The Exports of Higher Education Services from OECD Countries to Asian Countries, A Gravity Approach

We analyze bilateral exports of higher education services between OECD countries and Asia, using a gravity equation approach, panel data from 1998 to 2016, and PPML regression. The approach treats higher education consumption by Asian countries as a consumable durable good reflecting investment in human capital. Asian Students come to OECD countries to obtain degrees from their universities. Structurally, the flow of students from Asian country j to OECD country i depends on the higher-education capacity of i, the perceived quality of universities in i, expected earnings in i, a series of bilateral transaction costs between i and j, the income per capita in j, school-age demographics in j, and the usual multilateral trade resistance terms. We find that bilateral flows of students are strongly influenced by wage levels in the host country, bilateral distance, importers' income, demographics, common language, the visa regime prevailing in bilateral country pairs, and the network of migrants from j in i. These results hold through a variation of specifications, proxies, and estimation methods. We find mixed evidence on the role of tertiary education capacity in OECD countries and no evidence of a country's universities reputations explaining the flow of students. The evolution over time of education capacity, earnings, visa regimes, migrant networks, strong income growth and changes in demographics in nearby export markets explain the emergence of Australia, Canada, Korea, and New Zealand and the loss of market share by the US, which still strongly dominates international trade in higher education services. The decline in Chinese students coming to the US is also predicted for the most recent years driven by reduced by its college-age population