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Cultural and Institutional Determinants of Bilateral Trade Flows

Gert-Jan M. Linders (), Arjen Slangen (), Henri de Groot () and Sjoerd Beugelsdijk ()
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Gert-Jan M. Linders: Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam
Arjen Slangen: Rotterdam School of Management, Erasmus Universiteit Rotterdam

No 05-074/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

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 (search for similar items in EconPapers)
JEL-codes: F14 (search for similar items in EconPapers)
Date: 2005-07-10
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