Fixed effects and diplomatic representation

The results in this section utilise equation (4.2), and add control variables from the CEPII database for GDP and population size. To closely follow the related empirical literature, total exports is the dependent variable. Table 4.4 shows the results. Column (1) includes only time-invariant fixed effects, to which column (2) adds a fixed effect for time. Column (3) is the preferred specification which comes down to estimating equation (4.2), and explains the largest amount of variance in the sample with an R- square of 0.926. The results also show how the use of certain fixed effects renders control variables to be perfectly collinear with the fixed effects, leading to their exclusion. Additionally, the Table includes in column (4) an analysis of the effect of the Representation variable when accounting for zero trade flows as discussed in Section 4.2.3.

Utilising the panel dataset, column (1) includes bilateral fixed effects and exporter- and importer-specific fixed effects while ignoring time-varying fixed effects. The coefficient of the variable of interest is 0.169, significant at the 1 per cent level. Column (2), which adds a fixed effect for year, does not change this result. However, the preferred specification in column (3) shows that the utilisation of country-year fixed effects to account for time-varying factors cuts the coefficient for the commercial diplomacy proxy by a third, from 0.169 to 0.112. This underlines the importance of an appropriate set of fixed effects once again, and re-affirms the need for panel data estimation to account for temporal variation and endogeneity (Baier & Bergstrand, 2007).

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Table 4.4: The effect of diplomatic representation on total exports in cross-sectional and panel data settings

Dependent Variable: (1) (2) (3) (4)

Log of Total Exports (US$) Log (1+Exports)

Representationij 0.169*** 0.169*** 0.112** 0.229**

(0.051) (0.051) (0.048) (0.121)

Log of i's Population 1.175*** 1.479***

(0.139) (0.152) Log of j's Population 0.554*** 0.812*** (0.107) (0.123) Log of i's GDP 0.536*** 0.653*** (0.032) (0.044) Log of j's GDP 0.621*** 0.691*** (0.030) (0.033) RTA 0.205*** 0.236*** 0.306*** 0.325*** (0.042) (0.043) (0.050) (0.049) Currency 0.040 0.128*** 0.241*** 0.236*** (0.036) (0.042) (0.060) (0.055) Observations 29,550 29,550 30,186 36,808 R-squared 0.915 0.915 0.926 0.823

Exporter FE Yes Yes No No

Importer FE Yes Yes No No

Country-pair FE Yes Yes Yes Yes

Year FE No Yes No No

Exporter-Year FE No No Yes Yes

Importer-Year FE No No Yes Yes

Notes:

Robust standard errors in parentheses for columns (1) to (3). Columns (4) to (7) feature cluster-robust standard errors (on country-pair). *** p<0.01, ** p<0.05, * p<0.1. Intercepts included but not recorded. This table adds control variables used in Head et al. (2010) to equation (4.2) and illustrates the effect of the inclusion of different types of fixed effects in columns (1) to (6) as well as the effect of accounting for zero trade flows in column (7). Aside from control variables used in equation (4.2), this Table adds GDPs for both countries, and Population sizes for both countries.

75 The results in column (4) of Table 4.4 indicate that retaining zero trade flows biases the commercial diplomacy proxy variable upwards. This confirms the point in Section 4.2.3 which states that an upwards bias is expected due to the systematic absence of diplomatic representation where there is no trade. In all columns in Table 4.4, the control variables behave as expected in a gravity model.

Preliminary to the main analysis in Section 4.3.3, Table 4.5 and Table 4.6 respectively assess equations (4.2) and (4.3) for all trade variables of interest whereas Table 4.4 only does this for total exports in column (6). These results do not use a lag-structure like the main analysis based on equations (4.6) and (4.7). The effects of the commercial diplomacy proxy on exports are shown in Table 4.5, while the effects for imports are in Table 4.6. Both Tables share the same structure: the dependent variable in column (1) is total exports; columns (2) to (4) are the exports in different types of goods; and columns (5) and (6) are the margins of trade.

Looking at the export-promotion function of commercial diplomacy, the pattern of results in Table 4.5 provides only partial support for Hypotheses H1a and H2a as diplomatic representation does not affect exports in homogeneous goods (H1a), nor the intensive margin (H2a). The pattern of results is identical to that in Moons and de Boer (2014). As for the import-promoting function of commercial diplomacy (i.e. the effect of country j's diplomatic representation in country i on country i's exports to country j) in Table 4.6, again partial support for Hypotheses H1a and H2a exists. The change from the export-promoting function in Table 4.5 is that there is no longer a significant effect for differentiated exports, but that there is a significant effect for homogeneous goods. While these results correspond with Volpe Martincus et al. (2010), they do not take into account the possible remaining simultaneity bias. Because homogeneous goods do not incur search costs, the significance of the Representationji variable indicates the likely presence of an endogeneity issue in the form of simultaneity bias. Moreover, the extent to which the differences between the export- and import-promoting functions are structural is unclear without estimating equations (4.6) and (4.7), to which the discussion now turns.

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Table 4.5: Estimation of equation (4.2)

(1) (2) (3) (4) (5) (6)

Log of Log of Log of Log of Log of

Log of Homogeneous Reference Priced Differentiated Extensive Intensive

Exports Exports Exports Exports Margin Margin

Representationij 0.112** 0.076 0.168*** 0.140*** 0.093*** -0.008 (0.048) (0.079) (0.062) (0.049) (0.034) (0.047) RTA 0.306*** 0.305*** 0.200*** 0.252*** -0.135*** 0.430*** (0.050) (0.068) (0.055) (0.049) (0.034) (0.045) Currency 0.241*** 0.804*** 0.097 0.058 -0.024 0.259*** (0.060) (0.112) (0.082) (0.061) (0.041) (0.062) Observations 30,186 22,690 24,649 28,058 29,891 29,891 R-squared 0.926 0.860 0.906 0.937 0.887 0.799 Notes:

Robust standard errors clustered on country pair in parentheses. *** p<0.01, ** p<0.05, * p<0.1. Intercepts included but not recorded. All estimations include exporter-year, importer-year, and country-pair fixed effects. They are not included here for brevity. Homogeneous, reference priced, and differentiated goods defined as in the 'liberal' classification from Rauch (1999). Extensive and intensive margins are based on Hummels and Klenow (2005) and Dutt et al. (2013).

Table 4.6: Estimation of equation (4.3)

(1) (2) (3) (4) (5) (6)

Log of Log of Log of Log of Log of

Log of Homogeneous Reference Priced Differentiated Extensive Intensive

Exports Exports Exports Exports Margin Margin

Representationji 0.110** 0.170** 0.130** 0.059 0.070** 0.049 (0.050) (0.079) (0.066) (0.051) (0.036) (0.049) RTA 0.305*** 0.305*** 0.198*** 0.251*** -0.136*** 0.430*** (0.050) (0.068) (0.055) (0.049) (0.034) (0.045) Currency 0.240*** 0.807*** 0.096 0.055 -0.025 0.261*** (0.060) (0.112) (0.082) (0.061) (0.041) (0.062) Observations 30,186 22,690 24,649 28,058 29,891 29,891 R-squared 0.926 0.860 0.906 0.937 0.887 0.799 Notes:

Robust standard errors clustered on country pair in parentheses. *** p<0.01, ** p<0.05, * p<0.1. Intercepts included but not recorded. All estimations include exporter-year, importer-year, and country-pair fixed effects. Homogeneous, reference priced, and differentiated goods defined as in the 'liberal' classification from Rauch (1999). Extensive and intensive margins are based on Hummels and Klenow (2005) and Dutt et al. (2013).

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