International Trade and International Finance (eBook)

Malabika Roy is a faculty member of the Department of Economics, Jadavpur University, Kolkata. She teaches financial economics to the undergraduate as well as the post graduate students. Her research interest includes corporate finance, financial markets in emerging economy and understanding the role of financial markets and institutions at the household level. She has widely published in reputed national and international journals. She has also conducted several research projects funded by national and international agencies and has worked as consultant for UN, ESCAP. Saikat Sinha Roy is a faculty member of the Department of economics, Jadavpur University, Kolkata. His research interest and teaching are focused on theories and empirics of international trade, applied trade modeling, and interface between trade and industrial structure, international trade and institutions. He has published in reputed national and international journals. He received the prestigious British Academy of Social Sciences/ESRC/AHRC Visiting South Asia fellowship in 2009. In 2013 he received a research grant from British High Commission, New Delhi, to conduct a study on state level exports in India. He also conducted the UNCTAD-GoI-DfiD funded Trade Related Research Capacity Building project.

Foreword 5
Contents 6
Introduction 9
Recent Developments in Trade Theory and Empirics 15
1 The “New-New” Trade Theory: A Review of the Literature 16
Abstract 16
1 Introduction and Motivation 16
2 Stylized Facts in Need of an Explanation 18
3 The Melitz Model and How It Explains the Stylized Facts 20
3.1 Autarky 21
3.2 Trade 23
4 Subsequent Research 25
5 Welfare Implications 31
6 Conclusion 32
References 32
2 Time Zones and FDI with Heterogeneous Firms 35
Abstract 35
1 Introduction 36
2 The Model and Basic Results 38
3 Conclusions 43
References 43
3 MNEs and Export Spillovers: A Firm-Level Analysis of Indian Manufacturing Industries 45
Abstract 45
1 Introduction 45
2 FDI and Exports in India: Some Stylized Facts 47
3 Analytical Framework 48
3.1 The Estimation Model 51
3.2 The Method and Data 52
4 Empirical Results 53
4.1 Robustness Check for the Export Spillover Model 56
5 Conclusions 57
References 58
4 IPR Regulatory Policy, Commercial Piracy, and Entry Modes of MNC: A Theoretical Analysis 61
Abstract 61
1 Introduction 62
2 The Model 64
2.1 The Game Plan 64
2.2 The General Assumptions 66
3 The Behavior of MNC and Fake Firm Under Different Entry Modes 67
3.1 Export Mode of Entry 67
3.2 Fragmentation Mode of Entry 68
3.3 Complete Production in LDC 74
4 Choice of Optimal Entry Modes and IPR Policy 79
5 Numerical Analysis 81
6 Conclusion 83
Appendix 1 84
References 85
International Trade and Institutions 86
5 International Trade and the Size of the Government 87
Abstract 87
1 Introduction 87
2 The Framework of a Small Open Economy 90
3 Openness and the Size of the Government 92
4 Robustness: Positive Externality 97
5 Conclusion 100
Appendix 100
References 104
6 The Effects of Corruption on Trade Flows: A Disaggregated Analysis 106
Abstract 106
1 Introduction 106
2 Empirical Model 109
3 Data Sources and Results 112
4 Conclusions 124
Appendix 1 124
References 124
7 Enlargement Decisions of Regional Trading Blocs 126
Abstract 126
1 Introduction 126
2 The Model 129
3 The Benchmark Case: Technology Asymmetry 130
4 Expansion of the Existing FTA 132
4.1 Second-Stage Decisions 133
4.1.1 Horizontal Expansion and the Non-member Country’s Decision 133
4.1.2 Simultaneous Consolidation and Expansion and the Non-member Country’s Decision 137
4.2 First-Stage: Optimal Expansion Decision of Member Countries 140
4.3 Subgame Perfect Expansion of the FTA 142
5 Market Size Asymmetry 143
5.1 Second-Stage Decisions 143
5.1.1 Horizontal Expansion and the Non-member Country’s Decision 143
5.2 Simultaneous Consolidation and Expansion and the Non-member Country’s Decision 145
5.3 First-Stage Decisions 146
5.4 Subgame Perfect Expansion of the FTA 149
6 Conclusion 150
Acknowledgments 151
Appendix 151
References 165
8 Deal Breaker or the Protector of Interests of Developing Countries? India’s Negotiating Stance in WTO 167
Abstract 167
1 Introduction 167
2 India in GATT and WTO 170
2.1 Agreement on Agriculture and India 172
2.2 Non-Agricultural Market Access and India 175
2.3 Trade in Services and India 177
3 Which Way Is the Doha Round Heading? 179
4 India’s Role in Doha Round: Running with the Hare and Hunting with the Hounds? 183
References 184
9 Is WTO Governed Trade Regime Sufficient for Export Growth? 186
Abstract 186
1 Introduction 187
2 A Snapshot View on Growth in World Trade 189
2.1 Cross-Country Export Growth 190
2.1.1 Mobility Analysis 191
3 Gravity Model in Trade Flow Estimation and Its Extensions 193
4 Model and Econometric Methodology 194
4.1 Possible Determinants of Export Flows 194
4.1.1 Measure of Infrastructure 195
4.1.2 The Econometric Model 195
Separating Out the Effect of WTO 196
4.2 Data Coverage and Sources 197
5 The Estimation Results 198
6 Conclusions 202
References 203
Issues in Trade, Trade Policy and Development 205
10 Export Performance in Textile and Garments with China as a Competitor: An Analysis of India’s Situation from the Perspective of Structure-Conduct-Performance Paradigm 206
Abstract 206
1 Context 207
2 T& G Export: The Relative Performance of India and China
3 India and China After Phasing Out of the MFA 218
4 Structure of T& G Industry in India and China
5 Nature of Competition and Specialization in Major Export Markets 227
6 Concluding Observations 230
Acknowledgments 232
References 232
Websites Consulted 233
11 Impact of Trade Liberalization on Indian Textile Firms: A Panel Analysis 234
Abstract 234
1 Introduction 235
2 Scenario 236
3 Literature Review 241
4 Data Sources and Methodology 244
5 The Fixed Effect Models: Description, Analysis, and Findings 247
5.1 Model Specifications 247
5.2 Results and Interpretations 248
5.2.1 Firm-Level Profit After Tax 248
5.2.2 Analysis of Firm-Level Sales Revenue 251
5.2.3 Firm-Level Imports of Raw Materials 253
5.3 Discussion of the Main Findings 256
6 Conclusion 257
References 258
12 Trade, Infrastructure and Income Inequality in Selected Asian Countries: An Empirical Analysis 261
Abstract 261
1 Introduction 261
2 Data and Methodology 265
2.1 Robustness Checks 268
3 Inequality, Trade and Infrastructure: Stylized Facts 268
4 Trade, Infrastructure and Inequality: The Empirical Relationship 271
5 Conclusions 278
Acknowledgments 279
Appendix: List of Variables and Sources 280
References 280
13 A Theoretical Model of Trade, Quality of Health Services and Signalling 283
Abstract 283
1 Introduction 284
2 Rationale Behind Signalling Cost 287
3 The Model Under Autarky 289
3.1 Stage 2: Patients Select Quality of Innovative Health Services 290
3.2 Stage 1: Price Selection of the Profit Maximizing MNHSP 292
4 The Model with Trade 294
5 Concluding Remarks 296
References 297
14 Smuggling and Trafficking of Workers: A Brief Review and Analysis of the Economics of Illegal Migration 298
Abstract 298
1 Introduction 298
2 The Economics of Illegal Migration 301
2.1 Impact at Destination 303
3 An Analytical  Note with Smuggling and Trafficking of Illegal Workers 307
4 Concluding Remarks 312
Acknowledgments 313
Appendix 1 313
References 315
15 Impact of Trade Restriction on Child Labour Supply and the Role of Parents’ Utility Function: A Two Sector General Equilibrium Analysis 317
Abstract 317
1 Introduction 317
2 The Model 321
3 Derivation of Supply Function of Child Labour 322
4 The General Equilibrium Analysis 325
5 Comparative Statics 325
5.1 Imposition of Stringent Trade Restriction by Rest of the World on the Exported Product of the Small Open Economy and Effect on Factor Price and Child Labour Supply 326
5.2 Alternative Specification of Utility Function and Effect on Child Labour Supply 328
6 Concluding Remarks 330
References 330
Issues Related to Foreign Investment Flows 332
16 The Determinants of Foreign Direct Investment: An Analytical Survey 333
Abstract 333
1 Introduction 333
2 Changing Map of FDI in the Recent Years 337
2.1 Recovery of Global Investment and New Trends in Outflows from the Global South 341
3 The Theoretical Background 344
4 Empirical Findings 346
4.1 Domestic Pull Factors as Determinant of FDI Inflows 346
4.2 Push Versus Pull Factors as Determinant of FDI Inflows 350
4.3 Business Cycles in Advanced Economies and Flow of FDI to Emerging Markets 351
4.4 Internalization by the Global South 352
4.4.1 Drivers of Outward FDI for the Global South: Empirical Evidence 353
4.4.2 Motivations 354
5 Concluding Remarks 356
References 357
17 Foreign Direct Investment, Capital Formation, and Growth 363
Abstract 363
1 Introduction 363
2 Growth of FDI and Its Long-Term Relation with Economic Growth 365
2.1 Granger Causality Tests 367
2.2 Long-Run and Short-Run Relationship Between FDI and Growth: Dynamic Panel Data Analysis 367
3 Concluding Observation 370
References 370
18 Foreign Direct Investment and Macroeconomic Indicators in India: A Causality Analysis 372
Abstract 372
1 Introduction 372
2 The Present State of Art 374
3 Methodology and Data Sources 376
3.1 Causality Test 376
3.2 Toda and Yamamoto Test 376
3.3 Data Measurement 378
3.4 Macroeconomic Indicators 378
4 Empirical Results 379
4.1 Toda-Yamamoto Causality Test 379
5 Conclusion and Policy Implications 381
References 382
Issues Relating to Globalization, Financial Markets and Financial Instruments 384
19 Exploratory Study of Select Commodity and Equity Indices Around the Meltdown of 2008 385
Abstract 385
1 Lay of the Land 385
2 Background Literature 388
3 Exploratory Data Analysis of Select Price Trends 391
4 A Few Researchable Ideas 396
References 402
20 An Empirical Investigation of Volatility Clustering, Volatility Spillover and Persistence from USA to Two Emerging Economies India and China 403
Abstract 403
1 Introduction 403
2 Diagnostic Tests 405
2.1 Unit Root Tests 406
2.2 Chow Test 407
3 GARCH Model: Results 408
3.1 GARCH Model to Establish Persistence of Shock and to Calculate Half-Life of Shock 408
3.2 Half-Life Calculation 410
4 EGARCH Model: Results 413
4.1 EGARCH Estimates to Justify Volatility Clustering and Leverage Effect 413
4.2 EGARCH Estimate to Justify Spillover from US Markets in Different Sub-periods 414
5 Conclusion 416
Appendix 1 417
Appendix 2 419
Appendix 3 421
References 424
21 Imbalances, Local and Global, and Policy Challenges in the Post-Crisis World 426
1 Introduction 426
2 Global Imbalance 427
3 Local Imbalances 428
4 Inequality in Income and Wealth 430
5 Wake up Call for Central Bankers 430
6 Conclusion 432
References 432
22 Testing Non-linearity in Emerging and Developed Markets 434
Abstract 434
1 Introduction 435
2 Data Set 436
3 Non-linearity Tests and Results 437
3.1 Non-linearity 437
3.2 BDS Test 439
3.3 Hinich Bi-Spectrum Test 441
3.4 Keenan Test 443
3.5 Tests Based on Neural Networks and Taylor Series Approximations 444
4 Conclusion 446
Appendix 447
References 460
Issues Related to Foreign Exchange Market 463
23 Foreign Exchange Markets, Intervention, and Exchange Rate Regimes 464
Abstract 464
1 Introduction 464
2 Foreign Exchange Market: Institutional Features 466
2.1 Indian FX Markets 469
2.2 Types of Intervention in FX Markets 476
2.3 Impact of Measures on Domestic Markets 479
2.4 Encouraging Hedging 481
3 FX Markets and Policy 482
4 Conclusion 484
Acknowledgment 485
Appendix: Deriving Equilibrium Noise Trader Entry 485
References 486
24 Global Foreign Exchange Market: A Crisis Analysis 488
Abstract 488
1 Introduction 489
2 Earlier Literature in the Field 490
3 The Study 491
3.1 Stress in the GBP/USD Exchange Rate and the Two Stock Markets 493
3.2 Stress in the INR/USD Exchange Rate and the Two Stock Markets 498
3.3 Stress in the INR/SGD Exchange Rate and the Two Stock Markets 501
4 Concluding Remarks 503
References 504
25 The Impossible Trinity: Where Does India Stand? 506
Abstract 506
1 Introduction 507
2 India Post 1991 Liberalization Reforms 508
2.1 Capital Account Management 508
2.2 Exchange Rate Management 510
3 Impossible Trinity or Trilemma 511
3.1 Evolution of Trilemma in India 511
4 Concluding Remarks 517
References 517
Issues Related to Financial Institutions 519
26 Guaranty Funds and Moral Hazard in the Insurance Industry: A Theoretical Perspective 520
Abstract 520
1 Introduction 520
2 The Model 523
2.1 The Setup for the Insurer 523
2.2 The Insurer’s State-Contingent Payoffs 525
3 Optimal Quality Decisions from the Social Planner’s and the Insurer’s Perspectives 526
3.1 Underwriting Premiums 526
3.2 The Social Planner’s Problem 527
3.3 The Insurer’s Problem 528
3.4 Optimum Quality Comparisons for the Social Planner and Equity Holders 529
4 Insurer’s Quality Choices in the Presence of a Guaranty Fund with a Pro-Rata Loss Sharing Scheme 529
5 An Alternative Mechanism for Mitigating the Moral Hazard Problem 531
5.1 Optimal Asset Quality When Underwriting Quality Is Given and Guaranty Fund Holds an Option on Insurer’s Future Cash Flow 531
5.2 Optimal Underwriting Quality When Asset Quality Is Given and Guaranty Fund Holds an Option on Insurer’s Future Cash Flow 533
5.3 Discussion of the Contingent Regulatory Mechanism 534
6 Conclusion 535
Acknowledgments 535
Appendix 536
References 537
27 Performance of Aggregate Portfolios of Equity Mutual Funds: Skill or Luck? 539
Abstract 539
1 Introduction 539
2 Understanding Mutual Funds 540
2.1 Literature Survey 547
2.2 The Performance of Aggregate Portfolios of Indian Equity Mutual Funds 548
2.3 The Regression Framework 548
2.4 Construction of Risk Factors 549
2.5 Regression Results for Equal-Weighted and Value-Weighted Portfolios of Active Funds 550
2.6 Bootstrap Methodology 551
2.7 Bootstrap Analysis 552
3 Conclusion 554
References 555
28 Foreign Bank Presence and Financial Development in Emerging Market and Developing Economies: An Empirical Investigation 556
Abstract 556
1 Introduction 556
2 How Do Foreign Banks Affect Financial Development? 558
3 Related Empirical Literature 560
4 Research Hypotheses and Empirical Methodology 563
4.1 Key Hypotheses 563
4.2 Empirical Model 564
4.3 Data Sources and Definitions 567
5 Empirical Results 567
6 Conclusion 572
Appendix 572
References 574
29 Banks, Financial Derivatives, and Crises: A Fourth-Generation Model 576
Abstract 576
1 Introduction 576
2 From the Third to the Fourth Generation 578
3 Manias and Panics 581
4 Conclusion 586