Asymmetric Effects of Cultural Institutes on Trade and Foreign Direct Investment

34 Pages Posted: 16 Apr 2019

See all articles by Donald D. Lien

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

David Bojanic

University of Texas at San Antonio

Melody Lo

University of Texas at San Antonio

Date Written: May 2019

Abstract

The purpose of a cultural institute is to improve international relations with other countries by promoting language familiarity and cultural awareness. In addition, cultural institutes can provide additional business opportunities that lead to positive economic side effects such as increases in trade and foreign direct investment (FDI). In this study, gravity models were used to analyse the data for the Goethe Institut (Germany), the Cervantes Institute (Spain) and the Confucius Institute (China) to identify any stylised international patterns of the documented economic effects. The study finds significant positive effects on bilateral trade and FDI outflows for all three programmes, along with two important (i) the effects are stronger for nonā€advanced economies and (ii) the effects are substantially larger on FDI than on trade. These results suggest that cultural institutes can be an effective policy tool in promoting FDI outflows, with the strongest effect realised when a home country locates its cultural institutes in host countries with developing economies. Importantly, results also suggest that the Chinese government's approach to extend its soft power through rapid expansion of Confucius Institutes worldwide has not been as successful as the efforts by the German Goethe Institut in increasing trade and FDI.

Keywords: bilateral trade, cultural institutes, foreign direct investment, gravity model

Suggested Citation

Lien, Donald and Bojanic, David and Lo, Melody, Asymmetric Effects of Cultural Institutes on Trade and Foreign Direct Investment (May 2019). The World Economy, Vol. 42, Issue 5, pp. 1520-1553, 2019. Available at SSRN: https://ssrn.com/abstract=3372529 or http://dx.doi.org/10.1111/twec.12751

Donald Lien (Contact Author)

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

David Bojanic

University of Texas at San Antonio ( email )

Melody Lo

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

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