Investigating the Effect of Diplomatic Representation on Trade

Abstract

Economic diplomacy is an unavoidable tool for improving economic standards, and it needs to be an important instrument for policy makers in stimulating international trade and supporting domestic firms. This chapter analyses the impact of economic diplomacy on bilateral trade flows in Croatia in the period from 1992 to 2017. The authors use an applied gravity model of trade by employing fixed effects model (FE), random effects model (RE), and pseudo Poisson maximum likelihood (PPML) estimator. PPML estimator takes into count zero trade flows because estimating zero trade flows with OLS estimator could lead to several biases. The problem of dependence between diplomacy representatives was solved by constructing individual regressions using FE model and PPML estimator. The hypothesis of the chapter, which was tested, states that diplomatic representation has had positive and significant effects on bilateral trade flows (imports and exports) of Croatia. The results of the analysis have shown that the diplomatic representation via embassies and consulates is a relevant trade and trade-enhancing factor.