Impact of preferential trade agreements (PTAs) on firms’ degree of internationalization

RESEARCH ARTICLE

Impact of preferential tradeagreements (PTAs) on firms’degree of internationalization

Evidence from PakistanSulaman Hafeez Siddiqui

Department of Management Sciences, The Islamia University of Bahawalpur,Bahawalpur, Pakistan

Muhammad ZafarullahUniversity of Central Punjab, Lahore, Pakistan andBahauddin Zakariya University, Multan, Pakistan

Muhammad Ijaz LatifDepartment of International Relations, The Islamia University of Bahawalpur,

Bahawalpur, Pakistan, and

Ghulam ShabirDepartment of Media Studies, The Islamia University of Bahawalpur,

Bahawalpur, Pakistan

AbstractPurpose – The purpose of this paper is to postulate the impact of preferential trade agreements(PTAs) on internationalization strategies of member countries’ firms. The study also aims totriangulate the proposed model using empirical data from PTA partner economies.Design/methodology/approach – The mixed methods research design is used for the purposeof inquiry as suggested by Creswell. The inductive reasoning based on critical literaturereview and grounded theory methodology is used to postulate the model. Explanatory strengthof the model is triangulated using empirical longitudinal trade data of Pakistan with herbilateral PTA partners, i.e. Malaysia, Mauritius, Iran, Sri Lanka and China. Internationalizationindices are adapted following the Ietto-Gillies and London (2009) and Petri (1994) to measure theintensity and geographical diversification dimensions of internationalization. Country-level tradestatistics are used as a proxy of firm-level data to explain the international expansion of homefirms resulting from PTAs.Findings – Empirical results confirm a strong and long-term impact of PTAs on the intensity andextensity dimensions of internationalization over post-agreement period in Pakistan and membereconomies. Gravity index depicts greater concentration of Pakistan’s trade in FTA markets andthereby confirms the influence of PTAs on international market selection. Analysis at sectoral leveldepicts a contraction in services trade whereas expansion in the manufacturing firms’ export growthto member economies.Originality/value – The paper extends the theory of internationalization by identifying PTAs asexogenous variable influencing internationalization strategies of member countries’ firms in a developingSouth Asian context. Coupled with findings from empirical data, the study identifies PTAs as a newstrategic trade policy tool available to policy makers for promoting and influencing the home firms’internationalization strategies.

Keywords MNEs, Degree of internationalization, New trade theory,Preferential trade agreements (PTAs), Strategic trade policy

Paper type Research paper

The current issue and full text archive of this journal is available atwww.emeraldinsight.com/2045-4457.htm

Received 8 March 3013Revised 17 May 201319 August 20135 November 201324 November 20134 December 2013Accepted 5 December 2013

South Asian Journal of GlobalBusiness ResearchVol. 3 No. 1, 2014pp. 54-78r Emerald Group Publishing Limited2045-4457DOI 10.1108/SAJGBR-03-2013-0015

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1. IntroductionDue to the centrality of multinational enterprises (MNEs) in international activities, theissue of internationalization is common to both international economics and internationalbusiness literatures. The new wave of globalization, however, has shifted the theoreticalfocus from country-focussed and supply-led trade theories in international economics tofirm-focussed and demand-led new trade theories (along with normative prescriptions ofstrategic trade policy) found in international business (Markusen and Venables, 1998;Hayes and Abernathy, 1980; Ethier, 1982; Brander, 1995; Brander and Spencer, 1983, 1985;Eaton and Grossman, 1986; Helpman, 1984; Grossman and Horn, 1988; Grossman andHelpman, 1993; Grossman and Maggi, 1997; Gawande and Krishna, 2003). Within thecontext of strategic interaction among firms in international markets, the new tradetheories have been used to analyze the impact of R&D subsidies and othersupport provided by the home government on the international growth and marketshare of domestic champions. These theories explain and necessitate pro-competitivehome-government intervention to support national champions in imperfect internationalmarkets with the objectives of shifting rents to home firms and enhancing domesticwelfare. Since preferential or free trade agreements (PTAs) between nations at bilateral(BTAs) and regional level (RTAs) have grown exponentially under WTO, a number ofstudies have also examined their impact on member countries including South Asia(Otsuki et al., 2013; Moinuddin, 2013; Perera and Wickramanayake, 2012; Suhail andSreejesh, 2012; Jayawickrama and Thangavelu, 2010; Weerakoon, 2009; Baysan et al.,2006; Medvedev, 2006; Lesher and Miroudot, 2006; Chowdhury, 2005). Overall there issignificant theoretical and empirical evidence that these PTAs produce rents to themember nations’ firms, in line with the new trade theory and strategic trade policy theory.Particularly, a recent study by Siddiqui et al. (2010) uses the new trade theories andits normative application to understand internationalization strategies of firms.This represents an attempt to link international economics literature with internationalbusiness by focussing upon internationalization of firms. Despite these efforts, theexisting literature on PTAs seldom links the preferential market access and informationabout host market provided to member countries and their firms under PTAs withmeasures of firms’ internationalization, which refers to the degree of integration ofhome firms and economy with international markets. Hence, existing literature onvarious forms of PTAs does not offer implications for firms’ internationalization in thepartner countries.

With this gap in mind, current study develops a theoretical rationale of PTAs/FTAsas strategic trade policy tool to influence internationalization strategies of firms.This is in line with new trade theory implications. In addition, the paper presentsa model for depicting linkage between PTAs and the degree of internationalization(DOI) of home firms and economy – thus connecting international economics withinternational business literatures. The impact of PTAs on internationalization refers tothe impact of PTAs on the degree of integration of home firms and economy withthe PTA member in a way, which enhances their export and/FDI performance(Siddiqui et al., 2010; Taveres and Young, 2005). Third, the study triangulates thepostulated relationships depicted in the model using longitudinal trade data ofPakistan’s bilateral PTAs with some of its trading partners like Malaysia, Mauritius,Iran, Sri Lanka and China.

Pakistan provides a rich context within which to study this relationship, primarilybecause of its growing importance in the South Asian region and the global economy(Khilji, 2012), and recent signing of five new agreements. Under structural adjustment

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program of 1988, Pakistan has been pursuing trade and investment openness policiesusing multilateral, regional and bilateral arrangements within WTO framework(Zada et al., 2011). Yet Pakistan, like many other developing economies, is facingproblems related to lack of internationalization of home firms, and a concentratedexport product and market portfolio (Zada et al., 2011; Siddiqui and Saleem, 2010).

Current study has important practical and policy implications in terms of usinga different lens to inform their work. In particular, we depart from the present practiceof using computable general equilibrium (CGE) model – ex ante analysis and gravitymodel – ex post analysis (Moinuddin, 2013; Petri et al., 2011), multiple regression andtrade indices to measure intra-regional trade integration (Hamanaka, 2012; Mashaand Ding, 2012; Suhail and Sreejesh, 2012; Weerakoon, 2009; Chowdhury, 2005), or evenopinion surveys (Kawai and Wignaraja, 2011). Instead, we depict the outcome of PTAson firms’ internationalization in member countries using internationalization indiceswithin the context of strategic trade policy.

The paper is laid out in six sections. First, we summarize literature review related tonew trade theory, strategic trade policy and internationalization of firms. Second,a theoretical framework detailing the proposed model and its postulations is presented.Methodology is discussed next followed by findings and discussion of results.We conclude with limitations of study and direction for future.

2. Literature review2.1 New trade theory and strategic trade policyThe central idea of the new trade theory, related to business strategies of firms, is thatthe home government support to the domestic champions can favorably alter strategicalternatives vis-a-vis their rivals in imperfect international markets. Initiated byBrander and Spencer (1985), horizontal intra-industry trade flows based on productdifferentiation, imperfect markets, externalities and increasing returns to scale, etc.serve as a foundation of this theory (Dixit and Stiglitz, 1977; Helpman and Krugman,1985; Krugman, 1990a, b; Krueger, 1990; Ietto-Gillies, 2000).

Based on various analyses, the normative literature elaborates the idea of strategictrade policy to justify the role of public policy in support of national championscompeting with the MNEs (Reimer and Stiegert, 2006; Dixit, 1984, 1987; Dixit andKyle, 1985; Markusen and Venables, 1998; Brander, 1995). A credible pre-commitmentby government is considered to be the key ingredient, which helps domestic firmschoose from the available strategic alternatives. The pre-commitment by governmentis facilitated through tariff, subsidy or any other support measure that favorsdomestic firms over MNEs. The strategic trade theory explains how such macro-leveltrade policy interventions can affect MNEs’ decisions of location and mode of foreignoperations in international markets – making a case for supporting theinternationalization strategies of home firms (Knight and Yaprak, 2000; Rasiahet al., 2010; Czinkota, 2010).

2.2 Theories of firms’ internationalizationGal�an et al. (1999) explain that studying the internationalization process involvesanswering three basic questions: why does a firm decide to go abroad, where does the firmlocate its foreign activities, and how (mode of entry) are the international activitiesrealized. Various scholars have provided a synthesis of the internationalization literature,including Johanson and Vahlne (2009), Buckley and Hashai (2009), Buckley and Ghauri(1999) and Dunning (2001). These provide four major paradigms, including industrial

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organization (IO) theory (Hymer, 1960/1976; Vernon, 1966; Caves, 1971; Agmon andLessard, 1977; Porter, 1986; Markusen and Venables, 1998; Helpman, 2006), internalizationtheory (Penrose, 1959/1995; Buckley and Casson, 1976; Casson, 2000; Rugman, 1986;Rugman and Verbeke, 2004), transaction cost theory (Williamson, 1975; Hennart, 1982)and eclectic theory (Dunning, 1980, 2000; Dunning and Lundan, 2008). Within these broadparadigms, the adaptations and innovations in the internationalization models have beenintroduced by the process model of internationalization ( Johanson and Vahlne, 1977, 1990;Johanson and Wiedersheim-Paul, 1975), network theory ( Johanson, 1986; InternationalTrade Center (ITC), 2010; Johanson and Mattsson, 1988), innovation-based models(Cavusgil, 1980) and born global models (Knight et al., 2004; Knight and Cavusgil, 2005).In addition, several other studies at the country level have also exploredinternationalization models within domestic context (Rahman, 2003; Klonowski, 2005;Herrmann and Datta, 2005; Zafarullah et al., 1997; Koch, 2001).

While theories explaining the internationalization has mushroomed, critics havealso discussed limits of their explanatory power in explaining dynamics of theinternationalization process or strategy in emerging market conditions (such as Pakistan).For example, Morgan and Katsikeas (1997) and Axinn and Matthyssens (2002) point outthe absence of any coherent model incorporating the public policy determinants of firms’internationalization.

2.3 PTAs and PakistanFree trade areas (FTAs) are agreements among two or more countries under whichthey agree to eliminate tariffs and non-tariff barriers on trade of goods amongthemselves. Since each country maintains its own policies, including tariffs, on tradeoutside the region (Cooper, 2012), the term PTA is used to include arrangements withlimited tariff preferences, free trade agreements (FTAs) and custom unions. A PTA canbe at bilateral level (BTA) as well as regional level (RTA). Other than tariff concessions,the PTAs also signify commitment of partner countries to facilitate and support eachother’s firms in their respective markets through complementary measures.As mentioned previously, there is much evidence supporting PTAs’ influence onboth extra regional and intra-regional trade and FDI flows of member countries’ firms(Baysan et al., 2006; Medvedev, 2006; Lesher and Miroudot, 2006), leading (possibly) toan exponential growth of PTAs both at bilateral and regional level (Aggarwal, 2008).

The PTA literature has also elaborated their outcomes for various welfare outcomesfor the trading partners at macro, industry and firm level. Within South Asia, studiesby Chowdhury (2005), Weerakoon (2009), Moinuddin (2013), Suhail and Sreejesh (2012)have measured the impact of free trade agreements on trade flows of the membernations at regional level. These studies have analyzed the trade outcomes of tradingagreements mostly at a regional level in South Asia. However, these studies haveneither discussed the role of FTAs as a strategic trade policy tool to enhance homefirms’ internationalization, nor have these focussed upon the impact of bilateral FTAson trade flows in Pakistan. Moreover, at the firm level, although impact of economicintegration on the strategies of MNEs has been analyzed by researchers (e.g. seeAggarwal, 2008; Altomonte, 2007; Maggi and Rodriguez-Clare, 2005; Kumar, 1998),there is limited focus on analyzing the impact of trade agreements on MNEs’internationalization strategy.

Pakistan offers a good context for this study because in recent years, it has signedfive PTAs at bilateral level with Malaysia, Iran, Sri Lanka, Mauritius and China, underthe Enabling Clause and article XXIV of GATT under WTO framework.

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3. Theoretical framework3.1 Strategic trade policy, PTAs and firms’ internationalization: a critical synthesisThe study proposes theoretical model depicting influence of PTAs on internationalizationstrategies of firms in member countries (see Figures 1 and 2). Model in Figure 2 elaboratesthe impact of PTAs on diversification dimension of internationalization strategy in detail.The theoretical foundations of this study follow the framework developed forunderstanding MNEs strategies under IO approach, i.e. new trade theory and strategictrade policy (Markusen and Venables, 1998; Markusen, 2001, 2004). Using IO approach,Siddiqui et al. (2010) shed light on the implications of new trade theories and strategictrade policy for firms’ internationalization strategies in imperfect markets. Their studyhas elaborated role of home government support for “domestic champions” in alteringtheir strategic tradeoffs vis-a-vis competitors in oligopolistic international markets toenhance their internationalization performance. Maggi and Rodriguez-Clare (2005) offera balanced view and provide arguments both supporting and disfavoring targeting of“domestic champions” through strategic trade and industrial policies. They present PTAsas the “horizontal approach” of strategic trade and industrial policy, which focusses onthe creation of favorable framework conditions for home firms instead of picking specificfirms to draw on state-support.

In order to explain the role of PTAs in influencing the firms’ internationalizationstrategies, the model adapts Maggi and Rodriguez-Clare (2005), Schmitt (1990) and Hirsch(1976). The intermediate variables through which PTAs influence internationalizationstrategy are mainly extracted from Whalley (1998), Narula (2001), Neary and Leahy(2000), Altomonte (2007), Kumar (1998), TeVelde and Bezemer (2006), Liu (2006), Suhailand Sreejesh (2012), Kawai and Wignaraja (2010, 2011), Masha and Ding (2012). Detail ofthese intervening variables and their dynamics is discussed in the following sections.

- Market Agglomeration Effect- Better Market Access- Learning by Doing- Trade Facilitation- Networking and Alliances Opportunities- Better Market Knowledge- National Treatment- Entry Barriers for Rival Firms- Enhanced Purchase of Strategic Assets in member country market- Horizontal Support Measure

Decision to Go Abroad“Why” or “Intensity” of

Internationalization

Choice of Mode of Entry“How”

Preferential Trade Agreement

(“Credible” commitmentby home andhost govt.)

Intermediate Effects to InfluenceInternationalization Strategy

International Market Selection

“Where” or “extensity” ofinternationalization

Home Firms’ Internationalization

Strategy (DOI)

Figure 1.Impact of PTAson home economy’s orhome firm’s degree ofinternationalization

- Intervening Variables linking PTA with Diversification of Internationalization Trade Expansion Effect- Economies of Scope- More knowledge about new product opportunities

- Product Development to match the customers’ preferences more effectively

- Decrease in market concentration on the existing trading partners

- Exploration of new opportunities in PTA with new trading partner

PTA with Majorexisting trading partners Product Diversification

PTA with existingminor trading partners

Market DiversificationPTA with new tradingpartners

Figure 2.Impact of PTAs ondiversification ofinternationalization

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3.2 Impact of PTAs on firms’ internationalization strategy and DOI: the modelGiven the rent shifting outcomes of PTAs in imperfect markets, the role of PTA isextended to postulate its impact on “why,” “where” and “how” decisions of home firms’internationalization strategy. The model in Figure 1 elaborates the impact of PTAs onhome firms’ internationalization strategy through the intervening affects associatedwith the PTAs.

Schmitt (1990) has traced implications of European economic integration on trade andFDI using new trade theory and strategic trade policy. Hirsch (1976) has also analyzed theeffect of economic integration on production in European Free Trade Agreement (EFTA).Intermediate effects associated with PTAs mentioned in the model (refer to Figure 1)have all been discussed in the literature and presented in some details.

Internationalization strategy is operationalized using framework by Ietto-Gilliesand London (2009), which measures DOI using two dimensions namely “intensity” and“extensity” of internationalization. According to Ietto-Gillies and London (2009), intensitymeasures DOI as the quantum of foreign activities in relation to domestic activitieswhereas the activities can be trade at country level or sales at firm level. Extensity,on other hand, measures geographical scope or spread of internationalization activities.While details of indices used to measure both intensity and extensity of DOI is included inthe methodology section, we discuss key relationships that our model hypothesizes.

3.3 Impact of PTAs on intensity dimension of DOIIntensity dimension of DOI can be measured for two major modes of internationaloperations, i.e. trade and FDI (Ietto-Gillies and London, 2009; Lipsey et al., 2001;Sullivan, 1996). Trade is basic mode of internationalization, whereas, FDI representstransition from exporting to multinational production/operations through purchase offoreign assets. The impact of PTAs on internationalization strategy of firms isexplained for both modes of entry into international markets in following sections.

3.3.1 Transition from domestic sales to exporting and increase in export intensity.Intensity of internationalization is represented here by gradual increase in the exportintensity of home firms, i.e. ratio of export sales to total sales. This also represents thetransition between various modes of export activity, i.e. indirect exports to directexports, etc. The formation of FTA impacts the domestic home firm’s decision toexport to the FTA market if:

PPTA þ K4PH þM ð1Þ

where PFTA and PH represent the production cost in the FTA market and home market,respectively; K represents the knowledge assets responsible for competitive advantageof home firm or returns associated with firm-specific assets, M represents the exportmarketing costs (tariff, transport and other marketing costs).

In case of horizontal intra-industry trade, K becomes the major determinant of decisionto go abroad. Since K is associated with increasing returns to scale and dynamicexternalities, the formation of FTA results in a larger internal market and thereby servesas an incentive for the K-intensive home firms for engaging and expanding exports.The increase in export intensity of K-intensive firms also expands the amount ofknowledge assets in home economy and is associated with other positive spillover effect.Thus, FTA serves as a horizontal support measure or tool of strategic trade policytargeted at increasing the internationalization intensity of home firms selling K-intensivedifferentiated products in imperfect international market. This argument is supported by

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Hossain (2012) whose study looks into knowledge spillovers associated with tradeintegration in south Asian economies. This study points currently poor growth in termsof knowledge development resulting from SAARC integration yet also identifies highergrowth of knowledge assets associated with other economic integrations in Asia.

The impact of PTAs on internationalization is not only associated with theK-intensive firms. In case of vertical intra-industry trade, efficiency becomes the primedeterminant of this decision. Because of PTA, the M is expected to reduce significantlyas the PTA country reduces tariff and provides better trade facilitation services,national treatment and other intervening effects (Otsuki et al., 2013; Suhail andSreejesh, 2012; Petri et al., 2011). If we assume K¼ 0, the reduction in M encourages thehome firm to engage in and expand its exporting. PTAs are elaborated as strategictrade policy tool as they are seen by domestic firms as “credible domesticcommitment.” By converting the two markets into a single internal market for goodsand services covered by the agreement, the PTAs enhance the export intensity homefirms. Johanson and Vahlne (2009) elaborate the internationalization outcomes of beingmember of a large network and introduce the concept of “liability of outsidership,”which states that member firms of a network experience greater internationalization ascompared to non-member firms due to greater exchange of information, goods,services and capital within network. This concept fits well with the argument ofgreater internationalization of firms in PTA member countries.

The formation of trade agreement also impacts the selection of foreign market byhome firms (Cooper, 2012; Rugman and Verbeke, 2004; Rahman, 2003). The home firmsexporting elsewhere find it more profitable to export to PTA market after theagreement. We refer to it as “market deepening effect” of PTAs whereby the intensityratios to PTA market significantly increase in post agreement period due to preferredselection of member country market by home firms. Export intensity of home countryand its firms to PTA market increases as a result of agreement due to larger internalmarket, knowledge and learning spillovers, and significant decrease in exportmarketing costs, etc. (Krugman, 2008; Caves, 1996).

The home firms also become more competitive against their rivals in the PTAmarket after the agreement and thus are able to fetch greater market share.An increase in export intensity is also lock stepped by an upward change in modes ofexporting depicting and ever increasing market commitment of home firms. Increasedexport intensity and greater market commitment makes the home firms morecompetitive vis-a-vis their foreign rivals in PTA market in the long run. Even aftertransition from PTA to multilateral trade liberalization, the home firms enjoy thelearning curve effects, first mover advantages and economies of scale effects on theiraverage cost (Koutsoyiannis, 1982, 1984; Krugman, 2008; Caves, 1996).

Since the amount of preference given to home firms is equal to the amount ofdiscrimination against the third country firms, the PTAs serve as entry barriersto deter the entry of those firms. This is in line with New Trade Theory as explained byDixit and Kyle (1985) and Dixit and Grossman (1986) who have analyzed the use ofhome country support for promoting entry in foreign markets and creating entrybarriers for rival firms. The home firms have to face less competition in the PTAmarket, as a result. Even if the non-member country firm is more efficient in theproduction of a particular good after the PTA, the average cost will decline moresharply of the PTA firms due to economies of scale making the third country firm lesscompetitive in the long run. The rise in the bilateral trade share can be used as a proxyof entry barriers to the non-member firms explained above with reference.

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3.3.2 Transition from exporting to multinational production (mode of entry).Another dimension of internationalization is choice of mode of entry or “how to enter”international markets by firms as mentioned in Figure 1. The transition fromexporting to multinational production/operation shows the increase in home outwardFDI to PTA market. The home firm continues to prefer exporting to FTA market overproduction there if:

PPTA þ K4PH þM ð2Þ

PPTA þ C4PH þM ð3Þ

here C denotes the additional cost of controlling overseas production/operationscompared to domestic production. M and K represent export marketing cost andfirm-specific knowledge assets, respectively. The Equation (2) is same as (1).

The multinational organization of production of home firms in PTA market wouldpreferred over exporting when:

PPTA þ CoPH þM ð4Þ

PPTA þ CoPPTA þ K ð5Þ

The Equation (5) further implies that the said transition would be when:

CoK ð6Þ

The Equation (5) implies that home firms will undertake FDI in the host market of PTAmember when the revenue generating effect of firm-specific knowledge assets can offsetthe cost of controlling these assets there. This conclusion is in line with the Dunning’seclectic paradigm, which states that MNEs choose different strategies in variousinternational markets keeping in view the firm-specific factors, location-specific factorsand transaction cost factors. It is also explained by Rugman and Verbeke (2004)and Markusen and Venables (1998) within the context of new trade theory and MNEsbehavior. They argue that the transition between various MNE activity is determined byfirm-specific knowledge assets and transaction cost to operate these assets in imperfectinternational markets.

This implies that home country’s or firms’ FDI to PTA market would increase wheneither C in PTA market decreases or M and K increase in home market. The formation ofPTAs significantly reduces the tariff and thereby facilitates the home firms’ positionagainst the third market firms. Moreover the creation of internal market also encouragethe home firms to shift the production from single domestic plant to multi-plantproduction in the PTA market if transport cost are higher relative to cost of controllingforeign investment (Liu, 2006; Hirsch, 1976).

PTAs produce knowledge spillovers to the member countries and add to theamount of K in home firms (Hossain, 2012). This is in line with the Uppsala model( Johanson, 1986; ITC, 2010; Johanson and Vahlne, 1977, 2009), which explainsmovement of firms from exporting to higher level of internationalization, i.e. FDI asthey accumulate more knowledge of and network relationships in host market over

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time. Thus formation of PTA enables greater accumulation of host market knowledge,due to increased export intensity, and encourages home firms to enhance their marketcommitment through joint ventures, FDI, etc. The C also includes the costs associatedwith the degree of foreignness of home firms in host market. Over the long run as homefirms export to PTA market, the degree of foreignness decreases and so does C.

Moreover, the firms also get the opportunity to purchase the country-specificstrategic assets in the PTA member country, which enable their strategic positionagainst their rivals in the home as well as third country markets. For these reason, theFDI intensity also increases as a result of formation of PTAs. Liu (2006), Lesher andMiroudot (2006) and Kumar (1998) have also elaborated the impact of investmentprovision in trade agreements on FDI decision of member country firms and transitionfrom exporting to higher level of internationalization.

Impact of PTAs on extensity dimension of internationalization. Figure 2 elaboratesthe impact of PTA on second dimension of DOI referred to as extensity, whichmeasures geographical scope of MNEs internationalization. Pakistan like many otherdeveloping countries is facing the problem of export product and market concentration(Zada et al., 2011; Siddiqui et al., 2010). This concentration has brought volatility in theexport earnings of Pakistan that are used to pay for imports and service the foreignliabilities (Siddiqui and Saleem, 2010). The PTAs can help diversify the export productand market portfolio in Pakistan and other developing countries facing the sameproblem. Sections below discuss both market and product diversification effects ofPTA in detail.

3.3.3 Market diversification effect. Whitelock (2002) discusses the selection and mode ofentry into foreign markets as key aspect of internationalization theory and impliespotential inferences about market diversification of MNEs. Qian (1997) has associatedformation of PTA with creation of large internal market for MNEs. This outcome hasimplication for market diversification in that formation of PTAs with minor and newtrading partners reduces the degree of export market concentration in few countries.This impact is magnified if the country is successful in becoming member of a largeregional trade agreement. The PTA member country can also be used as a gateway toenter more markets, especially if the PTA member country is a hub economy in theinternational trading network. The knowledge spillovers and learning effects, which arecentral in expanding to other markets at firm level, are also associated with inter-firmnetworks developed between the PTA members’ firms ( Johanson and Vahlne, 2009).The firm-level learning and innovation are more imperative if the other PTA member isa knowledge-based economy (Hossain, 2012). The productivity and competitivenessoutcomes of PTAs through learning and purchase of strategic assets in member countriesmarket can also help firm enter the non-PTA markets. This leads to purchase of strategicassets there, which not only facilitates their operations in the member country marketbut also enable it to enter the other markets (Rugman and Verbeke, 2004). Access tolocation-specific resources leads to greater internationalization (Fernhaber et al., 2008).Integration of geographical markets enables access to location-specific resources inmember countries and thereby may lead to greater internationalization in diverse areas.

3.3.4 Product diversification effect. Baysan et al. (2006) have explained the tradeexpansion effects associated with India-Sri Lanka Free Trade Agreement despite theapparent limited grant of preferences. They argue that the political economy pressuresagainst preferences generally operate against the existing import from the partnercountry. Goods that the partner country does not supply at the time of the negotiations donot pose an obvious threat and therefore manage to receive significant preferences. And it

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is in these products that the scope for trade expansion can be quite large. Jayawickramaand Thangavelu (2010) have examined the impact of China-India-Singapore FTA on thelong run comparative advantage of member economies and explained the diversificationoutcomes of PTAs. The trade expansion is another way of explaining the productdiversification effect associated with the PTAs (Curran and Zignago, 2011). This impliesthat market diversification associated with PTAs also impacts the export productportfolio diversification indirectly. As the country enter in the PTA with an existingtrading partner, the trading relations are deepened due to preferential market access andother benefits explained above. The exporting country firms exploit these benefits byseeking new opportunities and developing new products to effectively serve the market.A PTA with a new trading partner accelerates the impact of market diversification onproduct diversification as the new potential sector for exports are identified and firmsseek to exploit the new opportunities through new products. The identification of newsectors, which are not part of the major export portfolio of home country also lead toproduct diversification if the country has potential to serve them. The emphasis on theemerging or non-conventional export products in the product coverage of PTAs can helpthe country boost its exports in such value added industries and reduce the concentrationin the traditional sectors.

4. Methodology4.1 Research designWe test the postulated influence of PTAs on DOI of partner economies using empiricaldata from Pakistan. A comparison of values of the indices of internationalizationdeveloped in the study over pre- and post-agreement period is used to evaluate theinfluence of PTAs on DOI.

Impact assessment of FTAs has undergone rigorous methodological innovations withdifferent econometric tests used in studies on the topic (Moinuddin, 2013; Petri et al., 2011;Hamanaka, 2012; Masha and Ding, 2012; Suhail and Sreejesh, 2012; Weerakoon, 2009;Chowdhury, 2005). Plummer et al. (2010) has given a detailed review of variousmethodological choices with their pros and cons. CGE model and gravity models havebeen the mostly used methods in a majority of these studies. These models were lesssuitable for the present study as FTAs are hypothesized in the proposed theoretical modelto be the exogenous variable influencing the DOI. This has necessitated the use ofmeasures of DOI to assess the impact of FTAs on partner economies. These measures havebeen extensively used in the literature in international business to study the dynamicsof internationalization (Ietto-Gillies and London, 2009; Lipsey et al., 2001; Sullivan, 1996).

4.2 Research variablesDOI which represents the dependent variable of the above model, is measured byusing framework developed by Ietto-Gillies and London (2009) to develop indices ofDOI. The choice of indicators/variables for the measurement of DOI has beenaddressed by various researchers in IB and economics such as Sullivan (1994, 1996),Dorrenbacher (2000), Hassel et al. (2003), Lipsey et al. (2001) and Ietto-Gillies (1989,1998, 2002), Ietto-Gillies and London (2009), Ramaswamy et al. (1996), Heshmati (2006).According to Ietto-Gillies and London (2009), construction of DOI indices involvescertain choices such as the level of aggregation used, i.e. firm, industry or country;and the internationalization modes which the study concentrates on, i.e. trade or FDIor alliances, etc. The choice of indicators/variables, moreover, also depends on thedimension of DOI, i.e. intensity or extensity to be measured.

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The construction of DOI indices, used to measure the impact of Pakistan’s bilateralFTAs with some of its trading partners on home firms’ DOI, has made followingchoices:

. level of aggregation: country level;

. internationalization mode studied: trade; and

. dimension of internationalization studied: intensity and extensity.

The selection of following indicators/variables has been made in view of the theoreticalrequirements of the research problem at hand.

4.3 Intensity of DOIAccording to Ietto-Gillies and London (2009), trade is a specific internationalizationmode and trade-related indicators can be used to capture it. In order to measure theintensity dimension of DOI for trade mode between Pakistan and its PTA partners atcountry level, following intensity measures are used in this study. These intensityindices are measured in terms of percentage.

4.3.1 Trade intensity index. The trade with partner country(s) divided by total tradeof a given country multiplied by 100. Also calculated as the ratio of trade with partnercountry(s) to the total trade of a given country.

4.3.2 Export intensity index. The exports with partner country(s) divided by totalexports of a given country(s) multiplied by 100. Also calculated as the ratio of exportsto partner country(s) to the total exports of a given country. This ratio is measuredfor both good and services to analyze the internationalization effects of PTAs atsectoral level.

4.3.3 Import intensity index. The imports from partner country(s) divided by totalimports of a given country multiplied by 100. Also calculated as the ratio of importsfrom partner country(s) to the total imports of a given country.

The longitudinal analysis of changes in above indices/variables depicts the degreeof integration of home economy/firms with the PTA partner(s) market as a result ofagreement.

4.4 Extensity of DOIGeographical scope is another dimension of DOI, which refers to the numberof countries the activities spread into or concentrated in. This study makesuse of gravitation index (Petri, 1994; Ietto-Gilies et al., 2000), which measuresthe extent to which the foreign activity gravitates toward a specific countryor region rather than being equally spread among all. It is defined by Petri (1994)as the ratio of the share of partner b in the trade or exports to the share of b in all worldtrade, excluding country a. In the context of this study this index is algebraicallydenoted as:

GTIPak�PTA ¼ ðTP�PTA=TP�Þ=½TPTA�=ðT�� TP�Þ�

where GTIPak�PTA¼ intensity of Pakistan’s trade (exports, imports) with the PTApartner; TP�PTA¼ trade (exports, imports) of Pakistan with the PTA partner;TP*¼ total trade (exports, imports) of Pakistan with rest of the world; T**¼ totalworld trade; TPTA¼ total trade (exports, imports) of PTA partner with rest ofthe world.

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Gravity index is calculated in this study for bilateral trade and exports betweenPakistan and PTA partner(s). The logarithmic measure of gravity index is alsocalculated as under:

LGTIPak�PTAmember ¼ LogðGTIPak�PTAmemberÞ

4.5 DataLongitudinal trade data of Pakistan and its PTA partners is used (State Bank ofPakistan, 2010; ITC, 2010) to measure the above indices and test our model. The tradedata between 2006 and 2010 is used in this study. Due to lack of coherent and validfirm-level data of international sales and spread of activities, country-level trade data isused as proxy for firm-level data. The choice of country-level trade data is in line withthe various aggregation levels suggested by Ietto-Gillies and London (2009) to measurethe DOI. Trade data is an effective representation of international expansion andgeographical spread of home firms. The trading partners of bilateral PTAs of Pakistanare China, Iran, Malaysia, Mauritius and Sri Lanka. The year of signing bilateral PTAsbetween Pakistan and PTA partners is 2007-2008.

4.6 AnalysisThe values of intensity and gravity indices are calculated using the above data and theresults are tabulated in tables discussed in results section. The longitudinal variation inDOI for both intensity indices and gravity indices is analyzed to capture the impactof PTAs on home firms’ internationalization, using country-level data as proxy.

The logarithmic measure of gravity index is distributed around 0. It appears 0 whenthe PTA partner’s share in Pakistan’s trade or exports equals the partner’s globalshare, denoting average intensity. It appears positive for above average and negativefor below average intensity.

5. Results5.1 Intensity indices of DOI between Pakistan and bilateral PTA partnersTables I-III present longitudinal variation in the intensity indices over pre and postPTA years for exports, imports and total trade. Table IV extends the analysis of overallintensity ratios to sectoral level, i.e. goods and services for all the PTA partners for

Pre-FTA Post-FTAFTA partners 2006 2007 2008b 2009 2010

China 2.14 2.69 2.91 3.13 5.03Iran 0.87 0.84 0.44 0.81 0.83Malaysia 0.37 0.40 0.51 0.56 0.90Mauritius 0.16 0.19 0.22 0.18 0.19Sri Lanka 0.66 0.90 0.87 0.99 1.17Total of all FTA partners 4.22 5.02 4.94 5.66 8.12Pakistan with rest of world 0.14 0.12 0.12 0.15 0.14

Notes: As % age of total. aThe exports with partner country(s) divided by total exports of a givencountry multiplied by 100. Also calculated as the ratio of exports to partner country(s) to the totalexports of a given country; bFTAs signed with trading partnersSources: State Bank of Pakistan (2010), aITC (2010)

Table I.Export intensity ratio

(intensity dimensionof DOI)a

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Notes: As % age of total. aThe imports from partner country(s) divided by total imports of a givencountry multiplied by 100. Also calculated as the ratio of imports from partner country(s) to the totalimports of a given country; bFTAs signed with trading partnersSources: State Bank of Pakistan (2010), ITC (2010)

Table II.Import intensityratio (intensitydimension ofinternationalization)a



Notes: As % age of total. aThe trade with partner country(s) divided by total trade of a given countrymultiplied by 100. Also calculated as the ratio of trade with partner country(s) to the total trade of agiven country; bFTAs signed with trading partnersSources: State Bank of Pakistan (2010), ITC (2010)

Table III.Trade intensityratios (intensitydimension ofinternationalization)a

Pre-FTA Post-FTAIntensity ratios 2006 2007 2008a 2009 2010

Trade intensity ratio 9.15 9.88 10.62 10.70 13.31Export intensity ratio 4.22 5.02 4.94 5.66 8.12Export intensity-goods 4.92 5.97 5.45 6.44 9.85Export intensity-services 1.14 1.08 2.06 2.05 1.50Total imports 12.18 12.82 13.62 13.68 16.71Import intensity-goods 11.85 12.97 13.41 14.41 18.15Import intensity-services 13.16 12.34 14.38 10.60 10.14

Notes: As % age of total. aFTAs signed with trading partnersSource: State Bank of Pakistan (2010)

Table IV.Intensity ratios atsectoral level for totalof all FTA partners

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more precise results. Tables V-VII offer comparison of growth rates of export, importand trade of Pakistan with PTA partners and with rest of the world.

5.2 Extensity or scope of DOI (gravity index and its logarithmic measure)Tables VIII-X demonstrate the impact of PTAs on geographical intensity orconcentration of DOI in Pakistan using the longitudinal variation in gravityindices and their logarithmic measure. The gravity indices are calculated for trade

Pre-FTA Post-FTAFTA partners 2006 2007 2008a 2009 2010

China 32.19 21.23 4.02 71.73Iran 1.02 (40.98) 77.56 9.24Malaysia 13.13 42.06 7.19 70.13Mauritius 22.09 26.86 (19.27) 13.48Sri Lanka 43.34 8.16 9.48 26.35Total of all FTA partners 25.42 10.39 10.85 52.89Pakistan with rest of world 5.40 12.13 (3.28) 6.70

Notes: Moving years as % age. aFTAs signed with trading partnersSources: State Bank of Pakistan (2010), ITC (2010)data

Table V.Export growth ratesof Pakistan to PTA

partners and withrest of the world


China 10.68 33.76 (21.87) 12.67Iran 23.00 22.27 32.14 100.60Malaysia 20.30 55.58 (1.32) (1.29)Mauritius (83.29) 31.41 (13.59) 159.85Sri Lanka (6.14) (0.43) (8.00) (19.56)Total of all FTA partners 12.00 36.75 (13.28) 17.75Pakistan with rest of world 6.35 28.74 (13.66) (3.61)


Table VI.Import growth ratesof Pakistan to PTA



China 13.52 31.84 (18.22) 23.28Iran 14.40 0.42 41.36 77.31Malaysia 19.65 54.43 (0.65) 4.73Mauritius (37.26) 27.54 (18.39) 37.43Sri Lanka 24.16 5.64 4.65 15.20Total of all FTA partners 14.34 31.69 (9.40) 24.67Pakistan with rest of world 5.98 22.46 (10.07) 0.22


Table VII.Trade growth ratesof Pakistan to PTA


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expansion or market diversification effect of PTAs on Pakistan’s exports, importsand trade. An improvement in the value of gravity index implies greater concentrationof trade among the member countries. If the member country is not the major tradepartner this improvement represents market diversification effect. The logarithmicmeasure of gravity indices is also calculated and is presented by values in parenthesisin the tables of gravity index. The market diversification effect of PTA is capturedthrough these indices. The logarithmic measure of gravity index is distributed around0. It appears 0 when the PTA partner’s share in Pakistan’s trade or exports equals the

Pre-FTA Post-FTAFTA partners’ share 2006 2007 2008b 2009 2010c

China 0.30 0.35 0.37 0.37 0.61(�0.52) (�0.46) (�0.44) (�0.43) (�0.21)

Iran 1.89 1.69 0.77 1.93 1.65(0.28) (0.23) (�0.11) (0.29) (0.22)

Malaysia 0.31 0.34 0.44 0.48 0.72(�0.51) (�0.47) (�0.36) (�0.32) (�0.14)

Mauritius 6.12 7.41 8.63 7.04 7.57(0.79) (0.87) (0.94) (0.85) (0.88)

Sri Lanka 11.84 16.56 17.00 17.20 19.66(1.07) (1.22) (1.23) (1.24) (1.29)

Total with FTA 0.48 0.53 0.51 0.56 0.81(�0.32) (�0.28) (�0.30) (�0.25) (�0.09)

Notes: As % age of total. ITC calculations based on COMTRADE statistics; Values in parenthesisrepresent logarithmic value of gravity index. aThe share of partner country(s) in the total of a givencountry, divided by the share of the partner country(s) in world trade, excluding trade with the givencountry; bFTAs signed with trading partners; cprovisionalSource: State Bank of Pakistan (2010)

Table VIII.Gravity indexa fortotal exports ofPakistan withFTA partners


China 1.45 1.43 1.45 1.14 1.36(0.16) (0.16) (0.16) (0.06) (0.13)

Iran 2.48 2.69 2.59 4.11 6.65(0.40) (0.43) (0.41) (0.61) (0.82)

Malaysia 2.24 2.59 3.40 3.79 3.48(0.35) (0.41) (0.53) (0.58) (0.54)

Mauritius 3.91 0.64 0.63 0.61 1.57(0.59) (�0.19) (�0.20) (�0.21) (0.19)

Sri Lanka 3.17 2.81 2.12 2.46 1.59(0.50) (0.45) (0.33) (0.39) (0.20)

Total with FTA 1.64 1.65 1.73 1.55 1.88(0.21) (0.22) (0.24) (0.19) (0.27)

Notes: As % age of total. ITC calculations based on COMTRADE statistics; values in parenthesisrepresent logarithmic value of gravity index. aThe share of partner country(s) in the total of a givencountry, divided by the share of the partner country(s) in world trade, excluding trade with the givencountry; bFTAs signed with trading partners; cprovisionalSource: State Bank of Pakistan (2010)

Table IX.Gravity indexa fortotal imports ofPakistan with FTApartners

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partner’s global share, denoting average intensity. It appears positive for aboveaverage and negative for below average intensity.

5.2.1 Gravity Index: Diversification Effect of PTAs on DOI.

6. Discussion6.1 Internationalization outcomes (intensity dimension)Our results indicate a significant increase in the share of bilateral exports in totalexports of Pakistan to all the PTA members except for Mauritius in post-PTA period.Due to long-term impact of PTAs suggested by strategic trade policy theory andJayawickrama and Thangavelu (2010), the full impact of PTAs is actually realized in2010 when there is a significant increase in intensity indices. This also impliesa greater impact on DOI once the learning and spillover effects at firm level are realizedover long run (TeVelde and Bezemer, 2006; Suhail and Sreejesh, 2012; Koutsoyiannis,1984; Krugman, 2008). Since export activities in Pakistan are carried out by firmswith negligible share of state owned enterprises, an increase in export intensity atcountry-level data represents significant increase in intensity dimension of DOI ofhome firms in Pakistan. The growth rates of export also present a similar picturein Table V confirming the impact of PTAs on DOI. A huge increase of exports is carriedout by either more firms’ entering the export market or by increase in the export intensityand export involvement of existing exporting firms to these PTA partner and, thus,represents the impact of PTAs on firms’ internationalization in Pakistan. A closer lookon the sectoral distribution of export intensity in terms of goods and services sectorspresents contrasting findings about the type of the firms experienced greaterinternationalization (Table IV). While export intensity of goods is significantlyincreased, that of services sector is rather reduced in post-PTA period. This impliesgreater internationalization of manufacturing firms in Pakistan compared to servicessector. Since services sector contributes more than 50 percent to national income accounts,this trend calls for a change in the terms of PTA agreement to foster services firms’internationalization in Pakistan. A study by Gulzar (2011) to enhance share of services in


China 0.94 0.94 0.99 0.81 1.03(�0.02) (�0.03) (�0.01) (�0.09) (0.01)

Iran 2.13 2.15 1.62 3.10 4.45(0.33) (0.33) (0.21) (0.49) (0.65)

Malaysia 1.40 1.62 2.15 2.33 2.24(0.15) (0.21) (0.33) (0.37) (0.35)

Mauritius 4.76 2.95 3.04 2.69 3.59(0.68) (0.47) (0.48) (0.43) (0.55)

Sri Lanka 6.00 7.12 6.19 7.27 7.07(0.78) (0.85) (0.79) (0.86) (0.85)

Total with FTA 1.12 1.14 1.21 1.13 1.40(0.05) (0.06) (0.08) (0.05) (0.15)

Notes: As % age of total. ITC calculations based on COMTRADE statistics; values in parenthesisrepresent logarithmic value of gravity index. aThe share of partner country(s) in the total of a givencountry, divided by the share of the partner country(s) in world trade, excluding trade with the givencountry; bFTA signed with trading partners; cprovisionalSource: State Bank of Pakistan (2010)

Table X.Gravity indexa for total

trade of Pakistan withFTA partners

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total trade of Pakistan has also stressed the active use of trade agreements focussingservice sector. The PTAs has also resulted in upward movement of import intensity indexrepresenting more intense international involvement of home firms in Pakistan in PTAmarkets. The import intensity index is significantly improved for all PTA partners exceptSri Lanka. The import intensity for all PTA partners is significantly improved inpost-PTA period despite a reduction in Pakistan’s imports share with rest of the world.

Results comparing trade growth of Pakistan with FTA partners and that with restof the world further substantiate the influence of PTAs on DOI. The total trade andexport growth rate of Pakistan with all FTA partners is much higher than that withrest of the world in the post-PTA years. Even in 2009, while the overall trade growthhas been negative due to global financial crisis, trade growth rate to FTA partners hasbeen 10.85 percent. Similar contrasting results between exports growth to FTApartners and that to rest of the world are obtained, confirming significant impact ofbilateral FTAs on firms’ internationalization.

6.2 Internationalization outcomes (diversification dimension)Our results indicate that the values of gravity index for exports have significantlyimproved for each of the PTA partners except for Iran. Although the absolute value ofexports to Iran and export intensity is increased but due to a higher increase in thetrading activities of Iran with rest of the world, the exports from Pakistan are lessconcentrated in Iran. The value of index for overall concentration of exports to all PTApartners is showing significant increase. This implies greater geographical concentrationof export activities of Pakistan in PTA partners. Since the share of Pakistan’s exports intotal world exports is not significantly increased in post-PTA periods, the concentrationof exports in PTA markets implies greater market diversification and less dependenceon traditional trading partners like US, UK and EU. These results also indicate thatformation of PTAs has significantly impacted the international market selectiondecision of exporting firms from Pakistan in the favor of PTA member markets.This supports the hypothesized model of market diversification effect of PTAs at firmlevel as well. Given no significant change in the size of domestic production, the increasein concentration of exports in PTA markets is led by a change in home firms’international market selection. The logarithmic values of gravity index are also improvedby reduction in the negative values or increase in the positive values between pre and postPTA period. This implies relatively greater bilateral trade ties between PTA partners thanwith rest of the world.

Our findings are in line with the literature on PTAs and their impact onorganization of production of MNEs in the context of new trade theory. Schmitt (1990)elaborated the role of EFTA on production and location choices of firms in membercountries under the framework of new trade theories and strategic trade policy.Panagariya (2003) has also shown that there is stronger tendency of more tradebetween the PTA member countries. His study confirms that even if the non-membercountry firm is more efficient in the production of a particular good after the PTA,the average cost of the PTA firm will decline more sharply making the third countryfirm less competitive. This also makes PTAs a valid tool for the strategic trade policyaiming at supporting home firms in imperfect international markets. Within South Asiancontext, the studies by Aggarwal (2008), Rodriguez-Delgado (2007), Baysan et al. (2006),Panagariya (2003) and Keidanren (2000) have also provided support to the theoreticalarguments developed here in the favor of bilateral FTAs for firms’ internationalizationin Pakistan.

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6.2.1 Implications for policy makers. The results from data analysis confirm a strongand long-term impact of PTAs on the intensity and extensity of internationalization.The study identifies PTAs as a new strategic trade policy tool available to policy makersfor promoting and influencing the home firms’ internationalization strategies. On policyside, role of PTA as a horizontal support measure of strategic trade policy (Maggi andRodriguez-Clare, 2005) signifies its importance as a pro-competitive tool. The positivefindings call for an active role of strategic trade policy that can provided pro-competitivehorizontal support to home-based firms in imperfect international markets as suggestedby Narula (2001), Whalley (1998), Yoshimatsu (1998), Suhail and Sreejesh (2012), Rugmanand Verbeke (2004), Reimer and Stiegert (2006). Moreover, the design of industrial policyalso needs to be adapted in line with the provisions of the trade agreements withinstrategic trade policy framework (Harrison and Rodriguez-Clare, 2009; Lall, 1994; Rodrik,2004; Neary and Leahy, 2000) so that both can complement each other to boost outputinnovation and a competitive international enterprise development in Pakistan. Anotherissue to be addressed with bilateral FTAs is their greater focus on trade compared toinvestment (Moinuddin, 2013). This factor not only explains currently lower level ofmulti-plant MNE activity of home firms from member countries but can potentiallyhinder their transition from export/import to higher level of internationalization(Liu, 2006; Lesher and Miroudot, 2006; Kumar, 1998). Another key feature of the results istheir contrast against regional trade agreement in South Asia, to which Pakistan ispartner. Rodriguez-Delgado (2007) confirms slower trade growth within SAFTAmembers compared to that in other trading blocs. This implies greater effectiveness ofbilateral trade agreements for trade growth among member countries compared toregional trading. Aggarwal (2008) has discussed the political sensitivity of negotiations inlarge SAFTA as a possible challenge for its effectiveness.

However, the policy makers also need to be cautious about the intense informationrequirement and government failure while designing trade agreement within strategictrade policy in the favor of domestic champions (Harrison and Rodriguez-Clare, 2009).Another policy suggestion can be that Pakistan should sign more FTAs with largetrading blocs such as ASEAN and non-traditional yet large-sized trading partners inorder to benefit from the market diversification effect arising out of “market deepeningeffect” associated with PTA. The study thereby extends both conceptual and empiricalunderstanding in IB over the issue of internationalization and MNEs strategies bylinking it with theory of strategic trade policy and New Trade Theory.

7. ConclusionsThe concept of PTAs is an evolving phenomenon in the strategic trade policy context.Most of the PTAs have only recently been signed and their long-term impact is yet tobe fully realized. The model proposed in this study should also be further tested usingfirm-level measures of internationalization to enhance the generalizability of thefindings. The study opens avenues for further theoretical and empirical research atfirm and industry level to test the effectiveness of hypothesized relationships.

The study has identified PTAs as exogenous variable influencing strategic behaviorof firms related to their internationalization decisions in imperfect markets, which isthe least understood area in firms’ internationalization strategies. The study has alsodeveloped the theoretical rationale for linking the preferential market access andinformation about domestic market provided to the member countries’ firms underPTAs with the home-based firms’ internationalization strategy, i.e. decision to goabroad, foreign market selection and mode of entry. This new role of PTAs has strong

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theoretical support from new trade theory, which signifies the strategic interactionbetween firms in imperfect international markets and explains the relationshipbetween the support provided by home government to the home-based firms and theirinternational performance against foreign rivals. The theoretical framework in thispaper is of significant importance to IB scholars for understanding firm behavior inimperfect markets under government policy intervention.

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Cebi, P. (2003), “Strategic trade policy with R&D and lobbying”, Midwest InternationalEconomics Meetings.

About the authors

Sulaman Hafeez Siddiqui is a PhD Candidate (International Marketing) at the University Utara,Malaysia and is serving as a Senior Lecturer at The Islamia University of Bahawalpur, Pakistan.His research interests are in the areas of international marketing, strategic management, BoPbusinesses and issues in development economics. Sulaman Hafeez Siddiqui is the correspondingauthor and can be contacted at: [email protected]

Dr Muhammad Zafarullah is a Professor of Marketing. He earned a PhD from StrathclydeBusiness School, UK. He is Pro-rector, University of Central Punjab, Pakistan and has also servedas Vice Chancellor, Bahauddin Zakariya University, Pakistan. His research interests are in theareas of international marketing, strategic management and organizational behavior.

Dr Muhammad Ijaz Latif is an Associate Professor of International Relations where he iscurrently serving as Chairman, Department of International Relations, The Islamia University ofBahawalpur, Pakistan. He earned his PhD from Kobe University, Japan. His research interestsare in the areas of international political economy, international organizations and theories ofinternational relations.

Dr Ghulam Shabir is a Professor of Media Studies with a PhD from The Islamia University ofBahwalpur, Pakistan where he is also currently serving as Chairman, Department of MediaStudies. His research interests are in the areas of cross-cultural communication,internationalization of media organizations and media policy.

To purchase reprints of this article please e-mail: [email protected] visit our web site for further details: www.emeraldinsight.com/reprints

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Impact of preferential trade agreements (PTAs) on firms’ degree of internationalization

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