The estimation of export potential values in international market selection methods: a comparative analysis
Owing to the renowned link between exports and economic growth, governments pursue export promotion. As resources for export promotion are scarce and incorrect market selection can lead to significant losses, important market selection decisions are often based on estimated export potential values. In the literature, three international market selection methods attempt to estimate export potential values, namely, the gravity model, the Export Potential Assessment of the International Trade Centre and the Decision Support Model. It is, however, challenging to put a specific value to export potential as it is difficult to evaluate its accuracy due to the potential not always being actively pursued and/or realised in actual trade. This study, therefore, sets out to compare these three international market selection methods to establish whether the existing methods (for estimating export potential values) give similar answers. This comparison is applied to a selection of South Africa’s top manufacturing products, based on the fact that the South African government has identified the increased exporting of manufactured goods as an important component and driving force to reach the economic growth target of 5.4% by 2030. The empirical analysis (tests) used in this study to compare the ranks of the estimated export potential values were the Spearman rank-order correlation test, frequency distributions and a comparison of the top 10 product-country combinations assigned by the respective methods. The results of the Spearman rank-order test indicated that the International Trade Centre and Decision Support Model approaches had the highest overall correlation (0.694), followed by the International Trade Centre and gravity approaches (0.650). The correlation between the Decision Support Model and gravity methods were much lower (0.377). Furthermore, the International Trade Centre and Decision Support Model approaches had the fewest differences in the ranks of product-country combinations (only 13% of product-country combinations had differences in ranks of more than 10 places), followed by the International Trade Centre and gravity approaches with 21% of product-country combinations where this was the case. The Decision Support Model and gravity methods only had slightly more product-country combinations (25%) with differences in ranks of more than 10 places. Considering the overall comparison of the top 10 product-country combinations emanating from the different methods, the International Trade Centre and Decision Support Model methods have the most product-country combinations with the exact same rank, as well as the most product-country combinations included in both methods’ top 10. The Decision Support Model and gravity model, on the other hand, have the fewest product-country combinations with the same ranking, along with the fewest product-country combinations included in both models’ top 10. Overall, the results of the study, therefore, indicate that the rankings based on the export potential values estimated by means of the International Trade Centre and Decision Support Model approaches are the most comparable among the three approaches, while the comparison between the ranks assigned by means of the Decision Support Model and gravity approaches shows the lowest similarity levels. A possible reason for this might be that the gravity model can be computationally burdensome when estimating export potential values on a large, detailed scale (product level). The variables used in the gravity model are also mostly on country level, which makes product-specific analysis challenging. Furthermore, the variables used in the gravity approach to estimate export potential values can be considered outdated. Conversely, the International Trade Centre and Decision Support Model approaches have been designed to analyse export potential on a large scale and detailed product level. These two approaches also incorporate variables relevant to trade in the 21st century. Based on the literature and empirical analysis of this study, a conclusion was drawn that the Export Potential Assessment of the International Trade Centre are the most comprehensive to estimate export potential values on a detailed product level. This approach was inspired by the gravity model, which incorporates market attractiveness and trade barriers. It also includes most of the aspects of trade potential that the Decision Support Model encompasses, such as import size and growth and market accessibility. It is, however, important to keep in mind that each of the three approaches has a specific purpose, benefits and limitations. It is, therefore, recommended that the gravity, International Trade Centre and Decision Support Model approaches be used to enhance and complement one another. Export promotion decisions should, however, not be based on export potential values alone as other immeasurable components of export potential should be considered in addition to the quantitative analysis.