An Empirical Investigation into the Role of Technology Gap in the Trade Relations of the EU Member States

Objective: The objective of this article is an empirical analysis of the role of technology gap in explaining the intensity of trade relations of the EU28 Member States over the period 1995-2015. Research Design & Methods: We construct a basic trade model in a gravity framework and further augment it by incorporating various measures of technology gap. We verified the robustness of the results by re-estimating the model into subgroups depicting the south-south, south-north & north-north trade. Findings: We have found that the technology gap plays a substantial role in determining the intensity of present trade relations of the EU28 Member States. We tested the robustness of the results and have found that the impact of technology gap varies with respect to different groups of reporters and partners depending on their level of technological sophistication. The results are in line with the postulates of trade theory. Implications & Recommendations: Technology gap plays an important role in determining the intensity of trade within the group of the EU28. The gradual convergence in incomes and TFP levels is likely to modify its role, with more effort directed at horizontal differentiation which in turn could lead to the intensification of the IIT. Contribution & Value Added: We tested various standard and non-orthodox measures of technological gap. The semi-mixed effects panel data model was estimated with the use of PPML – a new and superior approach.