Selwyn Moons Peter van Bergeijk [email protected]

Does economic diplomacy work? Meta analysis of the effect of Economic Diplomacy on international flows

Selwyn Moons Peter van Bergeijk [email protected]

MAER-Net Colloquium (7 September 2013)

The paper in a nutshell

• Topic: the impact of diplomatic activity on trade & FDI• Two literatures:

– 1980s&1990s international relations– 2000s international economics

• 643 t-values taken from 29 studies• Evidence predominantly on exports and embassies• Question 1: Does it work?• Question 2: Sensitivity to model specification.

04/21/23 Bergeijk 2

Today’s plan

1. Definition & motivation

2. Literature

3. Sample & bibliometrix

4. Meta regression

5. Conclusions

Economic diplomacyEconomic diplomacy is the use of government relations and government influence to stimulate international trade and FDI and is directed to:•open markets and the opening of markets to stimulate cross border economic activities (imports, exports, FDI);•the use of bilateral relationships to assist domestic companies which encounter difficulties abroad;•improving the functioning of international markets in;•increasing economic security by the promotion of (and compliance with) international rules and agreements

04/21/23 Bergeijk 4Definition & motivationDefinition & motivation

Methuen 1703 Treaty

Definition & motivationDefinition & motivation

Classical Economists are Critical about Economic Diplomacy

04/21/23 Bergeijk 6

We have lost the French market for our woolen manufactures, and transferred the commerce of wine to Spain and Portugal, where we buy worse liquor at a higher price David Hume 1742

So far this treaty, therefore, is evidently advantageous to Portugal, and disadvantageous to Great Britain. Adam Smith 1776


Trends in modern economic diplomacy

High level trade missions Export promotion agencies

04/21/23 Bergeijk 7

05

10152025303540

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005


While transport costs decreased, distance did not die

04/21/23 Bergeijk 8

Source: van Bergeijk and Brakman 2010Definition & motivationDefinition & motivation

Relevance of economic diplomacy

• Cultural factors may make it necessary for national governments to get involved in international transactions. This is especially the case now that former communist countries account for an increasing share of world trade.

• State enterprises may be the counterpart of a company operating in the international markets. This creates the necessity for entrepreneurs to seek cooperation with its national government to equalize the power balance and to improve its playing field.

• (Political) uncertainty about international transactions must often be removed or reduced. Government involvement may signal that a transaction will not raise political resistance.

• The information needed for international transactions sometimes requires involvement of government officials.


Literature(s)• Growing body of literature. • First wave: 1980s international relations

– ‘general’ – mainly use political event data, dummies

• Second wave: 2000s international economics– ‘specific’ – More refined analysis, main focus on embassy network and

activities, cross section analysis

• Binding element: most papers use the gravity equation• What changed: new datasets (instruments, period and

countries) more computing power

LiteratureLiterature

Construction of the Sample

Starting point: traditional review of literature Search strategy

04/21/23 Bergeijk 11Sample & bibliometrixSample & bibliometrix

Selection rules

• Paper taken in to account when:– empirically address the question what the impact is of

economic diplomacy on trade and investment flows– t - values are reported or can be (re)constructed – (Note: 1334 coefficients in 30 primary studies versus

643 t values in 29 studies)• Paper not taken into account:

– logit or probit models (probability of trade)– incompleteness of key statistics (Note: 27 studies and

416 t values)

Sample & bibliometrixSample & bibliometrix

1334 regressions from 30 studies

By instrument By international flow


What do we know?

Evidence by instrument Evidence by flow


Diplomatic climate

Embassies

EPA/IPA

State visits

Non embassies

Other trade missions

(Dis)agreement

04/21/23 Bergeijk 15

: t-values for economic diplomacy as reported in the primary studies

-10

0

10

20

30

40

Hea

d an

d Ri

es (2

006)

Bigl

aise

r (2

007)

van

Veen

stra

et a

l (20

11)

Yako

p et

al (

2011

)

Segu

ra-C

ayue

la e

t al (

2007

)

Volp

e M

artin

cus

and

Carb

allo

(201

0)

Mor

isse

t (20

03)

Nits

ch (2

007)

Sum

mar

y (1

989)

Polli

ns (1

989b

)

Afm

an a

nd M

aure

l (20

10)

Lede

rman

et a

l (20

07)

Gil

et a

l (20

07)

Volp

e M

artin

cus

et a

l (20

10)

Rose

(200

7)

Yako

p an

d va

n Be

rgei

jk (2

011)

Polli

ns (1

989a

)

Gil-

Pare

ja e

t al (

2007

)

Berg

eijk

(199

2)

Berg

eijk

(199

4)

Nig

h (1

985)

Pola

chek

et a

l (20

07)

min

max

median

avg


State visits


Funnel plot

04/21/23 Bergeijk 17

05

10

15

ln(o

bse

rvat

ions

)

-20 -10 0 10 20 30t-statistic

Funnel plot with pseudo 95% confidence limits


Meta-regression analysis

Metaregression analysisMetaregression analysis

Estimated equations

P(yij=1)=α0+β1OBSERVATIONSij+β2NOTOLSij+β3COUNTRYSPECIFICj+β4GRAVITYEQUATIONj+β5PRE2000j+β6,…,9 [primary dependent variableij]+β10,…,16 [instruments of diplomacyij]+ε ij (3)

Probability of significant t (Logit, RE Logit, significance levels)

Metaregression analysisMetaregression analysis

reference case is a primary study that measures the impact of foreign representation (embassies and consulates) on exports

Findings I (Empirical design & dependent variable)

04/21/23 Bergeijk 20Metaregression analysisMetaregression analysis

Findings II (Instruments of diplomacy)

04/21/23 Bergeijk 21Metaregression analysisMetaregression analysis

Conclusions & issues for discussion

• Evidence suggests “it works” but predominantly for exports and foreign network

• Future research design: Lumping embassies consulates EPAs etc together creates potential downward bias of the effect

• Sample selection rules; incomplete studies, inclusion N

Documents

Selwyn Moons Peter van Bergeijk [email protected]