Research On Home Market Effect Of China's Manufacturing Industries' International Trade

Home market effect means, in a word of scale economy and transportation cost, the bigger the home market is, the much easier its product can export to the world. For a long time, the interpretation of China's foreign trade has been largely confined to comparative advantage. However, some scholars have found home market effect in China's foreign trade. If the competitiveness of China's international trade is from comparative advantage, then with development of China's economy, its foreign trade would face a recession. If the competitiveness of China's international trade is from the home market effect, then continuous release of its domestic demand would be eternal power for its trade. Therefore, studying home market effect has positive meaning on the development of China's foreign trade and its policy making.On base of Krugman's home market effect theory and its development, we summarize the domestic and foreign researches in this field. Then, with expansion of Weder (2003) model, we prove the relationship between scale economy, trade costs and home market effect. Finally, with reference of Davis& Weinstein's method and Weder(2003) model, we construct our empirical model and use China, India, Brazil and other five countries'data from 1992 to 2008 to test home market effect in manufacturing industries.From the research, we find home market effect in five semi-industries within machinery and transport equipment industry, with power-generating machinery and equipment semi-industry showing the strongest home market effect and other transport equipment semi-industry lying behind. Relative to the food manufacturing industry and fuel industry of low scale economy, high scale economy such as iron and steel industry, chemical industry, machinery and transport equipment industry exhibit strong home market effect, which can be explained by economies of scale strengthening home market effect. Through the empirical tests between 1992-2001 and 2002-2008, we found, after joining WTO, increasing economic openness has positive effect on relative exports in manufacturing industry and has made it show home market effect, but does not have significant effect on iron and steel industry, chemical industry and textile industry. So the relationship between economic openness and home market effect varies with industry.Based on our conclusions, in order to make best use of home market effect to cultivate sustainable competitiveness of China's international trade, policy making should pay full attention to home market effect, focus on developing and exploiting home market demand, fasten industry's consolidation, improve the chain of industry and change market segmentation status to strengthen scale economy, so as to give sustainable development to China's international trade.