Cultural and Institutional Determinants of Bilateral Trade Flows

Tinbergen Institute Discussion Paper No. 05-074/3

31 Pages Posted: 17 Aug 2005

See all articles by Gert-Jan Linders

Gert-Jan Linders

Ministry of Social Affairs and Employmen

Arjen HL Slangen

University of Amsterdam Business School

Henri L. F. de Groot

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Sjoerd Beugelsdijk

University of Groningen

Date Written: July 2005

Abstract

This paper studies the intangible costs of international trade by extending the basic gravity equation with measures of cultural and institutional distance, and institutional quality. Analyzing a sample of bilateral trade flows between 92 countries in 1999, we find that institutional distance has a negative effect on bilateral trade, presumably because the transaction costs of trade between partners from dissimilar institutional settings are high. In contrast, we find that cultural distance has a positive effect on bilateral trade. A potential explanation for this finding is that firms prefer trade to host-country production in culturally distant countries. Finally, we find that the institutional quality of both the importer and exporter increases the amount of bilateral trade.

Keywords: Trade, gravity model, cultural distance, institutions

JEL Classification: F14

Suggested Citation

Linders, Gert-Jan and Slangen, Arjen and de Groot, Henri L.F. and Beugelsdijk, Sjoerd, Cultural and Institutional Determinants of Bilateral Trade Flows (July 2005). Tinbergen Institute Discussion Paper No. 05-074/3, Available at SSRN: https://ssrn.com/abstract=775504 or http://dx.doi.org/10.2139/ssrn.775504

Gert-Jan Linders

Ministry of Social Affairs and Employmen ( email )

Den Haag
Netherlands

Arjen Slangen

University of Amsterdam Business School ( email )

Amsterdam
Netherlands

Henri L.F. De Groot

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6168 (Phone)
+31 20 598 6004 (Fax)

Tinbergen Institute

Gustav Mahlerplein 17
Amsterdam, 1082 MS
Netherlands

Sjoerd Beugelsdijk (Contact Author)

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

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