The migration-trade nexus in the presence of vertical and horizontal product differentiation

Extended abstract Over the last twenty years a vast literature, especially empirical, has been developed in order to analyze the impact of migration flows on international trade under the hypothesis that ethnic networks play a key role. The basic idea is that immigrants are connected to their home countries by various types of links including: knowledge of home institutions, available products, home-country markets, languages and preferences. International trade can be influenced by immigrants’ ties to their home countries, because these linkages could help to decrease trade transaction costs. (Gould, 1994; Head and Ries, 1998; Dunlevy and Hutchinson, 1999; Rauch, 1999, 2001; Girma and Yu, 2002; Wagner et al., 2002; Bruder, 2004; Mundra, 2005; Jansen and Piermartini, 2009; Murat and Pistoresi, 2009; Peri and Requena-Silvente, 2010; Aleksynska and Peri, 2011; Egger et al.,2012; Bratti et al., 2012; Parsons, 2012; Felbermayr et al., 2012, to name but a few). However the great bulk of the literature has not remarked sufficiently that, in order to deeply explore the relationship between migration and international trade, it becomes noteworthy to take into account the nature of trade flows. In other words, an accurate analysis of the migration-trade nexus requires the crucial distinction between inter industry and intra industry trade flows, and the further separation of vertical and horizontal components inside intra-industry trade (IIT, thereafter). In fact, the theoretical literature on IIT’s determinants (see Helpman and Krugman (1985), Falvey and Kierzkowsky (1985), Flam and Helpman (1987)) shows that transaction costs are a negative determinant of the share of intra-industry trade in total trade. In addition, changes in transaction costs have a stronger impact on trade in differentiated products than in homogeneous goods. Therefore, if immigration allows a decline in trading transaction costs, this reduction will have a larger positive effect on the volume of intra-industry trade than on the volume of inter industry trade. The further observation that transaction costs could affect product differentiation in different ways - depending on the type of product differentiation involved, vertical or horizontal – induces us to explore the migration-trade link by discriminating vertical and horizontal components of IIT. Actually the literature on IIT has largely demonstrated that theoretical explanations of vertical intra-industry (VIIT, thereafter) differ significantly from Krugman style models of horizontal intra industry trade (HIIT, thereafter), and consequently empirical tests on the industry specific determinants of IIT should be carried out separately for VIIT and HIIT (Greenaway, Hine and Milner, 1995). In analogy with these prescriptions of IIT literature, empirical tests on the migration trade nexus should be performed independently for VIIT and HIIT. On the one hand, the protrade role of immigration in terms of transaction costs reduction seems more appropriate when HIIT is involved, because the immigrants’ knowledge of home country markets and available products should enhance more “variety trade” than “quality trade”. On the other hand, growing income differentials between immigrants and natives should activate more VIIT. This last observation calls into question the relevance of differences in human capital endowment between trade partners and between immigration and emigration flows. Usually, in theoretical frameworks analyzing the migration-trade link no distinction is made between immigrants and emigrants with reference to their pro-trade role (Gould, 1994). In addition, in empirical contributions testing the relationship between migration and trade, the nexus is explored by considering the exclusive role of immigrants (except in some rare study in which the role of emigrants is explicitly explored; see Murat and Pistoresi (2009), Parsons (2012)). Nevertheless, in the presence of human capital differences between immigrants and emigrants, an in-depth analysis of the migration trade nexus shouldn’t overlook the distinction between emigrants and immigrants, given that their influence on trade flows - and on the nature of trade flows - is virtually different. Furthermore an investigation of the pro-trade effects of migration carried out separately for immigrants and emigrants turns to be particularly significant when also the nature of trade flows is explicitly considered (disentangling HIIT and VIIT). Hence an analysis conducted by crossing the two dimensions of migration (immigration and emigration) and the two dimensions of intra-industry trade (VIIT and HIIT) provides a richer set of information by improving the interpretation of empirical results. Following this line of argument, the present work investigates the existing link between migration and intra-industry trade. In particular, three major questions are addressed here: 1) does migration help to increase intra-industry trade? 2) Does migration have a different impact on vertical and horizontal intra-industry trade? 3) Do the trade effects of immigration and emigration have different magnitudes? We try to answer these questions focusing on the Italian and German case which, in our opinion, seem to be the right countries for this type of analysis. For instance, Italy was a land of emigration and has also become a land of immigration over time, and the share of its bilateral intra-industry trade has increased in the early twenty first century (from 44% in 2000 to 47% in 2010) together with migration flows. Moreover, Italy lends itself to the separated analysis of the two components of IIT, since, especially for Italy, the “quality” trade (VIIT) represents the predominant amount of all IIT (63% in 2010). Furthermore the Italian outward and inward flows of migrants, other than a different historical importance, are different because of countries from which they come, or to which they go; also differing in educational level. Italian emigrates mostly go to developed countries, and instead immigrants in Italy are coming from developing countries. This circumstance – supported by other sources of information (Fondazione Migrantes) - signals that Italian emigrants are mostly more skilled than immigrants arriving in Italy. Moreover, we are dealing with two European countries that have different national dynamics of the labor market. In particular, among the big European countries, Italy and Germany are those which better represent the two significantly different trends characterizing labor market. We use country-level data that combines the bilateral intra-industry trade indexes and both the stock of immigrants and emigrants by countries (data sources include: EUROSTAT, Comext database, for trade data at the 8 digit level of disaggregation; ISTAT, migration trends and foreign population, Istat annuals on line, and Federal Statistic Office, with reference to Italian and German immigration data respectively; Anagrafe Italiani Residenti all’Estero, AIRE database, for data on Italian emigration). Then, following the methodology proposed by Greenaway, Hine and Milner (1995) and based on unit values of imports and exports as proxies of quality, the intraindustry trade has been divided in its two components, horizontal and vertical, in order to check which one is more affected by migration. The empirical model, departing from Hummels and Levinshon (1995), is developed adding to the basic specification our key variables: the stock of immigrants and the stock of emigrants. Since intra-industry trade index varies between 0 and 1, the method of ordinary least squares (OLS) is not appropriate and cannot be directly used for the model’s estimate (estimated coefficients would not be efficient). On this regard, Caves (1981) noted that OLS method has the disadvantage of not ensuring that predicted values of the dependent variable will be within its feasible range from 0 to 1. As the literature suggests (Balassa, 1986), in order to overcome this problem, we apply a logistic transformation to IIT and then we use OLS to estimate the model. The estimation’s results suggest that our hypotheses are consistent with the data: for instance, in the case of Italy, both emigration and immigration exert a positive influence on the share of intra-industry trade between Italy and its partner countries, even if the coefficient of the emigration variable is not statistically significant in all regressions (it becomes statistically different from zero only with reference to HIIT, confirming in any case the relevance of disentangling VIIT and HIIT in empirical tests). This result could be related to the fact that immigrants in Italy mostly come from developing countries which represent economies dissimilar to the Italian one so that the information brought by immigrants is more valuable (in terms of trade transaction costs’ reduction) than the information carried by Italians who go to developed countries. With regard to the VIIT and the HIIT, we find that the discrimination between these two components of IIT leads to a deep investigation of the link migration-IIT and improves the interpretation of empirical results, suggesting that migration has different effects on the two types of IIT. Indeed, the estimated coefficients are very different between them and the impact on the VIIT and HIIT is quite different. In particular, always with reference to the Italian case, the effect of immigration and emigration on international trade turns to be more relevant and significant when the “variety” trade (HIIT) is explicitly considered. Therefore, not to separate IIT in its two components leads to underestimate the potential effect of migration on IIT since it rules out the notable effect on the horizontal intra-industry trade. These results seem encouraging, in particular in light of the fact we used a very highly disaggregated data and, unlike other studies, our calculations are based on a dataset where both manufacturing and non manufacturing industries are included.