Advances in Management and Applied Economics

Testing for the Home Market Effect in Inter-Regional Trade in Korea

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• Abstract

  This study attempts to test the HME hypothesis in inter-regional Korean trade. For this purpose, we draw on the multi-regional model recently developed by Behrens et al. (2009). In particular, we utilize Behrens et al.’s (2009) simple linear filter, which allows us to separate the “pure HME” from “the third-country effect”. Our contribution includes converting the theoretical simple linear filter into an empirical framework for testing HME. We apply the empirical linear filter to inter-regional trade data of 100 manufacturing industries for 16 Korean regions. Our tests identify the presence of HME in inter-regional trade and its strength appears to be greater than that observed in the international context of earlier studies. Furthermore, important third-country effects are observed across Korean regions.