Trade Flow and Nation Brand Distance: A Structural Gravity Model Approach
AL BESHER, HUDA ISMAIL
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ABSTRACT In today’s fierce global competition, nations are aiming to improve their country’s standing in the international trade market to sustain their economic vitality and growth. A progeny of this global milieu, the ‘nation brand’ concept has captured the growing attention of policy makers, practitioners, and scholars. Similar to corporations, countries are competing to improve their nation brand which represent the whole image of a country including economic, political, cultural, historical and social aspects to stimulate the trade flows. Despite the plethora of researches that is interested in studying this area, the concept of nation brand is divergent and fragmented as the field is still developing and lacking a coherent theoretical base and a solid reliable measurement. In response, this thesis will build on the existence literature to synthesize, analyze, examine and discuss the multifaced nation brand concept that is backed by the theorical background of New Trade Theory (NTT), OLI Eclectic Paradigm and the Country-of-Origin effect (COO). The purpose of this study is to examine the moderation impact of nation brand distance (NBD) on the relationship between geographical distance, trade agreements and both export and import flow. The Nation brand distance (NBD) is a distance type that is firstly introduced in this thesis and can be defined as the degree to which nation brand scores differ from the target county to another country. The NBD is calculated based on Country Brand Strength Index (CBSI) which consists of relative values per capita of the statistical data for five different areas that composite the index, which includes the dimensions of exports, tourism, foreign direct investment, immigration, and government environment. Using a quantitative research method, this thesis has investigated both export and import flow between United States and its 36 major trading partners from 1993 to 2016. To test the panel data, the structural gravity model of international trade was employed using a first-order Taylor approximation of multilateral resistance terms and estimated by Ordinary Least Square (OLS) and Poisson-Pseudo-Masimum Likelihood (PPML). The empirical findings shows that NBD influence both export and import volume in which less distant countries in term of nation brands are able to overcome the negative effect of geographical distance which can stimulates the export mainly and import flow to some extent. The results on the impact of NBD on FTA and trade flows provides some interesting insights as the there is a negative and significant moderation impact of NBD on the relationship between FTA and both export and import volume which suggest that a decrease of NBD will increase the effect of FTA on trade flow. Overall, the results supported most of the study expectations and found evidence that less nation brand distance between two trading partners will have a positive moderation impact export volume mainly and import volume to some extent. The theoretical contribution of the research is that it extends the New Trade Theory by focusing on countries, rather than companies. It also extends the monopolistic competition concept of the theory to show how nation brand of a country can explain importing products that is similarly produced in the local market due to consumer perception on the producing country image which drives the product demand. Further, economies-of-scale explains trade among countries like the US and other developed countries where they have similar technologies, similar production costs, and to some extent similar nation brand aspects. This thesis also extends the OLI theory by highlighting that it is a key variable for countries as well as firms for the decision to enter new markets. On the practical contribution, governments and public policymakers can improve their trade flow by improving the nation brand strategy. Thus, reducing the gap in nation brand distance between the trading partners will overcome the geographical distance negative affects and will lead to more trade agreements in place. Further, for multinational businesses, this study will motivate them to use the nation brand distance to study the feasible target market abroad. The originality of the study exists as it is the first to explore nation brand distance impact on trade flow. It contributes to the existing literature that studied nation brand based on aggregate effects on conjecture and anecdotal evidence. Further, future studies is recommended to use this research outcome to build on the concept of NBD for more regerous value added to the field that will help many nations to develop better branding strategies and may contribute to stimulate trade flow by billions of dollars.