Intra-Industry Trade in Machinery and Transport Equipment: Malaysia and its Trading Partners

Abstract

Intra-industry trade (IIT) has become prominent across Asia including Malaysia due to the greater influence of globalization in international trade and rapid economic growth. The growth of IIT occurred because of its characteristics which could result in gains from trade through better exploitation of economies of scale and product differentiation as well as enhance innovation. Since IIT is important in increasing the growth of an economy through trade earnings trade, therefore there is a need to study the determinants of IIT in Malaysia. This study is focused on the manufacturing sector especially the machinery and transport equipment (SITC 7) from 1994 to 2014. IIT is calculated by using the Grubel Lloyd (GL) index. Panel data is utilized in performing panel cointegration and panel Granger causality tests. The Hausman specification test shows that the fixed effect least square dummy variable (LSDV) model is better than the random effects model. These tests were used to determine the relationship between the levels of IIT and its determinants namely differences in per capita GDP, foreign direct investment, geographical distance and technological advancement. The results show that the variables are cointegrated in the long run, in addition to the existence of short run relationships between intra-industry trade with differences in per capita GDP and foreign direct investment.