'Linguistic distance' as a determinant of bilateral trade.

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'Linguistic distance' as a determinant of bilateral trade.

1. Introduction

Variables accounting for the transaction costs associated with international trade have been included in gravity models since the early application of this model to explain the volume of bilateral international trade. (1) Although Bergstrand (1985, 1989) limits transaction cost variables to adjacency and membership in a preferential trading area, Gould (1994) extends Bergstrand (1985) to explicitly model "costs associated with gaining foreign market information." Gould focuses on the trade-enhancing effects arising from the presence of a stock of foreign immigrants residing in the home country.

Several papers have extended Gould (1994) and all of these have included a variable to account for the effect that a common language between the trading partners would have on transactions costs. (2) Frankel (1997) discusses the role of common language in the gravity framework and has included this variable in subsequent papers. (3) Boisso and Ferrantino (1997) attempt to capture the language effect by constructing a measure of the likelihood that an exporter from one country would encounter an importer in another country who spoke the same language. Their measure of linguistic similarity had no identifiable effect on the volume of trade between pairs of countries. That is, a higher probability that an exporter from one country would encounter an importer in a second country who spoke the same language had no significant effect on the volume of trade between the two countries.

Wagner, Head, and Ries (2002) attempt to provide a measure of the degree of commonality of language between two countries that is very similar to that derived by Boisso and Ferrantino; that is, it is the probability that a randomly chosen person from a Canadian province would speak the same language as a randomly chosen person in the trading partner. These measures are a modification of the practice of using a dummy variable for a common language between trading partners. Hutchinson (2002) demonstrates that the greater the proportion of the population that speaks English as either a first or a second language, the higher the volume of trade (both exports and imports) between the United States and that country. (4)

We attempt to capture the trade effect imposed on residents of a country, native or immigrant, of learning a second language. We examine the effect on international trade that results from what Chiswick and Miller (1998) call "linguistic distance": how "distant" from English a particular l...

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