Trade Performance and the Role of R & D, Patents, Investment and Hysteresis: An Analysis of Disaggre

This paper experiments with three different proxy variables - ie, relative patenting activity, R & D expenditure and investment - in an attempt to capture the importance of non-price factors (such as relative product quality, variety and innovation) in the determination of import volumes. The empirical work uses bilateral import volume data for the UK, Germany and Italy - disaggregated to 4-digit ISIC level - together with disaggregated bilateral proxies for quality and innovation. The paper seeks to identify `hysteresis' effects in UK import volumes by testing whether the temporary appreciation of sterling in the early 1980s - which was accompanied by a 27% increase in UK import penetration and a 25% fall in manufacturing employment - resulted in a permanent increase in UK imports (ie, between 1979-81 the sterling effective exchange rate rose by around 30%, but virtually all of the appreciation had been reversed by the end of 1983). The paper concludes: quality and innovation are important determinants of trade shares for certain sectors; the temporary appreciation of sterling at the start of the 1980s was associated with a permanent loss of market share for UK producers partly because the high level of sterling encouraged UK purchasers to try more imported products, particularly imports from the newly-industrialising countries; relative import price elasticities are approximately twice (in some cases, three times) as large as those previously estimated using aggregate data. No PDF version is available. Please contact the NIESR Publications Office to order a free hard copy of this Discussion Paper.