Intra-industrial trade has undergone a considerable increase in recent decades. The models proposed by Krugman (1980) and Helpman & Krugman (1985) permit the causes of this expansion to be understood; they describe a market with a great number of companies, each of them producing a differentiated product without barriers to entry. The key prediction of these models is that trade liberalisation among countries leads to a higher degree of competition, provoking the exit from the market of some companies, while those remaining expand their production by taking advantage of economies of scale.

Thus, in accordance with Krugman (1980), a large domestic market means an increase in the supply of differentiated products, which will subsequently be exported, permitting companies to take advantage of greater economies of scale. This phenomenon, termed the home market effect (HME), generates a reorganisation of resources towards the more efficient companies and encourages the localisation of multinationals in those markets which offer greater potential for growth. Given this context, the processes of trade liberalisation are exploited by companies with higher levels of productivity, thereby becoming exporters, while those whose productivity is lower either exit from the market or limit themselves to merely serving the domestic market (Roland-Holst et al., 1995). The existence of fixed costs to entry into the export markets (such as the acquisition of information regarding consumer tastes, diverse regulations, the establishment of trade networks, etc.) means that only those firms with expectations of profits are those which become exporters (Melitz, 2003). This would explain why only a small number of companies become exporters (Bernard et al., 2007). Here, Melitz & Ottaviano (2008) built a model which, allowing for business heterogeneity, predicts how trade liberalisation, associated to a greater size of the domestic market, induces a sectorial process of the self-selection of firms.

The Spanish economy, since its incorporation into the European Union (EU), has demonstrated the principal characteristics described above: strong growth of the domestic market, a profound liberalisation of exchanges and, above all, increasingly elaborated products destined to high-income markets. Some studies have shown the presence of the HME to be a key factor in the upsurge of Spanish manufacturing exports (Claver et al., 2011). However, few studies have analysed the long-term effects of the growth of the domestic market as a determinant of exports in the agrifood industry. For the European case, Olper et al. (2014) and Chevassus-Lozza & Latouche (2012) have shown that the abovementioned effect of selection in the food industry has been driven by the growth of the domestic market1. For the Spanish agrifood sector, however, research in this line has been very limited in comparison to studies focusing on other effects such as the liberalisation of trade barriers. The focus has been on Spanish incorporation into the EU, paying little attention to other factors which also favour the expansion of such trade (Contreras & Bacaria, 2000; Sanz, 2000; Sanz & Gil, 2001; Gil Pareja et al., 2005; Selva & Álvarez-Coque, 2011) and thus studies of this factor are needed. We also believe that analysing the food trade from this other perspective is important, as this is crucial to an understanding of Spanish exports. In Spain, the agrifood industry represents over 18.1% of the sales of the manufacturing sector and employs approximately 18.5% of the workforce (INE, 2012). According to data from the economic report by the Spanish Federation of Food and Drink Industries (FIAB), the agrifood industry was the leading export sector in 2013. Agrifood exports reached a value of €38 billion in 2013, which represented 16% of total Spanish exports.

Given this context, the objective of this study was to analyse the factors determining the process of internationalisation of the Spanish agrifood industry from a long-term perspective. The paper concentrates on the empirical verification of the existence of a home market effect in the food and drink industries in Spain and on the effects on trade flows of integration into the EU. As explained above, market liberalisation also plays an important role in the process of company reorganisation. Consequently, we linked the HME to the possibilities for international expansion offered by Spanish accession to the EU. Thus, our hypothesis was to verify that the development of the domestic market (the home market effect) has been a key factor in the success of the internationalisation of the Spanish agrifood industry.

The present study makes an additional contribution to the literature on the HME, applying a gravity specification for the disaggregated flows of trade for 13 agrifood sectors, from a long-term perspective, and in a period in which an intensive process of liberalisation and growth occurred in the domestic market. Another important contribution is that we have taken into account the latest technical advances in gravity equation estimation, and thus it has been determined by factors such as “multilateral resistance”, “unobservable heterogeneity”, the heteroscedasticity of residuals and the existence of null values in the dependent variable, which various studies have shown to be very important (Haq et al., 2012).

To achieve our objective we used the exports of the Spanish agrifood industry, estimating gravity equations for 13 agrifood sectors with exports destined to 175 countries, in the period 1970-2012. The gravity model for trade is probably one of the most successful empirical applications in international economics and has been used profusely, since the pioneering article by Tinbergen (1962), to analyse aspects of great importance such as: the impact on trade of the GATT/WTO system (Rose, 2004); regional trade agreements (Baier & Bergstrand, 2007); non-reciprocal trade agreements (Gil-Pareja et al., 2014); exchange rate systems (Klein & Shambaugh, 2006); or monetary unions (Rose, 2000).

The methodology employed is the gravity equation. The initial applications of the gravity model, developed by Tinbergen (1962) and Pöyhönen (1963a,b) and employed in the study of the determinants of international trade, lacked a theoretical basis. Subsequently, the success of this approach in explaining international trade patterns caused economists to formally develop its theoretical foundations (Anderson, 1979; Bergstrand, 1985, 1989; Helpman & Krugman, 1985; Deardoff, 1998; Eaton & Kortum, 2002; Evenett & Keller, 2002). Analogous to Newtonian physics (from which it takes its name), this model assumes that bilateral trade flows depend positively on the economic size of countries (normally measured by their income) and negatively on the distance between them. Although the first empirical applications were based on this idea and it could be said that it was merely an econometric model which explained international trade well, from the 1970s on analytical developments began to appear (Anderson, 1979; Bergstrand, 1985, 1989; Deardoff, 1998; Eaton & Kortum, 2002; Evenett & Keller, 2002; Anderson & van Wincoop, 2003); these support it from almost any theoretical approach dealing with the motivations for trade between countries.

In addition to the basic variables (income and distance), the gravity model incorporates other variables which affect, in one direction or another, the trade barriers among countries: this is termed the “expanded gravity model”. In particular, for each of the agrifood subsectors considered, the specification used in this study is the following:

Table 4 presents the results of the estimation of 13 gravity equations (one for each sector), using PPML. From a general perspective, it can be concluded that the exports of the Spanish food and drink industry have been strengthened by the growth of the domestic market, by the increase in demand in the destination markets and by the trade creation effect promoted by adherence to the EU. However, as numerous studies have shown, the physical distance between markets have continued to constitute an important barrier to trade. All the variables have the expected sign.

Firstly, the results of the coefficients (Yit) and (Yjt), which refer to market size, both in Spain and in the countries of destination of exports, display a positive and statistically significant effect in the majority of cases. It can also be observed that there exists empirical evidence supporting the existence of the HME in 9 of the 13 industries studied: processed meat products; dairy industry; grain mill products; bakery and farinaceous products; confectionery and chocolate; non-alcoholic drinks; animal feed; other food products; tobacco industry. In these nine subsectors β2>β3, which demonstrates the existence of an HME. As columns (1) and (2) show, the coefficients (Yijt) are statistically significant and superior to the coefficient of the income of the importing country (Yijt). The most notable exceptions of the presence of the HME, are those of the subsectors of the processing and preservation of fish, the processing and preservation of fruit and vegetables, the oil industry and the elaboration of alcoholic drinks. As stated earlier, these were precisely the most traditional sectors of Spanish agrifood exports, those which experienced lower growth in their sales abroad in the period and also those which displayed less intensity in the processes of industrial reorganisation.

Secondly, as shown by many studies, we have found empirical evidence of the creation of trade by the insertion of the Spanish agro-industry into the EU. In our case, we can offer this new empirical evidence of the positive effect, from a long-term perspective and also in a disaggregated form, for the distinct subsectors comprising the food and drink industry. Furthermore, our results underline that this boost to trade only took place following completion of the process of transition of Spanish integration into the EU, as it was then that tariff barriers for Spanish products were completely eliminated.

Column (6) for the dummy variable UEij86-92, which attempts to capture positive effects in trade in an initial period of liberalisation, shows that neither positive signs nor statistical significance are found in the majority of subsectors in this period. There even exist negative and statistically significant signs in some sectors, which would imply a certain effect of trade deviation. The exceptions to this general result are produced in the alcoholic drinks industry and the animal feed industry, where there was already an effect of trade creation from 1986 onwards.

After 1992, as shown in the sign and significance of the coefficients of the variable UEij93-12, which draws us close to the effect of EU integration, following the finalisation of the transition period, in 7 of the 13 industries considered there is evidence of a positive effect of such integration for Spanish food exports, once completed the transition process with the dismantling of tariff barriers. Specifically, this positive effect is to be found in processed meat products, fish and fruit and vegetables, the confectionery and chocolate industries, alcoholic drinks and the oil industry.

Lastly, we have attempted to explore the effect of the reduction of trade barriers on an international scale, following the Uruguay Round of GATT, and its positive influence upon the exports of the Spanish agroindustrial complex. On the basis of our results, it is only possible to talk of a certain boost to trade for four industries: dairy products, bakery and farinaceous products, alcoholic drinks and animal feed. Similarly, no positive effect is perceived for the exports of the Spanish food industry from the proliferation of the Preferential Trade Agreements (PTA_ijt), signed from the 1990s onwards with economies outside the EU.

The objective of this study was to analyse the factors determining the process of internationalisation of the Spanish agrifood industry from a long-term perspective. The paper verifies the existence of a home market effect in the food and drink industries in Spain as a key factor in explaining its process of internationalisation. The presence of this effect is remarkable in the most dynamic industries, where the process of restructuring caused by the development of the internal market was more intense. Furthermore, the influence of the process of European integration has been shown to be a very important factor.

We have taken into account the latest theoretical advances in the estimation of the gravity equation, such that we have controlled for factors such as “multilateral resistance”, “unobservable heterogeneity”, the heteroscedasticity of residuals and the existence of zeros in the dependent variable, which various studies have shown to be very important (Haq et al., 2012). Finally, we have estimated an equation for each of the industries comprising the Spanish agribusiness complex for the period 1970-2012, taking into account a broad sample of destination markets, including data for 175 countries.

The results of the empirical work permit the validation of the hypothesis of the positive effect of the development of the domestic market as a key factor in the success of the process of internationalisation of the Spanish agrifood industry. The test has been performed for 13 industries, evidence of its presence existing in nine of them. Specifically, the HME has appeared in those for which we had previously observed a greater dynamism and a process of restructuring of its more intensive business fabric: processed meat products; the dairy industry; grain mill products; bakery and farinaceous products; confectionery and chocolate; non-alcoholic drinks; animal feed; other food products; and the tobacco industry. This result is consistent with previous studies (Feenstra et al., 2001; Serrano & Pinilla, 2014), which underline that the most traditional sectors, with a predominance of homogeneous products, are those which do not take advantage of the existence of the HME.

Furthermore, the estimation of the gravity equation performed reinforces the idea, already proposed in previous studies, that the Spanish agrifood trade has progressively concentrated in those EU countries with greater market potential. In our case, new empirical evidence is gathered of the positive effect of integration into the EU, from a very long-term perspective and in a disaggregated fashion for the distinct subsectors which comprise the food and drink industry. These results complement the academic debate which has focused solely on the effect of the liberalisation of the barriers to trade with Spanish incorporation into the EU (Contreras & Bacaria, 2000; Sanz, 2000; Sanz & Gil, 2001; Gil Pareja et al., 2005; Selva & Álvarez-Coque, 2011). In addition, we can partially qualify the results of some previous studies, since the positive effect upon the exports of the Spanish agrifood industry as a consequence of the liberalisation of the EU markets occurred later than the actual date of adherence. For a large number of industries, these positive effects did not appear until the completion of the process of transition by the dismantling of the tariff barriers established by the treaty of adhesion. It would also be interesting for future research to analyse the effect of particular products.

These results show that the Spanish food industry, beyond simply seizing the opportunities offered by barrier-free access to a vast market, has displayed very dynamic behaviour. The initial limitations of small size, and the scarcity of financial, human and technical resources has not prevented its transformation into a dynamic industry with large and productive firms. Improved domestic demand has been of key importance in technological development in the sector (Martínez & Burns, 1999; Martínez & Briz, 2000). Firms have had to adapt to conditions of quality demanded by consumers and regulations in international markets. This successful adaptation has led to an increase in productivity for export-oriented firms (Galdeano-Gómez, 2010). The mentioned initials limitations to taking advantage of economies of scale which can also be compensated for in some cases by managers establishing collaboration networks with other firms (Martínez-Carrión & Medina-Albaladejo, 2010).

Finally, the results could be interesting for policymakers designing and implementing export programmes for firms. Internationalisation policy actions can plan improvements to establish new programmes promoting company size or programmes encouraging collaboration between firms as an alternative mechanism. It might, therefore, be of interest to produce export support programmes especially for small and medium-sized enterprises focusing on encouraging cooperation between organisations, in order to improve company competitiveness.

One of the principal limitations of the present study is that it lacks a deeper analysis of the characteristics of the exporting companies in the sector. Some recent studies have attempted to improve the models which explain trade from a microeconomic approach. On this point, Antràs et al. (2010) emphasise the importance of business heterogeneity to justify the good behaviour of the Spanish foreign sector. According to these authors, Spanish exporters are dominated by large companies, but also by a considerable number of small enterprises which are also competitive. The latter are companies which innovate, which have managed to differentiate their products and position them in high margin segments or are companies in which their directors have had the capacity to participate in collaborative networks. In turn, Navaretti et al. (2011) in a comparative analysis of European exporting companies make clear the greater importance of the internal characteristics of companies, compared to other factors, such as their location. The achievement of a better understanding of the resources and capacities required to face the process of internationalisation in the agrifood sector may be the objective of future research.