Asymmetric effects of cultural institutes on trade and foreign direct investment

Donald Lien, Melody Lo and David Bojanic

The World Economy, 2019, vol. 42, issue 5, 1520-1553

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 non‐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.

Date: 2019
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