An Empirical Application of Gravity Model Theory to Indo-BIMSTEC Business Relations

Abstract

This paper applies the Gravity Model Theory (Tinbergen 1962) to assess the impact of determinants on the Indo-BIMSTEC trade and trade potential for the sample of six countries, over the period 1997-2019.  The study also examines the application of Heckscher-Ohlin (1933) and Staffan Linder (1961) and J.H. Bergstrand theories (1989) using the variables GDP per capita Differential and GDP per capita of India and BIMSTEC countries respectively. The estimate of Hausman Specification test suggests that fixed effect gravity model is to be preferred to the random effect gravity model. The study reports that GDP is consistence and Distance is inconsistent with the hypothesis of basic gravity model, however, the insignificant p-values do not support the proposition and market size of BIMSTEC countries has negative and insignificant impact on trade. The finding reveals that there is presence of convergence in INDO-BIMSTEC trade, which indicates that India has trade potential with Bhutan, Nepal, Sri Lanka and Thailand. Further, the study confirms that China’s increasing trade with BIMSTEC countries is threat to the INDO-BIMSTEC trade relations as increase in the China’s trade with BIMSTEC countries will tend to decrease the India’s trade with BIMSTEC countries. The study suggests that India’s promising business relations with BIMSTEC countries will make her position strong in the current world order.