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Investigating the Effect of Diplomatic Representation on Trade: A Case Study of Croatia

Economic diplomacy is an important tool for policy makers in supporting domestic firms and stimulating international trade. This paper analyses the impact of economic diplomacy on bilateral trade flows in Croatia in the period from 1992 to 2017. We use an applied gravity model of trade by employing fixed effects model (FE), random effects model (RE) and Pseudo Poisson Maximum Likelihood (PPML) estimator. PPML estimator takes into count zero trade flows because estimating zero trade flows with OLS estimator could leas to several biases. The problem of dependence between diplomacy representatives was solved by constructing individual regressions using FE model and PPML estimator. The hypothesis of the paper which was tested states that diplomatic representation has have positive and significant effect on bilateral trade flows (imports and exports) of Croatia. The results of the analysis have shown that the diplomatic representation via embassies and consulates is a relevant trade and trade- enhancing factor.

economic diplomacy ; bilateral trade ; Croatia ; Poisson-pseudo maximum likelihood estimator.

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