An empirical examination of the role of vertical product differentiation in north-south trade

Conclusions Our results indicate that the general line of reasoning embodied in the recently developed models of North-South IIT would seem to be valid. The various measures of income and size similarity do seem to affect North-South IIT in the theoretically predicted way. Further, this type of trade is positively impacted by the direction of quality differences and, to a lesser degree, the extent of quality differences. Finally, it would appear that modeling this type of trade on a bilateral basis using data detailed by both industry and country has not only theoretial appeal, but is empirically useful. The results, however, do not address the mechanism which generates these quality differences between the exports of the North and South. The theoretical models use different assumptions concerning the process which generates the quality differences. Such differences may be related to capital abundance as in Falvey 1981]; a Ricardian form of comparative advantage as in Flam and Helpman 1987]; or a complex combination of the two.¹⁵ Some preliminary evidence on the role of quality differences has been given in this paper. The difficult task of explaining what generates these differences is an important issue left unaddressed at this point.