The available empirical evidence on Spain's industrial exports to the rest of the European Community relies heavily on time-series aggregate export and import functions that focus exclusively on relative price and demand levels and take little account of factors such as product differentiation, which the recent literature on industrial organization suggests may play a critical role in explaining the trade patterns of individual industries.

In Discussion Paper No. 521, Carmela Martín and Lourdes Moreno note the prevalence within the Community of two-way trade in many commodity groups and significant price differentials for similar products even at the most disaggregated level. Assuming that neither imports nor exports are perfect substitutes for domestic goods, they develop an econometric model using a panel data approach to explain Spain's industrial exports to the Community. The key determinants are the real effective exchange rate and EC(7) real value added, and also a `structural' component for each sector, which they capture by measures of `technological effort' (R&D expenditure plus payments for technological imports) and of advertising expenditures. These may either have a specific positive influence on export performance or indicate the extent of firms' competition for (vertical or horizontal) product differentiation.
Martín and Moreno find wide variations in the cost and price elasticities of EC export demand across sectors: from cost and price elasticities of 2.19 and 2.85 for textiles, leather and clothing to a cost elasticity of 0.41 for transport equipment and a price elasticity of 2.50 for office and data- processing machines. Thus, one can even find sectors with positive cost (price) elasticities of EC export demand. These results support the view that non-price factors significantly influence international competitiveness: in particular advertising expenditures and, to a lesser extent, technological effort are positively related to the performance of Spain's industrial exports to the rest of the Community.

Martín and Moreno conclude that Spanish firms seeking to improve their performance within the single European market should base their strategy on not only cost but also non-cost competitive factors such as quality, design and brands. Moreover, the government could support trade performance by promoting innovation in and diffusion of technology (e.g. by introducing measures to encourage upgrading of products and processes) and by adopting training measures to improve human capital.

Spain's Industrial Exports to the EEC: A Panel Data Approach
Carmela Martín and Lourdes Moreno

Discussion Paper No. 521, April 1991 (IT)