Essays on the composition of trade

This thesis consists of three essays on the composition of trade. The first essay extends the empirical work of Hausmann et al. (2007) to examine the causal effect of foreign direct investment, remoteness, and institutional quality on export sophistication. Using cross country panel data, the finding shows that foreign direct investment has a positive effect, and the effect is greater for countries with low institutional quality. Similarly, remoteness from major markets has a strong negative effect, which indicates competitive disadvantage. With regard to institutional quality, its effect on export sophistication is evident only in manufactured exports. The results are robust to alternative measurement of the dependent variable and econometric estimation methods. The findings have important implications for developing countries that strive to enhance their export sophistication. The second essay provides an explanation of the distance puzzle in a gravity model estimation. Distance not only makes trade more expensive and reduces the volume of trade, but it also affects the composition of trade. The essay investigates the composition of trade as a plausible explanation of the puzzle using trade intensity index. It develops a micro foundation of the trade intensity index and its decomposition into the complementarity and country bias indices. The results show that distance has a negative effect on the complementarity index, which indicates the indirect effect of trade costs on the trade intensity index. The findings imply that the overstated distance elasticity in the standard gravity estimation is a consequence of aggregation bias and a failure to account for compositional effect. The decomposition, together with the empirical findings, seems to provide a better explanation for the long standing puzzle. The third essay uses a disaggregated version of the Eaton and Kortum (2002) model to analyze the relative importance of technology and trade costs for export sophistic