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This paper aims to examine the determinants of vertical intra‐industry trade (VIIT) in the automobile components industry between Portugal and the European Union 27 (EU‐27) and the BRIC countries (Brazil, Russia, India and China) during the period 1995‐2006.

The paper formulates some theoretical hypotheses that may explain the fragmentation of the production in the automobile industry. These hypotheses are tested using a dynamic panel data analysis. The estimates are more reliable because the instruments used control for the potential endogeneity of the explanatory variables.

The results indicate that VIIT is a positive function of the difference in per‐capita GDP between Portugal and its trading partners, confirming the Linder hypothesis. Moreover, there is statistical evidence that geographical distance influences negatively this type of VIIT between Portugal and the EU‐27 only. The results do not confirm the hypothesis that there is a positive correlation between differences in endowments and VIIT in the automobile components sector.

This paper confirms some relevant theoretical hypotheses on the causes of the fragmentation/outsourcing. The good results obtained with the Arellano and Bond GMM system estimator suggest that the building of dynamic theoretical models will be of interest to academic researchers in fragmentation theory.