Theories on Countertrade

A limited number of empirical studies on countertrade have been conducted. The following findings characterize some of the theoretical studies on countertrade practices:

  • Countertrade is positively correlated with a country’s level of exports. This means that a higher level of international commercial activity is associated with a high level of countertrade (Caves and Marin, 1992; Hennart and Anderson, 1993).
  • Countertrade is often used as a substitute for foreign direct investment (FDI). Even though foreign direct investment reduces market transaction costs (by internalizing sources of raw materials and components through vertical integration), multinational companies resort to countertrade as a second-best solution when host countries im­pose restrictions on inward FDI. Countries engaged in heavy countertrade tend to be those that severely restrict inward FDI. FDI may also be less attracted to politically risky countries, in spite of their positive attitudes toward foreign investment. Such countries are likely to have a high level of countertrade activity (Hennart, 1990).
  • The stricter the level of exchange controls, the higher the level of countertrade activity. This appears to be a response to the restrictions imposed on the acquisition of foreign currency. Some studies also show that a significant percentage of countertrade has little to do with foreign exchange shortages but rather is intended to reduce high transaction costs that affect the purchase of technology or intermediate products.
  • Countertrade is positively correlated with a country’s level of indebtedness. Casson and Chukujama (1990) show that countries with higher debt ratios are more strongly engaged in barter. A country’s creditworthiness, as measured by a composite of ratings of international banks, is positively correlated with its barter activities (Hennart and Anderson, 1993).

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.

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