Chapter 5: The Weight of Bilateral Economic Diplomacy and Commercial Policy Revisited
This chapter investigates the relationship between trade and bilateral economic and commercial diplomacy econometrically, not to discover the obvious, but to see whether an empirical basis exists to either confirm or refute common sense: does economic and commercial diplomacy matter and does it have a measurable impact on bilateral trade flows? The economic rationale is that border effects exist and may be related to insufficient private investment in knowledge about foreign markets and the way to sell products abroad. Here the government may step in to solve a market failure and provide its knowledge as a public good. Two sorts of public sector knowledge centres appear relevant. First, the Foreign Service (that is the embassies and consulates abroad) may have superior knowledge about local market opportunities and unique experience in doing business in the specific cultural, institutional and political context of a country. Second, the export promotion agency may be an important source for businesses that consider an international strategy as it has knowledge about doing international business in general and about markets abroad. Typically the role of an export promotion agency would seem to be more linked to trade in general (so irrespective of destination) whereas embassies and consulates would be more directly linked to specific bilateral trade relations. Export promotion would thus seem to reduce to some extent the hurdle of the sunk costs involved in the export decision (that is have an impact on all export markets), whereas the activities of an embassy or consulate could be...
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