Institutional Factors as Determinants of International Trade Flows

Trade theory seeks to identify and to measure the determinants of the
international trade flows. During the last decades, variables traditionally not
included in trade modeling, such as geographical location, transport costs
or institutional and cultural issues have became remarkably important rising
the necessity to be included in this economic analysis. Institutional distance
between a pair of countries appears then as a fundamental variable to be
considered in explaining international trade flows.
This paper implements a gravity model to analyze bilateral trade patterns
empirically in relation with the institutional aspects. It allows us specifically to
investigate the influence of institutions on the commercial patterns for 51 from
1996 to 2004. We use indicators on political stability, regulatory quality, and
other proxies that reflect de quality of governance for both partners as well
as their institutional distance. Those indicators are successively incorporated
in the gravity equations. The paper ought to test that institutions and “good
governance” matter for international trade. We find that a better quality
of institutions, in particular the importer’s institutional quality, promotes
remarkably bilateral flows.
Juan Carlos Jiménez
Aránzazu Narbona
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