What are the effects of economic diplomacy on the margins of trade?

Abstract

Many countries have implemented economic diplomacy policies in an effort to support their firms in the internationalisation process. The channels through which these programs affect trade, the intensive margin or the extensive margin, were until now unknown. This paper aims to fill this gap by presenting a qualitative and quantitative literature review on the effect of economic diplomacy on the margins of trade. Allowing for different effects between the OECD countries and non-OECD Latin American countries the review shows that economic diplomacy is effective for increasing the extensive margin of trade. Economic diplomacy may thus serve as a successful instrument to diversify exports. Findings for the intensive margin are more ambiguous. In general, economic diplomacy does not seem to influence the intensive margin of trade significantly. Investigating regional effects however reveals that this result is mainly driven by the large number of insignificant observations for the non-OECD Latin American countries.