What Leads to Intra-Industry Trade between Sri Lanka and South Asia?

This study ascertains the determinants of Intra-Industry Trade (IIT) with particular reference to IIT between Sri Lanka and its major trading partners in South Asia; namely; India, Pakistan and Bangladesh. The study uses secondary data published in World Development Indicators, Penn World Table from 1992 to 2017. The level of IIT is calculated by using data gathered from Comtrade Data Base. Using panel data regression, the study adopts Random Effect model to analyze the regression results. The study concludes that economies of scale measured by difference of value added in the net output of the manufacturing sector and market size measured by average gross domestic product exert a significant influence on the level of IIT in the South Asian region. Differences of per capita Gross National Income (GNI - difference in income level) and tariff rate (the proxy for trade barriers) poses a negative influence on the level of IIT. The policymakers should be concerned about the possibility to increase IIT in the South Asian region. Based on the findings of the study, the present research offers policy recommendations to promote IIT within the region.