A Comparative Study on the International Trade Competitiveness of Kenya and Korea and the Determinants of their Exports

Abstract

Many modern liberal as well as orthodox classical economists believe that trade is the corner stone of sustainable economic growth and therefore countries promote their exports so as to grow their economy. Kenya is now classified as a lower middle income country after rebasing her economy in 2014, while Korea is classified as a developed country. Bilateral trade relations between the two partner states have been improving rapidly as evidenced by the increased overall trade and diplomatic engagements. To promote trade, comparative trade advantage is usually of paramount importance. The question then arises; in which economic sectors does Kenya have competitive advantage over Korea and vice versa? What determines their exports? This was the background upon which this study was established. Better terms of trade through improved production efficiency and export diversification remains one of the corner stone’s towards economic prosperity. This study carried out empirical analysis using econometric models one being the Revealed Comparative Advantage (RCA) and the Gravity trade model approach. RCA estimation was applied to measure the international trade competitiveness of Kenya and Korea. This was done on ten major trading sectors between the two partners for the period 2000 to 2011. According to the RCA empirical results, Kenya had revealed comparative advantage on sectors HS 03, HS 09, HS44, HS49, and HS7), while Korea showed strong Comparative advantage on sectors; HS63, HS68, HS 74, HS84 and HS92. Gravity model was utilized in the evaluation of mirror data to find the real determinants of exports between the two countries and their bilateral trade partners. Complementary exogenous parameters such as labor productivity, exchange rate and FDI will be augmented to the Initial model. Hausman test results illustrated that the Random Effect model (ECM) was most suitable for our data. In the light of the results possible policy recommendations have been suggested. Empirical outcomes show that distance had statistically significant negative impact; for both countries, GDP had significant positive effect on bilateral trade for both Kenya and Korea. GDP per capita for exporter (Kenya or Korea) and that for importer or bilateral partners had significant negative impact on 50 country set for Kenya and 50 and 30 country sets for Korea. Exchange rate had significant negative impact for Kenya throughout but mixed and significant impact on exports for Korea’s exports, while labor productivity had consistent positive and significant effect for Korea. FDI had a negative impact for 30 country set for Kenya only. Adjacency and membership to COMESA trading bloc were found to have a positive correlation to Kenya’s export trade. 50 country set and the 30 country set were found to be most appropriate in explaining bilateral trade flows for Kenya and Korea respectively.

Keywords: Revealed Comparative Advantage, Gravity model, Panel data, Pooled OLS regression, Fixed Effect, Random Effect, Kenya and Korea.