Time Zone Effect and the Margins of Exports

• Date: 01 June 2017
• Author: Rishav Bista,Rebecca Tomasik
• Published date: 01 June 2017
• DOI: http://doi.org/10.1111/twec.12415

Time Zone Effect and the Margins of

Exports

Rishav Bista and Rebecca Tomasik

Division of Finance and Economics, Marshall University, Huntington, WV, USA

1. INTRODUCTION

RECENT trade literature has started to examine the potential effect and implications of

time zones on trade and foreign direct investment. In their seminal paper, Stein and

Daude (2007) found that time zones have a negative effect on the overall level of trade

between two countries. While a positive effect has been suggested for trade in services, the

theory agrees that time zones always decrease trade in goods. This paper contributes to the

literature by examining whether time zone affects new trading relationships (the extensive

margin) or trade in existing relationships (the intensive margin). This paper also implements

the quartile analysis to examine potential non-linearity in the time zone measure at different

levels and its impact on exports.

Time zone literature suggests a negative effect of time zones on trade. This is due to

increased communication costs experienced between two offices with a large time zone differ-

ence. To do business, workers at one or both locations might have to come in early or stay

late. Workers required to be at the office outside of their ideal working hours may require

additional compensation. This raises the corporate costs of doing business in locations that are

far apart in terms of time zone differences (Stein and Daude, 2007). While different papers

have looked at some industry-level effects (Head et al. 2009), thus far no one has examined

how time zone differences affect the intensive and extensive margin of trade.

The extensive margin captures trade diversification or new trading relationships. The inten-

sive margin is the average volume of trade in these existing product–country trade relation-

ships. Therefore, the extensive and intensive margins both measure an increase in trade, but

these increases may be due to very different firm motivations. Melitz (2003) and Chaney

(2008) predict that decline in variable trade costs (e.g. reduction in tariffs) increases the

extensive as well as the intensive margin. Furthermore, Chaney (2008) shows that a reduction

in fixed costs (e.g. communication or information costs) affects only the extensive margin. It

is reasonable to expect that bringing a new product into a market requires more communica-

tion than increasing the amount of product exported to a country. It is our expectation that

the time zone effect, as it represents a communication cost, should affect the extensive margin

more than the intensive margin. The results of our analysis show that time zones do affect the

extensive margin in a negative and significant fashion. However, time zones have no effect

on the intensive margin at all. This fits with the idea that time zone costs are a fixed cost of

doing business overseas and thus only affect the extensive margin.

It is also possible that time zone effects are non-linear across different levels of time zone

differences. To examine this issue, a quartile analysis is used, which allows for the time zone

effect to vary across different levels of the time zone measure. It is expected that

time zone effects will be more important for larger time zone differences. This is again due

to the idea of having to compensate workers for working outside their ideal schedule. As the

time zone difference becomes larger, the employees are forced further away from their ideal

©2016 John Wiley & Sons Ltd 1053

The World Economy (2017)

doi: 10.1111/twec.12415

The World Economy