The impact of export promotion institutions on trade: is it the intensive or the extensive margin?

Abstract

This article provides evidence on the channels through which export promotion institutions affect bilateral trade using a sample of Latin American and Caribbean countries over the period 1995 to 2004. We find that these institutions have a larger impact on the extensive margin of exports, especially in the case of trade promotion organizations.

Acknowledgements

We thank Paulo Rodrigues Bastos and Pedro Martínez Alanís for excellent research assistance. The views and interpretation in this document are strictly those of the authors and should not be attributed to the Inter-American Development Bank, its executive directors or its member countries. Other usual disclaimers also apply.

Notes

¹Lederman et al. (2006) found that export promotion agencies have a strong and statistically significant effect on countries' total exports. Furthermore, Nitsch (2007a) reports that state visits have on average a positive impact on bilateral exports. Moreover, Rose (2004, 2005) and Nitsch (2007b) analyse the influence of international organizations and country groupings such as the G7 on trade flows, respectively.

²Of course, these institutions also entail costs. Thus, assessing these institutions from the point of view of social welfare would require contrasting these costs against the benefits they may potentially generate. Such an assessment is beyond the scope of this article.

³This model has a long tradition in the empirical trade literature. It has been extremely successful in explaining trade flows. Furthermore, a solid theoretical foundation has been now established for this model (e.g. Anderson and van Wincoop, 2003, 2004).

⁴Our survey suggests that trade promotion agencies operate abroad either directly through own offices or, in some cases, through embassies and consulates. Further, some countries have both offices of their agencies and diplomatic representations in certain importing economies. In particular, with only a few exceptions, offices of trade promotion organizations are located in countries where there is at least one diplomatic representation, which most likely has been opened before. Hence, these offices are in fact an additional presence of trade promotion institutions in the importer country and therefore their impact on trade is most properly compared to that of additional diplomatic missions as opposed to the existence of such missions at all (i.e. a count variable instead of a binary variable).

⁵We use two alternative definitions of export promotion offices: a conservative definition, which only considers commercial offices, and a liberal definition, which also includes representation offices, and promotion and distribution centres. Estimates reported below are based on the former definition. Results obtained with the latter are almost identical and are available from the authors upon request. In addition, we should mention that, because of lack of precise date information, offices of export promotion agencies are assumed to be opened the same year these agencies started to operate. The index t on TPO then reflects the fact that some agencies began their operations after our initial sample year. Finally, following Rose (2007), the number of embassies and consulates is determined excluding honourary consulates. This number is assumed to remain constant over the period. This seems to be a sensible assumption as changes in the number of diplomatic foreign missions have not been substantial.

⁶The statistical significance of the difference between the estimated coefficients across equations is based on a test performed after a seemingly unrelated regression estimation involving Equations 2 and 3.

⁷These results are robust to using alternative specifications including binary variables accounting for common land borders, membership in the WTO and common currencies.