Intra-Industry Trade Between India and Indonesia

Prabheesh, K P and Vidya, C T (2019) Intra-Industry Trade Between India and Indonesia. Buletin Ekonomi Moneter dan Perbankan. pp. 511-530. ISSN 1410-8046

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Abstract

This paper analyzes the determinants of India’s Intra-Industry Trade (IIT) with its trading partner, Indonesia, from 1995 to 2017. We estimate India’s IIT with Indonesia using bilateral commodity trade data at the two-digit Broad Economic Categories classification code level. Our estimates of IIT demonstrate that India’s trade with Indonesia is indeed intra-industry in nature. However, no remarkable improvements in the intensity of IIT is found. We also examine the determinants of IIT by estimating a standard IIT equation using an autoregressive distributed lag model. Our empirical findings reveal that trade imbalances, disparity in the demand structure, and the human capital endowments among the countries reduce bilateral IIT and that foreign direct investment and trade openness play an important role in enhancing it. This study therefore suggests relevant policy interventions to facilitate fair trade by reducing barriers.

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