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Heterogeneous Firms, Globalisation and the Distance Puzzle

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  • Mario Larch
  • Pehr-Johan Norbäck
  • Steffen Sirries
  • Dieter M. Urban

Abstract

Despite the strong pace of globalization, the distance effect on trade is persistent or even growing over time (Disdier and Head, 2008). To solve this distance puzzle, we use the recently developed gravity equation estimator from Helpman, Melitz and Rubinstein (2008), HMR henceforth. Using three different data sets, we find that the distance coefficient increases over time when OLS is used, while the non-linear estimation of HMR leads to a decline in the distance coefficient over time. The distance puzzle thus arises from a growing bias of OLS estimates. The latter is explained by globalization more significantly reducing the downward bias from omitting zero trade flows than it reduces the upward bias from omitting the number of heterogeneous exporting firms. Furthermore, we show that including zero-trade flows cannot solve the distance puzzle when using HMR. The HMR estimates are strongly correlated with the time pattern in freight costs reported by Hummels (2007).
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Suggested Citation

  • Mario Larch & Pehr-Johan Norbäck & Steffen Sirries & Dieter M. Urban, 2016. "Heterogeneous Firms, Globalisation and the Distance Puzzle," The World Economy, Wiley Blackwell, vol. 39(9), pages 1307-1338, September.
  • Handle: RePEc:bla:worlde:v:39:y:2016:i:9:p:1307-1338
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    File URL: http://hdl.handle.net/10.1111/twec.12303
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    Citations

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    Cited by:

    1. Samuel Standaert & Stijn Ronsse & Benjamin Vandermarliere, 2014. "Historical trade integration: Globalization and the distance puzzle in the long 20th century," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/897, Ghent University, Faculty of Economics and Business Administration.
    2. Lanz, Rainer & Lee, Woori & Stolzenburg, Victor, 2019. "Distance, formal and informal institutions in international trade," WTO Staff Working Papers ERSD-2019-03, World Trade Organization (WTO), Economic Research and Statistics Division.
    3. Elisaveta Archanskaia & Guillaume Daudin, 2012. "Heterogeneity and the Distance Puzzle," Documents de Travail de l'OFCE 2012-17, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Scott L. Baier & Amanda Kerr & Yoto V. Yotov, 2018. "Gravity, distance, and international trade," Chapters, in: Bruce A. Blonigen & Wesley W. Wilson (ed.), Handbook of International Trade and Transportation, chapter 2, pages 15-78, Edward Elgar Publishing.
    5. Anderson, James E. & Yotov, Yoto V., 2020. "Short run gravity," Journal of International Economics, Elsevier, vol. 126(C).
    6. Yotov, Yoto V., 2012. "A simple solution to the distance puzzle in international trade," Economics Letters, Elsevier, vol. 117(3), pages 794-798.
    7. Bergstrand, Jeffrey H. & Larch, Mario & Yotov, Yoto V., 2015. "Economic integration agreements, border effects, and distance elasticities in the gravity equation," European Economic Review, Elsevier, vol. 78(C), pages 307-327.
    8. Benedikt Heid & Wenxi Lu, 2020. "Genetic distance, cultural differences, and the formation of regional trade agreements," School of Economics Working Papers 2020-04, University of Adelaide, School of Economics.
    9. Hinz, Julian, 2017. "The view from space: Theory-based time-varying distances in the gravity model," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168270, Verein für Socialpolitik / German Economic Association.
    10. Borchert, Ingo & Yotov, Yoto V., 2017. "Distance, globalization, and international trade," Economics Letters, Elsevier, vol. 153(C), pages 32-38.
    11. Samuel Standaert & Stijn Ronsse & Benjamin Vandermarliere, 2016. "Historical trade integration: globalization and the distance puzzle in the long twentieth century," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 10(2), pages 225-250, May.
    12. Zongning Wu & Hongbo Cai & Ruining Zhao & Ying Fan & Zengru Di & Jiang Zhang, 2020. "A Topological Analysis of Trade Distance: Evidence from the Gravity Model and Complex Flow Networks," Sustainability, MDPI, Open Access Journal, vol. 12(9), pages 1-17, April.

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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