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Competitiveness in the Southern Euro Area: France, Greece, Italy, Portugal, and Spain

Author(s):
Bogdan Lissovolik, Julio Escolano, Stefania Fabrizio, Werner Schule, Herman Bennett, Stephen Tokarick, Yuan Xiao, Marialuz Moreno Badia, Eva Gutierrez, and Iryna Ivaschenko
Published Date:
April 2008
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V. Are the Southern euro areas Exports Moving to Markets with Less Competition?12

A. Introduction

Globalization has resulted in increasingly integrated markets across the world. As a result, competition may become tougher, and incumbent players may lose market share. Moreover, classical trade theory predicts a reduction in prices and margins, although the empirical evidence is mixed (see for example, Chen, Imbs, and Scott, 2004; and Boulhol, 2005). In the face of increasing competition, incumbent firms can adjust by increasing their productivity, and since this may prove difficult in mature industries, by diversifying toward markets with fewer competitors or higher-value-added products, where competition from new entrants could be weaker. However, shifts toward less competitive markets could indicate that exporting firms are not really adjusting but have been competed out of their traditional markets and forced to retreat into more protected but less profitable ones. Although all southern euro area five (SEA-5) countries have suffered a decline in their shares of world exports over the last decade (Figure V.1), it is not clear whether some adjustment has already taken place in response to the emergence of new global competitors.

Figure V.1.Share in World Exports of Goods, 1995-2005 (Percent)

Sources: UN, COMTRADE; and IMF staff calculations.

The purpose of this chapter is to analyze to what extent SEA-5 exporters are facing stiffer competition, and how they have tried to readjust to the new global environment. In particular, this chapter explores the following questions: (a) where are the SEA-5 countries exporting to, and with whom are they competing in those markets; (b) how has the intensity of competition evolved in those markets; and (c) have the SEA-5 countries reallocated their exports toward markets with lower degree of competition and higher relative unit values. In order to analyze these issues, we use six-digit data for export of goods from the United Nations Commodity Trade Statistics Database (COMTRADE), which implies a breakdown of exports into more than 4,000 differentiated product categories (a description of the data and definitions used in this paper are reported in Appendix V.A). We conventionally define competition as larger number of suppliers with more evenly distributed shares—measured by a Herfindahl index of each market separately and aggregated for each country according to the weight that the market in question has in its total exports.

The analysis shows that, despite some diversification, the main markets of the SEA-5 exporters are EU countries. In general, all SEA-5 countries are underdiversified compared with Germany, but Portugal and, to a lesser extent, Spain stand out because of their low degree of diversification relative to their peers. Greece, however, is highly diversified, thanks to the expansion of its exports into southeastern Europe. Contrary to expectations, the main export competitors of the SEA-5 countries are G-7 countries.

In line with global trends, all SEA-5 countries, except for Greece, faced increasing competition in their export markets during the last decade (1995–2005). Moreover, SEA-5 countries confront higher competition levels than Germany and the world as a whole. The average market share for the SEA-5 countries is smaller than for Germany and declined over the last decade. Nevertheless, some countries have been able to raise their relative unit values, probably indicating some quality upgrading.

In response to these challenges, there has been some reallocation of exports toward markets with less competition. In particular, France, Greece, and Portugal have entered into markets with lower levels of competition than those of the markets they have abandoned. Also, the combined effect of entry and exit from markets has raised relative unit values for most SEA-5 countries. And, although in general SEA-5 countries have not reoriented their exports toward markets with less competition, all SEA-5 countries, except for Greece, have shifted their exports toward markets where they have larger market shares.

Going forward, additional adjustments will be needed. First, SEA-5 countries can further diversify their export markets and profit from the opportunities presented by new markets. By being the first movers into markets with high growth potential, they can gain knowledge and consolidate their positions before competitive pressures arise in these markets. To a certain extent, this is the strategy being followed by some Greek exporters. Second, although competition may depress prices, there is certain scope to increase the quality of exports, as discussed in Chapter IV. Finally, productivity improvements can help firms maintain their competitive position.

B. Where are the Exports Going, and Who are the Main Competitors?

SEA-5 countries have diversified their exports across geographic markets since the mid-1990s, but the European Union remains the most important export destination (Table V.1). Although all SEA-5 countries are underdiversified compared with Germany, there are considerable differences among them (Figure V.2). Greece, which had one of the highest levels of export concentration in 1995, has become the most diversified country of the SEA-5 countries, thanks to its entry into southeastern Europe. By contrast, Portugal, which was the least diversified at the beginning of the period, is still lagging behind, partly due to its dependence on the Spanish market. Spain, despite improvements, has also a low degree of diversification compared with its peers, while Italy and France have increased their diversification, and are now close to world market averages.

Figure V.2.Geographic Diversification (1995-2005) 1/

Sources: UN, COMTRADE; and IMF staff calculations.

1/ A higher Herfindahl index indicates less diversification.

Table V.1.Southern euro area Five: Main Geographic Destinations of Exports, 1995–2005 1/(Share, in percent)
FranceGreeceItalyPortugalSpain
DestinationShare

2005 2/
DestinationShare

2005 2/
DestinationShare

2005 2/
DestinationShare

2005 2/
DestinationShare

2005 2/
BEL8.7ALB2.7AUT2.4AUT1.3BEL3.2
CHE2.7BEL1.5BEL3.0BEL4.8DEU12.5
CHN2.1BGR5.7CHE3.9DEU13.6FRA18.9
DEU15.7CYP6.8CHN2.1ESP25.4GBR9.8
ESP9.7DEU13.6DEU13.3FRA12.4ITA9.1
GBR8.8ESP4.0ESP7.3GBR9.2MEX1.9
ITA9.0FRA4.1FRA12.2ITA4.7NLD2.8
JPN2.0GBR7.8GBR6.6NLD3.3PRT9.9
NLD3.3ITA12.0GRC2.0SWE1.0TUR2.0
USA8.3NLD2.1JPN2.0USA6.6USA5.1
ROM2.9NLD1.9
RUS1.2POL2.1
TUR4.5ROM1.9
USA6.3TUR2.2
USA9.6
Sources: UN, COMTRADE; and IMF staff calculations.

The SEA-5’s main export competitors are G-7 countries. However, China is among the top five competitors for Greece, Portugal, and Italy (Table V.2). In order to measure the overlap between SEA countries’ export bundles and those of their main competitors, we use the export similarity index developed by Finger and Kreinin (1979). This index takes a value of 1 if two countries have identical exports and a value of 0 if their export patterns are totally dissimilar. Based on this measure, Greece, Italy, and Spain’s overlap with their main competitors decreased over the last decade while the opposite applied to Portugal (Figure V.3). France’s export similarity with its main competitors—the highest among the SEA-5—remained broadly unchanged.

Figure V.3.Index of Export Similarity, 1995-2004 1/

Sources: UN, COMTRADE; and IMF staff calculations.

1/ Weighted average of the indices of export similarity with main competitors. A higher index indicates greater export similarity.

Table V.2.Top Competitors 1/
FranceItalyGreecePortugalSpain
DEUDEUDEUDEUDEU
NLDCHNITAFRAFRA
USAFRAFRACHNUSA
GBRUSANLDITANLD
ITANLDCHNNLDITA
JPNGBRUSAGBR
USA
Sources: UN, COMTRADE; and IMF staff calculations.

C. Is Competition Becoming Tougher?

Concentration among exporters in a given market is measured by the Herfindahl index. This index has been extensively used in the literature to convey information about the distribution of market shares among firms in a specific market (Hennessy and Lapan, 2007; and Mirza, 2006). For this analysis, we define a market as a pair consisting a geographic destination and a product. The indicator of overall concentration is the sum of Herfindahl indices across all markets, weighted by the export shares of each market. Similar results are obtained using entropy as a measure of market concentration. The basic idea of this measure is that the higher the number of countries exporting into a market and the smaller their market share (lower Herfindahl index), the stiffer will be the competition in that market. However, caution must be applied in interpreting results, since we focus on the competition among exporters in a given market without considering domestic producers, the number of firms involved, or the evolution of markups.

Based on the Herfindahl indices, all SEA-5 countries, except for Greece, faced increasing competition in their export markets during the last decade. This trend is similar to that of other large European countries (Germany and the U.K.), although the increase was smaller for Italy, Spain, and Portugal (Figure V.4). SEA-5 countries face stiffer competition than Germany and the world as a whole, but the difference is not large for Spain and France. The average market share for the SEA-5 countries is lower than for Germany and, not surprisingly, has declined over time, even in the case of Greece, where the intensity of competition has declined as well (Figure V.5).

Figure V.4.Market Concentration (1995-2005) 1/

Sources: UN, COMTRADE; and IMF staff calculations.

1/ A higher Herfindahl index indicates higher market concentration and w eaker competition.

Figure V.5.Market Shares, 1995-2005 1/

Sources: UN, COMTRADE; and IMF staff calculations.

1/ Weighted average market share across all markets. Markets are defined as pairs of products and geographic destinations.

Despite this more intense market competition, some countries have managed to increase their relative unit values.3 In particular, Italy and Portugal seem to have upgraded their export quality in response to the emergence of new competitors (Figure V.6).4 Greece has also benefited from an increase in its relative unit value, probably aided by weaker market competition, while France and Spain have experienced just the opposite.

Figure V.6.Market Concentration and Relative Unit Values, 1995 and 2004

(Changes, in percent)

Sources: UN, COMTRADE; and IMF staff calculations.

This increase in competition has been mainly driven by nonmanufacturing and low-tech manufacturing goods (Figure V.7). Within the low-tech category, the textile industry is responsible for a large part of the increase in market competition in Italy and Portugal. In addition, some goods with higher-technology intensity have also led to higher competition in France, Italy, and Spain. Technology upgrading has, however, decreased the intensity of competition faced by Greece and Portugal.

Figure V.7.Contributions to Changes in Market Concentration, 1995 and 2004

Sources: UN, COMTRADE; and IMF staff calculations.

D. Are the SEA-5’s Exports Moving to Markets with Less Competition?

To assess whether the SEA-5 countries have tried to shift their exports to markets with less competition, we look at “traditional,” “entry,” and “exit” markets. Traditional markets are those markets where the SEA-5 have been present since 1995 and throughout the sample period; entry markets are those the SEA-5 countries have entered since 1995; and exit markets are those they have exited since 1995. The change in market competition between 1995 and 2004 can be then decomposed into three categories: (a) within effect: changes due to increased competition in traditional markets, keeping the export shares fixed; (b) between effect: changes due to a shift of export shares across traditional markets; and (c) net entry effect: changes due to differences in the level of competition between entry and exit markets.

The positive impact from the entry and exit markets have helped mitigate the intensity of competition for some SEA-5 countries but not enough to offset the negative impact from traditional markets. In particular, the degree of competition in new markets has been lower than that of exit markets in France, Greece, and Portugal (Figure V.8). However, only in Greece has this effect been large enough to offset the stronger competition in traditional markets. In fact, what sets Greece apart from the other SEA-5 countries is its entry into southeastern Europe, where markets are highly concentrated (Table V.3). The intensity of competition in traditional markets has increased across the board (negative within effect), and, with the exception of Portugal, there has not been an overall reorientation of exports toward markets with less competition (negative between effect). This is in line with developments in Germany and the U.K.

Figure V.8.Contributions to Changes in Market Concentration, 1995 and 2004 1/

(Percent)

Sources: UN, COMTRADE; and IMF staff calculations.

1/ A negative between effect indicates that exports have shifted toward traditional markets with stronger competition; a negative within effect indicates that the degree of competition in traditional markets has increased; a negative net entry effect indicates that the degree of competition in entry markets is higher than that of exit markets.

Table V.3.Net Entry: Contribution to Changes of Market Concentration by Geographic Destination, 1995 and 2004(Percent)
FranceGreeceItalyPortugalSpain
DestinationContributionDestinationContributionDestinationContributionDestinationContributionDestinationContribution
CHE0.7ALB8.4AUT0.0AUT-0.1DEU-0.2
CHN0.3BGR14.3CHE0.1DEU-0.3FRA-0.1
DEU-0.9CYP3.9CHN0.1ESP1.0GBR-0.1
ESP-0.1DEU0.1DEU-0.9FRA-0.9ITA0.1
GBR0.8ESP0.4ESP0.0GBR1.2MEX0.4
ITA-0.2FRA-1.4FRA-0.2ITA0.6NLD0.2
JPN-0.4GBR-0.1GBR0.1NLD-0.2PRT-1.0
NLD0.0ITA-1.0GRC-0.1SWE-0.2TUR0.4
USA0.7NLD0.2JPN-1.0USA0.6USA-0.2
ROM0.9NLD-0.3
RUS1.8POL0.2
TUR2.0ROM0.2
USA1.1TUR0.0
Sources: UN, COMTRADE; and IMF staff calculations.

Also, the shift in exports within the higher-technology markets has helped weaken competition. As expected, the intensity of competition faced by SEA-5 countries in their traditional markets has generally increased for all levels of technology intensity (negative within effect),5 as in Germany and the U.K. (Figure V.9). But the reorientation of exports within the medium high-tech markets has reduced competition in all SEA-5 countries (positive between effect), and, barring Italy, the same is true for high-tech markets. By contrast, the shift within the low-tech and nonmanufacturing exports has in general increased competition. Finally, for most SEA-5 countries the net entry effect of nonmanufacturing markets on competition has been negative while that of high-tech and medium-low tech markets has been positive.

Figure V.9.Contributions to Changes in Market Concentration by Technology Groups, 1995 and 2004 1/

(Percent)

Sources: UN, COMTRADE; and IMF staff calculations.

1/ A negative within effect indicates that the degree of competition in traditional markets has increased; a negative between effect indicates that exports have shifted toward traditional markets with stronger competition; a negative net entry effect indicates that the degree of competition in entry markets is higher than that in exit markets.

Moreover, there has been some reallocation of exports toward markets with larger average market shares and higher relative unit values. SEA-5 countries, with the exception of Greece, have tried to shift their exports toward those traditional markets where they enjoy larger market shares (positive between effect); overall, however, the emergence of new players has dampened market shares (Figure V.10). The entry and exit from markets have also boosted the average market share of Greece and, to a lesser extent, France. Although SEA-5 countries have not shifted their exports to traditional markets with higher relative unit values, the entry and exit from markets have raised relative unit values in all countries except for Italy (Figure V.11). Furthermore, Greece, Italy, and Portugal have succeeded in raising their relative unit values in traditional markets (positive within effect) despite stronger competition in those markets.

Figure V.10.Contributions to Changes in Market Share, 1995 and 2004 1/

(Percent)

Sources: UN, COMTRADE; and IMF staff calculations.

1/ A negative between effect indicates that exports have shifted toward traditional markets with lower market shares; a negative within effect indicates that market shares have declined in traditional markets; a negative net entry effect indicates that market shares in entry markets are lower than those of exit markets.

Figure V.11.Contributions to Changes in Relative Unit Values, 1995 and 2004 1/

(Percent)

Sources: UN, COMTRADE; and IMF staff calculations.

1/ A negative betweeen effect indicates that exports have shifted toward traditional markets with lower relative unit values; a negative within effect indicates that relative unit values have declined in traditional markets; a negative net entry effect indicates that the relative unit values of entry markets are lower than those of exit markets.

Appendix V.A. Data Sources and Definitions

Data sources

The trade data are from the UN COMTRADE database and consist the trade values and quantities of import flows. We include all goods (not just manufacturing) and use import flows because reporting of imports is generally more reliable than that of exports. The import data are at the six-digit product level, according to the Harmonized System (HS) classification. For each product, an observation consists the reporter, country of origin, time, trade value in dollars, quantity, and units in which the quantity is expressed.

Our database covers the period 1995–2005, but we have excluded from most of our analysis the year 2005 because COMTRADE data for that year are still preliminary. In order to create our sample we follow two steps. First, for each country, we focus on the top geographic destinations of its exports that account for at least 70 percent of exports during the period 1995–2005. We have excluded Belgium in many instances because prior to 1999 there are no data for Belgium disaggregated from the Benelux countries. Second, we exclude outliers and unrealistic observations to calculate the relative unit values.

Definitions

The export similarity index for any two exporters c and d to country X in year t is defined as follows:

where stpc is the value share of country c’s exports in product p in year t. This index is bounded by zero and unity: it will be zero if countries c and d do not have any products in common in year t and will be one if their exports are distributed identically across products.

We define a market as a pair consisting a geographic destination and a product. For a given country c, we define the index of concentration in market m as

where Sn,t is the market share of exporter n in market m at period t. Aggregating across all markets, we obtain the overall index of market concentration:

where βm,tC , is the share of market m in total exports of country c in period t.

Traditional markets (T) are those markets where the SEA-5 have been present since 1995; entry markets (EN) are those the SEA-5 countries have entered since 1995; and exit markets (EX) are those they have exited since 1995. Changes in the overall index of concentration between 1995 and 2004 can be then decomposed as follows:

The technology content of manufacturing products is based on the taxonomy provided by OECD (2005). Manufacturing products are classified into four groups: high technology, medium-high technology, medium-low technology, and low technology. This classification is based on a cutoff procedure using R&D expenditure and output in 12 OECD countries according to International Standard Industrial Classification (ISIC) Rev. 3 and covering the period 1991–99.

For each country c, we compute the unit value in market m by dividing export value by export quantity. We only consider those markets in which quantities are expressed in the same unit across the sample of exporters for that market. Relative unit values in market m are then calculated dividing the unit value of country c by the weighted average of the unit values of its competitors in that market. The overall relative unit value of country c is the weighted sum of the relative unit values across all markets, with weights equal to export shares.

References

    Boulhol, H., 2005, “Why Haven’t Price-Cost Margins Decreased with Globalization?unpublished (Paris: Université Panthéon-Sorbone).

    Chen, N., J.Imbs, and A.Scott, 2004, “Competition, Globalization, and the Decline of Inflation,” CEPR Discussion Papers No. 4695, (London: Centre for Economic Policy Research).

    Fabrizio, S., 2008, “Are the Southern euro area Five Countries Advancing in the Search for New and Better Products?Competitiveness in the Southern euro area: France, Greece, Italy, Portugal, and Spain, Chapter IV, forthcoming (Washington: International Monetary Fund).

    Finger, J. M., and M. E.Kreinin, 1979, “A Measure of Export ‘Similarity’ and Its Possible Uses,” Economic Journal, Vol. 89 (No. 356), pp. 90512.

    Hennessy, D. A., and H.Lapan, 2007, “When Different Market Concentration Indices Agree,” Economics Letters, Vol. 95 (May), pp. 23440.

    Mirza, D., 2006, “How Much Does Trade Contribute to Market Structure?,” Economica, Vol. 73 (February), pp. 5974.

    OECD, 2005, OECD Science, Technology, and Industry Scoreboard 2005 (Paris: Organization for Economic Cooperation and Development).

Prepared by Marialuz Moreno-Badia.

For the purpose of this paper, we focus on France, Greece, Italy, Portugal, and Spain (the southern euro area five, henceforth).

The relative unit values in this paper compare each country’s unit values with those of its direct competitors. Therefore, results are not comparable to those reported in Chapter IV.

Although relative unit values have been used extensively in the literature as a proxy of product quality on the premise that a higher price reflects higher quality, caution must be applied in interpreting results, as unit values may capture other effects, in particular, market power.

Except for low-tech products in Greece and Spain and high-tech product in Spain, for which the intensity of competition in traditional markets has declined slightly.

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