Cultural Distance And Bilateral Trade

The proposal of the "Belt and Road" initiative in 2013 has witnessed a new round of China's opening-up strategy.It is expected to be one of the most important platforms for China to improve regional cooperation and strengthen friendship with countries across Eurasia.It also provides great opportunities for China,as well as for other countries involved,to improve connectivity of international trade and investment.However,considering the massive geographical scope of the area,it is undeniable that China has to face with partners of different cultural backgrounds.The complexity in their languages,religions,social customs might pose a threat to the cross-cultural communication between China and other "Belt and Road‘economies.Therefore,it is necessary to examine the potential cultural obstacles and challenges that might be encountered in promoting the initiativeBased on Hofstede's(1980)theory of cultural dimensions,this paper investigates the effect of national cultural variance on bilateral trade.The study incorporates cultural distance variable calculated using Kogut and Singh's(1988)model to measure the extent to which the social norms and values the target "Belt and Road" countries differ from that of China.Four out of the six Hofstede's cultural dimensions are taken into consideration,namely power distance,individualism/collectivism,masculinity/femininity,and uncertainty avoidance.To better represent the dynamic form of decreasing cultural distance over time,this paper also takes inspiration from Liu Hongjun et al.(2016)to incorporate the reciprocal of time length since the establishment of diplomatic relations between China and the target countries.Employing data of bilateral trade between China and 45 "Belt and Road" countries between 2007 and 2017,a comprehensive analysis of both linear and non-linear relationship between cultural distance and trade is conducted using the classic gravity model.Results of the study suggests a negative effect of cultural distance on bilateral trade under the assumption of linear relationship.For each cultural dimension respectively,the linear regression suggests that of the cultural distance on power distance dimension has a significant positive effect bilateral trade.While cultural distance on the other three dimensions are negatively correlated with bilateral trade flows.The duality of the influence of cultural distance can partially explain the divergence of previous research on this topic.Under the assumption of a non-linear relationship,this paper finds out a U-shaped relationship between cultural distance and bilateral trade,meaning that cultural distance reduces bilateral trade while at a relatively low level,but increases trade while at a higher level.Regarding each individual cultural dimension,the results show that only cultural distance on power distance and individualism/collectivism demonstrate significant non-linear relationships with trade flow,with an inverted U-shape for the former and a U-shaped relationship for the latter.Judging from the study results,this paper believes that the influence of cultural factors on trade is very complicated.Therefore,it is of great significance for Chinese government and companies involved to promote cross-cultural communication with the "Belt and Road"countries,thereby reducing trade barriers.