Markets and Networks in International Trade: On the Role of Distances in Globalization

The enduring importance of geographic distance as an impediment to international trade has recently become recognized as an empirical fact in need of explanation. According to one line of argument—the 'network view'—the continuing high sensitivity of international trade to geographical dis...

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Bibliographic Details
Published in:Management international review 2012-12, Vol.52 (6), p.761-789
Main Authors: Håkanson, Lars, Dow, Douglas
Format: Article
Language:English
Subjects:
Bilateralism
Business and Management
Business Strategy/Leadership
Emerging Markets/Globalization
GDP
Globalization
Gravity models
Gross Domestic Product
International business
International economics
International trade
Linear regression
Management theory
Operations Management
Organization
Psychic distance
Research Article
Statistical analysis
Strategic management
Studies
Trade
Trade barriers
Transaction costs
Transportation costs
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Summary:The enduring importance of geographic distance as an impediment to international trade has recently become recognized as an empirical fact in need of explanation. According to one line of argument—the 'network view'—the continuing high sensitivity of international trade to geographical distance is associated with a shift in the composition of trade towards goods requiring more extensive information exchange and personal interaction between buyers and sellers. An alternative explanation—'the market view'—contends that improved availability of information and increasing transparency of markets have facilitated the matching of geographically more proximate buyers and sellers, and that the observed decline in average transportation distances is a reflection of increasingly efficient markets. This paper examines empirically the merits of these two arguments based on a longitudinal analysis of bilateral trade between 25 major trading nations for the period 1962-2008. It compares the development of the relative importance of 'psychic distance'—a proxy for information related transaction costs—and geographic distance—a proxy for transportation costs—in three categories of goods. The results are broadly in support of the 'market-view', showing that the sensitivity of trade to psychic distance has declined dramatically for all categories of goods. The impact of geographic distance has increased markedly for homogenous goods, whereas for more differentiated goods it has decreased mildly.
ISSN:0938-8249
1861-8901
DOI:10.1007/s11575-012-0142-3