Estimation of the Gravity Equation of Bilateral Trade in the Presence of Zero Flows

The gravity model is the workhorse model to describe and explain variation in bilateral trade empirically. Consistent with both Heckscher-Ohlin models and models of imperfect competition and trade, this versatile model has proven to be very successful, explaining a large part of the variance in trade flows. However, the loglinear model cannot straightforwardly account for the occurrence of zero-valued trade flows between pairs of countries. This paper investigates the various approaches suggested to deal with zero flows. Apart from the option to omit the zero flows from the sample, various extensions of Tobit estimation, truncated regression, probit regression and substitutions for zero flows have been suggested. We argue that the choice of method should be based on both economic and econometric considerations. The sample selection model appears to fit both considerations best. Moreover, we show that the choice of method may matter greatly for the results, especially if the fraction of zero flows in the sample is large. In the end, the results surprisingly suggest that the simplest solution, to omit zero flows from the sample, often leads to acceptable results, although the sample selection model is preferred theoretically and econometrically.

Estimation of the Gravity Equation of Bilateral Trade in the Presence of Zero Flows

The gravity model is the workhorse model to describe and explain variation in bilateral trade empirically. Consistent with both Heckscher-Ohlin models and models of imperfect competition and trade, this versatile model has proven to be very successful, explaining a large part of the variance in trade flows. However, the loglinear model cannot straightforwardly account for the occurrence of zero-valued trade flows between pairs of countries. This paper investigates the various approaches suggested to deal with zero flows. Apart from the option to omit the zero flows from the sample, various extensions of Tobit estimation, truncated regression, probit regression and substitutions for zero flows have been suggested. We argue that the choice of method should be based on both economic and econometric considerations. The sample selection model appears to fit both considerations best. Moreover, we show that the choice of method may matter greatly for the results, especially if the fraction of zero flows in the sample is large. In the end, the results surprisingly suggest that the simplest solution, to omit zero flows from the sample, often leads to acceptable results, although the sample selection model is preferred theoretically and econometrically

Linking Trade and Transport Statistics: the Dutch Case

International trade flows are important for a trading nation such as the Netherlands. They are an important source of income, value added, and welfare. Trade flows are strongly related to transport flows of goods to and from a country. However, not all international transport flows through a country are registered as merchandize trade flows. For example, transit flows of goods are not recorded in international merchandize trade statistics. Such flows can just as well serve as a basis for value added, though. For example, goods transferred in Rotterdam harbour and transported and distributed by Dutch logistics firms create a basis for value added in services trade. Moreover, transport flows of goods entail costs as well, such as the costs of traffic congestion and environmental pollution. Therefore, it is of interest to have good information on the value and quantities of goods transported through countries, and the modes of transport used for various types of flows. For this purpose, we need integrated statistics on trade flows and transport flows in goods. To be able to match trade and transit flows with transport statistics, complete and plausible information on mode of transport and gross weight is needed. This paper describes the scope and coverage of trade statistics in comparison to transport statistics for the Netherlands. We use transport statistics to allocate the plausible mode of transport to trade and transit flows. Creating an integrated view on trade and transport flows in goods, the paper intends to contribute to an improved understanding of the impact of merchandize trade and transit flows on the economy, both in terms of domestic value added and in terms of potential social costs related to congestion and the emission of pollutants.

Linking Trade and Transport Statistics: the Dutch Case

International trade flows are important for a trading nation such as the Netherlands. They are an important source of income, value added, and welfare. Trade flows are strongly related to transport flows of goods to and from a country. However, not all international transport flows through a country are registered as merchandize trade flows. For example, transit flows of goods are not recorded in international merchandize trade statistics. Such flows can just as well serve as a basis for value added, though. For example, goods transferred in Rotterdam harbour and transported and distributed by Dutch logistics firms create a basis for value added in services trade. Moreover, transport flows of goods entail costs as well, such as the costs of traffic congestion and environmental pollution. Therefore, it is of interest to have good information on the value and quantities of goods transported through countries, and the modes of transport used for various types of flows. For this purpose, we need integrated statistics on trade flows and transport flows in goods. To be able to match trade and transit flows with transport statistics, complete and plausible information on mode of transport and gross weight is needed. This paper describes the scope and coverage of trade statistics in comparison to transport statistics for the Netherlands. We use transport statistics to allocate the plausible mode of transport to trade and transit flows. Creating an integrated view on trade and transport flows in goods, the paper intends to contribute to an improved understanding of the impact of merchandize trade and transit flows on the economy, both in terms of domestic value added and in terms of potential social costs related to congestion and the emission of pollutants

Estimation of the Gravity Equation in the Presence of Zero Flows

The gravity model is the workhorse model to describe and explain variation in bilateral trade patterns. Consistent with both Heckscher-Ohlin models and models of imperfect competition and trade, this versatile model has proven to be very successful, explaining a large part of the variance in trade flows. However, the log-linear model cannot straightforwardly account for the occurrence of zero-valued trade flows between pairs of countries. This paper investigates the various approaches suggested to deal with zero flows. Apart from the option to omit the zero flows from the sample, various extensions of Tobit estimation, truncated regression, probit regression and substitutions for zero flows have been suggested. We argue that the choice of method should be based on both economic and econometric considerations. The sample selection model appears to fit both considerations best. Moreover, we show that the choice of method may matter greatly for the results. In the end, the results surprisingly suggest that the simplest solution, to omit zero flows from the sample, often leads to acceptable results, although the sample selection model is preferred theoretically and econometrically

Intangible Barriers to Trade: The Impact of Institutions, Culture and Distance on Patterns of Trade

Nijkamp, P. [Promotor]Rietveld, P. [Promotor]Groot, H.L.F. de [Copromotor

The trade-off between foreign direct investments and exports: The role of multiple dimensions of distance

To serve foreign markets, firms can either export or set up a local subsidiary through horizontal Foreign Direct Investment (FDI). The conventional proximity-concentration theory suggests that FDI substitutes for trade if distance between countries is large, while exports become more important if scale economies in production are large. This paper investigates empirically the effect of different dimensions of distance on the choice between exports and FDI. We find that different dimensions of distance affect exports and FDI differently. There is clear evidence of a proximity-concentration trade-off in geographical terms: the share of FDI sales in total foreign sales (exports and FDI sales) increases with geographical distance. The positive relation between import tariffs and FDI intensity provides further evidence for a trade-off resulting from trade costs. On the other hand, the share of FDI decreases with language differences and cultural and institutional barriers. The latter dimensions of distance thus affect FDI more strongly than exports

Intangible barriers to international trade: a sectoral approach

This paper studies the importance of intangible barriers to trade in explaining variation in disaggregate international trade. The analysis is based on a sample of 55 countries for the year 2000. We explicitly focus on the importance of institutional and cultural dimensions of distance. Our results reveal there is substantial heterogeneity in the impact of intangible barriers for different product groups. More specifically, we find that cultural differences do not affect total trade significantly, whereas trade in homogeneous goods is significantly negatively affected. A possible explanation for this pattern is that the substitution effect between trade and FDI is stronger for more differentiated products