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Can Business and Social Networks Explain the Border Effect Puzzle?

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  • Combes, Pierre-Philippe
  • Lafourcade, Miren
  • Mayer, Thierry

Abstract

McCallum (1995) shows in an influential contribution that, even when controlling for the impact of bilateral distance and region size, borders sharply reduce trade volumes between countries. We use in this Paper data on bilateral trade flows between 94 French regions, for 10 industries and two years (1978 and 1993) to study the magnitude and variations over time of trade impediments, both distance-related and (administrative) border-related. We focus on assessing the role that business and social networks can play in shaping trade patterns and explaining the border effect puzzle. Using a structural econometric approach, we show that intranational administrative borders significantly affect trade patterns inside France. The impact is of the same order of magnitude as in Wolf (2000) for trade inside the United States. We show that more than 60% of these (puzzling) intranational border effects can be explained by the composition of local labour force in terms of birth place (social networks) and by inter-plants connections (business networks). In addition, controlling for these network effects reduces the impact of transport cost on trade flows by a comparable factor. Thus, business and social networks that help to reduce informational trade barriers are shown to be strong determinants of trade patterns and to explain a large part of the border puzzle.

Suggested Citation

  • Combes, Pierre-Philippe & Lafourcade, Miren & Mayer, Thierry, 2003. "Can Business and Social Networks Explain the Border Effect Puzzle?," CEPR Discussion Papers 3750, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3750
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    References listed on IDEAS

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    1. Guillaume Daudin, 2003. "La logistique de la mondialisation," Revue de l'OFCE, Presses de Sciences-Po, vol. 87(4), pages 409-435.
    2. John Bryant & Murat Genc & David Law, 2004. "Trade and Migration to New Zealand," Treasury Working Paper Series 04/18, New Zealand Treasury.
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    4. Agnès Bénassy-Quéré & Amina Lahrèche-Revil & Lionel Fontagné, 2003. "Tax Competition and Foreign Direct Investment," Working Papers 2003-17, CEPII research center.
    5. David LABORDE & Jean SÉBASTIEN, "undated". "The Impact of Multilateral Liberalisation on European Regions: a CGE Assessment," EcoMod2004 330600087, EcoMod.
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    8. Toshihiro Okubo, 2004. "Intra-industry Trade and Production Networks," IHEID Working Papers 13-2004, Economics Section, The Graduate Institute of International Studies.
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      [Optimisation du phénomène migratoire pour l’Afrique : Envois de fonds, compétences et investissements]
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    More about this item

    Keywords

    border effects; gravity; networks;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration

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