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Cultural and Institutional Determinants of Bilateral Trade Flows

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Author Info
Gert-Jan M. Linders () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)
Arjen Slangen () (Rotterdam School of Management, Erasmus Universiteit Rotterdam)
Henri L.F. de Groot () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)
Sjoerd Beugelsdijk () (Radboud University Nijmegen)

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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.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-074/3.

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Date of creation: 10 Jul 2005
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Handle: RePEc:dgr:uvatin:20050074

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Related research
Keywords: trade; gravity model; cultural distance; institutions;

Find related papers by JEL classification:
F14 - International Economics - - Trade - - - Country and Industry Studies of Trade

References listed on IDEAS
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