“Fragmentation, Vertical Intra-Industry Trade, and Automobile components"

By analyzing vertical intra-industry trade (VIIT) within Portugal's automobile parts and components industry, this study adds new empirical evidence for the international fragmentation of the production process. For trade partner countries, we choose the EU countries, the BRICs, and the US during the period 1995 to 2005. From panel data analysis, the empirical evidence supports the notion that shorter geographical distance, dissimilar income levels, and dissimilar endowments between two economies lead to a higher VIIT of automobile components. In addition, our results also confirm the hypothesis that automobile (assembly) production in each country promotes higher VIIT of auto parts, while economic integration in the style of the European Union and similarity in culture do not magnify the VIIT of the parts and components industry. We conclude that income differences between trade partner countries are an important driver via the international fragmentation of production of a higher VIIT. However, a call for a geographically closer vertical linkage by the agglomeration effect for large domestic automobile production leads a firm to keep the entire production process within a country and may deter this income-difference effect