The Role of Variety and
International Trade on Regional
Sedef Akgüngör
Yaprak Gülcan
Mehmet Aldonat Beyzatlar
1. Introduction
2. Theoretical Background
3. Hypotheses
4.Econometric Model
5. Empirical Results
6. Conclusion and Policy Implications
• Variety and international trade are two significant
variables that explain regional innovativeness.
• Innovation is a central process in driving
economic growth through short run productivity
gains and long run employment growth by
creating new economic activities.
• innovation draws on knowledge that is often
sourced locally.
• There is a wide and growing literature that treats
innovations as an evolutionary branching process
• Variety: the number of actors, activities and
objects required to describe an economic system.
• Related variety
• Unrelated variety
• Over the past decade, considerable number of
academics examined the effect of related variety
on regional growth by using different variables.
• The studies found positive interaction between
relatedness and growth in many case studies,
such as Italy, the Netherlands, Spain, Turkey.
• Related variety and unrelated variety are both
significant in explaining regional innovations
(Castaldi, Frenlen and Los, 2013).
– Related variety enhances innovations as related
technologies are more easily recombined into new
– Unrelated variety enhances technological
breakthroughs since radical innovations stem from
previously unrelated technologies opening up
whole new functionalities and applications.
International Trade-Innovations
• International trade theory highlights the importance of
technological innovations in explaining the country’s
international competitiveness (Fagerberg, 1997).
• Schumpeter points out that economic development are a
dynamic process that derives from industry and trace.
• New products, new ideas play significant roles in
international trade.
• Marquees-Ramos and Martinez Zarzoso, 2010 point our the
importance of technical achievement on export
• Atkesen and Burstein (2010) point out the strong tie
between firms’ welfare, innovation and international trade.
Long Term International Trade Ties and
• The impact of international trade on innovation presents the
question of whether the influence of long term trade relationships
is higher that overall impact of international trade on innovation.
• The case of Turkey and Germany presents an interesting case study
• Turkey and Germany are two nations with various political, military,
economic, social, cultural and historical ties along the years. The
relationship between Turkey and Germany has gained momentum
within the framework of “Contract Labor Migration” that was
signed by Turkey and Germany in 1961.
• Dense political, economic and cultural relations between Turkey
and Germany and long term trading relationship influences
• ?????
Trade Ties
• Germany is Turkey’s biggest trading partner in the
EU. While the volume of trade between Turkey
and the Germany was about 6 billion Euros in
1990, it has reached almost 24 billion Euros in
• Germany, with more than 4.000 firms, is the
biggest foreign investor in Turkey. Besides trade
connections, the economic cooperation between
two countries expands every day by various
bilateral research and technology projects.
Objectives of the Study
• 1. Explore the impact of related variety and
unrelated variety on regional innovations.
• 2. Explore the impact of overall regional
international trade on regional innovations
• 3.Understand the impact of long-trade ties
between two countries on regional
Theoretical Background
• The theory follows the idea that international
trade is not only trade of goods and services but
it consists of movement of ideas and innovations.
• Spulber (2008) presents a model where he
contends that without international trade in
technology, the country’s human capital is equal
to population multiplied by base productivity.
• When international trade occurs, the human
capital increases by the amount of technology.
• The model developed by Spulber (2010) show
that innovation and international trade together
play an important role in domestic markets
where technology trade increases product variety
and increases national income in each country
and increases total gains from trade.
• Similar idea has also presented by different
scholars where the idea is that technological
innovations and international trade go parallel in
regions and countries (Egger and Keuschnigg,
2011; Damijan and Kostevc, 2010).
• The concept of recumbinant innovation contends that
related variety and unrelated variety enhances
innovations in two distinct ways.
• Recumbinant innovation vs. branching innovation
• Branching innovations refer to technological
improvements along a particular path
• Recumbinant innovations refer to fusions of multiple
• Recumbinant innovations create short cuts (facilitate
learning and knowledge exchange) allowing agents to
escape from technological lock in..
• The theory on innovations and trade and the theory on
recombinant innovations leads to the following three
• Hypothesis 1: There is a positive relationship between i
nternational trade and regional innovativeness
• Hypothesis 2: The impact of international trade on regi
onal innovativeness increases when international trade
ties are between the partner countries is higher than a
• Hypothesis 3: There is a positive relationship between
related variety and regional innovativeness.
• Dependent variable: Innovations
– Patent data
– Turkish Patent Institute (TPE) for the period 20022011 at the NUTS3 level for 81 provinces of
– Patents and utility models are used as the proxy
for innovation
• Independent variables
1. Variety
Related and unrelated
Entropy measures
The main advantage of the entropy measure, and the
reason for its use in the context of diversification, is that
entropy can be decomposed at each sectoral digit level.
• Entropy measures are computed using export data, which is
available for Turkey at the four-digit level from the Turkish
Statistical Institute (TUIK) database.
• 2. Export
• Export data of 81 regions for the 2002-2011
• Data were collected at the NUTS 3 level as the
spatial unit of analysis to deal with detailed
export map of all 81 provinces for the period
• Related Variety
• Unrelated Variety
• Weighted sum of the
entropy at the four digit
level within each two
digit level.
• Entropy of two digit
• Let all four digit sectors i fall exclusively under
a two digit sector Sg where g=1,…….,G
• Derive two digit shares Pg by summing the
four digit shares Pi
Unrelated Variety
Related Variety
• The concept of entropy measures implies that
four-digit entropy is equal to the sum of two-digit
entropy as unrelated variety and the weighted
sum of four-digit entropy within each two-digit
class as related variety.
• Related variety is considered to be the indicator
for Jacobs’s externalities because it measures the
variety within each of two-digit classes.
• By contrast, unrelated variety measures the
extent to which a region is diversified in very
different types of activity.
Econometric Model
Independent variables:
• total international trade volume (TINT),
• trade volume with Germany (TG),
• related variety (RV)
• unrelated variety (UV)
Dependent variable:
Patent and utility model applications (P)
The period of analysis is 2002-2011 for 81 provinces of Turkey.
All variables used in panel-data analysis are handled in natural
logarithm form and stationary condition.
2SLS Panel Regression Results
Dependent Variable is P
Model 1
Model 2
• This study confirms the hypotheses that there is a
positive relationship between
– (i) related variety and innovation,
– (ii) trade and innovation.
• The study also confirms that there is a simultaneous
relationship between patent applications and
international trade.
• The study found no evidence that trade ties with
Germany has a stronger influence on patent applications
than overall international trade.
• More research is needed to explore the impact of
international trade with Germany on innovativeness.
• A closer examination of sectoral distribution of trade
with Germany and sectoral patent applications might
give a different result.

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