Export market size matters : the impact of the market size of export destinations on manufacturing sectors growth
Sánchez González, Santiago
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This paper proposes that the market size of export destinations matters for the growth of manufacturing sectors in developing countries, given that the access to larger markets can help to circumvent potential lack of demand problems and to reach the full benefits of economies of scale. To test this hypothesis, first we propose a new Relative Export Market Size (REMS) index that measures the total market size of the export destinations of a specific manufacturing sector in a specific region, relative to the average destination market size of the same sector at national level. In a second step, we verify the impact of the REMS on value added, employment, physical capital accumulation and the revealed comparative advantage (RCA) of 129 manufacturing sectors in 23 regions in Colombia, using a Panel Vector Autoregressive model with exogenous variable (PVARX). The obtained results indicate that exporting to larger economies has a positive effect on the performance of manufacturing sectors. The estimated long-run effect of a unit increase in the REMS index is an increase of up to 18% value added per capita.