Do Similar Trade Partners Increase Trade Flow? An Empirical Analysis on Indonesia’s Bilateral Trade
Gangsar Kurniawan, Associate Professor Daisaku GOTO
2014 | Tesis | S2 Magister Ek.Pembangunan-
xi Indonesia is one of the most promising markets due to large economic size and rapid economic growth. Therefore, many countries are interested in having trade cooperation with Indonesia in order to promote their market penetration. Since trade has become an increasingly essential factor that contributes to Indonesia’s GDP, Indonesia need to promote exports through various trade cooperation, especially FTA (Free Trade Agreement). However, the growing number of Indonesia’s FTA have been more focused on its main trade partners such as USA, Japan, Korea, Australia, EU, and EFTA. These are developed countries which are very different from Indonesia in many aspects, especially in terms of income level per capita, and institutional quality. These differences might signal trade potential but at the same time might signal potential trade barriers. For example, a trade partner’s high institutional quality represents low trade risk. On the other hand, it might also signal potential trade barriers because countries with high institutional quality often set a high quality standard on import products. Indonesia also has other trade cooperation with developing countries such as Iran, South Africa, Belarus, Sri Lanka, and many others. However, this trade cooperation is not well-explored and still has much room to improve. If Indonesia develops more trade cooperation with developing countries, Indonesia may gain benefits from these new potential markets. This research attempts to address two research questions. First, do similar trade partners have significant impact on Indonesia’s exports? Second, are there any other potential markets that can be explored? This research utilizes data on Indonesia’s exports to its 100 largest trade partners during the time period from 1996 to 2011. The focus of this research is the impact of similar trade partners to Indonesia’s exports. The similarities are viewed from several aspects: economic, institutional, and cultural aspects. Basically, this research utilizes the gravity model that developed by Baltagi (2003) and Helpman (1987). The model is chosen because it incorporates similarity measurement in economic size and relative factor endowments. Institutional difference and cultural difference are also included in the model as part of the focus of analysis. As a proxy of institutional quality, this research uses institutional quality indicators derived from the World Bank database. And as a proxy of culture, this research utilizes six dimensions of the national culture index developed by Hofstede. The first research question: Do similar trade partners have significant impact on Indonesia’s exports? can be addressed from several aspects that become the focus in this research. This research finds that similarity in economic size and similarity in income level per capita have a positive and significant effect on Indonesia’s exports. This result supports Linder’s hypothesis instead of traditional trade theory that trade will be more intense between countries with similar per capita income levels. On the other hand, difference in institutional quality and difference in culture have a positive and significant effect on Indonesia’s exports. Regarding with the second research question: Are there any other potential markets that can be explored? This research employs cluster analysis based on the previous factor findings. Basically, Indonesia’s trade partners are clustered into several groups based on economic size, income level per capita, institutional quality, and cultural index. Then, similar countries in the same cluster with Indonesia in terms of economic size and income level per capita are kept. Countries in different clusters than Indonesia in terms of institutional quality and cultural index are also kept. Accordingly, countries that belong in these clusters are chosen as countries with potential market for Indonesia’s exports. In the end, it resulted with South Africa and Jordan as Indonesia’s potential trade partners. It means that these two countries are similar to Indonesia in terms of economic size and income level per capita. But also, these two are different from Indonesia in terms of institutional quality and culture. This research suggests that the Indonesian government should not only consider the trade partner’s economic size as an important factor while identifying potential markets. Similarity of per capita income level, institutional difference, and cultural difference should also be considered when establishing a trade partnership. This research also suggests to the government of Indonesia to improve the existing economic cooperation with South Africa and Jordan. These two countries might serve as new potential markets for Indonesia’s exports.
Kata Kunci : -
