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

1
Does economic diplomacy work? Meta analysis of
the effect of Economic Diplomacy on international
flows
MAER-Net Colloquium (7 September 2013)

• Selwyn Moons
• Peter van Bergeijk bergeijk_at_iss.nl

2
The paper in a nutshell

• Topic the impact of diplomatic activity on trade
  FDI
• Two literatures
• 1980s1990s 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.

3
Todays plan

1. Definition motivation
2. Literature
3. Sample bibliometrix
4. Meta regression
5. Conclusions

4
Economic diplomacy

• Economic 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

Definition motivation
5
Methuen 1703 Treaty
Definition motivation
6
Classical Economists are Critical about Economic
Diplomacy
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
Definition motivation
7
Trends in modern economic diplomacy

• High level trade missions

• Export promotion agencies

Definition motivation
8
While transport costs decreased, distance did not
die
Source van Bergeijk and Brakman 2010
Definition motivation
9
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.

Definition motivation
10
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

Literature
11
Construction of the Sample

• Starting point traditional review of literature

• Search strategy

Sample bibliometrix
12
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 bibliometrix
13
1334 regressions from 30 studies

• By instrument

• By international flow

Sample bibliometrix
14
What do we know?

• Evidence by instrument

• Evidence by flow

Diplomatic climate Embassies EPA/IPA State
visits Non embassies Other trade missions
Sample bibliometrix
15
(Dis)agreement
Sample bibliometrix
16
State visits
Sample bibliometrix
17
Funnel plot
Sample bibliometrix
18
Meta-regression analysis
Metaregression analysis
19
Estimated equations
Probability of significant t (Logit, RE Logit,
significance levels)
P(yij1)a0ß1OBSERVATIONSijß2NOTOLSijß3COUNTRYS
PECIFICjß4GRAVITYEQUATIONjß5PRE2000jß6,,9
primary dependent variableijß10,,16
instruments of diplomacyijeij (3)
reference case is a primary study that measures
the impact of foreign representation (embassies
and consulates) on exports
Metaregression analysis
20
Findings I (Empirical design dependent variable)
  Logit Logit Logit Logit Random Effects Logit Random Effects Logit
  5 5 1 1 1 1
OBSERVATIONS   0.29   0.540   0.711
    (1.2)   (2.05)   (1.97)
NOTOLS 0.64 0.27 0.58 0.514 0.672 0.423
  (2.8) (0.8) (2.67) (1.49) (2.58) (1.07)
COUNTRYSPEC. -0.30 -0.80 -0.64 -0.683 -0.865 -0.688
  (-1.1) (-1.70) (-2.53) (-1.52) (-2.61) (-1.14)
GRAVITY. 0.63 0.36 1.20 1.52 1.85 1.46
  (1.5) (0.60) (3.03) (2.57) (2.22) (1.90)
PRE2000 1.98 2.60 1.50 2.04 1.38 2.25
  (2.9) (3.3) (2.3) (2.7) (1.3) (2.3)
TOTALTRADE -1.2 -1.18 -2.19 -2.50 -2.81 -2.59
  (-1.7) (-1.5) (-3.1) (-3.1) (-2.3) (-2.6)
IMPORT -0.75 -0.53 -1.15 -1.03 -0.85 -0.94
  (-2.3) (-1.6) (-3.4) (-2.9) (-2.3) (-2.5)
FDI -0.19 -0.26 -0.44 -0.19 0.13 0.0
  (-0.3) (-0.4) (-0.6) (-0.3) (0.1) (0.0)
Metaregression analysis
21
Findings II (Instruments of diplomacy)
  Logit Logit Logit Logit Random Effects Logit Random Effects Logit
  5 5 1 1 1 1
EMBASSIES 0.43 -0.94 0.92 -0.52 1.89 -0.12
  (0.8) (-1.3) (1.7) (-0.8) (2.3) (-0.1)
CONSULATES -1.8 -3.4 -1.7 -3.4 -0.9 -3.1
  (-5.0) (-6.1) (-4.8) (-6.3) (-1.6) (-4.1)
FOREIGN EPA OFFICE -0.80 -1.38 -0.58 -1.6 -1.11 -1.6
  (-2.7) (-3.1) (-2.0) (-3.6) (-1.9) (-2.6)
TRADE MISSION -1.8 -2.5 -1.3 -3.1 -0.7 -2.3
  (-3.3) (-3.5) (-2.3) (-4.0) (-0.8) (-2.4)
STATE VISIT -1.6 -2.2 -1.5 -2.7 -0.3 -2.0
  (-4.2) (-4.2) (-4.1) (-4.9) (-0.4) (-2.2)
EIPA -0.72 -1.5 -0.53 -1.0 0.0 -0.86
  (-1.9) (-1.92) (-1.47) (-1.32) (0.1) (-0.9)
DIPLOMATIC RELATION 0.07 -0.91 0.67 -0.45 1.35 -0.11
  (0.1) (-1.0) (1.0) (-0.5) (1.3) (-0.1)
Metaregression analysis
22
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