Country and industry specific determinants of intra-industry trade: an analysis of Zambia's trade with South Africa and Tanzania,1990-2015

Abstract

The main objective of this study was to establish both the country specific and industry specific determinants of intra industry trade (IIT) between Zambia and its trading partners in the Southern African region namely South Africa and Tanzania using the modified gravity model of trade. The gravity model was initially criticized for being ad hoc and lacking theoretical foundation, however, this is certainly no longer true today because there are several theoretical developments that have provided support for the model. Using the gravity model in the present study is advantageous for two main reasons. Firstly, the application of gravity equations is consistent with the main objective of the study, that of identifying variables that act to encourage or discourage Zambia's involvement in IIT with its partner countries. Secondly, the gravity equations are consistent with many general equilibrium trade models. Using a modified gravity model in a panel data framework for the period 1990-2015, the estimation results from the Feasible Generalized Least Squares in the random effects model suggested that the significant factors in explaining intra industry trade (IIT) between Zambia and its trading partners in the Southern African region are; joint market size, dissimilarity in per capita income, transactional costs, product differentiation, capital intensity, economies of scale and the revealed comparative advantage index.