See

discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/305710293

Factors Transforming High-Tech Exports from

OICs

Article · January 2015

CITATIONS READS

0 71

3 authors, including:

Zafar Mahmood
School of Social Sciences and Humanities, NUST, Islamabad, Pakistan
56 PUBLICATIONS 118 CITATIONS

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Trade Potential of Pakistan View project

All content following this page was uploaded by Zafar Mahmood on 29 July 2016.

The user has requested enhancement of the downloaded file.

Journal of Business & Economics
Vol.7 No.2 (July-December, 2015) pp. 171-191

Factors Transforming High-Tech Exports from

OICs
Uzma Iqbal*
Zafar Mahmood∗∗
Atiq-ur-Rehman∗∗∗

Abstract

This paper intends to empirically examine how R&D expenditures, import of

intermediate inputs and scale-economies influence high-tech exports from
Organization of Islamic Countries (OICs). In this context, the study assesses
the predictions of the theories of international trade on comparative
advantage, processing trade as well as new economic geography. The paper
focuses on selected OICs that are aspiring to become technologically
advanced by diversifying their production and export base from low-end
products to high-tech products. To achieve this objective, these countries are
investing on domestic R&D activities, and making efforts to attract foreign
technologies and knowledge through imported inputs and foreign direct
investment. Besides, they are restructuring their industries to benefit from
scale-economies. Within this perspective, using the Empirical Bayesian
technique, the paper concludes that R&D expenditures positively influence
high-tech exports as predicted by traditional theories; while economies-of-
scale are relatively less effective in the promotion of high-tech exports. The
variable import of electronic parts and components strongly support the
presence of a phenomenon of processing trade. Based on these findings, the
paper draws some implications for policy making to leverage high-tech
exports from OICs.

*
Uzma Iqbal, Graduate, Federal Urdu University of Arts Science and Technology, Islamabad,
Corresponding author e-mail: uabd01@yahoo.com
∗∗
Zafar Mehmood, Professor and Head of Research, School of Social Sciences and
Humanities, National University of Sciences and Humanities, Islamabad.
∗∗∗
Atiq-ur-Rehman, Assistant Professor, Pakistan Institute of Development Economics,
Islamabad.ateeqmzd@gmail.com

171
 Iqbal, Mahmood & Rehman

Key Words: High-Tech Exports, Empirical Bayesian Method, OIC

countries.

1. Introduction

With harmonization of trade policies and revolution in ICT technology,

the world is experiencing freer movement of goods and services as well as of
factors of production across countries. These movements are increasingly
influencing the location of factors of production, which in turn is changing
the dynamics of comparative advantage. In this context, investment made in
research and development (R&D) and human capital are helping countries to
transform their economies to become attractive locations to produce and
export high-tech products rather than low-end products.

Conventional trade theories predict that with the evolution of factor

proportion, through the increase of knowledge changes the comparative
advantage over period. Countries can graduate from producing low-end
products to high-tech products. Recent literature on product cycle and
dynamic increasing returns appears to confirm the predictions of the
conventional trade theories (Vernon, 1966; Krugman, 1979; Redding, 1999).

Heckscher- Ohlin (HO) theory of international trade is based onthe

assumption of relative differences in capital-labor ratios across countries and
predicts that a country will export that product which intensively employs the
abundantly available factor of production.

New trade theories focus on the “size” (scale) of the market as an

important determinant of production and hence trade. In larger markets,
consumers benefit from a wider range of choices and lower prices, while
workers are also rewarded with higher real wages (Krugman, 1980). As
production of knowledge and technology (patents) are usually characterized
by scale-economies, it may be expected that the production which is more
concentrated with R&D establishes its place in bigger markets. Nonetheless,
international experience shows that small countries with well-built

172
 Factors Transforming High-Tech Exports from OICs

exhaustive R&D production, due to acquisition of knowledge historically or

accidently, can also specialize in high-tech products and gain sufficient scale-
economies to penetrate in global markets (McCann and Mudambi, 2004). It
needs to be underscored here that at times when diffusion of knowledge is
effective in a small economy then it becomes more important transforming
factor than even scale-economies to gain comparative advantage (Fagerberg,
et al., 2009).

North-South models developed by Krugman (1979) and Lu (2007) allow

for technological differences across countries, which explain the historical as
well as modern trade patterns. The model allows North either to enhance
R&D investment (“moving-in” phenomenon) to create new technology or
transfer its existing technology to countries in the South (“moving-out”
phenomenon), thus giving an advantage to the South to benefit from
advanced technology of the North. These theoretical contributions provide
the foundation for understanding the specialization patterns prevalent in the
developing South. Transfer of modern technology thus allows Southern
countries to gain comparative advantage in the production of high-tech goods
(Redding, 1999).Thus, technological innovation that takes place in the North
and later transfer of technology to the South both play an important role in
determining the trade pattern and evolution of trade pattern over time. In this
context, Srholec (2007) showed that high-tech specialization in developing
countries is not due largely to indigenous technological capabilities but due
mainly to intra-product import of parts and components (embodied
technology transfer).

The production and the exports of high-tech goods would possibly be

slightly affected or there would be no run-over of R&D expenditures if a
country has weak support institutions, which eventually do not facilitate
export firms to realize opportunities originating from knowledge- related
activities. Conventional trade theories whereas do consider intuitional setup
in their model formulations by considering perfect competition in both goods
and factor markets but refrain from modeling international differences in
intuitional set-ups. Lack of competition, barriers to entry, and state

173
 Iqbal, Mahmood & Rehman

regulations are important for the growth of output and international trade.To
capture the role of institutions on economic growth and comparative
advantage, the ratio of government expenditure to GDP is used as a proxy.

Within the above perspective, this paper empirically examines whether

Organization of Islamic Countries (OICs), who aims at increasing production
and export of high-tech products through increased R&D expenditures, are
able to impact their high-tech exports, or whether market size effect is a
prominent determinant of their specialization in high-tech products and
comparative advantage in high-tech products. The paper also attempts to
assess whether imports of intermediate inputs (electronics parts and
components) have helped OICs to move into high-tech goods production and
exports. Besides, the effect of relevant control variables is examined, such as
intuitional quality, education and FDI, on high-tech exports.

Remaining of the paper has 4 sections divisions. Section 2 set downs

theoretical framework. Empirical model is given in section 3. Section
4analyzes the empirical findings. Finally, section 5 concludes the paper and
draws some implications for policy.

2. Theoretical Framework

The models of ‘dynamic comparative advantage’ designate an input

function to investments in knowledge attracting activities (primarily
innovation through research and development) in shifting a country’s
comparative advantage since a long period of time. Such an evolution in
comparative advantage could either be explained through conventional
theories of international trade, enlightened by Ricardian model (differentials
across countries related to productivity) or HO model (differential factor
endowments across countries). Alternatively, evolution in comparative
advantage can follow what predicted by new economic geography model,
stating that high-tech goods manufacturing is subjected to increasing return
to scale and is therefore more likely to be situated in larger countries in

174
 Factors Transforming High-Tech Exports from OICs

presence of positive and high trade costs.1

In order to model the impact of an increase in knowledge capital (i.e.,

R&D-expenditures), the HO model is model. R&D is considered as an input
into the production of high-technology goods either directly or indirectly in
terms of skilled workers. The model (via Rybczynski theorem) predicts that
increased endowment of skilled workers will increase the supply of goods
and hence exports (or decrease in imports).

Alternatively, using the Ricardian model of comparative advantage in

terms of a cross section of countries with differences in technological
knowledge, it can be predicted that past technological change (it depends on
earlier expenditures on R&D, or production knowledge gathered with time)
determines the existing comparative advantage, which then structures the
pace of learning by doing and technological growth in each sector and each
economy.

The models predict that increased expenditure on R&D results in a

stronger comparative advantage in technology which then results improved
production of the industry. Therefore, both HO and the Ricardian approach
imitate the positive impact of R&D on the high-technology exports.

The new economic geography models weights the importance of market

size. The economies-of-scale and market size determine the specialization
patterns of trade within industries and everybody gains from trade as long as
this share is large, thus results the specialization in intermediate products
with the presence of closer and expanded linkages. Larger market size also
allows the chance of capturing externalities going that above of smaller
countries. Thus a focused spatial allocation of production may be
encouraged. In literature pecuniary linkages (consisting of backward linkages
showing supplies of intermediate goods and forward linkages illustrating to
larger demands i.e. size) are separated very precisely from the non-pecuniary

1
Theoretical and empirical frameworks presented here are based on Braunerhjelm and Thulin
(2008).

175
 Iqbal, Mahmood & Rehman

linkages related to knowledge overflows (here related as R&D). These

knowledge overflows increases in the larger domestic markets as the markets
are closer to each other. In order to get benefit of these expanded positive
externalities it is assumed that such knowledge overflows are confined to
home and increasing in market size and geographical closeness is
compulsory. Thus in the presence of trade cost and size differences across
countries if R&D is linked with increasing return to scale in production, the
production of the increasing scale good say here the high-tech good will
mainly occur in more sizable countries (who are too the net exporters of the
high-tech good).

The differences across countries that are related to the institutional

setting and with which the firms deal within their operations are ignored by
the trade and economic geography justifications of production and export
specialization specified above. Also different institutional designs are likely
to dominate or encourage the employment and transmission of a given
technology, so institutions can be viewed as a transfer factor. It has been
revealed by the prior research that how differences in the regulatory
structures, taxes, property rights, royalties, patents and incentives are directly
linked to the innovative process (Coughlinet al., 1991; Hill and Munday,
1992). Hence, for that reason proxies for such variables are included to
scrutinize the determinants of the dynamics of comparative advantage into
the empirical study.

3. Empirical Model

3.1 Empirical Condition

In this study the variable “share of high-tech exports” is taken as an

endogenous variable and is termed as the ratio of high-tech exports to the
total exports expressed as HTX. Instead of production variable the export
variable is selected as it points out that the products have reached sufficient
level of complexity or exclusivity, which generates their demand from
foreign countries. Besides, the selected countries have mixed trends of

176
 Factors Transforming High-Tech Exports from OICs

increase and decrease in their exports of high-tech products for the duration
of the study time, and the paper intends to analyze these trends. It may be
noted for the period of study that this share of exports of high-tech products
varies from 0.01 percent for Kuwait during 2000-2003 period to 40.47
percent for Malaysia in 2000-2003. This difference has remained fairly
stable. The impression achieved since 1996 from the countries with large
share of high-tech exports, two visible points come into sight. Primarily, in
expressions of ranking, Pakistan’s ranking increased from 10th to 6thplace
during 1996-2012, although the increase is steady but good thing is that it is
consistently moving up. Secondarily, considering the highest positions it can
be seen that Malaysia remained at the top with the highest share of 39.9
percent of the total exports, followed by Indonesia who stands at the high-
tech export share of 8.03 percent. Thus, Malaysia, Indonesia, Morocco,
Tunisia and Kazakhstan are holding five highest positions for the share of
high-tech exports among all OICs even for the entire study period too. It is
also observed that HTX for OICs does not increase over time. The average
increase in the share of high-tech exports between 1996 and 2012 for OICs is
slightly above 2.38 percentage points in year 2008 with the maximum of 4.54
percentage point increase in the year 2000. Malaysia who has the highest
share of HTX is experiencing a fall in it since 2000. It is noted that during
2000-2003 Malaysia had HTX of 40 percent while during this period its
imports of electronics parts and components was 24 percent of total imports
and the R&D expenditure was 0.6 percentage share of the GDP.

The theoretical study furnishes a comprehension that the HO model

strongly supports the indigenous innovation capabilities through investment
in R&D, which enhances the high-tech exports. In contrast, the model of new
economic geography emphasizes that large economies support the production
of high-tech goods and their exports. On the basis of these models, the
purpose is to examine whether or not the HO model offers good explanation
of high-tech exports from OICs? Does the new economic geography theory
propose well enough justification of high-tech exports from OICs? Whether
the processing trade phenomenon is more efficient in exporting high-tech
goods from OICs? To find the relevance of hypothesized questions an

177
 Iqbal, Mahmood & Rehman

empirical method is adopted.

A pooled data of OICs is taken over the time to give a balanced panel of
data in the analysis. In a sequence, to estimate the impact on the dependent
variable, panel regressions with random effects are applied because
individual differences of countries are not observable. Moreover, the set of
parameters for all countries is the same, which is problematic, and thus the
Empirical Bayesian methodology is used to get estimates for each individual
country. The error term is expected to exhibit standard properties; that is εj,t is
supposed to be autonomously and identically distributed with a zero mean
and variance σ2 for all j and t. Hence, the equation estimated is as follows:

HTX = β0 + β1R&Dj,t + β2SIZEj,t + β3INSj,t+ β4ImP&Cjt + β5Z j,t + εj,t

where, HTX represent the share of high-tech exports in total exports, the
explanatory variables are R&D as the relative level of expenditure or
disbursements on R&D as a percentage of GDP, market size (SIZE) represent
the size of a country’s GDP, INS relates to the impact of institutional settings
on the endogenous variable, imports of electronics parts and components as a
share of total imports (denoted by ImP&Cjt) and Z reflects the remaining
control variables in country j at time t. Hence, the general form of equation
including details of control variables is:

HTX = β0 + β1R&Dj,t+ β2SIZEj,t+ β3GEXPjt + β4IMP&C + β5EXPHK +

β6FDI + β7 TBP + β8 RGDPCH + εj,t

The coefficient β1 include the effect of expenditure on R&D as a

percentage of GDP and is expected to have a positive sign. The coefficient β2
captures the effect of market size used as a proxy for GDP as a percentage of
OIC GDP with the PPP adjusted current dollars on the dependent variable.
The large size of market is likely to have a positive influence on the
dependent variable. The coefficient β3 captures the effect of total government
expenditures on the share of high-tech export products, it is used as a proxy
for the institutional settings and is expected to have a positive sign of the

178
 Factors Transforming High-Tech Exports from OICs

coefficient. The coefficient β4 relates the relative share of imports of

electronics parts and components in total imports and is expected to
positively affect the dependent variable. The coefficient β5 shows the effect
of public sector expenditure on education and is expected to positively
influence the export of high-tech goods. The coefficient β6 represents the
inflow of foreign direct investment to OICs and is expected to positively
influence the high-tech exports. The coefficient β7 shows the impact of
exported technology. The coefficient β8 measures the impact of real GDP per
capita, employed as an alternative for capital per worker, and is anticipated to
have a negative impact.

Summary of the variables used in the analysis is described in Table 1

along with the data sources and the anticipated theoretical signs for each
variable.

Table 1
Variables Construction, Expected Theoretical Signs and Data Sources
Variable Description Expected Data Source
Sign
HTX High-tech exports/total exports Dependent WDI, World
Variable Bank
R&D Expenditure on R&D as % of +/- World Bank
GDP(GERD) and UNESCO
Imports of Logarithm of Import of integrated + WTO
IC&E circuits and electronic components
SIZE GDP as a % of OIC, PPP adjusted + SESRIC
current dollars Statistics and
Data base
FDI Inward stock of foreign direct + UNESCO
investment
EXPEDU Public spending on education as % of + UNESCO/
GDP World Bank
Data
RGDPCH Real GDP per capita (constant price) - Heston, et al.
(2002)
TBP Patents, royalties and license fees, ? WDI, World
receipts divided by payments, Bank
expressed in logarithm
Source: Adopted from Thulin (2006)

179
 Iqbal, Mahmood & Rehman

3.2 Data and Data Sources

To empirically analyze the above model for OICs, a complete data set
was required. In particular great difficulty was faced in collecting data on the
variable measuring knowledge and technology (patents and royalties).The
data used in the estimation of empirical model is for the period 1996 to 2012.

The data are obtained from World Development Indicators (WDI) by the
World Bank, SESRIC Statistics and Database by UNESCO, UN Statistical
Yearbook, specific Country’s case studies, UNIDO, WIPO, and U.S patent
and trade mark office website for patents (Table 1). In order to maintain the
consistency in data, missing data empirical techniques is used to fill the
values.

3.3 Hypotheses on Exogenous Variable

On the basis of the stylized facts of OICs and theoretical underpinnings

the following three hypotheses are formulated:

H1: Investment on knowledge positively influences high-tech exports.

H2: Scale economies positively impact high-tech exports.

H3: Import of intermediate inputs (transfer of embodied technology)

positively impact high-tech exports.

3.4 Methodology and the Estimation Procedure

Classical econometrics is applicable to stationary progression. As the

panel data comprise of both time-series and cross-section, to obtain
consistent results the time-series measurement makes it compulsory to apply
the Unit Root test for the certainty of outcomes. The study applies various
Unit Root tests to all the variables involved in the analysis following the
Nelson and Plosser (1982). To get reliable estimates, stationarity is crucial

180
 Factors Transforming High-Tech Exports from OICs

for standard econometric theory. To obtain the stationary series, the order of
integration is identified giving us the minimum number of difference through
the modern technique of panel unit root developed by Im, Pesaran, Shin
(2003) [hereafter IPS technique]. IPS technique is carried forward by the
famous method of Dickey-Fuller approach and is powerful for the fewer time
observations by merging both the time-series dimension with the cross-
section dimension. It identifies a disintegrated ADF regression for each
cross-section with individual outcomes and no time trend. Furthermore, Kao
(1999) panel co-integration test of Engel-Granger (1987) is employed for
more than one variable, which is found non-stationary so as to check the
presence of co-integration among the series and it is a second step of
estimation. Long run relationship between the chosen variables is measured
by a two-step residual based test.

3.5 Empirical Bayesian Estimator

Most of the econometrics techniques rotate around the classical

background. A new popular approach adopted in addition to classical
technique is empirical Bayesian approach. Bayesian estimation technique
has an important feature as it uses prior distribution by assuming
previous experience or guesses and makes the model more powerful
and flexible. With this character, this approach is particularly useful
when some data values are missing from the available data series. The
approach by creating missing values thus allows an improvement in
the significance level of the parameter estimates. It produces natural
results of the model thus contradicting the complexities of the classical
approach in which the prior parameters values are assumed randomly. In
Bayesian technique prior parameter values are estimated from the data.
Considering the advantages of Bayesian approach, this is used method to
estimate the model of high-tech exports share. The Empirical Bayesian
method does not make the estimates worse if missing values exist unlike the
traditional methods. In case of insufficient data with the sample size quite
smaller the Bayesian Approach establishes the necessary accuracy of the
model. Given the model

181
 Iqbal, Mahmood & Rehman

where, HTXi denotes the vector of high-tech exports share for the ith country,
Yi is a matrix of autonomous exogenous variables, βiis the vector of
coefficients and ϵi is the vector of residuals for each ith country.

In the Bayesian methodology, βi is assumed as random with several prior

density, i.e., βi ~ N (µ, Ω) somewhere µ is mean of prior density and the Ω is
variance of the prior density. The prior density incorporates our belief about
the parameters and the knowledge from the past experience.

The estimates of coefficients of regression, which are identified as

posterior, are gained by the following expression.

Variance of these estimates is given by

Thus, the Bayesian estimate is a weighted average of the prior and the
data density. The accuracy of the Bayesian methodology is sum of the
precision of prior and data. Thus, the Bayes estimates are constantly precise
than the data and the prior. The prior can be used from the previous beliefs
on the subject of the parameters. Additionally, it is possible to approximately
estimate the prior from the data and this methodology is called the Empirical
Bayes method as recommended by Carrington and Zaman (1994).The mean
of the prior density is estimated using the subsequent method:

Let, Xi be the vector of dependent variable for the ith cross-sectional unit
and Yi be the vector of independent variables then

182
 Factors Transforming High-Tech Exports from OICs

with,

then,

where, “n” is total number of cross-sectional units.

It can be seen that mean of the prior density is precision weighted

average of OLS estimates for all the cross sections. The variance of the prior
is given by

These prior mean and variance will be used to determine the coefficients
of the posterior density.

4. Empirical Results

Main purpose of the study is to determine the major factors influencing

high-tech export goods in OICs. This study thus provides meaningful
empirical support, which could be helpful in promoting high-tech goods’
exports from OICs.

4.1 Results of Panel Unit Root and Residual Based Co-Integration Tests

In order to assess the impact of different variables on the high-tech

exports, different classifications of variables is made. Thus, before reaching
at the final estimation, unit root test on each variable is checked as per
change in classification and it is also checked how differently it behaved on
the dependent variable. Finally, the variable is selected for which meaningful

183
 Iqbal, Mahmood & Rehman

results are obtained. Im, Pesaran and Shin (2003) unit root test is employed.
The results of unit root test on the selected variables are shown in Table 2.

Table 2
Panel Unit Root Test
Variable Statistics P Value U n i t R o o t I f :
GEXP -1.90919 0.0281 Not unit root (stationary)
EE -1.19126 0.1168 Unit root
FDI -1.46256 0.0718 Unit root
HTX -3.42111 0.0003 Not unit root (stationary)
IMP&C -2.95155 0.0016 Not unit root (stationary)
PATENTS 4.59720 1.0000 Unit root
R&D -2.29896 0.0108 Not unit root (stationary)
RGDP 4.96125 1.0000 Unit root
SIZE 0.21232 0.5841 Unit root

The variables are tested at level form. The series that are not stationary
shows the existence of unit root. Also the series which are unit root reflect
the null hypothesis; on the other hand the series which are stationary at the
level reflect the alternative hypothesis of unit root absence. Table 2 shows
that five variables including GEXP, HTX, IMP&C and R&D are stationary at
the level and do not show unit root in the Im, Pesaran and Shin test when
integrated at order I(0), depicted by t-value and the corresponding P-values
in Table 2. The remaining variables are not stationary and show unit root,
which forces us to employ co-integration test over them.

Now co-integration test is applied for the variables that are non-
stationary in order to find long run relationship between the high-tech exports
and its determinants. This would help in deriving better results. An Im,
Pesaran and Shin Panel co-integration test based on residual is employed to
see the long run relationship between the variables. The output of the
estimation is given in Table 3. The regression of the variables at the first
difference shows that there is long-run relationship between them and it
allows us to move to further estimation procedure.

184
 Factors Transforming High-Tech Exports from OICs

Table 3
Results of Residual Based Co-Integration test
At Level Form At First Difference
Method Statistic PROB.** Statistic PROB.**
(IF P<0.05,YES: IF (IF P<0.05,YES: IF
P>0.05 NO) P>0.05 NO)
Im, Pesaran -0.29633 0.3835 (No) -6.38925 0.0000 (Yes)
and Shin W-
Stat

4.2 Empirical Bayesian Results

Empirical Bayesian (EB) technique is used as the final estimation step;

the estimates of the empirical Bayes on the high-tech exports and its
determinant variables are reported in Table 4. The results obtained for
selected comparative advantage variables are consistent with the findings of
Braunerhjelm & Thulin (2008), especially when technology-related variables
are included in the regression.

In Table 4, the R&D is statistically significant and is positively linked

with high-tech exports. In particular, R&D turned out to be highly significant
for Azerbaijan and Morocco. Calvo (1996), Grossman (1990), and Jochem
and Schleich (2011) also found a positive association between R&D and
high-tech exports.

Another key variable, the market-size, which has a positive relationship

with the high-tech exports turned out to be statistically insignificant. This
indicates that OICs do not have sufficient scale-economies due to small-scale
and fragmentation of high-tech producing industries.

The variable import of electronic P&C is also introduced. It turned out to

be highly significant and is positively influencing the high-tech exports from
OICs. The coefficient shows that a one percent increase in IMP&C magnifies
the share of high-tech exports by about five percent. This finding is
consistent with the results found by Alves (2010), Srholec (2007) and
Lemoine and Kesenci(2002).

185
 Iqbal, Mahmood & Rehman

Table 4
Empirical Bayesian Results for High-Tech Exports

The variable stock of inflow of FDI is negatively influencing the high-

tech exports. It is well known that FDI in OICs is largely used in non-export
activities and is meant for domestic markets of these countries. As such this
finding is not contrary to general expectations.

Institutional setting in OICs is represented by the proxy total government

expenditures (GEXP). The results show that it has a positive relationship
with high-tech exports. It can be inferred that lack of institutions or their
capability adversely affect the high-tech exports and indeed act as a trade
barrier.

186
 Factors Transforming High-Tech Exports from OICs

The expenditure on education (EE) has unexpected adverse impact on

high-tech exports and is weakly significant for all OICs. This may be due to a
greater proportion of education expenditure spent in OICs on non-technical
education and lower levels of general education. In this context, Seyom
(2005) argued that it is strong technological institutional infrastructure and
tertiary education that is positively associated with high-tech exports.

Patents and royalties, which represent use of technology, have a positive

relation with high-tech exports. Weak relationship however indicates that
OIC countries still need to benefit from the potential of foreign technology
available to them.

The variable RGDP which is used as proxy for labor cost has a negative
and insignificant impact on high-tech goods exports. It thus indicates that
cheap labor could be helpful in the promotion of high-tech exports from
OICs , as these countries are currently mostly engaged in assembling the
parts and components for high-tech finished products for exports, which is
basically a labor intensive process. This result is consistent with the findings
of Grossman (1990), Alves (2010), Baldoneet al. (2001) and Macroni and
Rolli (2007).

5. Conclusion and Policy Implications

The empirical findings discussed in the preceding section conclude that

the phenomenon of processing trade is present as imports of intermediate
inputs are helping OICs to produce finished high-tech products for exports
markets. Significant impact of R&D on high-tech exports is found. This
confirms the role of indigenous capabilities in promoting high-tech exports
from OICs. We, however, could not find the presence of scale-economies in
OIC countries, which may benefit high-tech exports; of course, with the
exception of Turkey. As such we reject the incidence of home market effect.

The analysis also conclude that vertical specialization through the

processing trade phenomenon is creating skill competencies in OICs who

187
 Iqbal, Mahmood & Rehman

generally have low skills and in turn is promoting exports of high-tech

finished goods. Improvement in institutional settings and quality is positively
affecting the export of high-tech goods from OICs. Empirical findings further
indicate that OICs are exporting high-tech products but with less input from
FDI and human capital. These countries have small indigenous innovation
capabilities.

All in all, the empirical analysis led us to conclude that the product cycle
theory enlightens OICs more than the traditional trade theories or new
economic geography theory (a laeconomies-of-scale). The globalization of
world trade and trade liberalization allows countries to get benefit of
knowledge and skills of high tech goods components through import, thus
ultimately getting a grip on production technique of high-tech goods through
learning-by-doing process. The study finds that in this regard Malaysia and
Indonesia are the dominant OICs, who are focusing on the high-tech
industries. Remaining OICs though are in line but are quite far away from
both of these countries.

Above conclusion lead us to draw some implications for policymaking in

OICs. The deficiency in innovation capabilities needs to be overcome
through enhancing quality R&D resources. There is no coordination between
research institutions and private industries to produce high-end and quality
products. Therefore, OICs need to create this coordination not only within
each country but across the region as well.
Since import of electronics parts and components is positively and
significantly contributing towards promotion and expansion of high-tech
exports, it is therefore desirable that OICs remove most if not all the trade
restrictions faced by the high-tech industries. Governments in each OICs
need to allocate more and more resources for the education sector in general
and for higher education in particular to boost the innovation process in their
countries. OICs should attract FDI in export industries rather than FDI
exclusively meant for non-traded industries. This would benefit high-tech
industries in terms of receiving high quality foreign knowledge, technology
and foreign market access.

188
 Factors Transforming High-Tech Exports from OICs

References

Alves, G.F.S. (2015). Determinants of High-tech Exports. Portugal:

University of Aveiro. Available at:http://hdl.handle.net/10773/1829.

Baesu, V., Albulescu, C.T., Farkas Z., and Drăghici, A. (2015). Determinants
of the High-tech Sector Innovation Performance in the European Union:
A Review. Science Direct, 19, 371-378.

Baldone, S., F., Sdogati, and Tajoli, L. (2001).Patterns and Determinants of

International Fragmentation of Production: Evidence from Outward
Processing Trade between the EU and Central Eastern European
Countries. WeltwirtschaftlichesArchiv, 137(1), 80-104.

Braunerhjelm, P., and Thulin, P. (2008).Can Countries Create Comparative

Advantages? R&D-Expenditures, High-tech Exports and Country Size in
19 OECD-countries: 1981–1999. International Economic Journal, 22(1),
95-111.

Carrington, W. J., and Zaman, A. (1994).Inter-industry Variation in the Costs

of Job Displacement. Journal of Labor Economics, 12(2), 243-75.

Calvo, J.L. (1996). Export Behaviour of Spanish SME Manufacturing Firms:

The Role of Innovation. Available at: http://www2.uned.es/dpto-analisis-
economico1/fichprof/jcalvo/articulos/ExportPME.pdf.

Coughlin, C.C., Terza, J.V., and Vachira, A. (1991). State Characteristics

and the Location of Foreign Direct Investment in the United States.
Review of Economics and Statistics, 73, 675–683.

Fagerberg, J., Srholec, M., and Verspagen, B. (2009). Innovation and

Economic Development. In Hall, B., and Rosenberg, N. (eds.) Handbook
of the Economics of Innovation. North Holland.

Grossman, G.M. (1990). Explaining Japan’s Innovation and Trade: A Model

189
 Iqbal, Mahmood & Rehman

of Quality Competition and Dynamic Comparative Advantage. Monetary

and Economic Studies, 8(2), 75-100.

Heston, A., Summers, R., and Aten, B. (2002). Penn World Table Version
6.1. PA, USA: Center for International Comparisons at the University of
Pennsylvania(CICUP).

Hill, S., and Munday, M. (1992). The U.K. Regional Distribution of Foreign
Direct Investment in the United States: Analysis and Determinants.
Regional Studies, 26, 535–544.

Jochem, P., and Schleich, J. (2011). Exploring the Drivers Behind

Automotive Exports in OECD Countries - An Empirical Analysis.
(Working Paper Sustainability and Innovation No. S 3/2012). Karlsruhe,
Germany: Fraunhofer Institut für System- und Innovationsforschung ISI.

Krugman, P. (1980). Scale Economies, Product Differentiation, and the

Pattern of Trade. The American Economic Review, 70(5), 950-959.

Krugman, P. (1979). Increasing Returns, Monopolistic Competition, and

International Trade. Journal of International Economics, 9, 469-479.

Lemoine, F., and Kesenci, D. (2003). International Trade and Technology

Transfer: The Cases of Turkey, India and China Compared (Working
Paper, No. 2003 – 16). The Centre d'Études Prospectives et
d'Informations Internationales (CEPII).

Lu, C. (2007). Moving up or moving out? A Unified Theory of R&D, FDI,

and Trade. Journal of International Economics, 71, 324 – 343.

McCann, P., and Mudambi, R. (2004).The Locational Behaviour of

Multinational Enterprises: Some Analytical Issues. Growth and Change,
35(4), 491-524.

Marconi, D. and Rolli, V. (2007). Comparative Advantage Patterns and

190
 Factors Transforming High-Tech Exports from OICs

Domestic Determinants in Emerging Countries: An Analysis with a focus

on Technology. Rome, Italy: Banca d’Italia.

Redding, S. (1999). Dynamic Comparative Advantage and the Welfare

Effects of Trade. Oxford Economic Papers, 51, 15–39.

Seyoum,B. (2005). Advances in Competitiveness Research. PA, USA:

American Society for Competitiveness.

Srholec, M. (2007).High-tech Exports from Developing Countries: A

Symptom of Technology Spurts or Statistical Illusion?
WeltwirtschaftlichesArchiv, 143, 227-25.

Vernon, R. (1966). International Investment and International Trade in the

Product Cycle. Quarterly Journal of Economics, 80, 190–207.

191

View publication stats