Home Market Effects Research Based On Non-homothetic Preferences

On the basis of the export-oriented growth model relying on labor forcesadvantages, China has made great development in a favorable global economicenvironment and become the world’s largest exporter. However, with the rise in thecost of domestic labor forces, the extensive trade mode can no longer last, and theinsufficient external demand caused by the continued weakness of the internationalmarket after the financial crisis has become another serious constraint of China’sforeign trade development. This paper, based on the characteristics of the time,explores the endogenous motivation of the healthy and sustainable development ofChina’s foreign trade and tries to answer the following questions: Besides thecomparative advantages of labor forces endowment, does China possess any otherexisting or potential advantages that can promote the foreign trade? The report to theEighteenth National Congress of the Communist Party of China has made it clear thatChina will actively cultivate the new competitive advantages in export. Then, doesChina have the endogenous motivation to establish new competitive advantages ofexport and what is its formation mechanism? Whether the effort to adjust the incomestructure and the resulting consumption demand of high-quality merchandise canprovide a new opportunity for the structure optimization and sustainable developmentof China’s foreign trade?Firstly, the paper tries to find the inherent logical connections from a theoreticallevel. On the one hand, relax the assumption of the homothetic preferences and takethe non-homothetic preferences in stead, so as to deepen the understanding of thetrade theory based on the demand side. Meanwhile, bring the individual consumerincome differences into the model and separate the different needs of different incomegroups for different categories of products from the scale of demand. On the otherhand, combine the quality upgrading with the export behavior of the enterprise anddistinguish products of different quality types (or different quality index of the exportindustry) so as to accord with the demand preferences of different income group. Thentake the local market effect as link to figure out the solution to China’s excessivedependence on external demand and low price competition from the perspectives ofthe quality upgrading of the enterprise and the structural adjustment of domesticdemand. The study finds that the income elasticity of demand for products of different qualities varies from different income groups, which affects the export structure bylocal market effect. The adjustment of the income structure and the rise of the overallincome level will enable a country to explore its potential of local market effect onhigh-quality products, and thus establish new competitive advantages.Secondly, the paper analyzes the status quo of China’s manufacturing trade andtakes the classic local market effect test as the benchmark to explore whether thereexists the local market effect in China’s manufacturing industry on the whole and howvarious factors contribute to it. Then, the paper makes a collaborative research ofdemand structure, the quality of the products and local market effect. First, use theoutput data directly to test the local market effect. In order to distinguish the factor ofdemand structure from the traditional factor of demand scale, this paper devises atwo-step estimation strategy, bringing the variable of the demand structure as aninstrumental variable into the first step estimation, which screens the industries withlocal market effect under two different criteria. Second, make influencing factorsanalysis based on porbit and logit models.Meanwhile, this paper further uses the gravity model to indirectly test the localmarket effect. By incorporating the demand structure into the classic gravity model,the test equation of the local market effect can separate the influence of the demandscale and that of the demand structure. While calculating the similarity index ofdemand structure of samples countries and China, indentify the manufacturingproducts with different quality types through the regression of each export productfrom sample countries. On this basis, take the panel threshold regression methods toexamine the different impact that the demand structure with demand scale of differentdistribution range makes on local market effect of products of different quality. Thestudy finds that there are differences of local market effect among products ofdifferent quality types. In terms of the factor of demand scale, the most obvious partof China’s local market effect appears in the low-quality competitive products,followed by the price competitive products, while the local market effect ofhigh-quality competitive products is relatively weak. In terms of the factor of demandstructure, the results are completely different. The factor of demand structureproduces the most significant impact on the high-quality products to strengthen thelocal market effect, followed by low-quality competitive products, while the productof price type appears to weaken the local market effect. The factor of demandstructure relies on that of demand scale. The demand scale is the dominant factor thatenables the product to achieve the local market effect and only when the demand scales of two countries are similar will the factor of demand structure give play tolocal market effect.