Overseas network of export promotion agency and export performance: the Korean case.
Since the appearance of the first export promotion agency (EPA EPA eicosapentaenoic acid.
n.pr See acid, eicosapentaenoic.
n. ) in Finland in 1919, many countries have found that EPAs help their firms gain access to international markets. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. a research conducted by Lederman et al. (2006), there were national EPAs in 88 of the 116 countries contacted by the study group in 2005. The economic justification for government support for exports is based on scale economies, productivity spillovers, and market failure, including asymmetric information Asymmetric Information
Information available to some people but not others.
In other words, the asymmetric information is held by only one side, meaning someone is keeping a secret. or externalities externalities
side-effects, either harmful or beneficial, borne by those not directly involved in the production of a commodity. . Governments introduce EPAs to implement their export promotion programs, and EPAs establish their offices overseas in order to facilitate their effective functioning.
Even though EPAs have been a popular instrument to promote exports, there has been a great deal of debate regarding the need for government-sponsored EPAs. Keesing and Singer (1991a, 1991b) have argued that EPAs in developing countries are inefficient as a result of weak leadership, inadequate funding, and a bureaucratic executive. Bernard and Jensen (2001) have shown that U.S. state export promotion expenditures exert no significant effect on the probability of exporting. Gencturk and Kotables (2001) have demonstrated that export promotion programs increase the profitability, but not the sales, of U.S. firms. There are no externalities across firms, and export promotion programs are simply transferred from agencies to exporting firms.
On the contrary, a considerable body of research suggests that EPAs exert a positive effect on export performance. Recently, Alvarez (2004) demonstrated that the utilization of export promotion programs in Chile has contributed positively to export performance in small- and medium-sized enterprises. Lederman et al. (2007) determined that EPAs exert a positive and strong effect on exports in a study of the 88 national agencies worldwide. For every $1 of export promotion, they estimated a $40 increase in exports for the median EPA. In addition, there is heterogeneity in the effects of export promotion budgets across regions. For every $1 in the EPA budget, there is an additional $100 of exports in Eastern Europe Eastern Europe
The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991. and Asia, $70 in Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. and the Caribbean, $38 in Sub-Saharan Africa, $5 in the OECD OECD: see Organization for Economic Cooperation and Development. countries, and -$53 in the Middle East and North Africa. Rose (2007) has suggested that the presence of a foreign mission (embassies and consulates) is associated with higher exports. Embassies and consulates perform many other functions to help exporters, including the provision of market information and the identification of sales opportunities. Exports increase by 6%--10% for each additional consulate in a sample of 22 exporting countries and their approximately 200 destination countries. Gil, Llorca, and Martinez Serrano (2008) have shown that Spanish regional agencies, a network of offices abroad with the aim of providing support for companies wishing to trade and invest in foreign markets, increase trade. The estimated impact appears to be larger than that observed for Spanish embassies and consulates.
These previous studies have revealed a heterogeneous effect of EPAs across regions. Thus, there is a clear need to explore country or region-specific cases. There is reason to expect that the Korean case would generate interesting results on this topic. The value of Korean exports has risen from virtually nothing in the 1960s to $284 billion in 2005. The rate of annual increase is 22.8%, which is the largest annual rate of increase of any economy. This success has been largely attributed to government policies aimed at promoting exports. (2) Some early studies (Hogan 1991; Keesing and Singer 1991a, 1991b; de Wulf 2001) have taken a negative view of EPAs, especially in developing countries, except in Korea and certain Asian countries. Therefore, the principal objective of this paper is to evaluate the effectiveness of Korea's overseas export promotion offices by estimating their effect on exports. (3) Rather than using the number of foreign trade agencies as in the study of Gil, Llorca, and Martinez Serrano (2008), or the number of embassies and consulates as in the study of Rose (2007), this paper will use the budgets of Korea's EPA's overseas offices established at 78 destinations from 1994 to 2004.
The major EPA in Korea is the Korea Trade and Investment Promotion Agency (KOTRA), which was founded in 1962. KOTRA established its first overseas offices in 1962 and had 97 locations in 2008. Its primary activities include (1) facilitating international trade, (2) powering business success through information, and (3) bolstering the trade-investment infrastructure. In order to facilitate trade between Korean exporters and overseas buyers, the KOTRA engages in business matchmaking Matchmaking
Matricide (See MURDER.)
marriage broker whose plans are foiled by a pair of lovers. [Czech Opera: Smetana The Bartered Bride in Osborne Opera, 32]
Levi, Dolly , international exhibitions, e-trade, and IT/cultural industry marketing. The KOTRA provides information regarding local business practices and cultural and market conditions via in-depth research and seminars, its trade information library, and its overseas investment support centers. To strengthen its function of bolstering the national economic infrastructure, the KOTRA cooperates actively with other relevant organizations and nurtures marketing and investment experts.
To estimate the effect of EPA's overseas offices on exports, allowing for other trade determinants, this paper uses the gravity model Gravity models are used in various social sciences to predict and describe certain behaviors that mimic gravitational interaction as described in Isaac Newton's law of gravity. , (4) in which the activities of EPA offices abroad, which search for market information and sales opportunities, reduce the costs of exporting and thus promote exports. I estimate the panel data by the ordinary least square (OLS OLS Ordinary Least Squares
OLS Online Library System
OLS Ottawa Linux Symposium
OLS Operation Lifeline Sudan
OLS Operational Linescan System
OLS Online Service
OLS Organizational Leadership and Supervision
OLS On Line Support
OLS Online System ) method, and the results are robust with the inclusion of destination-specific fixed effect intercepts. To control for reverse causality causality, in philosophy, the relationship between cause and effect. A distinction is often made between a cause that produces something new (e.g., a moth from a caterpillar) and one that produces a change in an existing substance (e.g. from exports to the budgets of overseas EPA offices, I use instrumental variables (IVs). My estimates of the budgets of EPA's offices abroad are significant for Korea's exports. Exports increase with the budgets, even after controlling for potential endogeneity problems. The main finding of this study is that an increase of 10% in the budgets increases exports by 2.45%-6.34%. This paper suggests that EPAs are effective in terms of their impact on national exports.
This paper is organized as follows. Section II suggests a methodology to estimate the effect of overseas offices of the KOTRA on Korea's exports. The estimation strategies and data are discussed in Section III. The estimation results are reported in Section IV. Section V concludes this study.
II. THE MODEL
The basic model is from Feenstra (2004) and Baier and Bergstrand (2001), in which the gravity equation with border effects is derived to estimate the relative contribution of potential trade determinants in explaining the growth in bilateral trade flows. The basic framework established by Feenstra (2004) is as follows: a country in the world i(i = 1, ..., M) produces and exports [N.sub.t.sup.i] goods to country j. The utility function in country j at time t is described by constant elasticity of substitution In economics, more specifically econometrics or mathematical economics, there are production functions that describe the output given a certain combination of inputs (e.g. labour and capital). specification as below:
[U.sub.t.sup.j] = [M.summation summation n. the final argument of an attorney at the close of a trial in which he/she attempts to convince the judge and/or jury of the virtues of the client's case. (See: closing argument) over (i=1)][N.sub.t.sup.i][([c.sub.t.sup.ij]).sup.[[sigma]-1/[sigma]]], (1)
where [c.sub.i.sup.ij] denotes the consumption of any product from country i to country j at time t, and [sigma] is the elasticity of substitution Elasticity of substitution is the elasticity of the ratio of two inputs to a production (or utility) function with respect to the ratio of their marginal products (or utilities). Mathematical definition
Let the utility over consumption be given by between products among countries ([sigma] > 1).
The overall price index in country j at time t is defined as:
[P.sub.t.sup.j] = [([M.summation over (i=1)][N.sub.t.sup.i][([p.sub.t.sup.ij]).sup.[1-[sigma]]]).sup.[1/1-[sigma]]], (2)
where [p.sub.t.sup.ij] is the price of each product exported by country i to country j. [p.sub.t.sup.ij] is the price including additional export costs from country i to country j, whereas [[~.p].sub.t.sup.ij] is the price without any additional costs. As defined broadly by Anderson and van Wincoop (2004), trade costs include all costs incurred in getting a good to the final users: transportation costs (both freight and time costs), policy barriers (tariff and non-tariff barriers), information costs Information costs
Transactions costs that include the assessment of the investment merits of a financial asset. Related: Search costs. , contract enforcement costs, costs associated with the use of different currencies, legal and regulatory costs, and local distribution costs distribution costs distribute npl → Vertriebskosten pl (wholesale and retail).
We can model the relationship between these as [p.sub.t.sup.ij] = [C.sub.t.sup.ij] [[~.p].sub.t.sup.ij], in accordance with the notion of "iceberg transportation cost" by Samuelson (1952). [C.sub.t.sup.ij] units must be exported to country j in order for one unit to arrive because ([C.sub.t.sup.ij] - l) units melt along the way. If there is no additional export cost, [C.sub.t.sup.ij] = 1, and [p.sub.t.sup.ij] = [[~.p].sub.t.sup.ij]. For example, if the currency of country i appreciates, country i must send [C.sub.t.sup.ij] > 1 units of its products in order for one unit to arrive in country j. Similarly, for information costs, if no EPA offices abroad are searching for information regarding market and sales opportunities instead of the related firms, country i must send [C.sub.t.sup.ij] > I units.
The representative consumer in country j has the following budget constraint A Budget Constraint represents the combinations of goods and services that a consumer can purchase given current prices and his income. Consumer theory uses the concepts of a budget constraint and a preference ordering to analyze consumer choices. .
[Y.sub.t.sup.j] = [M.summation over (i=1)][N.sub.t.sup.i][p.sub.t.sup.ij][c.sub.t.sup.ij], (3)
where [Y.sub.t.sup.j] is the aggregate income in country j at time t.
The demand for each product is derived from maximizing Equation (1) subject to Equation (3).
[c.sub.t.sup.ij] = [Y.sub.t.sup.j]/[P.sub.t.sup.j][([p.sub.t.sup.ij]/[P.sub.t.sup.j]).sup.-[sigma]]. (4)
The total value of exports from country i to country j at time t can be expressed as [X.sub.t.sup.ij] = [N.sub.t.sup.i] [p.sub.t.sup.ij] [c.sub.t.sup.ij]. Substituting Equation (4) into the total value of export yields:
[X.sub.t.sup.ij] = [N.sub.t.sup.i][Y.sub.t.sup.j][([p.sub.t.sup.ij]/[P.sub.t.sup.j]).sup.[1-[sigma]]]. (5)
On the product side, labor is the only resource, and each firm in country i requires the labor to necessarily produce an output of [y.sub.t.sup.i] as in Krugman (1979).
[L.sub.t.sup.i] = [empty set] + [phi][y.sub.t.sup.i], (6)
where [empty set] is the fixed labor input needed for production, and [phi] is the marginal labor input.
The profit is as follows:
[[pi].sub.t.sup.i] = [[~.p].sub.t.sup.ij][y.sub.t.sup.i] - w([empty set] + [phi][y.sub.t.sup.i]). (7)
Given the equilibrium wage w. the profit is re-addressed as follows:
[[pi].sub.t.sup.i] = w[([phi][y.sub.t.sup.i]/[empty set] - 1) - [empty set]]. (8)
In order to have zero profits, the output of firm is fixed at:
[[bar.y].sub.t.sup.i] = ([empty set] - 1)[empty set]/[phi]. (9)
Following the fact that firm output is fixed in Equation (9), and country i produces [N.sup.i] goods, the GDP GDP (guanosine diphosphate): see guanine. in country i is as follows:
[Y.sub.t.sup.i] = [N.sub.t.sup.i][[~.p].sub.t.sup.ij][[bar.y].sub.t.sup.i]. (10)
Substituting [N.sub.t.sup.i] = [Y.sub.t.sup.i] / [[~.p].sub.t.sup.ij] [[bar.y].sub.t.sup.i] into Equation (5), we obtain:
[X.sub.t.sup.ij] = [Y.sub.t.sup.i][Y.sub.t.sup.j]/[[~.p].sub.t.sup.ij][[bar.y].sub.t][([p.sub.t.sup.ij]/[P.sub.t.sup.j]).sup.[1-[sigma]]]. (11)
This paper uses [p.sub.t.sup.ij] = [C.sub.t.sup.ij] [[~.p].sub.t.sup.ij]. Equation (11) is re-expressed as follows:
[X.sub.t.sup.ij] = [Y.sub.t.sup.i][Y.sub.t.sup.j]/[([[~.p].sub.t.sup.ij]).sup.[sigma]][[bar.y].sup.t][([C.sub.t.sup.ij]/[P.sub.t.sup.j]).sup.[1-[sigma]]], (12)
By taking the logs in Equation (12), the following equation is obtained:
ln([X.sub.t.sup.ij]) = ln([Y.sub.t.sup.i][Y.sub.t.sup.j]) + (1 - [sigma])ln([C.sub.t.sup.ij]) - [sigma]ln([[~.p].sub.t.sup.ij]) + ([sigma] - 1)ln[P.sub.t.sup.j] + ln([[bar.y].sub.t.sup.i]). (13)
In order to control for the effect of income convergence on trade, as emphasized by Help-man (1987), the term [Y.sub.t.sup.i][Y.sub.t.sup.j] is further decomposed to [([Y.sub.t.sup.i] + [Y.sub.t.sup.j]).sup.2] [s.sub.t.sup.i][s.sub.t.sup.j].
[s.sub.t.sup.i]([s.sub.t.sup.j]) = [Y.sub.t.sup.i]/[Y.sub.t.sup.i] + [Y.sub.t.sup.i]([Y.sub.t.sup.j]/[Y.sub.t.sup.i] + [Y.sub.t.sup.i]). (14)
Equation (13) can be re-written by the relationship [Y.sub.t.sup.i][Y.sub.t.sup.j] = [([Y.sub.t.sup.i] + [Y.sub.t.sup.j]).sup.2] [s.sub.t.sup.i][s.sub.t.sup.j], as follows:
ln([X.sub.t.sup.ij]) = 2 ln([Y.sub.t.sup.i] + [Y.sub.t.sup.j]) + ln([s.sub.t.sup.i][s.sub.t.sup.j]) + (1 - [sigma])ln([C.sub.t.sup.ij]) - [sigma]ln([[~.p].sub.t.sup.ij]) + ([sigma] - 1)ln[P.sub.t.sup.j] + ln([[bar.y].sub.t.sup.i]). (15)
To incorporate the effect of EPA's overseas offices on exports, this paper adopts the concepts of "iceberg transportation cost." The budget of the EPA's overseas offices can influence the number of units to be exported.
Let us model [C.sub.t.sup.ij] as follows:
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII ASCII or American Standard Code for Information Interchange, a set of codes used to represent letters, numbers, a few symbols, and control characters. Originally designed for teletype operations, it has found wide application in computers. ] (16)
where [Tar.sub.t.sup.ij] denotes the tariff rate for products from country i to country j, [ER.sub.i.sup.ij] denotes the exchange rate between country i in country j, [EPAO.sub.t.sup.ij] denotes the budget of EPA's offices overseas of country i in country j, [Dis.sup.ij] denotes the distance between country i and country j, [Lang.sup.ij] is a binary dummy variable This article is not about "dummy variables" as that term is usually understood in mathematics. See free variables and bound variables.
In regression analysis, a dummy variable , that is 1, if country i and country j share a common language. Tariff reduction, depreciation in bilateral exchange rate, and increasing budgets of EPA's overseas offices reduce transaction costs, whereas the distance and language differences increase them.
Substituting Equation (16) in Equation (15) yields an ultimate theoretical model for estimation, which is as follows:
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (17)
III. ESTIMATION STRATEGIES AND DATA
A. Estimation Strategies
Baseline Empirical Strategy. The empirical counterpart of the theoretical model, Equation (17) is given by
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (18)
where i denotes the exporter (Korea), j denotes the importer (Korea's 78 destinations), (5) t denotes the time (t = 1994, ..., 2004). The exports from the exporter i to the importer j([X.sub.t.sup.ij]) are dependent on the sum of gross domestic product (GDP) ([Y.sub.t.sup.i] + [Y.sub.t.sup.j]), income convergence ([s.sub.t.sup.i], [s.sub.t.sup.i]), tariff rate ([Tar.sub.t.sup.ij]), exchange rate ([ER.sub.t.sup.ij]), budget of EPA's overseas offices ([EPAO.sub.t.sup.ij]), the distance ([Dis.sup.ij]), language ([Lang.sup.ij]), export price ([[~.p].sub.t.sup.ij]), importer's Consumer Price Index (CPI (1) (Characters Per Inch) The measurement of the density of characters per inch on tape or paper. A printer's CPI button switches character pitch.
(2) (Counts Per I ) ([P.sub.t.sup.j]), and the other omitted influences on exports ([[upsilon up·si·lon or yp·si·lon
Symbol The 20th letter of the Greek alphabet. ].sub.t.sup.ij]).
Korea is the only country in the world in which the Korean language Korean language
Official language of North Korea and South Korea, spoken by more than 75 million people, including substantial communities of ethnic Koreans living elsewhere. is spoken. The majority of high schools in Korea have chosen English as their principal foreign language, and other languages such as Chinese, Spanish, Japanese, French, or German as secondary foreign languages. Therefore, [Lang.sup.ij] is a binary dummy variable, that is 1, if Korea's destination country uses a language such as English, Chinese, Spanish, Japanese, French, or German, and 0 if the destination country uses other languages.
In Equation (18), we are principally interested in [[beta].sub.5], which represents the marginal effect on exports of the budgets of EPAs overseas. The paper first estimates Equation (18) excluding the [EPAO.sub.t.sup.ij] variable by OLS, which assesses whether the gravity equation works well and how it is affected by including the budgets of Korea's overseas EPAs. In addition, the [EPAO.sub.t.sup.ij] variable is inserted into the gravity equation.
To allow for importer-specific effects, the gravity equation with random and fixed effects is estimated. (6) A fundamental problem raised by the estimation of Equation (18) is how the theoretical price indices, [[~.p].sub.t.sup.ij] and [P.sub.t.sup.j], should be measured. The best way to solve this problem is to use the fixed effect approach, as has been suggested by many authors. (7)
Anderson and van Wincoop (2003) argued that different countries have a different general resistance to trade, "multilateral resistance," as well as trade resistance between two countries which are function of distance, language, colonial ties, and so forth. Anderson and van Wincoop (2004) have pointed out that the panel framework in the gravity model should include country-fixed effects for each year because "multilateral resistance" may change over time. Thus, this paper also estimates the gravity equation with the destination country's fixed effect for each year.
Instrumental Variables Strategy. Heavy exports to destination countries may spur Korea to spend larger amounts on export promotion, so that there may be a reverse causality from exports to the budgets of EPA's overseas offices. (8) Thus, it is desirable to use IVs. (9). Gil, Llorca, and Martinez Serrano (2008) and Rose (2007) use only cross-section samples for IVs. This paper finds appropriate instrument variables with time, which must represent the existence of market opportunities combined with barriers to entry in the particular destination. The IVs considered herein are [CO.sub.2] emissions (metric tons per capita [Latin, By the heads or polls.] A term used in the Descent and Distribution of the estate of one who dies without a will. It means to share and share alike according to the number of individuals. ), energy use (kg of oil equivalent per capita), electric power consumption (kWh per capita), fixed line and mobile phone subscribers per 100 people, market capitalization Market Capitalization
A measure of a public company's size. Market capitalization is the total dollar value of all outstanding shares. It's calculated by multiplying the number of shares times the current market price. This term is often referred to as market cap. of listed companies (% of GDP), foreign direct investment (FDI FDI
See: Foreign direct investment ) net inflows, high technology exports (% of manufactured exports), Internet users (per 100 people), military expenditure (% of GDP), primary completion rate, worker remittances, and compensation of employees.
Data on the total values of exports from Korea to 78 destinations over the period 1994-2004 are taken from the UN Comtrade. (10) As any database does not provide the prices for bilateral trade, this paper directly calculates the export price index, using the UN Comtrade data classified at the SITC SITC Standard International Trade Classification
SITC Six in the City (Milwaukee, WI)
SITC State Information Technology Consortium
SITC Spatial Information Technology Center (Fulton-Montgomery Community College) five-digit level. It is desirable to calculate the export price index using the average of export shares as weights in Korea's exports. The Fisher ideal index is provided in Appendix 1.
The gross domestic product (current price), exchange rate, and CPI are obtained from the International Monetary Fund's (IMF IMF
See: International Monetary Fund
See International Monetary Fund (IMF). ) International Financial Statistics database. Tariff rates and gravity-related data such as distance and language are from the World Bank. All tariff rates from the World Bank are based on unweighted averages for all goods in ad valorem According to value.
The term ad valorem is derived from the Latin ad valentiam, meaning "to the value." It is commonly applied to a tax imposed on the value of property. . (11) Data on the budgets of overseas EPAs are obtained from the KOTRA. The potential IVs are taken from the World Bank, World Development Indicators.
IV. EMPIRICAL RESULTS
To identify the effects of EPA's overseas offices on export performance, this paper focuses on the case of Korea. Table 1 presents the regression results. This paper begins by estimating Equation (18) excluding the [EPAO.sub.t.sup.ij] variable to check how the estimated results are affected by the inclusion of budgets. According to column (1), the equation fits the data well, explaining nearly three-quarters of the changes in Korea's exports to 78 destinations. The log sum of GDPs and the product of shares ([s.sub.t.sup.i],[s.sub.t.sup.j]) have a positive and significant effect. The convergence in relative country size increases exports. The coefficient of tariffs is negative as expected, but insignificant. The coefficient of the exchange rate has a significant effect, which means that the depreciation of the Korean currency (Won) results in an increase in exports. Exports also decrease with distance. The coefficient on the indicator variable for language is positive, as expected. Linguistic familiarity also promotes exports. As expected, the export price has a negative effect and the overall price in each destination has a positive but insignificant effect.
TABLE 1 OLS Estimation Results OLS OLS In([Y.sub.t.sup.i] + 1.358 *** (0.066) 0.790 *** (0.101) [Y.sub.t.sup.j]) ln([s.sub.t.sup.i] 0.620 *** (0.046) 0.441 *** (0.047) [s.sub.t.sup.j]]) In([Tar.sub.t.sup.ij]) -0.001 (0.004) -0.001 (0.004) In([ER.sub.t.sup.ij]) 0.043 *** (0.014) 0.034 ** (0.013) In([EPAO.sub.t.sup.ij]) 0.481 *** (0.069) In([Dis.sup.ij]) -0.867 *** (0.061) -0.756 *** (0.061) [Lang.sup.ij] 0.309 *** (0.074) 0.289 *** (0.070) In([p.sub.t.sup.i]) -0.133 ** (0.055) -0.082 * (0.046) In([P.sub.t.sup.j]) 0.022 (0.103) -0.114 (0.104) [R.sup.2] .72 .74 No. of observations 585 558 Random Effect Fixed Effect In([Y.sub.t.sup.i] + 0.976 *** (0.097) 1.148 *** (0.011) [Y.sub.t.sup.j]) ln([s.sub.t.sup.i] 0.857 *** (0.090) 1,136 *** (0.152) [s.sub.t.sup.j]]) In([Tar.sub.t.sup.ij]) 0.001 (0.004) -0.000 (0.005) In([ER.sub.t.sup.ij]) 0.078 ** (0.034) 0.031 *** (0.009) In([EPAO.sub.t.sup.ij]) 0.212 *** (0.046) 0.108 ** (0.051) In([Dis.sup.ij]) -0.852 *** (0.157) [Lang.sup.ij] 0.288 * (0.155) In([p.sub.t.sup.i]) -0.023 (0.028) 0.008 (0.029) In([P.sub.t.sup.j]) 0.034 (0.061) 0.251 (0.101) [R.sup.2] .71 .95 No. of observations 558 558 Country and Year-Fixed Effect In([Y.sub.t.sup.i] + [Y.sub.t.sup.j]) 0.653 *** (0.118) ln([s.sub.t.sup.i] [s.sub.t.sup.j]]) 0.418 *** (0.047) In([Tar.sub.t.sup.ij]) -0.002 (0.004) In([ER.sub.t.sup.ij]) 0.033 ** (0.013) In([EPAO.sub.t.sup.ij]) 0.506 *** (0.082) In([Dis.sup.ij]) -0.731 *** (0.061) [Lang.sup.ij] 0.284 *** (0.070) In([p.sub.t.sup.i]) -0.103 (0.072) In([P.sub.t.sup.j]) 0.003 (0.116) [R.sup.2] .74 No. of observations 558 Notes: * signifcant at 10%; ** significant at 5%; *** significant at 1%.
In column (2) the log value of the budgets of EPA's overseas offices is introduced. [EPAO.sub.t.sup.ij] is highly significant with the expected sign. An increase of 10% in the budgets increases exports by 4.8%. Columns 3 and 4 present coefficients with destination individual effects. The coefficient (.108) when using the fixed effect approach is smaller than that of the random effect approach. The Hausman test The Hausman test is a test in econometrics named after Jerry Hausman. The test evaluates the significance of an estimators versus an alternative estimator.
If the linear model suggests the use of a fixed effect estimation. (12) The coefficient of destination and year-fixed effect approach is small as compared with that of the simple fixed effect approach.
Table 2 presents the coefficients estimated using the IVs. (13) The coefficients of the IVs are quite similar to the previous ones. Column (1) presents the IV estimates using 12 variables as instruments that represent the existence of market opportunities. Columns (2) and (3) show the results of the random effect and fixed effect approaches. Columns (4) and (5) report the results using a different set of IVs. (14) IVs deliver a coefficient for [EPAO.sub.t.sup.ij] which ranges from .245 to .634 and is significant. Therefore, the effect of the budgets of EPA's overseas offices appears to be robust to the potential endogeneity problem.
TABLE 2 IV Estimation Results IV IV Random In([Y.sub.t.sup.i] + 1.999 * (1.119) 1.884 *** (0.587) [Y.sub.t.sup.i]) In([s.sub.t.sup.i] 0.296 (0.561) 1.315 *** (0.485) [s.usb.t.sup.l]) In([Tar.sub.t.sup.ij]) -0.019 (0.028) 0.018 (0.05) In([ER.sub.t.sup.ij]) 0.051 (0.096) 0.118 (0.633) In([EPAO.sub.t.sup.ij]) 0.245 *** (0.063) 0.634 *** (0.178) In([Dis.sup.ij]) -1.138 *** (0.364) -0.740 (0.887) [Lang.sup.ij] 1.625 *** (0.577) 0.815 *** (0.293) In([p.sub.t.sup.i]) 0.326 (0.568) 0.200 (0.288) In([P.sub.t.sup.l]) -0.203 (0.956) 1.143 (1.011) [R.sup.2] .16 .31 No. of observations 226 226 Sargan test [chi](4) = 5.78 [chi](4) = 21.7 IV Fixed Effect IV Fixed Effect (a) In([Y.sub.t.sup.i] + 1.223 ** (0.615) 1.672 * (0.951) [Y.sub.t.sup.i]) In([s.sub.t.sup.i] 2.334 ** (1.009) 3.097 *** (0.994) [s.usb.t.sup.l]) In([Tar.sub.t.sup.ij]) 0.005 (0.029) 0.000 (0.050) In([ER.sub.t.sup.ij]) -0.061 (0.826) -0.112 (0.071) In([EPAO.sub.t.sup.ij]) 0.524 ** (0.230) 0.567 *** (0.181) In([Dis.sup.ij]) [Lang.sup.ij] In([p.sub.t.sup.i]) -0.167 (0.153) -0.268 * (0.146) In([P.sub.t.sup.l]) -0.633 (0.750) -1.588 ** (0.639) [R.sup.2] .94 .94 No. of observations 226 246 Sargan test [chi](54) = 199.6 [chi] (55) =217.3 IV Fixed Effect (b) In([Y.sub.t.sup.i] + [Y.sub.t.sup.i]) 2.049 ** (0.799) In([s.sub.t.sup.i] [s.usb.t.sup.l]) 2.368 ** (1.032) In([Tar.sub.t.sup.ij]) 0.013 (0.031) In([ER.sub.t.sup.ij]) -0.541 (0.834) In([EPAO.sub.t.sup.ij]) 0.403 * (0.238) In([Dis.sup.ij]) [Lang.sup.ij] In([p.sub.t.sup.i]) -0.338 ** (0.147) In([P.sub.t.sup.l]) -1.235 * (90.758) [R.sup.2] .94 No. of observations 230 Sargan test [chi] (53) = 203.2 Instruments--Energy use (kg of oil equivalent per capita), electric power consumption (kWh per capita), fixed line and mobile phone subscribes per 100 people. FDI net inflows, Internet users (per 100 people), military expenditure (% of GDP), primary completion rate, worker remittances and compensation of employees, [CO.sub.2] emissions (metric tons per capita), high technology exports (% of manufactured exports). market capitalization of listed companies (% of GDP). (a) Energy use (kg of oil equivalent per capita), electric power consumption (kWh per capita), fixed line and mobile phone subscribes per 100 people, FDI net inflows. Internet users (per 100 people), military expenditure (% of GDP), primary completion rate, worker remittances and compensation of employees. [CO.sub.2] emissions (metric tons per capita). (b) Energy use (kg of oil equivalent per capita), electric power consumption (kWh per capita), fixed line and mobile phone subscribes per 100 people, FDI net inflows, Internet users (per 100 people), military expenditure (% of GDP), primary completion rale, worker remittances and compensation of employees, market capitalization of listed companies (% of GDP). * significant at 10%; ** significant at 5%; *** significant at 1%.
To check the robustness of the estimated results, this paper classifies the destination samples into two groups in terms of country size (GDP) and development level: large versus small countries, and developed versus developing countries (Appendix 2). (15) Table 3 reports the impact of Korean EPA's overseas offices among the destination groups. The estimations result in positive and significant coefficients in many cases. However, some coefficients are not statistically significant. The large country group generates insignificant estimates via the fixed effect approach, with the small country group in IV random and fixed effect approaches. The developed country group evidences insignificant coefficients in the fixed effect and IV fixed effect approaches, with the developing country group in the OLS random and fixed effect approaches. The point worth noting is that for the classification by development level, the coefficients of developing countries are higher than those in developed countries. This implies that the effects of EPA's overseas offices on exports are sizeable in developing countries.
TABLE 3 The Effects by Destination Groups Country Size Large Small OLS 0.419 *** (0.072) 0.948 *** (0.092) OLS random effect 0.247 *** (0.056) 0.190 ** (0.058) OLS fixed effect 0.071 (0.067) 0.126 * (0.072) IV 0.928 * (0.538) 0.842 *** (0.334) IV random effect 0.787 *** (0.261) 0.377 (0.276) IV fixed effect 0.535 ** (0.236) 0.414 (0.309) Development Level Developed Developing OLS 0.238 ** (0.113) 0.513 *** (0.095) OLS random effect 0.201 ** (0.078) 0.072 (0.061) OLS fixed effect 0.061 (0.092) 0.040 (0.064) IV 0.106 ** (0.539) 0.209 ** (0.080) IV random effect 0.106 ** (0.053) 0.313 * (0.180) IV fixed effect 0.257 (0.742) 0.447 ** (0.225) Notes: * significant at 10%; ** significant at 5%; *** significant at 1%.
Historically, governments have established EPAs to facilitate and encourage exports. As a form of intervention, EPAs have established a network of offices abroad. However, a considerable amount of debate exists concerning the need for government-sponsored EPAs. Despite such criticism, however, the number of EPAs has steadily increased. This policy needs to be based strictly on evidence. Are EPAs indeed an instrument to boost exports'? The theoretical implication is that the activities of EPA offices abroad which are searching for information on the market and sales opportunities reduce the export costs, thus promoting exports. In reality, the KOTRA has implemented a variety of activities to promote exports. This paper shows that the EPA offices abroad have a significant effect on Korea's exports over the sample period 1994-2004. Exports increase with the budgets of EPA's overseas offices even after controlling for potential endogeneity problems. The estimation results provide evidence suggesting that the network of EPA's overseas offices is beneficial to export performance. This paper suggests that EPAs are effective in terms of an impact on national exports. However, the general evaluation for public funding Public funding is money given from tax revenue or other governmental sources to an individual, organization, or entity. See also
APPENDIX 1. FISHER IDEAL INDEX
For the price without additional costs for exporting ([[~.p].sub.t.sup.ij]), this paper attempts to measure the relative price of goods from the export country i to the import country j to the world market. The classical Laspeyres price index is as follows:
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (A1)
where [I.sub.t.sup.ij] is the set of goods from the export country i to the import country j. [[bar.p].sub.st.sup.ij] denotes the price of good s exported to the import country j, and [[bar.p].sub.st.sup.i*] denotes the price of good s from the export country i to the world market*. [q.sub.st.sup.i*] is the quantity of good s from the export country i to the world market*. Therefore, the Laspeyres index for price weights the prices in each destination by the quantities to the world (base). Conversely if we use each destination quantity to weight the prices, we have the Paasche price index.
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (A2)
where [q.sub.st.sup.ij] is the export quantity of good s exported to the import country j.
One of the most commonly used indices is Irving Fisher's (1922) ideal price index, which is the geometric mean (mathematics) geometric mean - The Nth root of the product of N numbers.
If each number in a list of numbers was replaced with their geometric mean, then multiplying them all together would still give the same result. of the Laspeyres and Paasche indices.
Fisher Export Price Index for [[bar.p].sub.t.sup.ij] is as follows:
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (A3)
APPENDIX 2. COUNTRY GROUPS
Large versus Small Countries
Large Countries (38). Argentina, Australia. Austria. Belgium, Brazil, Canada, China, Denmark. Finland, France. Germany, Greece, Hong Kong Hong Kong (hŏng kŏng), Mandarin Xianggang, special administrative region of China, formerly a British crown colony (2005 est. pop. 6,899,000), land area 422 sq mi (1,092 sq km), adjacent to Guangdong prov. , India. Indonesia, Iran, Ireland, Israel, Italy, Japan, Malaysia. Mexico, Norway. Poland, Portugal. Russia, Saudi Arabia Saudi Arabia (sä`dē ərā`bēə, sou`–, sô–), officially Kingdom of Saudi Arabia, kingdom (2005 est. pop. , South Africa South Africa, Afrikaans Suid-Afrika, officially Republic of South Africa, republic (2005 est. pop. 44,344,000), 471,442 sq mi (1,221,037 sq km), S Africa. . Spain. Sweden, Switzerland, Taiwan. Thailand, The Netherlands, Turkey. United Kingdom. United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. , and Venezuela.
Small countries (39). Algeria, Bangladesh, Bulgaria. Cambodia. Chile, Colombia, Cote d'Ivoire, Croatia, Czech Republic Czech Republic, Czech Česká Republika (2005 est. pop. 10,241,000), republic, 29,677 sq mi (78,864 sq km), central Europe. It is bordered by Slovakia on the east, Austria on the south, Germany on the west, and Poland on the north. . Dominican Republic Dominican Republic (dəmĭn`ĭkən), republic (2005 est. pop. 8,950,000), 18,700 sq mi (48,442 sq km), West Indies, on the eastern two thirds of the island of Hispaniola. The capital and largest city is Santo Domingo. , Egypt. Guatemala. Haiti, Hungary, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Libya, Morocco, Myanmar, Nigeria, Oman, Pakistan. Panama, Paraguay, Peru. Philippines, Romania, Singapore, Slovenia, Sri Lanka Sri Lanka (srē läng`kə) [Sinhalese,=resplendent land], formerly Ceylon, ancient Taprobane, officially Democratic Socialist Republic of Sri Lanka, island republic (2005 est. pop. , Ukraine, United Arab Emirates United Arab Emirates, federation of sheikhdoms (2005 est. pop. 2,563,000), c.30,000 sq mi (77,700 sq km), SE Arabia, on the Persian Gulf and the Gulf of Oman. , Uruguay. Uzbekistan. Vietnam, and Zimbabwe.
Developed versus Developing Countries
Developed Countries (24). Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong. Ireland, Israel, Italy, Japan, Norway, Portugal, Singapore. Spain, Sweden, Switzerland, Taiwan, The Netherlands, United Kingdom, and United States.
Developing Countries (54). Algeria, Argentina, Bangladesh, Brazil, Bulgaria, Cambodia, Chile, China, Colombia, Cote d'lvoire. Croatia, Czech Republic, Dominican Republic. Egypt, Guatemala, Haiti, Hungary, India, Indonesia, Iran, Iraq, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Libya, Malaysia, Mexico, Morocco, Myanmar, Nigeria, Oman. Pakistan. Panama, Paraguay, Peru, Philippines, Poland. Romania, Russia. Saudi Arabia, Slovenia, South Africa, Sri Lanka, Thailand, Turkey, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Venezuela, Vietnam, and Zimbabwe.
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(1.) Alexander and Warwick (2007) provide the rationales for government intervention in detail.
(2.) The Korean government has used several important policy tools to promote industrialization and exports, including preferential credit systems, preferential tax and tariff systems, and administrative support (establishing Korea Traders Association, Korea Trade Promotion Agency [KOTRA], Korea Export-Import Bank) (Yoo 1997; Smith 1999).
(3.) Lederman et al. (2006) examine the effect of national EPA budgets on exports, using the panel data from the countries to the world. However, this paper examines the effect of EPA budgets for its overseas offices on exports, using the panel data from a country to its trade partners.
(4.) This paper uses a sophisticated gravity model while Lederman et al. (2006) use a simple export equation, and Gil, Llorca, and Martinez Serrano (2008) and Rose (2007) use a typical gravity model that is adequate for trades between countries in the world.
(5.) To reduce the effect of policies other than EPA overseas offices, this paper uses panel data involving exports from Korea to 78 destinations. The effects of other policies might be simply controlled for, as this paper compares the effects of EPA overseas offices across destinations.
(6.) Gil, Llorca, and Martinez Serrano (2008) demonstrated that the Hausman test suggests the use of fixed effect estimators. Nonetheless, the results of the parameter for the number of Spanish trade agencies abroad are quite similar for fixed- and random effect estimations.
(7.) Harrigan (1996), Hummels (1999), Redding and Venables (2000), and Rose and van Wincoop (2001).
(8.) As mentioned by Gil, Llorca, and Martinez Serrano (2008), if the decision to open a foreign trade office is not based on past exports, but on the existence of market opportunity, no endogeneity problem arises.
(9.) Rose (2007) chooses IVs in terms of a two-pronged strategy: the potential geo-political importance of a country and the desirability of residing in a country. The relevant variables for the potential geo-political importance of a country are "proven oil reserves Oil reserves refer to portions of oil in place that are claimed to be recoverable under economic constraints.
Oil in the ground is not a "reserve" unless it is claimed to be economically recoverable, since as the oil is extracted, the cost of recovery increases incrementally ," "proven gas reserves," "military spending," and "diplomatic corps." The relevant variables for the desirability of residing in a country are "Conde-Nast top 100 destinations," "Zagat surveys," "Ritz hotels," "Four seasons hotels," and so forth.
(10.) Because of the data availability Refers to the degree to which data can be instantly accessed. The term is mostly associated with service levels that are set up either by the internal IT organization or that may be guaranteed by a third party datacenter or storage provider. on the budgets of KOTRA's overseas offices, the period for analysis is 1994-2004.
(11.) World Bank Trade Databases: http://siteresources.worldbank.org/INTRES/Resources/469232-1107449512766/tar2005a.xls
(12.) The resulting Hauseman chi-square statistics is 35.96, which is significant. The null hypothesis null hypothesis,
n theoretical assumption that a given therapy will have results not statistically different from another treatment.
n of no correlation between the individual effects and the explanatory variables is rejected.
(13.) Before using the instrumental estimation, this paper runs the suspected endogenous variable Endogenous variable
A value determined within the context of a model. Related: Exogenous variable. with the possible instrument and control variables to test for the strength of the instruments. The results for the first stage regression show that instruments are adequate (Appendix 3).
APPENDIX 3 The Strength of IV: First Stage Regression Independent Model 1 Model 2 Model 3 Variables Energy use 0.249 *** (0.04) 0.201 *** (0.04) 0.187 *** (0.05) Electric power 0.260 *** (0.01) 0.189 *** (0.01) 0.234 ** (0.08) consumption Phone 0.331 *** (0.07) 0.430 *** (0.10) 0.375 *** (0.10) FDI net flows 0.585 ** (0.20) 0.590 ** (0.25) 0.432 *** (0.103) Internet 0.414 *** (0.10) 0.502 *** (0.13) 0.408 ** (0.15) Military -0.053 (0.76) 0.104 (0.30) -1.003 (1.05) expenditure Primary 0.002 (0.10) 0.004 (0.10) -0.002 (0.12) completion Worker 0.168 (0.43) 0.340 (0.30) 0.003 (0.22) remittances and compensation [CO.sub.2] 0.249 *** (0.03) 0.395 *** (0.03) emissions High 0.268 * (0.12) technology exports Market 0.215 (0.10) 0.033 (0.20) capitalization F test 12.25 10.50 10.60 No. of 226 246 230 observations [R.dup.2] .843 .772 .753 Notes: Dependent variable is In ([EPAO.sub.i.sup.ij]) and independent variables are IV and control variables. These are OLS estimates. * significant at 10%; ** significant at 5%; *** significant at 1%.
(14.) The selected IVs are comparatively valid according to the Sargan test (chi-square statistics).
(15.) This paper classifies the sample countries into large (39) and small countries (38) on the basis of average GDP over 1994-2004. and into developed (24) and developing (54) countries according to the IMF's World Economic Outlook Database.
(16.) The Korean industrial structures characterized by a high degree of economic concentration (chaebol) and a distorted financial system have been generated as a result of policies targeted toward rapid industrialization and export growth. Korea is an example of successful export development led by the chaebol. Many economists have argued that the 1997 Korean financial crisis resulted from crony capitalism Crony capitalism is a pejorative term describing an allegedly capitalist economy in which success in business depends on close relationships between businessmen and government officials. practices (Smith 1999; Feenstra et al. 2002; Harvie and Lee 2003: Feenstra and Hamilton 2006).
CPI: Consumer Price Index
EPA: Export Promotion Agency
FDI: Foreign Direct Investment
GDP: Gross Domestic Product
IMF: International Monetary Fund
IV: Instrumental Variable
KOTRA: Korea Trade and Investment Promotion Agency
OLS: Ordinary Least Square
* I would like to thank the KOTRA for providing data on overseas offices. I would like to thank two anonymous referees and the editor for their very helpful suggestions.
Kang: Assistant Professor, School of Economics and Finance, Yeungnam University Yeungnam University is one of the largest universities in South Korea outside of Seoul. The university's predecessors, Taegu College and Chunggu College, were founded in Daegu in 1947 and 1950 respectively. , 214-1 Dae-Dong, Kyeongsan-si. Gyeongsangbuk-do 712-749, Korea. Phone 82-53-810-2845. Fax 82-53-810-2845, E-mail email@example.com