Contributions to Economics More information about this series at http://www.springer.com/series/1262 Stephan Huber Product Characteristics in International Economics Role and Impact on Economic Development 123 Stephan Huber Fachbereich Wirtschaftswissenschaft University of Regensburg Regensburg, Germany ISSN 1431-1933 ISSN 2197-7178 (electronic) Contributions to Economics ISBN 978-3-319-76092-6 ISBN 978-3-319-76093-3 (eBook) https://doi.org/10.1007/978-3-319-76093-3 Library of Congress Control Number: 2018934714 © Springer International Publishing AG, part of Springer Nature 2018 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Printed on acid-free paper This Springer imprint is published by the registered company Springer International Publishing AG part of Springer Nature. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface This book deals with the role of product characteristics in international economics and their impact on economic development. In particular, Chap. 2 focuses on the measurement of product characteristics as well as on the impact of product sophistication on growth. An early version of the chapter was published in 2017 in the Journal of Economic and Social Measurement (Vol. 42, Issue 1, pp. 27– 65). However, the version I present here is extended and updated. Chapter 3 offers evidence on the impact of foreign equity on the characteristics of products that firms produce. This chapter is the result of joint work with Dr. Katharina Schauberger (born as Eck). Previous outcomes of this collaboration were published in 2016 in the Canadian Journal of Economics (Vol. 49, Issue 4, pp. 1658–1684). Chapter 4, which is based on joint work with Prof. Dr. Richard Frensch (University of Regensburg and IOS Regensburg) and Prof. Dr. Roman Horváth (Charles University, Prague), analyzes whether the quality of a country’s legal and institutional framework is influenced by said country’s predisposition to trade rule-of-law-intensive goods. All chapters are based on my dissertation which was accepted at the University of Trier and supervised by Univ.-Prof. Dr. Xenia Matschke Ph.D. (University of Trier) and Univ.-Prof. Dr. Dr. h.c. Joachim Möller (University of Regensburg and iab Nuremberg). The chairman of the dissertation committee was Univ.-Prof. Dr. Ludwig von Auer (University of Trier). Regensburg, Germany Stephan Huber v Acknowledgements One of the key lessons I learned working on this book is that the generosity, patience, kindness, and wisdom of my family, friends, and colleagues is priceless. I hope that I will be able to repay their generosity, at least in part, by playing the same role for others in the future. I am indebted to my advisers, Xenia Matschke and Joachim Möller. Both are brilliant researchers and very nice persons. They inspired and helped me whenever I needed it. My sincere gratitude goes to Dieter Sadowski and Richard Frensch for their continuous support and advice. They encouraged me early on to go out to international conferences and to discuss my research with an open mind. I presented parts of this book at more than thirty international conferences. This could not have been possible without the financial support of the Graduate Center of Excellence at the Institute for Labour Law and Industrial Relations in the European Union (IAAEU) in Trier where I was a full-scholarship holder, the Institute for East and Southeast European Studies Regensburg (formely known as Osteuropa- Institut Regensburg), and the chair of Joachim Möller. I also thank Evžen Kocendaˇ and Jan Hanousek for hosting me at the CERGE-EI in Prague. My research stays in Assisi and the University of Perugia would not have been possible without Cristiano Perugini, Richard Frensch, and the ERASMUS Mobility Program. Special thanks go to Cristiano Perugini, Fabrizio Pompei, and Francesco Venturini. Their generosity and hospitality was exemplary. I am grateful for my colleagues and friends at the IAAEU Trier and the University of Regensburg. I want to thank Rainer Ammon, Rolf Tschernig, Philipp vom Berge, Roland Weigand, Daniel Heuermann, Stefan Rameseder, Binh Nguyen Thanh, and Daria Suprunenko for providing feedback and keeping me motivated. Especially Christoph Rust helped me a lot, thank you. With Nicolas Apfel, Rupert K. Eisfeld, Veronika Püschel, and Viktoria Schuck, I was able to draw on excellent research assistants. I thank for the support. I also thank Jan C. Stoll for the good times in Trier. I also want to thank my coauthors. Katharina Schauberger is a smart woman. It was a pleasure to work and be with her. Working with Richard Frensch and Roman Horváth always felt like a privilege to me. Their experience and kindness is superb. vii viii Acknowledgements Although the publications I placed together with Christoph Rust, Binh Nguyen Thanh, and Martin Breßlein did not become part of this book, these collaborations encouraged and enabled me to write this book. Above all, I thank my family. Without the care and sacrifices of my parents, Edith and Michael, and my wife, Martina, I would not have been able to write this book. Finally, I thank my children, Rosa and Ignaz, for their smile, which motivates and delights me. Regensburg, Germany Stephan Huber October 2017 Contents 1 Introduction .................................................................. 1 1.1 GeneralTopicoftheBook............................................. 1 1.2 ContributionandContentofThisBook............................... 4 References..................................................................... 6 2 Indicators of Product Sophistication and Factor Intensities: Measurement Matters ....................................................... 9 2.1 Introduction ............................................................. 9 2.2 Indicators That Are Based on Input-Output Tables ................... 11 2.3 A Critical Analysis of Product Sophistication Indicators............. 13 2.3.1 Michaely (1984) ............................................... 13 2.3.2 Lall et al. (2006) ............................................... 15 2.3.3 Hausmann et al. (2007)........................................ 17 2.4 An Alternative Econometric Approach................................ 21 2.5 GeneralWaystoModifytheIndicators ............................... 24 2.6 DescriptiveStatistics ................................................... 27 2.6.1 DoesSampleBalancingMatter?.............................. 28 2.6.2 DoestheCalculationProcedureMatter?..................... 29 2.6.3 DoestheAggregationLevelMatter? ......................... 36 2.6.4 DoestheTimeDimensionMatter? ........................... 38 2.6.5 DoOtherThingsMatter?...................................... 39 2.7 Re-estimation of Hausmann et al. (2007) ............................. 41 2.8 Conclusion.............................................................. 47 References..................................................................... 47 3 Product Sophistication and Spillovers from Foreign Direct Investment ............................................................ 51 3.1 Introduction ............................................................. 51 3.2 Potential Channels of FDI Spillovers and Their Effect on Product Sophistication .............................................. 55 3.3 DataandSummaryStatistics .......................................... 57 3.3.1 Firm-LevelData:Prowess..................................... 57 ix x Contents 3.3.2 Industry Linkages: OECD Input-Output Tables ............. 59 3.3.3 Product Sophistication ........................................ 63 3.3.4 Summary Statistics on Spillover Linkages and Product Sophistication in India........................... 65 3.4 The Impact of FDI Spillovers on Product Sophistication............. 70 3.4.1 Manufacturing of Highly Sophisticated Products ............ 70 3.4.2 Extent of Product Sophistication.............................. 74 3.4.3 RobustnessChecks ............................................ 78 3.4.4 Endogeneity Concerns ........................................ 82 3.4.5 ComparativeStatics ........................................... 85 3.5 Conclusion.............................................................. 87 References..................................................................... 88 4 Trade Patterns and Endogenous Institutions: Global Evidence ........ 91 4.1 Introduction