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EAST ASIAN REGIONALISM: THE NEED FOR ASEAN+3 FTA - THE NEXUS BETWEEN RCA AND IITAnother important thing to note is the low significant value of exports within ASEAN4 in terms of creating GDP growth. These are intriguing facts since export is considered as the main determinant of GDP growth. It is suspected that the effect of rivalry between ASEAN4 members and China is the main factor which creates insignificant value. This factor is supported by Holst and Weiss hat pointed out China’s emergence for creating short and medium term direct and indirect competition between ASEAN and China. They argued that ASEAN and China are experiencing intensified export competition in prominent third markets. This can lead to painful domestic structural adjustments within the ASEAN in the short run. Then again the mind set in viewing the economic opportunity or threat depends on whether China’s economy is perceived as complementary or competitive vis-a-vis individual ASEAN economies and on whether the latter economies are able to exploit their complementary opportunities and overcome the competitive threats.
Chia argued that “the differences in resource and factor endowments, production structures and productivities lead to a complementary relationship, whereas similarities in these areas lead to a competitive relationship”.
A priori we expected that RCA would explain the variation of the VIIT and that the correlation would be positive. The results confirm that prediction. Table 11 proof that the IIT used in the model is the VIIT.
As we used only a simple model, we must be careful with the conclusions. But, there is some empirical evidence against the prediction made by theory for separating the determinants of horizontal and vertical IIT. According to the theory, HIIT is explained by the interaction between economies of scale and (horizontal) product differentiation. VIIT can be explained by comparative advantages in the context of Heckscher -Ohlin (H-O) or Ricardo- Heckscher-Ohlin (R-H-O) framework, without recourse to economies of scale. Following Tharakan and Kerstens, “The latter study (Tharakan,1989) which carries out a product-by-product analysis (corresponding to SITC 5-digit ) suggests that the observed IIT is partly due to H-O-type determinants and partly caused by other factors such as vertical, and in some cases, horizontal product differentiation.” Fukao et al argues that VIIT is likely to be driven by differences in factor endowments. Therefore, it is expected that VIIT to be more clearly seen between developing and developed economies.
Kimura and Ando describe the production networks in East Asia as vertical intra-industry trade phenomena that involves back and forth links where by several countries participate in various stages of the production chains. Having said this, it is interesting to know about the motivations of CJK in making VIIT in ASEAN.
Table 12 shows us that for the case of Japan, difference in the level of economy (LOG(WAGE)) and the logistic performance are the most influential factors that contributes to the motivations of making VIIT in ASEAN. As for the case of Korea (table 13), Korean motivation is most likely influenced by the market power (COMPETITIVENES) and the trend toward industrialization process in ASEAN (INDUSTRY), let alone the difference level in Economy (LOG(WAGE)). But, from the same scheme we cannot see the pattern of VIIT for China since China and ASEAN are considered as developing countries which do not have substantial gap in income. Therefore, it is irrelevant when we try to calculate VIIT of China to ASEAN (table 14). The income gap result is similar to that in Greenaway, Hine and Milner. They argue that the greater the difference in the level of economy will lead to a greater share of VIIT.

Table 11. RCA-IIT nexus

Dependent Variable: IIT
Independent Variable Coefficient
RCA 0.016003***
C 0.511111
R-squared 0.412754

Table 12. Japanese Motivation in doing VIIT to ASEAN4

Dependent Variable: IIT Japan-ASEAN4
Variable Coefficient
LOG(WAGE) -0.050785***
LOGISTIC 0.163096**
INDUSTRY -0.005127
COMPETITIVENES (Japan-ASEAN4) -0.002783
R-squared 0.912621

Table 13. Korean Motivation in doing VIIT to ASEAN4

Dependent Variable: IIT Korea-ASEAN4
Variable Coefficient
LOG(WAGE) -0.041684***
LOGISTIC 0.154065
INDUSTRY 0.016522***
COMPETITIVENES (Korea-ASEAN4) 0.0161128*
R-squared 0.813666

Table 14. Chinese Motivation in doing VIIT to ASEAN4

Dependent Variable: IIT China-ASEAN4
Variable Coefficient
LOG(WAGE) 0.001195
LOGISTIC 0.026256
INDUSTRY -0.001101
COMPETITIVENES (China-ASEAN4) -0.002010
R-squared 0.025739