Data and Methodology

2.1 The Computer Industry in East Asia

East Asia is characterized by intricate production and distribution relationships, constituting part of a global triangular trading network. Japan; Korea; Taipei,China; and multinational companies located in ASEAN countries produce sophisticated, technology-intensive intermediate goods and ship them to the PRC and ASEAN countries for assembly by lowerskilled workers. The finished products are then exported throughout the world.

Foreign direct investment (FDI) flows and multinational companies play an important role in these triangular trading patterns. As Gaulier, Lemoine, and Unal-Kesenci (2005) discussed, FDI flows and multinational company activities reduce costs in host countries, transfer technological and managerial know-how, increase local procurement, multiply trade in intermediate goods, and strengthen distribution networks.

Triangular trading patterns are clearly evident in the computer industry. Table 1 disaggregates total exports from East Asia to the PRC and ASEAN countries by product category in 2007. ASEAN is defined to include Malaysia, the Philippines, and Thailand.² The product category ‘electronic components' is easily the leading export category in Table 1 [ PDF 38.8KB | 1 page ].³ Twenty-three percent of the exports from East Asian countries to the processor economies are electronic components.

This percentage is similar for the PRC and ASEAN (as a group) taken separately. For the PRC, 24% of goods coming from the rest of East Asia are electronic components; for ASEAN, the figure is 21%. In both cases, this is the largest import category.

Table 2 [ PDF 38.8KB | 1 page ] disaggregates total exports from ASEAN countries and the PRC to the world in 2007. The product category “computers and office equipment” is easily the most exported product category. Almost 13% of exports from the processor economies are in this category.

This percentage again does not change much if one looks at the PRC or ASEAN (as a group) separately. For the PRC 12% of total goods exports are in this category and for ASEAN 15% are.

Table 3 [ PDF 38.6KB | 1 page ] and Table 4 [ PDF 38.6KB | 1 page ] show the countries providing electronic components to the PRC and ASEAN countries, and the countries purchasing final assembled computers and office equipment from the PRC and ASEAN countries. More than 80% of the electronic components to the processor economies come from other East Asian countries. More than 70% of the final goods assembled in the PRC and ASEAN go outside the region. Thus, East Asia as a whole tends to produce computers by splitting up the value chain within the region and exporting the finished products throughout the world.

2.2 Identifying Trade Elasticities

This paper investigates how exchange rate changes in both East Asian assembly countries (PRC, Malaysia, Philippines, and Thailand) and in supply chain countries affect exports of processed goods. To do this it uses data on final computer and office equipment exports from the 4 assembly countries to 28 importing countries and data on electronics components exports from the 10 leading supply chain countries to the 4 assembly economies. There has been substantial variation both cross-sectionally and over time in exchange rates between the 4 assembly and 10 supply chain countries and the 28 countries importing the finished computers. This approach should thus help to identify in an econometric sense how exchange rate changes affect computer exports.

The imperfect substitutes model of Goldstein and Khan (1985) implies that the quantity of exports demanded by other countries depends on income in the other countries and the price of exports relative to the price of domestically produced goods in those countries. The quantity of exports supplied depends on the export price relative to the domestic price level in the exporting country. By equating demand and supply one can derive an export function:

where ex_t represents the log of real exports, rer_t represents the log of the real exchange rate, and rgdp represents the log of foreign real income.

Real exchange rates and real income are often taken as given when estimating export equations. This approach may be subject to simultaneous-equation and omitted-variable bias. If the elasticity of supply is infinite, however, it is possible to identify the parameters in equation (1).

In this case there is reason to believe that the perfect supply elasticity assumption may be reasonable. The International Monetary Fund (2005) argues that the supply of imports for processing into Asian assembly countries tends to vary one for one with the demand from the rest of the world for processed exports. Thus, sophisticated intermediate goods tend to flow elastically into Asian processor economies to accommodate increases in demand in the rest of the world.

2.3 Weighted Exchange Rates

Because the lion's share of the value-added of final computers comes from the technology-intensive parts and components rather than from assembly operations, this paper includes a weighted exchange rate among the countries supplying electronic components to the PRC and ASEAN countries. To calculate the weighted exchange rate, data on electronic components imports into the assembly nations was used. As Table 3 shows, more than 90% of electronics components imports in 2007 came from 10 countries. These are the East Asian economies (PRC; Malaysia; Japan; Philippines; Singapore; Korea; Taipei,China; and Thailand) plus Germany and the US. This same pattern holds for every year going back to 1990. These countries are thus assumed to be the major exporters of electronic components to the PRC and ASEAN.

For every year between 1990 and 2006 weights are calculated based on the percentage of electronic components going from the 10 major exporters to the 4 processor economies. Weights are calculated separately for each of the 4 processor economies and for each year. For instance, if 10% of Thailand's electronic components imports from the major electronic components exporters came from Japan in 2001, then w_{Thailand,Japan,2001} would equal 0.10. In order to explain Thailand's exports of computers to an individual country such as the United Kingdom (UK), w_{Thailand,Japan,2001} would be multiplied by the exchange rate between Japan and the UK in 2001 (rer_{UK,Japan,2001}). In similar ways weights can be calculated for Thailand's imports of electronic components from the other 9 major electronic components exporters. The products of these weights and the bilateral exchange rates between the major electronic components exporters and the UK could be calculated. The sum would then give a weighted exchange rate for computer exports from Thailand to the UK.

More generally, the weighted exchange rate between East Asian assembly country i and country j, purchasing computers from country i would be given by:

where wrer_i,j,t is the weighted exchange rate, w_i,k,t is the proportion of electronic components coming into processor country i from electronic components exporter j, and rer_j,k,t is the bilateral exchange rate between country j that purchases the final good and country k that produces electronic components.

To calculate wrer in this way it is necessary to measure exchange rates using a common numeraire. This can be done by employing the real exchange rate variables constructed by the Centre D'Etudes Prospectives et D'Information Internationales (CEPII). The CEPII real exchange rate between countries i and j is calculated by first dividing gross domestic product (GDP) in dollars for country i by GDP in purchasing power parity for country i and doing the same for country j. The resulting ratio for country i is then divided by the ratio for country j. This variable measures the units of consumer goods in country i needed to buy a unit of consumer goods in country j. It can be compared across countries as well as across time. Because it is comparable across countries, it can be used in equation (2) to calculate wrer . Higher values of wrer correspond to stronger exchange rates among the countries supplying parts and components.

2.4 Data and Econometric Methodology

The dependent variable is the log of computer and office equipment exports.⁴ These data are measured in US dollars and are obtained from the CEPII-CHELEM database. They are deflated using the US Bureau of Labor Statistics price deflator for imports of computers and office equipment.

The panel data set includes final exports from 4 East Asian processor economies (PRC, Malaysia, Philippines, and Thailand) to 28 countries over the 1990–2006 period.⁵

The independent variables include real income in the importing country ( rgdp ), the weighted real exchange rate between the supplier countries and the country purchasing the final good ( wrer ), and the bilateral real exchange rate between the assembly countries and the country purchasing the final good ( rer ). Real income is measured in constant US dollars (base year 2000). As discussed above, wrer is constructed using real exchange rate data obtained from the CEPII-CHELEM database.

In addition, the stock of FDI in the assembly country and a World Trade Organization (WTO) dummy variable for the PRC's exports are also included as independent variables. As discussed above, FDI plays an important role in processing trade. An increase in the stock of FDI may therefore lead to an increase in computer exports. Several authors (e.g., Garcia- Herrero and Koivu 2007) have also found that accounting for the PRC's WTO accession helps to explain its exports. Data on the stock of FDI are obtained from the United Nations Conference on Trade and Development (UNCTAD) website.⁶ The data are measured in US dollars and deflated using the US consumer price index. The WTO variable for the PRC's exports is a dummy variable that takes on a value of 1 after the PRC joined the WTO and 0 before.⁷

The model is estimated using dynamic ordinary least squares (DOLS). DOLS involves regressing the left-hand side variable on a constant, the right-hand side variables, and lags and leads of the first differences of the right hand side variables. The individual export equations have the form:

Here ex_i,j,t represents real exports from assembly economy i to country j; rgdp_j,t equals real income in importing country j; wrer_i,j,t represents the weighted exchange rate between the countries providing parts and components to country i and the importing country j; rer_i,j,t represents the bilateral exchange rate between assembly country i and importing country j; FDI_i,t, represents the stock of FDI in assembly country i; WTO is the WTO dummy variable for the PRC; and ∂i, μj, and γt are country i, country j, and time fixed effects. All the variables are measured in natural logs.

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