Technology Advantage and Home-market Effect: An Empirical Investigation

Yo-Yi Huang () and Deng-Shing Huang ()
Additional contact information
Yo-Yi Huang: Institue of Economics, Academia Sinica, Postal: Institute of Applied Economics, National Taiwan Ocean, University, No.2, Pei-Ning Rd., Keelung 202, Taiwan, R.O.C.
Deng-Shing Huang: Academia Sinica, Postal: Institute of Economics, Academia, Sinica, No.128, Sec. 2, Academia Rd., Nankang, Taipei 115, Taiwan, R.O.C.

Journal of Economic Integration, 2011, vol. 26, 81-109

Abstract:

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.

Keywords: Home-market Effect; Technology Advantage; Gravity Equation (search for similar items in EconPapers)
JEL-codes: F12 F14 F15 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0531

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