Impact of institutional and cultural distance on ASEAN’s trade efficiency

Abstract

This paper aims to analyze the impact of institutional and cultural distance on ASEAN’s trade efficiency using bilateral trade data from 2006 to 2016. The authors first employ an improved version of the stochastic frontier model to control endogeneity in estimating efficiency scores and then apply a sys-GMM model to estimate the impact of various distances on trade efficiency. The major findings are summarized as follows: first, trade efficiency of ASEAN’s with the rest of the world is moderate, ranging from 0.48 to 0.60, and shows a downward trend. This indicates that considerable trade potential exists between ASEAN countries and the rest of the world. Second, institutional and cultural distance negatively affects ASEAN’s trade efficiency. Third, trade freedom is an important factor that positively influences ASEAN’s trade efficiency. Based on these findings, this study concludes that efforts to reduce differences in institutions and culture and to promote trade liberalization are strongly suggested as remedies for ASEAN countries to turn potential trade performance into actual trade performance. (Published in Special Issue Recent developments in international economics