Can Business and Social Networks Explain the Border Effect Puzzle

Abstract

McCallum (1995) shows in an influential contribution that, even when controlling for the impact of bilateral distance, borders sharply reduce trade volumes between nations. We use in this paper data on bilateral good flows between 94 French regions, for 66 industries and 2 years (1978 and 1993) to study the magnitude and variations over time of intranational border effects. We focus on assessing the role that business and social networks can play in shaping trade patterns and explaining the border effect puzzle. Using a structural econometric approach, we show that intra-national administrative borders significantly matter in trade patterns inside France. The impact is of the same magnitude as in Wolf (2000) for trade inside the United States. This could appear puzzling since no tariff or non-tariff barriers, the most straightforward economic explanation for border effects, exist between French regions. We show, however, that at least half of these intra-national border effects can be explained by the employment composition in terms of birth place (social networks) or by inter-plants connections (business networks). Thus, business and social networks that reduce informational trade barriers are shown to be strong determinants of trade patterns and explain a large part of the border puzzle.