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Study on Optimization of Trade Structure in Our Country
—— Based on Industrial Organization Perspective
GENG Naiguo, ZHAO Lingfei
Economics & Management College, Shenyang Ligong University, P. R. China, 110168
Abstract: With the extensive use of industrial organization theory and market structure theory to
explain international trade, the new trade theory provides new ideas for study on the trade structure
optimization Based on industrial organization perspective and using regression analysis method, the
article carries on an empirical investigation into the relationship between Chinese trade structure and the
factors of industrial organization such as economies of scale, technology gap and product differentiation.
As a result, the new ways to optimize trade structure in our country are probed.
Keywords: Trade Structure, Industrial Organization, Regression Analysis
1 Introduction
In recent years, the rapid growth of export trade has made important contributions for the economic
development of China. But compared with the developed countries, Chinese trade structure is still
relatively backward, of which result, our country in international trade is in a very disadvantageous
situation, and the fundamental reason lies in Chinese industrial organizational lag. After 1960s,
intra-industry trade and the trade structure of the level division of labor between developed countries
come into being. The structure of international trade appears with a new trend. By extensive use of
industrial organization theory and market structure theory, the new trade theory explains international
trade and provides new research ideas for the study of trade structure optimization. In the current
international trade, technology gap, scale of economy and product differentiation are the main factors to
determine comparative advantage, therefore, we can view on industrial organization, through the
innovation of industrial organization, to optimize the trade structure of China, to promote Chinese
economy in a healthy and sustainable development .
For in China the relationship between trade structure and industrial organization is not studied
systematically, this article is based on industrial organization, according to the relative data of
2000-2008, through regression analysis, to study the function of the variable relationship between the
optimization of trade structure and industrial organization, and to explore the beneficial enlightenment
of optimization of Chinese trade structure.
2 A Number of Research Perspectives of Trade Structure at Present
At this stage, the research of the trade structure is based on 5 perspective roughly: The research of the
overall change of trade structure. (Balassa, 1977)pointed out that the comparative advantages between
different countries are changeable. Each country's economic development is a dynamic process.( Yin
Luanyu, 2007) pointed out that there exists a serious imbalance of region in the current trade structure,
the high concentration of market structure, and the structure of the export products and enterprise’s
nature are not reasonable and made recommendations.The research perspective of factors affecting
trade structure. (Jarko Fidnnuc, Manin Djablik, 2003) in the study of trade between the EU and CEECs
found the importance of FDI on the trade structure. (Jiang Jianxin, 2007) pointed out that foreign
merchants’ direct investments in China increase constantly, which reflects that Chinese economic
dependence on the international market is increasing. (Ye LingLi, Zhao Linhai,2008) analyzed the
interaction between import trade structure and technological progress.The research perspective of the
relationship between optimizing trade structure and economic growth. (Ghatak, 1997) according to the
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data related to trade in the period of 1955-1990 in Malaysia, found that exports of manufactured goods
have more effects to GDP than the primary products. (Anna Pinna, 1996) thought the re-distribution of
the using elements of foreign trade sector would affect the growth rates between countries and cause
differences in the economic growth of countries, to confirm the structure of foreign trade positive impact
on the national economy. Chan—Hyun Sohn Hongshjk ke 2003) confirmed that trade structure
has positive effect on economic growth.,according to the data of 66 countries from year 1991 to 2001.
The research perspective of the relationship between trade structure and industrial structure.
(Michaely, 1977) and (Balassa, 1978) examined the assumption with production function model that
export can improve total factor productivity, and thought that export can improve total factor
productivity through optimal allocation and full utilization of resources, transferring technology, and
then contribute to the industrial structure’s adjustment. (Mazumdar 1996)expanded the Baldwin’s (1992)
conclusion with Solow model and the theory of capital accumulation, and thought that the priority of a
country's industrial structure appears earlier than foreign trade structure. Industrial structure
determines the pulling
effect of the industrial structure. (Donghua Ping, Wang Jun, 2006) studied the
interaction between foreign trade structure and industrial structure of postwar Japan using econometric
model. (Wu Si,2009)analysed present situation and problems of Chinese industrial structure and
international trade and gave advice on the base of the interaction between trade structure and industrial
structure. The research
perspective of intra-industry trade. (Loertscher&Wolter,1980)was
respective,who studied the intra-industry trade of 13 countries from the OECD. Balassa Bauwens
1987) studied the intra-industry trade from 38 developed and developing countries. (Wei Long,Baixue,
2003) investigated the commodity structure of Chinese exports in recent years and pointed out that
China has participated into the global industry trade in the aspects of machinery, and IT. (Ding Chen,
2008) The analysis shows that bilateral trade between China and South Korea was dominated by
manufactured goods, such as the intra-industry trade of steel, machinery products between the two
countries will help improve the international competitiveness of related industries. Xu Yawei (2001), Ma
Jianfei (2002), Zhao Zhigang (2003), CHEN Wen (2003), Shi Zhiyu (2003)and Pan Xiangdong (2004),
examined the impact of the economies of scale, domestic demand, the state size, economic integration,
FDI system and other factors on intra-industry trade.
To be concluded, the researchers at home and abroad have made some achievements on trade structure,
making us to understand trade structure and the affecting factors of international trade structure better
and provide a number of theoretical and empirical basis for countries to develop appropriate trade
policies , promoting global process of economic integration as well. But there is not much research on
the relationship between trade structure and domestic industrial organization. Or rather, studying the
trade from the perspective of industrial organization structure is not systematic but only from a certain
angle.
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3 Trade Status of China Based on the Perspective of Industrial Organization
National Bureau of Statistics in the serial reports of 60th anniversary of New China reported that in the
last 60 years the gross of Chinese import and export is rising continuously.The total value of import and
export of China is increasing at the average rate of 25.9% per year from 2002 to 2008. The total value of
import and export of 7 years sums to 10.5 trillion U.S. dollars, accounting for more than 71 percent of
Chinese total value of import and export. In 2008, Chinese export gross has exceeded Japan, Germany
and ranked second in the world. The rapidly growing export trade contributed a lot to the economic
development of China.
As for trade structure, in recent years, Chinese export proportion of primary products declines and the
proportion of manufactured goods increases constantly. Chinese advantageous products are changing
gradually from labor and resource-intensive goods and primary industrial products to capital and
technology-intensive products in part. China achieves the upgrade of trade structure. But compared with
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the developed countries, the level of Chinese export structure is still relatively low, less efficiency and
competitive. As for the factor of technology gap, the proportion of high technological products in
Chinese export goods is still low. Processing trade is still dominated by the primary form, the industrial
relevance is low, less added value. China is known as "world factory", but a number of Chinese
enterprises do not have core technology and competitiveness. In fact, the growth of Chinese foreign
trade rate is mainly quantitative. For example, in 2008 Chinese exports of processing trade accounted
for 47% of total exports of goods, accounting for a higher proportion, but the added technological value
is less. For example, China is the largest TV producer and exporter, but in 40 patents for television, our
country only has 18 own intellectual property rights, which are non-core technologies. Many companies
do not actively strive to create independent intellectual property rights and famous brands, but simply
rely on materials processing, OEM to maintain manufacturing operations and earn the meager profits of
the low-end production chain. As for the factor of the scale of economy, according to statistics the
conversion rate of high-tech achievements in China is about 20%, only 15% of which form scale effect,
only 3% of the total results.
4 The Analysis of Affecting Factors of Trade Structure
4.1 The analysis of affecting factors of the trade structure under traditional trade theory
Differences in factor endowments. Heckscher – Ohlin’s factor endowment theory, explains the causes of
international trade with the abundance or the lack of production factors and factors of production
include natural resources, labour and capital. However, the factor endowments of a country is not
static.A country can promotes the conversion of its structure of import and export goods through
adjusting and upgrading the industrial structure.
Industrial structure. In general, the industrial structure is the basis of trade structure.A country’s trade
structure is determined by its industrial structure. Industrial structure is determined by countries’
(regions’) natural resources, economic systems, technological development and people's living habits
and other factors and is the result of long-term development of economy and technology.
Direct investment overseas. As direct investment overseas mainly concentrates in the industry, in which
the host countries’ factors are abundant and through the transfer of traditional industries, the promotion
of new industries, industries’ association and radiation, income of investment overseas and other effects.
They promote strongly the adjustment and upgrading of the investing-countries’ industrial structure and
are bound to affect the export structure of host country.
Other factors. In addition to the several main factors mentioned above, there are many other factors that
affect trade structure, such as the exchange rate. In an open economy, exchange rate policy can be used
to adjust the trade structure. In addition, the development of world economy and structural adjustment,
the degree of trade’s openness and trade friction system and other institutional factors, trade country's
industrial policy and trade policy, as well as political factors all will have an impact on the structure of
export trade.
4.2 The analysis of affecting factors of the trade structure under new trade theory
New trade theory breaks the assumptions of complete competition and constant returns of classical and
neoclassical theory, and explains international trade through extensive use of industrial organization and
market structure theory and analyses motives of international trade and infrastructure with the concepts
and ideas of monopolistic competition, increasing returns to scale, technology gap, different products etc.
Therefore, in the current international trade, technology gap, economies of scale and product
differentiation become the main factors that determine the comparative advantage and affect trade
structure.
The technology gap. Posner's theory of technology gap points out that not only the difference of factor
endowments and the existence of economies of scale but also technical differences between countries
and dynamics can lead to international trade. Technology gap theory bases its analysis on the technology
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gap between different countries and points out that technology gap and imitating-period determine the
realistic trade structure. Technologically backward countries master the high-tech gradually through
technical cooperation and direct foreign investment of multinational companies etc. and can imitate the
production of such products, thereby reducing imports and at last, taking the advantage of low price of
labor, on the contrary, they export such products to the countries owning advanced technology. At this
time, countries owning advanced technology update their technology and process to produce a new
generation of products, forming new advantages of technology and export a new generation of products
again, and so the cycle, so endless. This is the principle how the technological progress affects the trade
structure.
Economy of scale and product differentiation. Krugman's theory suggests that as long as the economies
of scale exist, even if national preferences, technology and factor endowments are of the same case, a
specialized division of labor and intra-industry trade between differentiated products will still appear.
The significance of international trade lies in forming an integrated world market and forming the trade
structure of special international division of labor. Chamberlain's model of product differentiation
explains the cause of intra-industry trade with product differentiation and the interaction between
consumer demand and economy of scale: the reason why the intra-industry of developed countries is
increasing constantly is that the producers from different countries want to take advantage of the
economy of scale to reduce unit production cost, just producing several differentiation products that can
reflect the preference of most domestic citizens, exporting some products to meet the preferences of a
few people abroad and the other preferences of domestic minority can be met by importing. These three
basic areas of modern industrial organization theory are market structure, market behaviour and market
outcomes and the core issue of this theory is protecting the dynamic competition under market
mechanism, at the same time, taking full advantage of "economy of scale".
5 The Study of How the Innovation of Industrial Organization Has an Effect on
Trade Structure
5.1 The selection of the indicators to measure the effect of industrial organization on trade
structure
Since this paper is mainly based on new trade theory and the perspective of industrial organization,
trying to study the variable relationship between the growth of trade structure and the innovation of
domestic industrial organization deeply and systematically, we select the following three representative
indicators: economy of scale, technological progress and product difference.
The structure of export trade (EXI). The structure of Chinese total exports can be explained
approximately by the quantity of the exports of manufactured goods /export gross, namely, the structure
of exports of manufactured goods.
Technical progress (R & D). A country's technological progress is usually measured by the proportion of
finance that the government invests in the exploration and innovation of technology. That’s why I select
a country’s R & D to measure this indicator.
Economy of scale and product differentiation (GL). Because the trade of product differentiation is the
product of economy of scale, these two factors are discussed together in this paper. Also, on the basis of
economy of scale, intra-industry trade appears easily from products that represent every country’s need,
so I chose intra-industry trade index (GL) to measure these two indicators. The index is calculated as: T
= 1 - [| X-M |/ (X + M)] where X and M represent respectively the quantity of exports and imports of a
particular industry or a certain category of merchandise. The values of letter “T” range from 0 to 1.
Taking into the account the fact that most of the products of mechanism and electricity, transport
equipment, IT etc implementing intra-industry have more high-tech and added-value and will have more
development space in China, so in this paper, the index of intra-industry trade of machinery and
transport equipment are selected to be the measure.
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5.2 Regression Analysis
The interval of data sample ranges from 2000 to 2008, the annual data should be the standard data.
：
Table 1 2000-2008 Summary of the variables
Unit %
The structure of
Technological progress
Economy of scale and
Year
product differentiation GL
export trade (EXI)
(R&D)
2000
89.8
0.90
94.65
2001
90.1
0.95
94.0
2002
91.2
1.07
96.20
2003
92.1
1.13
98.69
2004
93.2
1.23
96.99
2005
93.6
1.34
90.41
2006
94.5
1.42
87.80
2007
94.9
1.49
83.36
2008
94.6
1.54
79.25
Source: the index of trade structure of exports (EXI) and intra-industry trade is processed and calculated by
<Chinese Ministry of Commerce>; technical progress (R & D) is processed and calculated by <China Statistical
Yearbook>.
（ ）
To determine the correlation between the structures of export trade, technological progress and economy
of scale, product differentiation further, I select “least squares regression analysis” to creat regression
model. Firstly:
( EXI )t =
（
C1 + β1 • Rδ D)t +β 2 • (GL)t + U t
C1 is a constant term, Ut for the error term. According to available data, running the
Software of SPSS, regression results are as follows:
EXI t = 73.882 + 9.905Rδ Dt +0.072GLt + U t
（31.131） （17.814） （3.696）
R2=0.991
Adjusted R2=0.988
DW=1.890
F-statistic=320.212
5.3 The analyses of the empirical results
The signs of R & D and the GL coefficient are positive, which can be seen from the regression results,
β 〉0 ， β 〉0
2
namely 1
,proving that trade structure, technological progress, economy of scale and
product differentiation and these three factors show a positive correlation respectively, which is in line
with economic theory and phenomena. R2=0.991 shows that the goodness of fit of this equation is
higher and I believe the R & D and the GL are also the valid explanatory variables of the model. The
correlation coefficient between EXI and R&D is 9.905, namely, when other factors remaining
unchanged, each additional percentage point of the radio of financial supporting investment in
technological development and innovation, Chinese export trade structure will increase 9.905
percentage points, which shows that In the case of other factors being constant, technical progress has a
significant effect on Chinese trade structure. What’s more, it is also can be seen from their “t” value,
t = 17.814〉 t
(9) = 2.262 t = 3.696〉 t
(9) = 2.262
0.025
0.025
, 2
, R & D and GL coefficients
namely, 1
are significantly different from zero, indicating that technological progress, economies of scale and
product
differentiation
all
have
an
impact
on
the
export
trade
structure.
DW=1.890〉 du (9, 2,5%) = 1.699 , indicating that it does not exist the equation disturbance term
autocorrelation in the equation.
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6 Conclusion
It can be obtained from the analyses above that the optimization of industrial organization plays an
active role in restructuring trade and technological progress, economies of scale and product
differentiation all have a significant impact on the export trade structure. We can optimize Chinese
industrial organization, promote the adjustment and upgrading of Chinese industrial structure constantly
and promote the intra-industry trade of high-tech products to optimize our export trade structure by
promoting technological progress in Chinese enterprises, enabling enterprises to achieve economies of
scale and product differentiation and other measures. At present, the trade structure in Economic
development of our country is backward and there is uncoordinated and irrational relationship between
trade structure and industrial structure, which leads to the result that China is in a very disadvantageous
position in international trade and the fundamental reason lies in the lag of industrial organization, so it
is an urgent need to explore the policy of industrial organization’s innovation to build the road that suit
Chinese development, leading China to a strong trade country and look for ideas that are good for
Chinese economic development.
Authors Brief:
GENG Nai Guo, male, born in June of 1968, Work in Shenyang Ligong University and is engaged in the
work of teacher now, professor, direction of studying: Industrial Economy and Enterprise Management.
Master degree candidate's tutor
Tel: 024-24682232 13309825169
E-mail: [email protected]
ZHAO Ling Fei, male, born in March of 1982, Work in Shenyang Ligong University and is engaged in
the work of teacher now, direction of studying: Enterprise Management.
Tel: 024-31273453 13998115974
E-mail: [email protected]
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