhg dyhudjh ri wkh
LPI*v lqgxvwuldo surgxfwlrq vhulhv=

Q  lw
T
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l'

zkhuh lw ' Pm lw dqg lw lv wkh vkduh ri Fklqd*v h{sruwv wr wkh lwk frxqwu|1< Lq frqwudvw
mw
wr wkh Fklqhvh h{shulhqfh/ lqgxvwuldo surgxfwlrq lq wkh uhvw ri wkh zruog h{shulhqfhv
vhyhudo exvlqhvv0f|foh vzlqjv1
<
Wkh frxqwulhv lqfoxghg duh Ehojlxp/ Fdqdgd/ Ilqodqg/ Iudqfh/ Jhupdq|/ Kxqjdu|/ Luhodqg/ Lwdo|/
Mdsdq/ Nruhd/ Ph{lfr/ Qhwkhuodqgv/ Qruzd|/ Vsdlq/ Vzhghq/ wkh Xqlwhg Nlqjgrp/ dqg wkh Xqlwhg
Vwdwhv1 H{sruwv wr wkhvh frxqwulhv dffrxqw iru wzr0wklug ri Fklqd*v h{sruwv1

22
150

Index of Industrial Production − China
100

50

1993 1995 1997 1999 2001 2003 2005

Index of Industrial Production − World excluding China
100

90

80

1993 1995 1997 1999 2001 2003 2005

Iljxuh 8= Phdvxuhv ri Lqgxvwuldo Surgxfwlrq

916 Iruhljq Gluhfw Lqyhvwphqw

Fklqd kdv h{shulhqfhg udslg lqfuhdvhv lq iruhljq gluhfw lqyhvwphqw dqg/ dv Odug| +5338,

grfxphqwv/ vxfk lq rzv frph iurp upv lqwhuhvwhg lq surgxflqj lq Fklqd wr wdnh
dgydqwdjh ri orz xqlw oderu frvwv1 Edvhg rq FHLF gdwd vlqfh 4<<:/ wkh wrs sdqho
ri jxuh 9 vkrzv wkdw iruhljq gluhfw lqyhvwphqw dyhudjhv derxw '7 eloolrq shu prqwk
wkrxjk wklv dyhudjh lv dffrpsdqlhg e| odujh xfwxdwlrqv1 Ehfdxvh ri wkh odfn ri gdwd iru
wkh dvvrfldwhg lqlwldo ydoxh ri iruhljq fodlpv/ zh hvwlpdwh wkh iruhljq gluhfw0lqyhvwphqw

srvlwlrq e| fxpxodwlqj wkh dvvrfldwhg rzv> wkh uhvxowlqj hvwlpdwh xqghuvwdwhv wkh
dfwxdo ydoxh ri wkh vwrfn ri iruhljq lqyhvwphqw lq Fklqd1 Zlwk wklv frqvlghudwlrq lq
plqg/ wkh plggoh sdqho vkrzv wkdw rxu hvwlpdwh ri wkh vwrfn ri iruhljq lqyhvwphqw lq
Fklqd kdv jurzq vwhdglo| vlqfh 4<<:/ h{fhhglqj '733 eloolrq e| wkh plggoh ri 53381

Wr jhw d vhqvh ri wkh uhodwlyh lpsruwdqfh ri wklv vwrfn/ zh vfdoh lw e| zruog lpsruwv
h{foxglqj Fklqhvh lpsruwv1 Wkh uhvxowlqj udwlr lv

Sw
m 'f im
nwW ' >
sWpw  pWw

23
zkhuh im lv wkh groodu rz ri iruhljq gluhfw lqyhvwphqw lqwr Fklqd gxulqj wkh mwk
prqwk1 Wkh erwwrp sdqho vkrzv wkdw diwhu jurzlqj idvwhu wkdq zruog wudgh/ wkh vwrfn
ri iruhljq0gluhfw lqyhvwphqw kdv vwdelol}hg durxqg 7 shufhqw ri zruog wudgh h{foxglqj
Fklqd1
10000
Foreign Direct Investment − Monthly flows − Not Seasonally Adjusted
(millions of US dollars per month)
7500

5000

2500

1997 1998 1999 2000 2001 2002 2003 2004 2005

400 Cumulated Foreign Direct Investment
(billions of US dollars)

200

1997 1998 1999 2000 2001 2002 2003 2004 2005

Cumulated Foreign Direct Investment Relative to World Trade ex. China
4 (percent)

2

1997 1998 1999 2000 2001 2002 2003 2004 2005

Iljxuh 9= Iruhljq Gluhfw Lqyhvwphqw lqwr Fklqd

Rqh olplwdwlrq ri rxu vhulhv lv wkdw lw grhv qrw lghqwli| wkh vrxufh ri wkh frxqwu|

xqghuwdnlqj wkh lqyhvwphqw1 Lqghhg/ Odug| +5338, qrwhv dq lqwhuhvwlqj sdwwhuq lq wkh
ghvwlqdwlrq ri wkh surgxfwlrq ri iruhljq upv rshudwlqj lq Fklqd1 Vshflfdoo|/ Dvldq 
upv xvh Fklqd dv d sodwirup iru wkhlu h{sruwv zkhuhdv Dphulfdq upv rulhqw wkhlu
surgxfwlrq wrzdugv wkh Fklqhvh pdunhw1 Wklv ihdwxuh lv qrw fdswxuhg e| rxu gdwd dqg
wklv olplwdwlrq vkrxog eh nhsw lq plqg zkhq hydoxdwlqj wkh uhvxowv1

: Hfrqrphwulf Dqdo|vlv

Iru sdudphwhu hvwlpdwlrq/ zh xvh prqwko| gdwd iurp Mdqxdu| 4<<: wr Iheuxdu| 53371
Wkh uhdvrq iru wkh eulhi vdpsoh shulrg lv wkh odfn ri prqwko| gdwd rq iruhljq gluhfw

24
lqyhvwphqw lq Fklqd sulru wr 4<<:1 Wr dyrlg kdylqj wkh hvwlpdwlrq uho| vroho| rq
wklv frqvlghudwlrq/ zh dovr uhsruw hvwlpdwhg lqfrph dqg h{fkdqjh0udwh hhfwv edvhg
rq prqwko| gdwd iurp 4<<7 wr 5337 zlwk d vshflfdwlrq wkdw h{foxghv iruhljq gluhfw
lqyhvwphqw1

Wkh hvwlpdwlrq phwkrg lv ruglqdu| ohdvw vtxduhv dqg rxu irfxv lv rq wkh orqj0uxq
frh!flhqwv1 Uholdqfh rq ROV fduulhv vhyhudo olplwdwlrqv dqg rqh ri wkhp lv wkdw lw
grhv qrw uhfrjql}h wkh wuxqfdwlrq lq wkh udqjh ri ydoxhv ri wkh ghshqghqw yduldeoh1
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43
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44
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25
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:14 Sdudphwhu Hvwlpdwhv

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uhqplqel orzhuv/ lq wkh orqj0uxq/ wkh dvvrfldwhg lpsruw vkduh +wrs sdqho ri wdeoh 4,> wklv

hhfw lv vwdwlvwlfdoo| glhuhqw iurp }hur dqg urexvw wr odj ohqjwk1 Wkrxjk wklv uhvxow
frqwudglfwv rxu h{shfwdwlrqv/ wzr idfwruv pd| dffrxqw iru wkh jds ehwzhhq sulruv dqg
hylghqfh1 Iluvw/ vwdwh0rzqhg hqwhusulvhv kdyh sod|hg dq dfwlyh uroh lq ghwhuplqlqj
lpsruwv gxulqj wkh vdpsoh shulrg dqg wkhvh hqwhusulvhv pljkw kdyh rshudwhg lq dq

hqylurqphqw zkhuh wkh doorfdwlyh uroh ri sulfhv zdv qrw wkhlu pdlq frqfhuq1 Wkxv/
wkh w|sh ri vxevwlwxwlrq hhfw wkdw dq h{fkdqjh0udwh fkdqjh lv h{shfwhg wr lqgxfh
kdv ehhq devhqw1 Vhfrqg/ d qhjdwlyh vljq lv qrw qhfhvvdulo| lqfrqvlvwhqw zlwk wkhru|1
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Ri frxuvh/ zh gr qrw nqrz zkhwkhu wkhvh frqglwlrqv krog lq Fklqd dqg wkxv rqh fdqqrw
uxoh rxw wkh fdvh lq zklfk rxu uhvxowv duh lqfrqvlvwhqw zlwk wkhru|1
Wkh hylghqfh dovr uhyhdov wkdw pryhphqwv lq Fklqhvh lqgxvwuldo surgxfwlrq duh

lpsruwdqw lq h{sodlqlqj pryhphqwv lq wkhvh lpsruwv= wkh lqfrph hhfw lv srvlwlyh/
vwdwlvwlfdoo| vljqlfdqw/ dqg urexvw wr odj ohqjwk1 Ilqdoo|/ wkh uhvxowv lqglfdwh wkdw
dq lqfuhdvh lq iruhljq gluhfw lqyhvwphqw udlvhv Fklqd*v lpsruwv ri ruglqdu| surgxfwv
vxjjhvwlqj wkdw iruhljq gluhfw lqyhvwphqw +IGL, kdv frpsohphqwdulw| hhfwv1 Lq whupv

26
Table 1: Import Share of Ordinary Products - Long-run Coefficients
Sensitivity to Dynamic Specification and Sample Periods
Real Real Lagged Parameter Stability (a) Properties of Residuals (b)
Lags Income Exch. Rate FDI Dep. Var. SER CHW1 CHW2 Normality Independ. Homosked.
1997-2004 13 0.028 -0.014 0.456 0.669 0.135 na 0.361 0.694 0.846 0.964
(0.0092) (0.0055) (0.1448) (0.0741)

6 0.035 -0.014 0e 0.163 0.185 0.055 0.084 0.167 0.710 0.830
(0.0019) (0.0013) (0.13)

3 0.024 -0.008 0.164 0.183 0.160 0.119 0.065 0.104 0.529 0.064
(0.0024) (0.0016) (0.0435) (0.0688)

1 0.023 -0.007 0.172 0.193 0.164 0.041 0.062 0.386 0.637 0.134
(0.0025) (0.0016) (0.0452) (0.0705)

0 0.024 0e 0.138 -- 0.172 0.033 0.014 0.544 0.394 0.433
(0.0024) (0.04349)

1994-2004 13 0.085 -0.040 -- 0.870 0.165 0.695 0.790 r 0.290 0.450
(0.02) (0.01) (0.04)

6 0.036 -0.050 -- 0.370 0.230 r 0.030 r 0.220 0.180
(0.002) (0.005) (0.09)

3 0.032 -0.004 -- 0.360 0.210 r 0.040 r 0.190 0.500
(0.0016) (0.004) (0.08)

1 0.030 -0.040 -- 0.240 0.210 r 0.020 0.030 r 0.150
(0.0012) (0.003) (0.06)

0 0.027 -0.036 -- -- 0.250 r 0.210 0.270 r 0.680
(0.001) (0.003)
standard errors in parentheses; r means rejects null hypothesis; na means that sample is not long enough for test
0e: Selection algorithm excludes this variable for lack of statistical significance
(a): CHW1: Chow test with 0.5 sample split. CHW2: Chow test with a 0.9 sample split.
(b): significance level needed to reject the associated null hypothesis. Entries in bold denote rejection at the 5% significance level.
Normality: Jarque-Bera test; Serial independence: Autoregressive test; Homoskedasticity: ARCH

27
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ri sdudphwhu vwdelolw|1
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vwurqj iru vkruw odjv1 Lq rwkhu zrugv/ IGL lv jhqhudwlqj vxevwlwxwlrq hhfwv lq wkh vhqvh
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whupv ri wkh w ri wkh htxdwlrq/ wkh whvw uhvxowv lqglfdwh wkdw wkh uhvlgxdov duh zklwh

qrlvh dqg wkdw rqh fdqqrw uhmhfw wkh k|srwkhvlv ri sdudphwhu vwdelolw|1
H{whqglqj wkh vdpsoh shulrg dqg h{foxglqj iruhljq gluhfw lqyhvwphqw +erwwrp sdqho
ri wdeoh 5, uhyhdov d ghjudgdwlrq ri wkh vwdwlvwlfdo uholdelolw| ri wkh htxdwlrqv1 Zlwk
wklv frqvlghudwlrq lq plqg/ wkh hvwlpdwhg lqfrph hhfwv duh frpsdudeoh wr wkrvh edvhg

28
Table 2: Import Share for Parts and Components - Long-run Coefficients
Sensitivity to Dynamic Specification and Sample Dates
Real Real Lagged Parameter Stability (a) Properties of Residuals (b)
Lags Income Exch. Rate FDI Dep. Var. SER CHW1 CHW2 Normality Independ. Homosked.
1997-2004 13 0.015 -0.030 0e 0.622 0.079 na 0.532 0.351 0.527 0.704
(0.0021) (0.0098) (0.07)

6 0.015 0.003 0e 0.600 0.080 0.420 0.016 0.920 0.160 0.406
(0.001) (0.0016) (0.071)

3 0.013 0.004 0e 0.465 0.078 0.180 0.059 0.960 0.050 0.782
(0.0013) (0.0012) (0.0659)

1 0.016 0.002 -0.093 0e 0.078 0.143 0.858 0.180 0.954 0.433
(0.001) (0.0008) (0.0174)

0 0.016 0.002 -0.090 -- 0.081 0.534 0.154 0.393 0.264 0.955
(0.00109) (0.00078) (0.0182)

1994-2004 13 0.013 -0.006 -- 0.380 0.070 0.110 0.120 0.920 0.280 0.590
(0.001) (0.002) (0.07)

6 0.012 -0.005 -- 0.077 0.085 0.070 0.030 0.550 0.750 0.650
(0.0008) (0.0014) (0.05)

3 0.012 -0.004 -- 0.210 0.080 r 0.020 0.420 0.250 0.420
(0.0008) (0.0014) (0.07)

1 0.011 -0.003 -- 0.290 0.076 r 0.080 0.320 0.280 0.780
(0.0008) (0.0015) (0.06)

0 0.011 -0.002 -- -- 0.0845 r r 0.570 r 0.700
(0.001) (0.0011)
standard errors in parentheses; r means rejects null hypothesis; na means that sample is not long enough for test
0e: Selection algorithm excludes this variable for lack of statistical significance
(a): CHW1: Chow test with 0.5 sample split. CHW2: Chow test with a 0.9 sample split.
(b): significance level needed to reject the associated null hypothesis. Entries in bold denote rejection at the 5% significance level.
Normality: Jarque-Bera test; Serial independence: Autoregressive test; Homoskedasticity: ARCH

29
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45
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frqvwuxfwlrq lq r!fldo vwdwlvwlfv/ h{sruwv ri surgxfwv wkdw duh dvvhpeohg xvlqj lpsruwv ri sduwv1

30
Table 3: Export Share of Ordinary Products - Long-run Coefficients
Sensitivity to Dynamic Specification and Sample Period
Parameter Stability (a) Properties of Residuals (b)
Foreign Real Lagged
Lags Income Exch. Rate FDI Dep. Variable SER CHW1 CHW2 Normality Independ. Homosked.
1997-2004 13 0.055 -0.033 0e 0.659 0.133 na 0.020 0.390 0.560 0.060
(0.009) (0.009) (0.1)

6 0.049 -0.027 0e 0.550 0.128 0.132 0.020 0.480 0.550 0.390
(0.0075) (0.007) (0.09)

3 0.096 -0.056 0e 0.875 0.115 0.216 0.849 0.480 0.633 0.398
(0.042) (0.0312) (0.0728)

1 0.028 0e 0e 0.864 0.131 0.025 0.239 0.192 0.029 0.496
(0.0053) (0.596)

0 0.017 0e 0.125 -- 0.205 r r 0.898 r 0.247
(0.00069) (0.03201)

1994-2004 13 0.020 0e -- 0.840 0.153 0.100 0.290 0.730 0.170 0.240
(0.002) (0.065)

6 0.063 -0.024 -- 0.620 0.156 r 0.088 0.120 0.680 0.860
(0.011) (0.007) (0.086)

3 0.070 -0.024 -- 0.658 0.149 0.025 0.336 0.680 0.210 0.370
(0.013) (0.0075) (0.069)

1 0.058 -0.0185 -- 0.594 0.166 r 0.300 0.120 r 0.110
(0.011) (0.0067) (0.06)

0 0.040 -0.011 -- -- 0.217 r 0.030 0.210 r 0.020
(0.0055) (0.0034)

standard errors in parentheses; r means rejects null hypothesis; na means that sample is not long enough for test
0e: Selection algorithm excludes this variable for lack of statistical significance
(a): CHW1: Chow test with a 0.5 sample split. CHW2: Chow test with a 0.9 sample split.
(b): significance level needed to reject the associated null hypothesis. Entries in bold denote rejection at the 5% significance level.
Normality: Jarque-Bera test; Serial independence: Autoregressive test; Homoskedasticity: ARCH
31
Table 4: Export Share for Parts - Long-run Coefficients
Sensitivity to Dynamic Specification and Sample Periods
Parameter Stability (a) Properties of Residuals (b)
Foreign Real Imports of Parts Lagged
Lags Income Exch. Rate & Assmbly FDI Dep. Variable SER CHW1 CHW2 Normality Independ. Homosked.
1997-2004 13 0.050 -0.031 0.975 0e 0.400 0.080 na 0.360 0.350 0.950 0.840
(0.008) (0.006) (0.17) (0.11)

6 0.011 -0.006 1.269 0.083 0.222 0.083 0.015 0.070 0.309 0.110 0.580
(0.0046) (0.0039) (0.072) (0.0213) (0.0499)

3 0e 0.010 1.165 0.228 0.658 0.091 r r 0.404 0.293 0.481
(0.0018) (0.1406) (0.0418) (0.0701)

1 0e 0.009 1.099 0.186 0.504 0.098 r r 0.451 0.823 0.864
(0.0011) (0.0992) (0.0292) (0.0684)

0 0e 0e 1.058 0.157 -- 0.131 r r 0.520 0.404 0.471
(0.0667) (0.0193)

1994-2004 13 -0.060 0.052 -4.235 -- 1.030 0.109 r 0.570 0.650 0.060 0.220
(0.16) (0.144) (13.31) (0.057)

6 0.047 -0.002 0.880 -- 0.604 0.109 0.123 0.098 0.570 0.100 0.030
(0.0097) (0.0054) (0.2) (0.077)

3 -0.087 0.002 3.990 -- 1.060 0.117 0.360 0.240 0.410 0.090 0.050
(0.083) (0.053) (2.8) (0.06)

1 0.058 0.001 0.230 -- 0.760 0.127 r 0.230 0.460 0.130 0.090
(0.025) (0.009) (0.63) (0.11)

0 0.040 0e 0.790 -- -- 0.155 r r 0.170 r 0.040
(0.003) (0.11)

standard errors in parentheses; r means rejects null hypothesis; na means that sample is not long enough for test
0e: Selection algorithm excludes this variable for lack of statistical significance
(a): CHW1: Chow test with a 0.5 sample split. CHW2: Chow test with a 0.9 sample split.
(b): significance level needed to reject the associated null hypothesis. Entries in bold denote rejection at the 5% significance level.
Normality: Jarque-Bera test; Serial independence: Autoregressive test; Homoskedasticity: ARCH
32
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wr qrwlfh wkdw odjjhg uhvsrqvhv pd| pdwwhu pruh iru h{sruwv wkdq iru lpsruwv1 Wkhuh

duh vhyhudo uhdvrqv iru wklv dv|pphwu|1 Iluvw/ Fklqhvh h{sruwhuv gr qrw kdyh d fdswlyh
pdunhw/ dv lv wkh fdvh iru Fklqd*v lpsruwhuv1 Lqghhg/ Fklqd*v h{sruwv idfh vxevwlwxwhv
lq wkhlu ghvwlqdwlrq pdunhwv dqg/ wkxv fkdqjhv lq h{fkdqjh udwhv duh qrw olnho| wr
wudqvodwh lqwr lpphgldwh uhvsrqvhv lq Fklqd*v h{sruwv dv h{sruwhuv wu| wr jdxjh wkh

uhvsrqvh ri wkhlu frpshwlwlrq1 Vhfrqg/ Fklqd kdv qrw h{shulhqfhg/ lq rxu vdpsoh/
wkh w|sh ri exvlqhvv0f|foh ghyhorsphqwv wkdw fdq eh fdswxuhg zlwk odjjhg whupv1 Iru
h{dpsoh/ hfrqrplf dfwlylw| kdv qrw h{shulhqfhg wkh frqwudfwlrqdu| skdvh ri d exvlqhvv
f|foh dqg wkh uhdo ydoxh ri wkh uhqplqel kdv qrw h{shulhqfhg wkh odujh vzlqjv wkdw
pdmru fxuuhqflhv kdyh h{shulhqfhg1 Xqolnh wkh h{shulhqfh ri Fklqd/ zruog lqgxvwuldo

surgxfwlrq vkrzv vhyhudo exvlqhvv f|fohv +jxuh 8 deryh,1 Wkxv lghqwli|lqj g|qdplf
uhvsrqvhv iru lpsruwv lv pruh gl!fxow wkdq iru h{sruwv1

33
:15 Hodvwlflw| Hvwlpdwhv

Rqh gudzedfn ri hvwlpdwlqj sdudphwhuv ri dq htxdwlrq olqhdu lq wkh yduldeohv lv wkdw
wkh pdjqlwxgh ri wkh frh!flhqw hvwlpdwhv ghshqgv rq wkh xqlwv ri wkh uhjuhvvruv1 Wr

dyrlg wklv olplwdwlrq/ zh uh0h{suhvv wkh srlqw hvwlpdwhv lq whupv ri hodvwlflwlhv> wklv
wudqvirupdwlrq dovr khosv wr frpsduh wkh hvwlpdwlrq uhvxowv wr wkrvh jhqhudwhg xvlqj
dowhuqdwlyh irupxodwlrqv1 Qrwh wkdw wkh hodvwlflwlhv ri rxu olqhdu irupxodwlrqv jlyh wkh
shufhqw fkdqjh ri wkh wudgh vkduh lq uhvsrqvh wr d rqh shufhqw fkdqjh lq wkh h{sodqdwru|

yduldeohv1 Iru h{dpsoh/ wkh hodvwlflw| ri wkh lpsruw vkduh zlwk uhvshfw wr lqfrph lv
# $
C *? zpw |w Czp |w eeE
'  '  >
C *? |w zpw C| zpw e
cE

dqg lw ydulhv lq uhvsrqvh wr fkdqjhv lq lpsruw vkduhv dqg lqfrph1 Zh uhpryh wkh
vhdvrqdo hhfwv ri wkhvh yduldeohv e| xvlqj wkhlu prylqj dyhudjhv1 Wkxv/ wkh lqfrph
hodvwlflw| lv frpsxwhg dv
# $
C *? zpw pdE|w eeE
' > +45,
C *? |w pdEzpw e
cE

zkhuh pdE} lv wkh 450prqwk prylqj dyhudjh ri }= Zh dsso| wklv phwkrg iru hdfk ri
wkh hodvwlflwlhv1

:1514 Lpsruwv

Iljxuh : vkrzv wkh hyroxwlrq ri wkh <8( frqghqfh edqg iru wkh lpsruw vkduhv1 Wr
surylgh shuvshfwlyh rq wkh hyroxwlrq ri wkhvh hodvwlflwlhv/ wkh jxuh lqfoxghv hvwlpdwhv

sulru wr 4<<:1 Wkh hylghqfh vkrzv wkdw wkh lqfrph hodvwlflw| iru ruglqdu| lpsruwv jurzv
iurp voljkwo| ehorz rqh wr d shdn ri 518 lq 4<<</ uljkw ehiruh Fklqd*v dffhvvlrq wr wkh
ZWR/ zlwk d vxevhtxhqw ghfolqh wr 418 e| 53371 Wklv sdwwhuq uh hfwv wkdw wkh vkduh
ri Fklqd*v lpsruwv lq zruog wudgh kdv jurzq idvwhu wkdq Fklqd*v lqgxvwuldo surgxfwlrq

34
vlqfh mrlqlqj wkh ZWR1 Iru lpsruwv ri sduwv/ wkh lqfrph hodvwlflw| ulvhv iurp 31: wr
voljkwo| deryh rqh e| 5335 dqg vwdelol}hv dw wkdw ohyho1

INCOME ELASTICITIES EXCHANGE−RATE ELASTICITIES
0.5
Ordinary imports* Ordinary imports*
2.5

0.0

2.0
−0.5

1.5
−1.0

log−linear
1.0 * For 6 lags; the horizontal line corresponds to −1.5
long−run estimates from log−linear model with 13 lags
1995 2000 2005 1995 2000 2005
0.5 Parts & Assembly Imports**
2.5
Parts & Assembly Imports**
0.0

2.0
−0.5 log−linear
1.5
−1.0

1.0 ** For 1 lag; the horizontal line corresponds to
−1.5 long−run estimates from log−linear model with 6 lags

1995 2000 2005 1995 2000 2005

Iljxuh := <8( Frqghqfh Lqwhuydov iru Hodvwlflwlhv ri Lpsruw Vkduhv

Wkh h{fkdqjh0udwh hodvwlflw| iru lpsruwv ri ruglqdu| surgxfwv lv qhjdwlyh phdqlqj wkdw
dq dssuhfldwlrq ri wkh uhqplqel orzhuv Fklqd*v vkduh lq zruog wudgh1 Wklv hodvwlflw|

jurzv +lq devroxwh ydoxh, xqwlo 4<<</ sulru wr Fklqd*v dffhvvlrq wr wkh ZWR1 Wklv ulvh
lv gxh wr wkh vkdus dssuhfldwlrq ri wkh uhqplqel ryhu wklv shulrg +jxuh 7 deryh,1 Diwhu
Fklqd*v dffhvvlrq wr wkh ZWR/ wkh h{sdqvlrq lq wkh lpsruw vkduh orzhuv wkh hodvwlflw|
+lq devroxwh ydoxh, wkurxjk 53371 Iru lpsruwv ri sduwv/ wkh h{fkdqjh0udwh hodvwlflw| lv
srvlwlyh dqg vljqlfdqw exw wkh srlqw hvwlpdwh vkrzv d voljkw grzqzdug wuhqg1

Wr dvvhvv wkh vhqvlwlylw| ri wkhvh hvwlpdwhv wr wkh fkrlfh ri irupxodwlrq/ wkh jxuh
lqfoxghv wkh orqj0uxq hodvwlflw| hvwlpdwhv iurp d orj0olqhdu irupxodwlrq=

h  *? zpw ' h
cEO d n heEO  *? |w n h h  *? t i n x
f  nwW3 n gEO w hp = U
+46,

35
Wkh fklhi ihdwxuh ri htxdwlrq +46, lv wkdw wkh hodvwlflwlhv duh frqvwdqw1 Iru h{dpsoh/
wkh hodvwlflw| ri wkh lpsruw vkduh zlwk uhvshfw wr wkh uhdo h{fkdqjh udwh lv

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U U

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tiw
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Ct i > d sdwwhuq wkdw odfnv wkhruhwlfdo
U
mxvwlfdwlrq1 Iurp d sudfwlfdo vwdqgsrlqw/ krzhyhu/ wkh uhohydqw txhvwlrq lv zkhwkhu
wkh lpsolhg hodvwlflwlhv duh doo wkdw glhuhqw iurp wkh rqhv wkdw duh doorzhg wr fkdqjh1
Iru sdudphwhu hvwlpdwlrq zh dsso| wkh vdph vshflfdwlrq vwudwhj| wkdw lv dssolhg
wr htxdwlrq +;,1 Zkdw wkh uhvxowv vxjjhvw lv wkdw uholdqfh rq wkh frqyhqwlrqdo orj0olqhdu
irupxodwlrq |lhogv d udwkhu glhuhqw fkdudfwhul}dwlrq ri wudgh wkdq wkh rqh edvhg rq

wkh olqhdu prgho1 Iluvw/ wkh frqvwdqw0hodvwlflw| irupxodwlrq xqghuvwdwhv wkh uhvsrqvh ri
Fklqd*v lpsruw vkduhv wr fkdqjhv lq lqfrph1 Vhfrqg/ wkh orj0olqhdu prgho ryhuvwdwhv
wkh uhvsrqvlyhqhvv ri wkh uhdo h{fkdqjh udwh/ dqg erwk hodvwlflwlhv duh qhjdwlyh1
Vhwwolqj zklfk ri wkhvh wzr irupxodwlrqv/ htxdwlrq +;, ru htxdwlrq +46,/ rhuv wkh

ehvw fkdudfwhul}dwlrq ri Fklqd*v lpsruw vkduh lv eh|rqg wkh vfrsh ri wklv sdshu1 Krz0
hyhu/ wkh hvwlpdwlrq uhvxowv iru htxdwlrq +;, fdqqrw uhmhfw wkh k|srwkhvlv wkdw Cz p
Ct i lv
U
frqvwdqw dqg vxfk d qglqj frqvwlwxwhv hylghqfh djdlqvw wkh lqvwdelolw| ri Cz p
Ct i wkdw lv
U
uhtxluhg e| wkh orj0olqhdu prgho1 Ryhudoo/ wkhq/ wkhuh lv whqwdwlyh vxssruw iru suhihuulqj

wkh hvwlpdwhv iurp htxdwlrq +;,1
Wr dvvhvv wkh vhqvlwlylw| ri wkh hvwlpdwhv wr wkh ohyho ri djjuhjdwlrq/ zh hvwlpdwh
wkh sdudphwhuv ri

d d d d d d d
c EO  zpw ' d n e EO  |w n f  nwW3 n g EO  t i w n xp > +47,
U

d
zkhuh zpw lv wkh vkduh ri Fklqd*v qrq0rlo lpsruwv lq uhvw0ri0wkh0zruog lpsruwv1 Iru

36
sdudphwhu hvwlpdwlrq zh dsso| wkh vdph vshflfdwlrq vwudwhj| wkdw lv dssolhg wr htxd0
wlrq +;,1 Wdeoh 8 vkrzv wkh hvwlpdwlrq uhvxowv dqg jxuh ; frpsduhv wkh hodvwlflwlhv iru
frpsrqhqwv ri wkh djjuhjdwh djdlqvw wkh hodvwlflw| ri wkh djjuhjdwh1

ORDINARY PARTS & ASSEMBLY AGGREGATE

Income Elasticity Income Elasticity Income Elasticity

2 2 2

1 1 1

1995 2000 2005 1995 2000 2005 1995 2000 2005

Exchange−rate Elasticity

0.0 0.0 0.0
Exchange−rate Elasticity
Exchange−rate Elasticity
−0.5 −0.5 −0.5

−1.0 −1.0 −1.0

1995 2000 2005 1995 2000 2005 1995 2000 2005

Iljxuh ;= <8( Frqghqfh Lqwhuydov iru Hodvwlflwlhv ri Lpsruw Vkduhv  Vhqvlwlylw| wr
Ohyho ri Djjuhjdwlrq

Lqvshfwlrq ri wkh hylghqfh vxjjhvwv wzr lpsruwdqw uhvxowv1 Iluvw/ wkh hodvwlflwlhv iru wkh
vkduh ri djjuhjdwh lpsruwv duh frqvlvwhqw zlwk sulru h{shfwdwlrqv derxw wkh uhvsrqvh ri
wudgh= dq lqfuhdvh lq lqfrph ru d uhdo dssuhfldwlrq ri wkh uhqplqel udlvhv Fklqd*v vkduh

ri lpsruwv lq zruog wudgh1 Vhfrqg/ rqh fdqqrw lqihu wkh uhvsrqvh ri wkh frpsrqhqwv
edvhg rq wkh uhvsrqvh ri wkh djjuhjdwh= uholdqfh rq dq djjuhjdwh irupxodwlrq fduulhv d
orvv ri lqirupdwlrq1 Iru h{dpsoh/ wkh lqfrph hodvwlflw| iru wkh djjuhjdwh vkduh lv ehorz
rqh zkhuhdv wkh lqfrph hodvwlflw| iru wkh glvdjjuhjdwh vkduhv duh deryh rqh1 Vlploduo|/

wkh h{fkdqjh0udwh hodvwlflw| iru wkh djjuhjdwh vkduh vxjjhvwv wkdw dq dssuhfldwlrq ri
wkh uhqplqel udlvhv wkh vkduh ri djjuhjdwh lpsruwv zkhuhdv wkh fruuhvsrqglqj hodvwlflw|
iru ruglqdu| surgxfwv srlqwv wr d uhgxfwlrq ri wkdw lpsruw vkduh1 Ylhzhg dv d zkroh/

37
Table 5: Aggregate Import Share - Long-run Coefficients
Sensitivity to Dynamic Specification and Sample Period
Parameter Stability (a) Properties of Residuals (b)
Domestic Real Lagged
Lags Income Exch. Rate FDI Dep. Variable SER CHW1 CHW2 Normality Independ. Homosked.
1997-2004 13 0.105 -0.051 1.170 0.870 0.160 r 0.670 0.750 0.020 0.160
(0.04) (0.026) (0.89) (0.08)

6 0.046 -0.010 0e -0.170 0.210 0.020 0.095 0.010 0.680 0.850
(0.0016) (0.001) (0.05)

3 0.045 -0.009 0e 0e 0.200 0.026 0.020 0.250 0.490 0.110
(0.0018) (0.0016)

1 0.047 -0.011 0e 0e 0.220 0.220 0.080 0.060 0.210 0.140
(0.001) (0.0011)

0 0.047 -0.129 0e -- 0.214 0.030 0.020 0.450 0.270 0.020
(0.001) (0.014)

1994-2004 13 0.146 -0.144 -- 0.820 0.19 0.130 0.100 0.730 0.320 0.800
(0.037) (0.042) (0.05)

6 0.040 -0.043 -- 0.020 0.295 r 0.040 r 0.250 0.950
(0.002) (0.004) (0.08)

3 0.040 -0.041 -- 0.140 0.29 r 0.020 r 0.350 0.940
(0.002) (0.0047) (0.06)

1 0.039 -0.041 -- 0.180 0.284 r 0.080 r 0.650 0.790
(0.003) (0.0048) (0.06)

0 0.038 -0.038 -- -- 0.298 r 0.310 r 0.060 0.990
(0.0023) (0.004)

standard errors in parentheses; r means rejects null hypothesis; na means that sample is not long enough for test
0e: Selection algorithm excludes this variable for lack of statistical significance
(a): CHW1: Chow test with a 0.5 sample split. CHW2: Chow test with a 0.9 sample split.
(b): significance level needed to reject the associated null hypothesis. Entries in bold denote rejection at the 5% significance level.
Normality: Jarque-Bera test; Serial independence: Autoregressive test; Homoskedasticity: ARCH
38
wkh hyroxwlrq ri wkh hvwlpdwhg hodvwlflwlhv lv vx!flhqwo| glhuhqw dfurvv wkh wzr w|shv ri
surgxfwv wr vxjjhvw wkdw uholdqfh rq d prgho iru djjuhjdwh lpsruwv/ hyhq li frqvlvwhqw
zlwk rxu sulru h{shfwdwlrqv/ zrxog vxhu iurp dq djjuhjdwlrq eldv1

:1515 H{sruwv

Iljxuh < vkrzv wkh hyroxwlrq ri wkh <8( frqghqfh edqg iru wkh hodvwlflwlhv ri wkh h{sruw
vkduhv> wr dvvhvv wkh vhqvlwlylw| wr wkh fkrlfh ri irupxodwlrq/ wkh jxuh lqfoxghv wkh orqj0

uxq hodvwlflw| hvwlpdwhv iurp d orj0olqhdu irupxodwlrq1 Lqvshfwlrq ri wkh uhvxowv vxjjhvw
wkdw wkh lqfrph hodvwlflwlhv h{fhhg rqh e| d vljqlfdqw pdujlq exw wkh jds kdv qduurzhg
vljqlfdqwo| vlqfh Fklqd*v dffhvvlrq wr wkh ZWR1 Wkh hylghqfh dovr uhyhdov wkdw wkh
h{fkdqjh0udwh hodvwlflw| lv qhjdwlyh dqg vwdwlvwlfdoo| vljqlfdqw1 Wklv qglqj vxjjhvwv

wkdw Fklqd*v h{sruwv idfh jrrg vxevwlwxwhv lq wkhlu ghvwlqdwlrq pdunhwv1 Qrwh wkdw wkh
uhvxowv vxjjhvw wkdw xvlqj orj0olqhdu irupxodwlrqv whqgv wr ryhu vwdwh wkh h{fkdqjh0udwh
hodvwlflw| iru Fklqd*v h{sruwv iru wkh prvw uhfhqw shulrg1

INCOME ELASTICITIES EXCHANGE−RATE ELASTICITIES
5 Ordinary Exports*
Ordinary Exports*
0
4
−1
3

−2
2

1 * For 3 lags; the horizontal line corresponds to
−3
long−run estimates from log−linear model with 13 lags

1995 2000 2005 1995 2000 2005
5
Exports of Parts and Assembly** Exports of Parts and Assembly**
0
4
−1
3

−2 log−linear
2

1 −3
** For 13 lags; the horizontal line corresponds to
long−run estimates from log−linear model with 13 lags

1995 2000 2005 1995 2000 2005

Iljxuh <= <8( Frqghqfh Lqwhuydov iru Hodvwlflwlhv ri H{sruw Vkduhv

39
Wr dvvhvv wkh vhqvlwlylw| ri wkh hvwlpdwhv wr wkh ohyho ri djjuhjdwlrq/ zh hvwlpdwh
wkh sdudphwhuv ri

d d d d d d d
c EO  z{w ' d n e EO  |wW n f  nwW3 n g EO  t i w n x{ > +48,
U

d
zkhuh z{w lv wkh vkduh ri Fklqd*v h{sruwv lq uhvw0ri0wkh0zruog lpsruwv1 Iru sdudphwhu

hvwlpdwlrq zh dsso| wkh vdph vshflfdwlrq vwudwhj| wkdw lv dssolhg wr htxdwlrq +44,
dqg wkh hvwlpdwlrq uhvxowv duh vkrzq lq wdeoh 91 Iljxuh 43 frpsduhv wkh hodvwlflwlhv iru
frpsrqhqwv ri wkh djjuhjdwh djdlqvw wkh hodvwlflw| ri wkh djjuhjdwh1

ORDINARY PARTS & ASSEMBLY AGGREGATE
Income Elasticity Income Elasticity
5 5 Income Elasticity 5

4 4 4

3 3 3

2 2 2

1 1 1
1995 2000 2005 1995 2000 2005 1995 2000 2005
Exchange−rate Elasticity Exchange−rate Elasticity Exchange−rate Elasticity

−1 −1 −1

−2 −2 −2

−3 −3 −3

1995 2000 2005 1995 2000 2005 1995 2000 2005

Iljxuh 43= <8( Frqghqfh Lqwhuydov iru Hodvwlflwlhv ri H{sruw Vkduhv  Vhqvlwlylw| wr
Ohyho ri Djjuhjdwlrq

Lqvshfwlrq ri wkh hylghqfh vxjjhvwv wkdw uholdqfh rq wkh hodvwlflw| ri wkh djjuhjdwh
h{sruw vkduhv grhv qrw lqyroyh d orvv ri lqirupdwlrq1 Vshflfdoo|/ wkh jds ehwzhhq wkh
djjuhjdwh ri wkh hodvwlflwlhv dqg wkh hodvwlflw| ri wkh djjuhjdwh lv qxphulfdoo| vpdoo

40
Table 6: Aggregate Export Share - Long-run Coefficients
Sensitivity to Dynamic Specification and Sample Period
Parameter Stability (a) Properties of Residuals (b)
Foreign Real Lagged
Lags Income Exch. Rate FDI Dep. Variable SER CHW1 CHW2 Normality Independ. Homosked.
1997-2004 13 0.130 -0.078 0e 0.570 0.210 r 0.260 0.540 0.760 0.300
(0.02) (0.01) (0.08)

6 0.120 -0.068 0e 0.627 0.230 0.610 0.160 0.420 0.700 0.030
(0.02) (0.016) (0.086)

3 0e 0.410 6.100 0.988 0.190 0.370 0.750 0.140 0.780 0.400
(1.47) (20.5) (0.04)

1 0e 0e 0.840 0.850 0.228 0.300 0.020 0.520 0.390 0.240
(0.14) (0.05)

0 0.050 -0.010 0.290 -- 0.370 r r 0.190 r r
(0.009) (0.0086) (0.058)

1994-2004 13 0.149 -0.038 -- 0.744 0.230 0.050 0.190 0.760 0.350 0.770
(0.03) (0.0177) (0.077)

6 0.157 -0.036 -- 0.689 0.247 0.070 0.200 0.100 0.340 0.190
(0.024) (0.014) (0.073)

3 0.120 0e -- 0.780 0.260 0.040 0.030 0.030 0.850 0.020
(0.02) (0.07)

1 0.094 0e -- 0.660 0.290 r 0.020 0.950 r 0.550
(0.011) (0.06)

0 0.098 -0.012 -- -- 0.357 r r r r r
se (0.009) (0.0057)

standard errors in parentheses; r means rejects null hypothesis; na means that sample is not long enough for test
0e: Selection algorithm excludes this variable for lack of statistical significance
(a): CHW1: Chow test with a 0.5 sample split. CHW2: Chow test with a 0.9 sample split.
(b): significance level needed to reject the associated null hypothesis. Entries in bold denote rejection at the 5% significance level.
Normality: Jarque-Bera test; Serial independence: Autoregressive test; Homoskedasticity: ARCH
41
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wkh Fklqd*v wudgh vkduhv1 Wkh uhvxowv lqglfdwh wkdw d rqh0shufhqw uhdo dssuhfldwlrq ri

42
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Trade in Ordinary Products Trade in Parts and Assembly Products
0.00 0.00
Response of Export Share (percentage points) Response of Export Share (percentage points)

−0.01 −0.01

−0.02 −0.02

−0.03 −0.03

−0.04 −0.04

1997 1999 2001 2003 2005 1997 1999 2001 2003 2005

0.005 0.005

0.000 0.000
Response of Import Share (percentage points) Response of Import Share (percentage points)
−0.005 −0.005

−0.010 −0.010

−0.015 −0.015

1997 1999 2001 2003 2005 1997 1999 2001 2003 2005

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49
Table 7: Automated Granger Causality Tests -- 1997-2004

Equation Lag Structure Tests p-value
1 2 3 4 5 6 7 8 9 10 11 12 13
Dep. Var: Imports of Parts
CHW1 0.1088
Own lags 0.4714 0e 0e 0e 0e 0e 0e 0e 0e 0e 0e 0.4129 0e CHW2 0.0736
std. error (0.0691) -- -- -- -- -- -- -- -- -- -- (0.0725) -- normality 0.9406
Serial Indep. 0.0372
Exports of Parts 0e 0e 0e 0e 0e 0e 0e 0e 0e 0e 0e 0e 0e Homoskedast. 0.9952
std. error -- -- -- -- -- -- -- -- -- -- -- -- --

SER=0.09337

Dep. Var: Exports of Parts

Own lags 0.3432 0e 0e 0.0868 0.3606 0e 0e 0e 0e 0.221 0e 0e 0e CHW1 0.2288
std. error (0.0931) -- -- (0.0929) (0.1424) -- -- -- -- (0.0777) -- -- -- CHW2 0.2304
normality 0.0153
Imports of parts 0e 0.2271 0e 0e -0.4196 0e 0e 0e 0e 0e 0e 0.2979 0e Serial Indep. 0.5714
std. error -- (0.1131) -- -- (0.1623) -- -- -- -- -- -- (0.1312) -- Homoskedast. 0.261

SER=0.1103

0e: Selection algorithm excludes this variable for lack of statistical significance
CHW1: Chow test with a 0.5 sample split. CHW2: Chow test with a 0.9 sample split.
Normality: Jarque-Bera test; Serial independence: Autoregressive test; Homoskedasticity: ARCH

50
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51
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52