Does Economic Diplomacy Work? A Meta‐analysis of Its Impact on Trade and Investment

• Published date: 01 February 2017
• Date: 01 February 2017
• DOI: http://doi.org/10.1111/twec.12392
• Author: Selwyn J. V. Moons,Peter A. G. Bergeijk

Does Economic Diplomacy Work?

A Meta-analysis of Its Impact on Trade

and Investment

Selwyn J. V. Moons and Peter A. G. van Bergeijk

International Institute of Social Studies, Erasmus University, The Hague, The Netherlands

1. ECONOMIC DIPLOMACY: AN INTRODUCTION

BARRIERS to international trade and foreign direct investment (FDI) remain large despite

the advances made in communication and transportation technology, massively lower

transportation cost and reductions in formal trade barriers. In particular, informal trade barri-

ers, cultural and institutional differences and modi operandi continue to act as intangible bar-

riers that create frictions similar to the well-researched traditional resistance factors (Head

and Ries, 2006; Disdier and Head, 2008). Economic diplomacy, the topic of our investiga-

tion, is increasingly being recognised as an instrument that can be used to deal with these

intangible barriers to trade (e.g. van Bergeijk, 2009; Yakop and van Bergeijk, 2011).

Economic diplomacy aims to influence decisions on cross-border economic activities pur-

sued by governments and non-state actors (Bayne and Woolcock, 2003; Okano Heijmans,

2011). Economic diplomacy involves the activities of the government and its (inter)na-

tional networks and can be defined as the use of government relations and government

influence to enable international trade and investment. Typically, nations interact with

other nations through a broad range of actions of (semi)permanent international representa-

tions (embassies, consulates and other public sector business support facilities) and diplo-

matic bilateral activities (trade and state visits). Governments also interact with foreign

and domestic companies to stimulate trade and investme nt through domestic institutions

(investment and export promotion offices) that stand under the auspices of economic diplo-

mats (Saner and Yiu, 2003). These domestic institutions support companies in their trade

and investment decisions and use information from the diplomatic network, and in many

countries, these institutions form the home basis for the trade and investment activities

employed within the embassy network.

1

Economic diplomacy typically is an interdisci-

plinary subject to the fields of international economics, international political economy and

international relations and is receiving increasing attention in all three disciplines (van

Bergeijk et al., 2011b).

Economists traditionally have been sceptical about economic diplomacy. Key requirements

for government intervention are that the intervention targets markets failure and that the bene-

fits outweigh the costs of intervention. This was contested for economic diplomacy, especially

where it concerned export subsidies and export promotion agencies. Seringhaus and Botschen

(1991), for example, showed that the utility of export promotion is very limited and that

1

Economic diplomacy has several elements: bilateral economic activities between nations, including the

organisation of state and trade visits, use of investment and export promotion agencies and the export

promotion activities of the diplomatic network. Note that some of these elements have been labelled

‘bilateral economic diplomacy’ or ‘commercial policy’ (Saner and Yiu, 2003; Lee and Hudson, 2004;

van Bergeijk, 2009).

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336

The World Economy (2017)

doi: 10.1111/twec.12392

The World Economy

export promotion efforts all too often do not address the needs of exporters. Likewise,

Gencturk and Kotabe (2001) found that export subsidies make businesses more profitable,

but have no effect on their turn-over. In the same spirit, export promotion agencies (EPAs)

have received considerable criticism in the 1990s. World Bank publications by Hogan

(1991) and Keesing and Singer (1991) criticised the establishment of EPAs especially in

countries with high trade barriers where export promotion would serve as a palliative; the

effective first best solution is to lower trade barriers. As a result of these influential World

Bank studies, many development institutions withdrew their support to EPAs (Lederman

et al., 2006).

The economic justification for economic diplomacy is based on (i) the existence of asym-

metric information for operating internationally companies and (ii) externalities associated

with the collection and sharing of information about market conditions and business opportu-

nities in international markets (Hausmann and Rodrik, 2003). If information is imperfect, mar-

kets do not produce Pareto efficient outcomes (Greenwald and Stiglitz, 1986). In the

internationalisation decision of firms, imperfect and asymmetric information is often a fac-

tor, because it is costly for firms to identify potential business partners and to assess their

capabilities (Rauch, 1996; Rangan and Lawrence, 1999). It is likely that this type of infor-

mation about export markets is under-produced from a societal point of view because first

movers cannot reap the full benefits of this information due to free riding rivals (Hausmann

and Rodrik, 2003). Local and competing firms will try to restrict the availability of infor-

mation in order to prevent competitors from entering the market. This is especially prob-

lematic when one wants to enter a developing country because published statistics and

other sources are scarcer for those markets. Governments may step in by providing ‘unique,

reliable and impartial access to information such as through the global embassy network

and other government channels and contact, which become available through the govern-

ment’s very long term and non-commercial attachment to overseas markets’ (Harris and Li,

2005, p. 74). By supplying information to companies, economic diplomats reduce transac-

tion cost, facilitate international flows (trade and investment) and contribute to a more ef fi-

cient allocation of capital.

Policymakers consider economic diplomacy relevant for four reasons. First, the share of

the former centrally planned economies in world trade has increased (Kowalski et al.,

2013). In these countries, government is still regarded as a natural partner in the economy.

Second, state enterprises may be the counterpart of a company operating in the interna-

tional markets. This necessitates entrepreneurs to seek cooperation with their national gov-

ernment in order to equalise the power balance and to level the playing field. Third,

(political) uncertainty about international transactions must often be removed or reduced.

Government involvement may signal that a transaction will not raise political resistance.

Finally, some high-quality information needed for international transactions sometimes

requires involvement of government officials. In the slipstream of increased policy rele-

vance, empirical studies on economic diplomacy appeared in leading journals, including

Rose (2007), Nitsch (2007), Lederman et al. (2010) and Volpe Martincus et al. (2010a).

The academic attention and the popularity of economic diplomacy among policymakers

increase the importance of knowledge about the (size) effect and significance of economic

diplomacy.

Since the empirical work in the field of economic diplomacy is still evolving, lacking con-

sensus is an issue. We take stock of this literature by providing a meta-analysis of 32 empiri-

cal studies published in the period 1986–2011. These studies basically provide us with two

©2016 John Wiley & Sons Ltd

META ANALYSIS OF ECONOMIC DIPLOMACY 337

samples. Sample 1 contains 627 t-values and sample 2 consists of 963 reported significance

levels (both regarding the impact of economic diplomacy on international economic flows;

see Figure 1). Importantly, in the larger sample the number of insignificant and negative

coefficients exceeds the number of significantly positive coefficients (for sample 1, the

share of negative and insignificant t-values is 34 per cent). We scrutinise the mixed evi-

dence that is provided by these studies, controlling for differences in methodology, time

frame and data characteristics of the 32 studies by doing a meta-regression analysis. This is

a research method that enables researchers to synthesise and summarise previously obtained

empirical findings for a similar research question in a quantitative and statistically rigorous

fashion. Meta-analysis basically is a statistical approach in which the reported results are

controlled for the characteristics of the identified primary studies. It therefore both includes

and goes beyond a traditional systematic review. The use of a meta-analysis adds value to

a traditional review of the literature: a meta-analysis is less prone to subjective bias and

more transparent than a traditional literature review because it systematically analyses

sources of (quantitative) variation of earlier primary studies (Lazzaroni and van Bergeijk,

2015).

A meta-analysis enables us to combine the results from the different (sub)disciplines where

economic diplomacy is gaining ground. This is particularly relevant if only because the topic

of economic diplomacy should be studied from a multidisciplinary point of view while empir-

ical studies so far have by and large been mono-disciplinary in focus.

The contribution of this paper is, first, that this is the first meta-analysis of the effects of

instruments of economic diplomacy on international economic flows. Like other meta-ana-

lyses from the field of economics, we find that research design is an important determinant

for significance of the particular instrument(s) under econometric investigation (compare,

Ljungwall and Tingvall, 2008; Meyer and Sinani, 2009; Havranek and Irsova, 2010; Mebra-

tie and Van Bergeijk, 2011; Lazzaroni and van Bergeijk, 2015). Second, we identify impor-

tant methodological issues that can be taken into account in future research not only in the

field of economic diplomacy, but also in any emerging field. Third, we develop a logit

model of significance levels that allows us to consider 50 per cent more observations. This

innovation is relevant to research fields where establishing the meta-sign and its meta-sig-

nificance already is a relevant finding and where reporting in the primary studies frequently

416

475

211

488

0 200 400 600 800 1,000

Sample 1 (N = 627)

Sample 2 (N = 963)

Number of Observations

Significantly Positive p = 0.05 Insignificant

FIGURE 1

Sample 1 (Based on Reported and Calculated t-Values) Versus

Sample 2 (Based on Reported Significance Levels)

©2016 John Wiley & Sons Ltd

338 S. J. V. MOONS AND P. A. G. VAN BERGEIJK