Constant Market Share Analysis

Lecture 3
 How to explain Export Growth?
Structural changes in world production and exports
Need to evaluate the components, depending on changes of
different countries market shares of commodities
Constant Market Share:
Assumption that, over time, a countrys share of the worlds
markets should remain unchanged. In reality, however, there are
fluctuations in market share over time and the CMS model is a
statistical quantification of the structural and market deviations.
Shift Share:
Breaks down regional growth pattern into sub-components in light
of national share, growth within the industries and the regional
shift
 Constant Market Share Analysis
Developed by Tyszynski (1951) and later followed by others.
Constant Market Share (CMS) analysis is a technique for decomposing
the growth in a countrys exports into components that correspond to
holding its market shares constant at various levels.
The theoretical foundations of CMS analysis are drawn from the idea
that demand for exports in a given market from competing sources is a
function of the relative prices.
The theory suggests that export shares will remain constant except the
case when the relative prices vary.
So, changes in exports beyond the constant share norm can be attributed
to price changes - or changes in the level of competitiveness.
Since the imports of different countries grow at different rates, the
geographical distribution of a country's exports may also affect the
overall export growth of the country.
 How to Explain Exports
The three-level decomposition identies four dierent
components of the growth in the exports for the country of
interest:
Effect Implications

World Growth The part of the growth attributed to the overall rise in world
Eect exports.
Commodity The part of growth attributed to the commodity composition of
Eect the countries exports (positive if exports are concentrated in
commodities in which world demand is growing relatively
quickly).
Market Eect The part of growth attributed to the regional composition of
the countrys exports (positive if exports are concentrated in
markets which are experiencing relatively rapid growth.)

Competitiveness The residual eect, which captures the dierence between the
Eect actual export growth and the growth that would have occurred
had the export shares remained constant. A positive value is
interpreted as an increase in competitiveness.
 Dynamics of Residual and the Rest
For one-level, two-level and three-level alike, the residual is called
a competitiveness effect
The competitiveness effect summarizes the following two changes:
1. Changes in price competitiveness (assessed by the real effective
exchange rate and other factors),
2. Changes in non-price competitiveness (expressed by qualitative
factors reflecting product differentiation and other factors) in
the export performance.
The sum of the other three effects represents the structural
change effect due mainly to changes in the market and in the
product pattern of specialisation of a country.

Source: Simonis (2000)

 The Breakdown of Effects: One Level
Let I be a set of commodities exported by the country of interest,
which is indexed by i. Let J be a set of regions to which the goods
are exported, which is indexed by j. Then we can dene the identity:

Where V is the value of the ow of exports from the country under

study, a superscript indicates the period, and r is the growth rate in
world exports over the period.
Taking this expression and summing up both sides over commodities i
and regions j then yields::

The left hand side of the identity is simply the change in total exports
from the country of interest over the period.
The right hand side breaks this down into a component associated with the
overall world growth in exports, and a residual, the Competitiveness eect.

Gilbert (2010)
 The interpretation
At the heart of this approach is the assumption that over time,
a countrys share of the world markets would remain unchanged.

By calculating what the aggregate market share of a country on

the world market would have been, if its market shares in
individual commodity groups had remained constant, one can
determine the degree by which changes in market shares of
different countries could be explained by their initial commodity
composition.

The difference, according to Tyszynski, between the

hypothetical calculated market share and the actual share has
been caused by structural changes in world trade.
 The Problems
Case 1: Suppose we want to analyse Indias overall exports over 2011 and 2012 and
decompose the same in the two effects growth effect and competitiveness
effect.
Excel Operations
Case 2: Suppose we want to analyse Indias overall exports over 2010 and 2011 and
decompose the same in the two effects growth effect and competitiveness
effect.
Excel Operations
Case 3: Suppose we want to analyse Indias exports to United Arab Emirates over
2010 and 2011 and decompose the same in the two effects growth effect and
competitiveness effect.
Excel Operations
How to Interpret the Result?
 The Breakdown of Effects: Two Level
Taking this expression and summing up both sides over
commodities i and regions j then yields:

Where ri is the growth rate in world exports of commodity i over

the period. Summing over i and j and rearranging now yields:

Gilbert (2010)
 The Problems
Case 1: Indias export of automobile products (HS 87) to select
countries during 2009-10
Excel Operations
 Two Level Effect: Bilateral Trade Flows
Suppose the objective is to determine the CMS effect distribution of a
sectoral export from country A to country B.
The formula used for calculating the effects is:
X1 X0 = mX0 + {(mi m) Xi0} + [Xi1 Xi0 miXi0], where
X: exports of country A to country B
Xi: commodity i exports of country A to country B
m: Percentage increase in country B's total imports from period 0 to period 1
mi: Percentage increase in country B's imports of commodity i between
period 0 to period 1, and
X=Xi
The right hand side can be divided into three components:
1. The general rise in country B's total imports
2. The commodity composition of country A's exports to B in period 0, and
3. An unexplained residual indicating the difference between country As actual
exports increase to country B and the hypothetical increase if country A
maintained its share of exports of each commodity group in country B.
 The Problems
Case 1: Suppose we want to analyse Indias exports of Headgears etc. (HS
64) over 2011 and 2012 to China and decompose the same in the three
effects growth effect, commodity effect and competitiveness effect.
Excel Operations
Case 2: Suppose we want to analyse Indias exports of leather products
(HS 42) over 2011 and 2012 to US and decompose the same in the three
effects growth effect, commodity effect and competitiveness effect.
Excel Operations
Case 3: Suppose we want to analyse Indias exports of nickel products (HS
75) over 2011 and 2012 to Thailand and decompose the same in the three
effects growth effect, commodity effect and competitiveness effect.
Excel Operations
 The Breakdown of Effects: Three Level
If the constant share normalization applies at the region level then:

Gilbert (2010)
Where rij is the growth rate in world exports of commodity i
to region j over the period.
 Solving the Problems
Piezas-Jerbi and Nee (2009)
 CMS: Regional Breakdown
Partition J into two groups, including P, representing the
membership of a regional group of interest. Then:
 Applications: Few Examples
CMS on Indian Exports Nag and Chatterjee (2009), Singh (2014)

Policy Change and CMS Klein (2004)

Presenting the result:

1. Simonis (2000) Structural effect (Y-axis) and Competitiveness effect (X-axis) p. 8

2. Clipa (2007) presenting the effect in terms of percentage p. 3

3. Amador and Cabral (2008) if involve more countries then regional spread p. 212

4. Poramacham (2002) - Linking RCA and CMS findings p. 58-59

5. Klein (2004) linking trade barriers and CMS p. 10

 Criticisms to CMS: Some Issues
1. Choice of an appropriate base year
2. Aggregation Bias: Dependence on structure of consumer preferences, which is expected to be
consistent with the axioms of revealed preference, particularly, homothetic preferences
similarity of consumer preferences within regions and the absence of distribution effects.
Partial solution through clustering methods which require detailed mathematical operations with
extensive data set that includes all goods (domestic and imported goods), all prices, and budgets.
3. Partner Bias: World exports are a convenient standard when a study deals with many focus
countries, but it makes the results less meaningful. As CMSs objective is to examine
competitiveness, the standard should be the sum of all competitors of the focus country, not the
world exports.
4. Appropriate length of time: Since costs in each country are constant, relative prices can be taken
as determined solely by the cost conditions in the supplying country, i.e., differential growth
rates in wages or productivity, and relative improvements in technology. The supply conditions
limit applied analysis to changes over the medium to long run, whereas the demand conditions may
place an upper limit on the length of the period (due to changing tastes).
5. Currency used in CMS analysis can affect the size of different effects - should utilise the
currency that is most popular (US $).

Source: Ahmadi Esfahani (2006)