Fragmentation and parts and components trade in the Western Balkan countries

Abstract

As a consequence of the increasing globalization and integration of the world’s markets, there has been an intensive process of international fragmentation of the production over the last few decades. This phenomenon whereby previously integrated productive activities are segmented and internationally spread is reflected in the rapid increase in parts and components trade, growing at higher rates than final goods trade. In this process, the Western Balkan countries (WBC) have not been an exception. With their recent integration into the global markets, the WBC have witnessed growth in parts and components trade that has even exceeded the world average. This paper examines the determinants of the trade that stems from the international fragmentation of production in the WBC. Using a panel data set of disaggregated bilateral trade flows, we estimate gravity equations for the period 2000-2009. Our findings support the hypothesis drawn from the theory of fragmentation that trade in parts and components is motivated by labor cost differences and by geographical and proximity reasons. The relevance of additional service link costs, as well as the influence of institutional similarity and infrastructure quality or political-economic agreements is also confirmed by our empirical research.