Economic Integration and Bilateral Export Concentration : The Euro Effect

A common finding in the international trade literature is that economic integration leads to export diversification. By documenting a positive link between adopting the European common currency and bilateral export concentration, the current work shows that this is not always the case. Using a panel data approach, I find that exports between eurozone members are on average more concentrated than those among countries which do not share the euro. Central to this outcome is that some economic integration agreements, such as the euro, may lead to a drop in not only trade but horizontal FDI costs as well. Theoretically, the results can be explained by the substitutability between exporting and horizontal FDI within a two-sector, two-firm type model which allows for sectoral trade cost heterogeneity