The Impact of Economic Diplomacy on Exports: the Portuguese Case

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The Impact of Economic Diplomacy on Exports:

the Portuguese Case

Ana Rita Neves Fernandes

Dissertation

Master in International Business

Supervised by

Rosa Forte

2020

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Acknowledgements

I wish to express my sincere gratitude and appreciation to my supervisor, Professor Rosa Forte, whose guidance and knowledge were crucial and invaluable for the fulfilment of this milestone.

Additionally, I wish to express my appreciation to my parents, who, as always, were present throughout all the process surrounding the writing of this dissertation. Thank you for your constant support, for believing in me and having always the right words to guide and encourage me, when needed. And to my sister, for her support and for having given me the final push of encouragement that was needed to complete this project.

And to my friends, especially Inês, Inês, Rita and Ana, who always had the most encouraging words and believed in me – thank you for listening, being there and keeping up with me. Finally, to my Farfetch co-workers, who made sure to constantly check on me and the evolution of this work and whose cheerful and supporting words were highly valued.

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Abstract

The existing literature has shown there to be a positive relationship between exports and economic growth. Thus, in an attempt to reduce barriers to international trade and enhance exports, many governments have seen economic diplomacy as an important tool and an opportunity to diminish obstacles to trade and foster economic growth. Figuring as examples of economic diplomacy representation, foreign offices, embassies and consulates emerge as mechanisms which can have impact upon trade. Thus, this study aims to understand to what extent does the presence of Portuguese economic diplomatic representation in foreign states impact the export values of trade between Portugal and those countries. Based on Portuguese merchandise exports to 144 destination countries for the period between 2008 and 2018, and using the gravity model of trade, results indicate that economic diplomacy plays an important role on Portuguese exports. Indeed, we find that, ceteris

paribus, Portugal exports more to partners which host a Portuguese office in their territory and

additionally, an increase in the number of offices in a given country positively affects exports to that country.

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Resumo

A literatura existente denota uma relação positiva entre exportações e crescimento económico. Assim, como tentativa de reduzir as barreiras ao comércio international e fomentar as exportações, muitos governos têm recorrido à diplomacia económica como ferramenta, vendo esta como uma forma de diminuir estes obstáculos ao comércio e estimular o crescimento económico. Figurando como exemplos de representação de diplomacia económica, os escritórios internacionais, embaixadas e consulados surgem então como mecanismos que impactam os valores e padrões do comércio internacional. Consequentemente, este estudo tem como objetivo compreender até que ponto a presença de representação diplomática Portuguesa em países estrangeiros impacta os valores das exportações entre Portugal e esses países. Tendo como base as exportações de bens de Portugal para 144 destinos no período entre 2008 e 2018, e usando o modelo gravitacional do comércio, os resultados indicam que a diplomacia económica desempenha um importante papel nas exportações Portuguesas. De facto, os resultados demonstram que, ceteris paribus, Portugal exporta mais para países que possuem um escritório Português no seu território e, adicionalmente que um aumento do número de escritórios num determinado país, afeta positivamente as exportações para esse país.

Palavras-Chave: diplomacia económica, Portugal, exportações, embaixadas, consulados, escritórios

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List of Tables

Table 1 – Augmented Gravity Model of Trade ... 6

Table 2 – Influence of Economic Diplomacy Instruments upon International Trade ...12

Table 3 – Variables of the Study, its Proxy and Expected Impact on Trade ...23

Table 4 – Descriptive Statistics of the Model’s Variables ...27

Table 5 – Correlation of the Model’s Variables ...30

Table 6 – Estimation Results – All Sample ...32

Table 7 – Estimation Results – Year 2018 ...34

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List of Figures

Figure 1 – Evolution of Portuguese Exports (2008 – 2018) ...24 Figure 2 – Evolution of Portuguese Foreign Offices (2008 – 2018) ...26

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List of Abbreviations

AICEP Agência para o Investimento e Comércio de Portugal

CEPII Centre d'Études Prospectives et d'Informations Internationales ED Economic Diplomacy

EFTA European Free Trade Association EP Export Promotion

EPA Export Promotion Agency EU European Union

GDP Gross Domestic Product

NAFTA North American Free Trade Agreement UN United Nations

UNCTAD United Nations Conference of Trade and Development US United States

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1. Introduction

Exports have been encouraged and perceived by many governments as having a vital role in the improvement of a country’s economic performance (Alexander & Warwick, 2007), which can be explained by an increase in the factor productivity, superior technical efficiency or better usage of the productive capacity and economies of scale (Alvarez & Crespi, 2000). And in reality, empirical studies seem to have shown that “trade has a quantitatively large and robust positive effect on [national] income” (Frankel & Romer, 1999, p.379), especially when compared to those countries which foster the protection of the home market (Heitger, 1987). Thus, many countries, after the decrease of trade barriers and further controls of economic activity, witnessed a serious and lasting boost of the economic growth rate (Afonso, 2001).

While in the past, transportation and communication costs were seen as the major barriers to international trade, over the last few decades these barriers have registered a loss of importance and today, cultural and institutional factors are accounted as such (Van Veenstra, Yakop & van Bergeijk, 2010). This is where economic diplomacy figures as an important tool, by having the power to minimize the impact of these new barriers of trade. Seen as the compilation of the relationships developed by a country with its international network, economic diplomacy tends to comprise the relations and influence established by a country’s government, which has effect upon trade and investment (Moons & van Bergeijk, 2016).

Furthermore, and in spite of not being directly involved in trade, governments tend to function as vehicles for information and communication (Wilkinson, Thomas & McNally, 2011). This because, when considered its trusted intermediary purpose, governments have, among others, the function of providing market information to the potential exporters and identifying possible sales opportunities abroad (Alexander & Warwick, 2007). Since failure to enter foreign markets is in many occasions connected with information asymmetry, foreign missions can have the power to mitigate such issues, especially where high prohibitive barriers are concerned (Visser, 2019) – with such being possible due to the “unique, reliable and impartial access to information, such as through the global embassy network and other government channels and contacts” (Harris & Li, 2005, p. 74).

Additionally, promotion activities have the role of minimizing the uncertainty surrounding the action of entering a new market for a firm – whether it being by assisting in the assessment of possible profitable exporting markets, aiding on the foreign contractual

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procedures surrounding the process or even the analysis of the consumers’ response and/or information on the exporting product (Segura-Cayuela & Vilarrubia, 2008).

Foreign offices, embassies and consulates figure as examples of instruments of economic diplomacy and in recent years, literature has shown an increasing focus on the assessment of the role of these diplomatic representation instruments upon trade. Having been the first to macro-economically study this matter, Rose (2007) concluded that diplomatic representation does have a positive influence over trade rates (Moons & van Bergeijk, 2016). In fact, Rose (2007) went even further and realized, according to his evidence, that the “creation of an embassy has a substantially larger impact on exports than additional consulates” (Rose, 2007, p. 29) – exports tend to increase 120% for the first foreign mission created, usually an embassy, and 6% to 10% for each additional consulate. Moreover, Lederman, Olarreaga & Payton (2010), found a positive correlation between the increase of an export promotion agency’s budget and national exports – helping to overcome the issues of information asymmetry and possible trade barriers.

Overall and even though more recently studies have realized that the extent of the impact of economic diplomacy on trade tends to be distinct when taking into consideration the level of differentiation of the goods or the intensive and extensive margin of trade (Visser, 2019) or even the level of development of the countries engaged in the trade activities (Yakop & van Bergeijk, 2011), literature has expressed a positive effect between the instruments of economic diplomacy and trade. The value of such, however, has been the source of debate – especially due to limited data availability, spotlight on solely one focus country, from which general conclusions should not be drawn, a limited set of partner countries or a focus merely on developed countries (Moons & van Bergeijk, 2016). Thus, the attempt of quantifying the impact of the economic diplomacy instruments on trade has been source of analysis and study in recent years, figuring as an interesting topic to further review and delve. Consequently, the purpose of this study is to analyze to what extent the presence of Portuguese diplomatic representation in foreign states impacts the export values of trade between Portugal and those countries. Hence, having as a basis the equation of the gravity model and export data of Portugal and 144 partner countries in a 11-year-period (between 2008 and 2018), an econometric study will be conducted on the influence of economic diplomacy on trade.

Indeed, when we focus in Portugal, we can notice that the country witnessed a growth in the value of its goods’ exports, from 38 950 million euros in 2008 (INE, 2010) to 57 807 million

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euros in 2018 (INE, 2019). Furthermore, during the past five years, the annual budget of the Ministry of Foreign Affairs in Portugal has represented about 0.6% of the total State Budget of Portugal. And, when compared to 2019, the Ministry expects to use 61,3 million euros more during the year of 2020 (the budget for 2020 is almost 15% larger than that of 2019) – all of which goes to show the growing importance of the foreign presence of Portugal, its services and assistance. The embassies and other consular offices emerge as the main absorber of this figure, with Portugal having 133 foreign posts overseas, 76 of which being embassies, 48 consulates and 9 permanent missions – whose role today is much largely connected with economic diplomacy, with a focus on the promotion of trade and foreign investment (Portal Diplomático, 2018). Additionally, Portugal also hosts several foreign offices, which are a part of the Ministry of Foreign Affairs. AICEP (Agência para o Investimento e Comércio Externo de Portugal), the national agency for trade and investment, focuses on identifying opportunities of foreign investment in Portugal, as well as assisting national firms in their internalization process (AICEP Portugal Global, 2020) – currently, its global network is composed of 55 offices, with the field of action of some of these comprising more than one geography (in total, 69 countries are formally represented by AICEP).

Moreover, all top 10 destination countries of Portuguese merchandise exports (according to UN Comtrade data from 2018) were accounted as being hosts to Portuguese embassies and AICEP offices. Since to our knowledge no other analysis of such sort seems to have been conducted with a focus solely on Portugal, the study of the influence of Portuguese economic diplomacy on trade appears as an interesting and relevant topic to develop and examine. Thus, on this study, firstly, on Chapter 2, it will be reviewed the literature which focused on the topic of economic diplomacy and its results. Chapter 3 will present the methodology used on this study. On Chapter 4, we will introduce the results of this research along with their discussion and finally, on Chapter 5, a conclusion will be presented, according to our findings.

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2. Literature Review

Most studies which try to understand the impact of economic diplomacy upon trade have as a starting point the gravity model of trade, from which an econometric study is drawn. Thus, as a base point of this Chapter (Section 2.1), the gravity model of trade will be reviewed, starting with the base model (Section 2.1.1) and proceeding with further variables, beyond the distance and GDP, which can be added to this model – that is, the augmented gravity model of trade (Section 2.1.2). Furthermore, the role economic diplomacy can have in fostering trade opportunities and minimizing the effects of the different distance dimensions will be reviewed on Section 2.2. First, a review will be made on the different instruments of economic diplomacy (Section 2.2.1), followed by a review of empirical studies conducted on the topic of the influence of economic diplomacy upon trade (Section 2.2.2).

2.1 Gravity Model of Trade

2.1.1 The Base Model

Having as source of inspiration Newton’s law of gravitation, Tinbergen (1962) brought together the influence of the distance between two countries and their dimension in order to explain the volume of bilateral trade flows. Since then, the model has become the empirical tool for the economic analysis of international trade (Yakop & van Bergeijk, 2011). The gravity model of trade states that trade flows between two certain countries are set to be proportional to the gross domestic product (GDP) of these countries and inversely proportional to the distance between them (Tinbergen, 1962). The gravity equation can be expressed in the following way:

𝑇

_𝑖𝑗

= 𝐾

𝑌𝑖𝑌𝑗

𝑑𝑖𝑗 (1)

where 𝑇𝑖𝑗 is the volume of trade between the two countries, 𝑖 and 𝑗, 𝐾 is seen as the

gravitational constant, 𝑌𝑖 and 𝑌𝑗 correspond to the GDP of country 𝑖 and 𝑗, respectively, and

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As evidenced by equation (1), the potential volumes of trade between two countries, 𝑖 and 𝑗, vary inversely with the distance between them, ceteris paribus. Thus, of “two nations with similar resources, industrial and institutional structures, the one closer to nation 𝑖 would have stronger bonds with nation 𝑖” (Isard, 1954, p.309). At the same time, the trade volume between countries 𝑖 and 𝑗 will be directly proportional to the economic mass (generally measured by the countries’ GDP) of both countries. Thus, between two distinct countries, nation 𝑖 will most likely favour the one whose economic mass is greater – “the larger the GDP, the more they will trade” (Visser, 2019, p. 201), ceteris paribus.

2.1.2 The Augmented Gravity Model

In recent years, it has been common to perceive that the impact of distance on trade has faded, being “argued that information technologies and, in particular, global communications are shrinking the world, turning it into a small and relatively homogeneous place” (Ghemawat, 2001, p.3). Indeed, it is believed that the phenomena of globalization, technological developments, with the emergence of supply chains, outsourcing or offshoring practices and historic events, such as the fall of the Berlin Wall or the invention of the Internet, have shaken up the status quo, leading to the consideration that the world is now flat (Friedman, 2005).

However, Ghemawat (2001) drew attention to the fact that distance still matters, especially when considering other dimensions beyond the physical sphere. Indeed, seen as a broad principle, distance can include factors of economic nature, as the existence of formal and informal barriers to trade, but also those of non-economic essence, such as differences in culture, religion or technological development, for instance (Van Bergeijk & Brakman, 2010). The CAGE Distance Framework, tries to shed light into the cultural (C), administrative (A), geographic (G) and economic (E) dimensions of distance and the firm’s need to take these into consideration when building their business strategy – focusing on the differences between the countries and their consequent impact on trade patterns (Ghemawat, 2001). Thus, there are determinants beyond the physical distance and the country’s economic dimension which should be taken into consideration when analysing the pattern of the trade activity between two nations. Consequently, the gravity model can be expanded to include further variables (Feenstra, 2003) – which can be shown on Table 1. These additional variables can be of cultural essence, on whether the same language is shared; of

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administrative/political character, if past colony/colonizer relationship exists or foreign trade policies are shared – the countries may be both members of a trading block (Melitz, 2001); of geographic nature, if analysing whether the countries have a common border, for instance; or, lastly, of economic nature, if a common currency is shared.

Table 1 - Augmented Gravity Model of Trade

Determinants Impact on International Trade

Cultural

Common Language +

Shared Social Norms +

Common Religious Beliefs +

Administrative & Political Historic Ties + Colonial Relationship + Trading Bloc + Common Policies + Unstable Government -

Frail Legal Institution -

Geographic Physical Distance - Common Border +/- Transportation Facilities + Communication Means + Landlockedness - Economic GDP + Common Currency +

Source: Own elaboration based on Ghemawat (2001) and Afman and Maurel (2010)

Starting with cultural factors, distinct religious beliefs, language, race, practices and social norms can be accounted as expressions of cultural distance, which will in the end have an influence upon bilateral trade. Indeed, due to high communication costs, similarities among languages can encourage trade, with lesser need for an interpreter or commercial

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intermediary (Ferro & Ribeiro, 2016). As stated by (Fidrmuc & Fidrmuc, 2015, p. 32), “speaking the same language facilitates communication and makes transaction easier and more transparent”, especially when considering that language should be taken into account throughout all the stages of the internationalization process of a company, from the search for partners, to the negotiation phase or even in the contracts established between the partners (Ferro & Ribeiro, 2016). Melitz & Toubal (2014) provide an interesting insight into the impact the different spheres of the language can have upon the establishment of trade relationships, shedding light into the relevance of taking into account both spoken and native common languages and their impact on trade, as opposing to the simple official language.

In line with what was previously mentioned, historical past bonds, common regional trading bloc, political governmental decisions and hostility are administrative/political matters which can affect trade patterns (Ghemawat, 2001). Indeed, past colonial ties could foster the existence of a lingua franca, or even the pre-establishment of business contacts between producers, distributors and suppliers (Rauch, 2001). Moreover, pertaining to the same trade bloc can foster opportunities for trade creation or trade diversion, by shifting from a third (outside the trade bloc) partner to an intra-bloc commercial relationship – due to the hindering of the barriers to trade (Haftel, 2004). Additionally, a common trade bloc can also lower the chances of political and international conflicts (Mansfield & Pevehouse, 2000) and tends to induce higher levels of integration and similarities, in the institutional and policy level, between the bloc countries (Hess & van Wincoop, 2000).

When considering the geographic distance, Ghemawat (2001) went beyond the actual kilometres distance between two given nations but grasped also other characteristics which should be taken into consideration, such as sharing a common border, topography, the lack of sea or river access, differences in climate, landlockedness or weak transportation and communication links. Indeed, the existence of a common border will mean geographic proximity between the adjacent countries, which can have a positive impact upon bilateral trade (Frankel & Rose, 2002). Thus, one might think that trade patterns within the regional level would be little impacted by land borders, which is to say that trade levels with a neighbour country would be similar to internal trade, that is, between the different regions of that country. However, evidence shows that borders tend to reduce bilateral trade levels – with this impact being larger for smaller countries (Anderson & van Wincoop, 2003). Such conclusion was witnessed by McCallum (1995), when analysing the impact of the USA/Canada border on the regional trade rates. When studying these two countries, due to

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their apparent affinity of cultural and language scope, one would think that the geographic boundaries between the two would have little impact. However, the author concluded that the “national borders matter”, as trade activity was 2,200 percent higher among Canadian provinces than with USA states – when considering similar distances, economic dimensions and the presence of both countries at the trading bloc of North American Free Trade Agreement (NAFTA) (McCallum, 1995). In the end, we must bear in mind that the broad idea of borders, further from the geographic delimitation between two countries, also means differences in culture, customs, institutions, regulations and policies (Anderson & van Wincoop, 2001).

Finally, where economic distance is concerned, the differences of income of the inhabitants, the costs and quality of natural, financial, human or infrastructural resources and a common currency should also be accounted as impactful upon trade patterns (Ghemawat, 2001). Indeed, if two countries share a currency, the transaction costs are set to be hindered, with a reduction of the volatility of the exchange rate playing an important role in such (Rose, 1999).

In the end, all of the aforementioned determinants should be taken into careful consideration when analysing the attractiveness degree of a certain country for the expansion of a firms’ business into its territory (Ghemawat, 2001).

Thus, although significant and far-reaching changes in the communications and technology worlds have been witnessed, having lowered the formal barriers to trade and foreign direct investment (such as tariffs, quotas or embargoes), informal barriers, related to cultural and institutional differences, are still very much present (Moons & van Bergeijk, 2016). And this is where economic diplomacy emerges as a relevant tool, and a further variable of the gravity model of trade, which can be used to minimize the effect of these intangible obstacles to trade (Yakop and van Bergeijk, 2011) – such as differing institutional and cultural characteristics between potential commercial partners or international (dis)trust, among others (Van Bergeijk, 2009).

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2.2 Economic Diplomacy and International Trade

2.2.1 The Instruments of Economic Diplomacy

Since the end of World War II, governments have become more involved and given risen attention to the economic side of the relationships established with foreign states and “management of external economic activities” (Bayne & Woolcock, 2013, p.95). Economic diplomacy is then seen “as the use of political means as leverage in international negotiations, with the aim of enhancing national economic prosperity, and the use of economic leverage to increase the political stability of the nation” (Okano-Heijmans, 2013, p.553).

In recent years non-state actors, such as non-governmental organizations, international media agencies, corporations or people’s movements have also become involved in economic diplomacy, “by shaping government policies and as independent players in their own right” (Bayne & Woolcock, 2013, p. 4). However, the state carries on as the dominant party as it “represent[s] and mediate[s] the interests of business as well as civil society interests to political and public entities abroad” (Okano-Heijmans, 2013, p.553). Thus, governments use their international network of influence and relationships as a catalyst for trade and direct investment opportunities, through the form of permanent international representation, such as embassies, consulates or export promotion offices and diplomatic bilateral activities, as state visits (Moons & van Bergeijk, 2016).

Perceived as an useful policy tool, with the power of lowering fixed costs of trade (Visser, 2019), economic diplomacy functions as an intermediary in the networks of international business and a “vehicle for foreign market entry” (Welch, Welch, Young & Wilkinson, 1998, p. 75). Furthermore, it is also a source for information and communication (Wilkinson et al., 2011) hence diminishing information asymmetries (Visser, 2019).

Indeed, in the last decades, many empirical trade analysts seem to have drawn special attention to the phenomena of economic diplomacy and its impact upon international trade, including Rose (2007), Afman & Maurel (2010), Lederman et al. (2010), Yakop & van Bergeijk (2011), among others. Questioning on whether there is a direct link between diplomatic representation and exports, these studies have focused, not only on the role of embassies and consulates upon economic trade but have gone beyond and attempted to also grasp the impact of foreign offices or state visits.

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Diplomacy as we know it today dates to the outcomes of the Peace of Westphalia in 1648, perceived by many as the basis for the modern international system, which put the spotlight in the state, the new key actor of international relations (Malone, 2013). Diplomatic mission is seen as the representation of a state in a receiving state (Berridge & James, 2003), with embassies and consulates perceived as its main examples.

With a more formal tone, embassies carry the responsibility of state-to-state relations, having the entrustment of the total territory (Malone, 2013) – its functions comprise representation, fostering the country’s interests, fomenting influence and local friendly relations, negotiation and lobbying, political reporting, gathering of information and commercial diplomacy (Berridge, 2010). A consulate on the other hand, can be located in numerous locations within a country’s territory and its function is today largely connected with providing support to the nationals in case of need and fostering its interests or the issuing of visas (Berridge, 2010), although information gathering, trade opportunities seeking and fostering political, commercial, economic and cultural relationships with the receiving state should also be accounted as the services of a consulate (Vienna Convention on Consular Relations, 1963).

With the goal of helping “exporters understand and find markets for their products” (Lederman et al., 2010, p. 257), export promotion agencies (EPAs), often called foreign offices, conduct services of four distinct sources: country image building (promotional events), export support services (technical assistance, information on trade, customs logistics, packaging), marketing (trade shows, importer and exporter missions) and market research (general, sector and firm information, importer and exporter databases). EPAs can be seen as outposts, as they develop contacts and provide a flow of information (Wilkinson & Brouthers, 2000). In the end, EPAs’ role is largely connected with assisting the internationalization activities and enhancing the performance of the business sector, which happens to have impact upon the competitiveness and image of the home country abroad (Van Veenstra et al., 2010). Finland was the first, in 1919, to set up an EPA in an oversea country. Some countries, such as Spain, also create regional offices, which provide support and information to firms in the regional level that wish to export to overseas markets (Gil, Llorca & Serrano, 2008).

Official or state visits, usually carried out by the head of a government or state to another, respectively (Berridge & James, 2003), are also seen as valuable forms of fostering relations among countries, figuring as an opportunity to hold talks, firm agreements of economic cooperation or establish commercial and political relationships (Van Bergeijk, 2009). Some

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of these visits are also seen as an opportunity for businesses to carry trade missions, focused on their exporting efforts. Indeed, trade missions are seen as key instruments for governments in order to assist national businesses, multinationals and small- and medium-sized enterprises in their attempts to expand their businesses, internationalize and access foreign markets (Ruël, 2018). Usually through direct contact with local business people and government representatives (Mercier, 2007), trade missions provide a learning experience (Seringhaus, 1989), allowing the acquisition of knowledge on how business is conducted in the foreign market, the services available, potential consumer receptivity or the commitment level necessary to succeed overseas (Seringhaus & Rosson, 1989) (apud Wilkinson & Brouthers, 2000).

2.2.2 Empirical Studies on Economic Diplomacy and Trade

Through the Scopus and Web of Science databases and having as keywords of search “Economic Diplomacy”, “Embassies”, “Consulates”, “International Trade”, “EPA” and “Foreign Office”, a set of studies were collected. Additionally, and even though we can witness a growing focus on the topic of economic diplomacy and its relevance to exports, the analysis of such is relatively recent, with Rose (2007) being one of the first to macroeconomically study the matter. Thus, most authors have as empirical baseline of their research the same studies, which focus on the different instruments of economic diplomacy. Furthermore, Moons & van Bergeijk (2016) have collected some of these studies in their meta-analysis on the effectiveness of economic diplomacy.

As a result, a review was made of 16 studies which focused on analysing and quantifying the effect of different instruments of economic diplomacy on bilateral trade flows. The results of this analysis can be seen in Table 2, for easier assessment and comparison. Table 2 organizes the studies according to its author and publication year, while presenting further characteristics of these researches, such as its focus country, period of analysis, method of estimation, economic diplomacy instrument and results of the study – all of which are organized according to the year of publication.

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Table 2 - Influence of Economic Diplomacy (ED) Instruments upon International Trade

Author(s) Country Period Estimation Method Instrument Results

Alvarez &

Crespi (2000) Chile

1992 to

1996 Logit and Tobit Models EPAs

EPAs improve the competitiveness of the firms by fomenting their technological innovation and positively impact the number of export markets. In a 4-year period, EPAs generate higher levels of exports, the differentiation of

the exporting markets and goods. Head & Ries

(2006) Canada

1990 to

2003 ___ Trade Mission

The trade missions performed by Canada’s prime minister and international trade minister to foreign states had little

impact upon bilateral trade with those countries.

Nitsch (2007) France, Germany, USA 1948 to

2003

OLS, Fixed, Random

Effects, IV & 2SLS State Visit

State and official visits are positively correlated with exports – one visit increases bilateral exports by around 8 to 10

percent.

Rose (2007) 22 countries 2002 to

2003 OLS, Fixed Effects & IVs

Embassies & Consulates

Bilateral exports increase between 6-10% for each additional consulate. However, the effect of the first mission is

considerably higher than that of the following. Gil, Llorca &

Serrano (2008) Spain

1995 to 2003

OLS, IVs, Fixed & Random Effects

Embassies, Consulates & Regional Trade

Agencies

The embassies and consulates Spain hosts overseas have a positive effect of around 11% on exports. However, such impact is smaller than that of foreign regional trade agencies,

which increase trade by 74%. Segura-Cayuela & Vilarrubia (2008) 21 countries 1999 Extension of the Heckman Selection Correction & Probit with

Fixed Effects

Embassies & Consulates

The existence of foreign service (an embassy or consulate) of the exporter in the territory of the importer is linked to a raise of 11 to 18% of the probability of trade between them.

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Table 2 (continuation)

Author(s) Country Period Estimation Method Instrument Results

Afman & Maurel (2010)

“East” (all transition economies) & “West” (EU-15 & OECD

countries except Poland, Hungary, Slovakia & Czech Rep)

1995, 2000 & 2005

OLS & Fixed Effects _{& Consulates}Embassies The impact of opening a new embassy is equivalent to a _{reduction of around 2 to 8% of an ad valorem tariff.}

Lederman, Olarreaga & Payton (2010)

103 developed and developing

countries 2005

OLS, IVs, 2SLS & Heckman Selection

Correction

EPAs

A 10% increase in the budget of an EPA leads to an increase of 0.6 to 1% in the exports – their scope of work was mainly

related with the surpass of trade barriers and asymmetric information issues.

Van Veenstra, Yakop & van Bergeijk (2010)

36 countries 2006 OLS Embassies & _Consulates An increase of 10% on the number of consulates and embassies _{relates to 0.5 to 0.9% more of trade flows.}

Volpe Martincus

(2010)

Latin American & Caribbean countries 1995 to 2004 OLS Embassies, Consulates & EPAs

Although embassies and consulates positively impact bilateral exports, the effect of opening an EPA tends to be 5.5 higher.

Additionally, both instruments are more impacting in the introduction of new export goods – which is to say, upon the

extensive margin of trade. Creusen &

Lejour (2011) The Netherlands

2002to

2008

Least Squares with Fixed Effects

Embassies, Consulates &

EPAs

Embassies, consulates and foreign offices increase trade by 2.4%, with this positive effect upon export growth being higher

for middle income countries.

Kang (2011) South Korea 1994 to

2004

OLS, Fixed Effects &

IVs EPAs

An increase of 10% in the budget of an EPA has a positive effect of between 2.45% and 6.34% on the country’s exports.

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Table 2 (continuation)

Author(s) Country Period Estimation Method Instrument Results

Volpe Martincus, Carballo & Gallo

(2011) Latin American & Caribbean countries 1995 to 2004

OLS, Heckman Selection Correction & System GMM

Embassies, Consulates & EPAs

The impact of EP offices is larger than that of diplomatic representation (embassies and consulates). Additionally, the effect of foreign offices and diplomatic missions is larger on

the extensive margin than on the intensive of trade. Yakop & van

Bergeijk (2011)

63 countries (of low and high income)

2006 OLS, 2SLS, IVs & GMM Embassies &

Consulates

Confirmed Rose (2007)’s findings and concluded that the effect of ED is greater in developing countries. Hayakawa, Lee &

Park(2014)

Japan & South Korea

1962 to

2009 Fixed Effects EPAs

There is a positive correlation between EPAs and trade, with the impact being marginally higher when exporting to a

low-income partner.

Visser (2019) 100 countries 1985 to 2005 Fixed Effects Embassies &

Consulates

The effect of economic diplomacy tends to be greater upon differentiated goods than homogeneous goods. Additionally, ED is also more impactful upon the extensive margin of trade

– being useful in the creation of new trade relationships. Note: for the purposes of his study, Visser (2019) accounted, as the variable for economic diplomacy, the existence of a chargé d’affaires, minister-counsellor or

ambassador in the country’s territory.

Legend: EP - Export Promotion; EPA - Export Promotion Agency; GMM - Generalized Method of Moments; IV - Instrumental Variables; OLS - Ordinary Least

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Almost all the studies analysed can be considered macro-studies, in the sense that they use country-level trade data of a country or a set of countries. The exceptions are the study of Alvarez & Crespi (2000), whose sample is a collection of Chilean exporting companies, and that of Creusen & Lejour (2011), which is based on firm level data as it analyses new trade relations of a sample of companies’ in the Netherlands – both being thus microstudies. From the information presented on table 2, we can witness that the effect of economic diplomacy upon exports tends to vary according to the instrument adopted by the countries analysed. Thus, regarding embassies and consulates, for instance, Rose (2007) found that exports increase for each additional consulate around 6 and 10%. However, such result, even though positive, tends to be smaller when compared to the impact of a common language, land border or regional trade agreement (Rose, 2007). Additionally, the positive effect of the first foreign post, usually an embassy, is relatively higher, accounting for an increase of around 120% on exports, than that of the following ones, about 5 to 11% – with this impact declining as more consulates are created (Rose, 2007).

As a way of reducing information, transport, legal and regulatory costs, the countries could foster diplomatic representation offices between them – with the opening of a new embassy being equivalent to a reduction of around 2 to 8% of an ad valorem tariff (Afman & Maurel, 2010). Furthermore, Segura-Cayuela & Vilarrubia (2008) found that the existence of an embassy or consulate enhances the chances of trade between 11 to 18% but seems to have little impact on the volume of trade with already existing partners. These results are in line with those of Visser (2019), who also concluded that economic diplomacy tends to be more effective in the creation of new trade relationships, due to its ability to reduce the fixed costs of trade.

Additionally, economic diplomacy, in the form of embassies and consulates, tends to be seen as more effective for trade flows which either originate or end in developing countries rather than developed ones (Yakop & van Bergeijk, 2011). With the same being witnessed when comparing its effect upon low- and high-income countries as the impact of economic diplomacy on export growth upon low-income countries tends to be more substantial (around 12%) than that on high income countries (quite null) – (Creusen & Lejour, 2011). Van Veenstra et al. (2010) go even further and conclude that the most significant positive effect is that of the establishment of an embassy of an high-income country in a low-income one – with such observation indicating that the level of development of the nations engaged

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in the bilateral trade activities should be taken into account in the assessment of the real effectiveness of economic diplomacy (Van Veenstra et al., 2010).

Gil et al. (2008) understand that embassies and consulates’ goals are fairly connected with bilateral affairs of political, military and culture nature. Because of such, Spain has developed a set of alternative institutional bodies, the regional agencies, which aim at promoting the internationalization venture of Spanish firms, with a specific focus on the promotion of trade and investment opportunities. Indeed, they came to conclude that these regional agencies lead to a positive impact of around 74% on regional exports – with this effect being larger than that of Spanish embassies and consulates of around 11%, although smaller than that of a common language (458%) or pertaining to the same trade bloc, EFTA and the EU in this case (153%).

Focusing on the effects of export promotion agencies upon trade, Kang (2011) believes that the EPAs South Korea has in foreign markets are a key element to explain the success of the country’s exports and indeed this author and Lederman et al. (2010) found a positive correlation between an increase in EPA’s budget and trade rates. Hayakawa, Lee & Park (2014) also found that the existence of an EPA in a certain country, results in an increase of around 61% of bilateral trade, with this effect being marginally larger when the exporting partner is of a low-income nature.

However, the effect of an EPA upon trade tends to differ when we analyse both the extensive and intensive margins of trade. When mentioning extensive margin, one tends to talk about the establishment of new trade relationships (Felbermayr & Kohler, 2004) and/or increase of product categories traded among countries/firms which already trade (Amurgo-Pacheco & Pierola, 2008), while the intensive margin focuses on the possible variation of trade volumes of already existing trade relationships (Felbermayr & Kohler, 2004). And indeed, the “number of products exported is 27.8% greater when establishing a foreign office of an export promotion organization in the importer country” (Volpe Martincus, 2010, p. 159) – that is when considering the extensive margin of trade, while it is only 16.1% when focusing on the intensive margin (Volpe Martincus, 2010). For embassies and consulates, those results are of 6% and 2.8%, respectively (Volpe Martincus, 2010), which leads to believe that, the impact of the export promotion offices seems to be greater than that of diplomatic missions, as embassies and consulates (Volpe Martincus, Carballo & Gallo, 2011). These results are in line with those of Volpe Martincus (2010), who believes such can be explained by the fact that information problems figure as more likely when trying to diversify the trade portfolio

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and introduce new goods and EPAs tend to be more specialized entities, whose personnel is more focused on enhancing trade related matters, with its marketing expertise, for instance, being helpful in such goal (Volpe Martincus, 2010). This can also explain why this author found that EPAs positive effect seems to be higher when accounting for differentiated goods being traded, while the impact of embassies and consulates is higher upon the trade variation of homogeneous goods.

Furthermore, having as a starting point both the missions performed by the prime minister of Canada and the ones undertaken by the minister of international trade, Head & Ries (2006, p. 772) concluded that “while Canadian trade subsequent to a mission was higher with mission-targeted countries than the gravity model predicts, it was also higher prior to the mission”, which means that the mission itself has little impact. On the other hand, when focusing on the official external visits of the heads of state of France, Germany and the United States (in this case the presidents of France and the US and the chancellor of Germany), Nitsch (2007) concluded that, with the main goal of enhancing bilateral relations, state visits were proven to be positively correlated with exports, with one visit increasing bilateral exports by around 8 to 10 percent. This effect, however, was proven to have little significance for a period longer than 2 years after the visit – with the impact marginally rising in the following year but proven to be short-lived (Nitsch, 2007).

From the information presented above we can draw a set of relevant conclusions. Not all instruments of economic diplomacy have the same impact on a country’s exports. Thus, while embassies, consulates and EPAs seem to have a positive effect upon exports (Rose, 2007; Afman & Maurel, 2010; Yakop & van Bergeijk, 2011; Lederman et al., 2010; Kang, 2011), state visits seem, especially in the long run, to have little impact (Nitsch, 2007; Head & Ries, 2006). Furthermore, the actual value of the impact of some of the economic diplomacy’s instruments is quite heterogeneous, such being dependent on: the number of countries analysed – some of these studies have solely one focus country (e.g. Creusen & Lejour, 2011; Kang, 2011), while others focus on a set of countries (Van Veenstra et al., 2010; Lederman et al., 2010); the level of development of the countries (Yakop & van Bergeijk, 2011; Creusen & Lejour, 2011); the intensive or extensive margin of trade (Segura-Cayuela & Vilarrubia, 2008; Volpe Martincus et al., 2011) or even the level of differentiation of the traded goods (Volpe Martincus, 2010).

Thus, the present study aims to further grasp the influence of economic diplomacy activities, in this case the EPAs, embassies and consulates Portugal has distributed throughout the

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world, on the country’s exports. In other words, if the existence of foreign offices of country i, in this case Portugal, in the territory of country j is translated into higher volumes of bilateral trade between i and j. In the case of Portugal and its EPAs, the agency AICEP has offices in different geographies and countries and this information will be used in order to access its effectiveness in positively influencing Portuguese exports to the country in which the office is based.

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3. Methodology

This chapter will present the methodology used in this study in order to assess the possible impact of economic diplomacy on Portuguese trade for the period between 2008 and 2018. The foundation of this research will be the gravity model of trade. We will thus and firstly present the model used, along with the variables included (Section 3.1). In Section 3.2, a characterization of the sample will be showcased, with the period and countries analysed, along with descriptive statistics of the main data collected. And lastly, in Section 3.3, the correlation between the model’s variables will be introduced.

3.1 Econometric Model and its Variables

One of the common characteristics of the articles mentioned in table 2 is that almost all use the gravity model of trade as the methodology for the studies, by drawing an econometric equation with the variables the authors believe to be more suited to the question they are looking to answer. As one of the most empirically successful in economics and mentioned above, the gravity model of trade correlates the volume of trade between two countries to the physical distance between them, GDP and further elements which may impact trade (Anderson & van Wincoop, 2003). In this way, the economic model to be estimated is given by the following equation:

𝐿𝑛(𝐸𝑥𝑝_𝑖𝑗𝑡) = 𝛽₀+ 𝛽₁𝐿𝑛(𝐺𝐷𝑃_𝑗𝑡) + 𝛽₂𝐿𝑛(𝐷𝑖𝑠𝑡_𝑖𝑗) + 𝛽₃𝐸𝐷_𝑖𝑗𝑡+ 𝛽₄𝐿𝑎𝑛𝑑_𝑗+

𝛽₅𝐿𝑎𝑛𝑔𝑢𝑎𝑔𝑒_𝑖𝑗 + 𝛽₆𝑇𝑟𝑎𝑑𝑒_𝐵𝑙𝑜𝑐_𝑖𝑗𝑡+ 𝛽₇𝐼𝑛𝑓𝑟𝑎_𝑗𝑡+ 𝛽₈𝑃𝑜𝑙_𝑆𝑡𝑎𝑏_𝑗𝑡+ 𝜀_𝑖𝑗𝑡 (2)

where i denotes de exporting country (in this case, Portugal), j denotes the importing country, t denotes time, 𝐿𝑛(. ) denotes the natural logarithm, and 𝜀𝑖𝑗𝑡 is the error term.

Concerning the variables, Expijt (the dependent variable) corresponds to the real Portuguese

merchandise exports in year t to the partner country j, in US millions of dollars (constant prices 2010). The real values were obtained by deflating the current values, having used the GDP deflator. The data was extracted from the International Monetary Fund website, as done by Rose (2007), Afman & Maurel (2010) or Yakop & van Bergeijk (2011).

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This study will follow the base equation of the traditional gravity model of trade, with the GDP and geographic distance (Dist) as the basic independent variables. However, further variables which may impact bilateral trade flows will also be added, namely economic diplomacy (ED), landlockedness (Land), common language (Language), common trade bloc (Trade_Bloc), quality of infrastructures (Infra) and political stability (Pol_Stab). Consequently, we shall have the following explanatory variables:

− GDP: the annual real Gross Domestic Product of importing country j, in millions of US dollars (constant prices 2010). Like Rose (2007) and Hayakawa et al. (2014), these values were collected from the ‘World Development Indicators’ of the World Bank Group database1_;

− Dist: the geographic distance in kilometres between the capitals of countries i and j. This data was obtained through the CEPII (Centre d’Études Prospectives et d’Informations Internationales) website, a centre for research and expertise on the world economy, as did Creusen & Lejour (2011) and Hayakawa et al. (2014) for their own studies;

− ED: denotes Economic Diplomacy and is measured through four proxies. First, a dummy variable (FOd) which takes the value of 1 if country i has a foreign office in country j and zero otherwise. Secondly, the number of foreign offices country i, in this case Portugal, has in the territory of country j in year t (FOn). This data was extracted from the AICEP website and the values represent the number of offices the agency detains in each of the countries between 2008 and 2018. Third, a dummy variable (ECd) which takes the value 1 if country i has an embassy or consulate in country j and zero otherwise. Finally, the number of embassies and consulates Portugal hosts in its trade partners will also be analysed (ECn). This data was obtained through the Portal Diplomático website, which is a part of the Ministry of Foreign Affairs of Portugal. However, for this variable we were able to obtain the data solely for the year of 2018. This variable is also added by Rose (2007) and Yakop & van Bergeijk (2011) to the gravity equation used in their studies;

1_{Although the base model also incorporates the GDP of the exporting country, this variable was not included}

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− Land: a dummy variable which takes the value 1 if country j is landlocked, which is to say if its territory does not have a connection to any ocean and 0 otherwise. As per Yakop & van Bergeijk (2011) and Volpe Martincus et al. (2011), this information was collected from the CEPII website;

− Language: a dummy variable which assumes the value 1 if countries i and j share a common language and 0 otherwise. This information was also obtained through the CEPII website as by Yakop & van Bergeijk (2011) and Volpe Martincus (2010)2_;

− Trade_Bloc: a binary variable in which 1 indicates that countries i and j are a part of the same trade bloc and 0 otherwise. For the study being conducted, the trade bloc considered was the European Union, as per Afman & Maurel (2010);

− Infra: indicates the quality of port infrastructures of country j and refers to an indicator ranging between 1, which stands for extremely underdeveloped port infrastructures, to 7, well developed and efficient by international standards. The source of this data is the World Economic Forum, Global Competitiveness Report, obtained via the World Bank Data Indicators. According to the 2019 UNCTAD Review of Maritime Transport, “more than four fifths of world merchandise trade by volume is carried by sea” (UNCTAD, 2019, p. 4). Additionally, optimized and developed infrastructures have the power to enhance both competitiveness on a regional level and economic developments (Bottasso, Conti, de Sá Porto, Ferrari & Tei, 2018). Thus, in a world of supply chains, the quality of logistics [infrastructures] figures as a relevant tool for trade efficiency (Arvis, Mustra, Ojala, Shepherd and Saslavsky, 2012) and consequently, of inclusion in this study;

− Pol_Stab: refers to a political indicator of country j, measured through the detailed documentation of The Worldwide Governance Indicators: Methodology and Analytical Issues and stands for the political stability and absence of violence and terrorism, which is to say it represents the “perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism” (Kaufmann, Kraay & Mastruzzi,

2_{Note that usually studies also incorporate another dummy variable to indicate if country i and j have past}

colonial ties that is if they share a historic bond of colonizer/colony relationship. However, in the case of Portugal, the countries with which it shares colonial ties are the same with which it shares the common language. In this way, we only consider the variable of common language.

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2010). This indicator ranges from approximately -2.5, for which the country can be seen as being politically unstable and likely to host violent attacks in its territory, to 2.5, when the country is stable and thus safer and less expected to suffer violent offensives. Politics have the power to mould the patterns of international trade, with similar policy interests and democratic environments fostering international trade activity (Morrow, Siverson & Tabares, 1998). Conflicts and violence, on the other hand, hinder the chances of trade, by implying additional transaction costs. Such stems not only from the insecurity they generate and its impact on the consumption patterns of the population, but also due to the increasing costs of doing business, the decreasing attractiveness of the country to international producers, the impact of the violent acts upon the countries’ infrastructures or consequent security regulations, such as the shutting down of borders (Nitsch & Schumacher, 2004). Thus, the indicator for political stability and likelihood of violence figures as relevant for the purposes of this paper as it can be impactful upon trade patterns.

The independent variables, their proxies and expected impact on exports, according to the literature review of Section 2.1.2, are summarized on table 3.

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Table 3 – Variables of the Study, its Proxy and Expected Impact on Trade

Variable Proxy Expected Impact on Trade Source of Data

GDP Annual real Gross Domestic Product at

constant prices of 2010 (millions of USD) +

International Monetary Fund Dist Distance in kilometres between _{the countries’ capitals} - CEPII

ED

FOd – dummy variable (1 – Portuguese office abroad

0 – no office)

FOn – number of Portuguese offices in partner country j

ECd – dummy variable

(1 – Portuguese foreign embassy or consulate 0 – no embassy or consulate)

ECn – number of Portuguese embassies and consulates in country j + AICEP & Portal Diplomático Land Dummy Variable (1 – landlocked country 0 – no landlockedness registered) - CEPII Language Dummy Variable (1 – common language 0 – no shared language) + CEPII Trade_Bloc Dummy Variable (1 – same trade bloc 0 – no common trade bloc)

+ European

Union

Infra

Index ranging from 1 (extremely underdeveloped)

to 7 (well developed)

+ World Bank

Indicators

Pol_Stab Index ranging from approximately -2.5

(unstable & violent) to 2.5 (stable and safe) +

Worldwide Governance

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3.2 Characterization of the Sample and Descriptive Statistics

This study focuses on Portuguese merchandise exports to 144 countries during a time period of 11 years, from 2008 to 2018. The list of the 144 destination countries can be found in the Appendix (Table A1). Although the bilateral trade data collected initially included a total of 212 countries, 68 of these were removed due to missing data for some relevant variables, such as the exports values, quality of port infrastructures or political stability. Note, however, that the countries removed from the sample are the destination of a mere 3% of Portuguese exports as the 144 countries of our sample represented the destination of around 96,95% of the total Portuguese merchandise exports in 2018 – the value of the exports to these 144 countries was of 67890 million US dollars, against a total of 70023 million US dollars in the mentioned year.

During the period under analysis, Portuguese merchandise exports to the 144 destination countries increased from 51375 million dollars in 2008 to 67890 million dollars in 2018 (see Figure 1).

Figure 1 – Evolution of Portuguese Exports

(2008 – 2018, millions of US dollars, constant prices 2010)

0 10000 20000 30000 40000 50000 60000 70000 80000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Valu e (mill io ns o f do lla rs ) Year

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The Portuguese merchandise exports to foreign states varied slightly over the years, having reached its lowest value in 2009 (being of around 41167 million dollars) – which may be explained by the financial crisis of 2007-2008. After this slight decrease, the following years saw a recovery and, after a couple of years of stable values, since 2016 we see a steady increase. In fact, the exports value peaked and hit the maximum value in 2018, having surpassed the 67890 million dollars mark (see Figure 1).

For the variable Economic Diplomacy, our main explanatory variable, we may inspect the total number of foreign offices Portugal hosts in the destination countries of our sample, as information regarding the number of embassies and consulates3_{are only available for the last}

year under analysis (2018). Between 2008 and 2018, the number of offices abroad increased from 47 to 69 (see Figure 2).

Additionally, when it comes to the foreign offices, we can see that there are those whose sphere of activity is not restricted to the geography in which they are located. This is to say that their scope of action can also entail the affairs of neighbouring countries, functioning as a representation of the region, and not solely of the country in which they are based. For instance, currently, the scope of action of the AICEP office in Chile does not solely include the affairs of this country, but also includes those of Peru – the AICEP delegate oversees both geographies, in spite of being based in one of them. Likewise, the delegation in Bangkok is currently responsible not only for Thailand, but also for Myanmar, Laos, Vietnam and Cambodia. Consequently, we adopted a comprehensive definition of foreign office, and all geographies which had and currently have a formal representation of AICEP are accounted, for the matters of this study, as having a Portuguese foreign office in its territory, whether the actual office is located within their borders or not.4

3_{On this study, only Consulates-General and Vice-Consulates were accounted as Consulates.}

4_{Note that in order to test the robustness of our results, we also estimated our model considering that a country}

has a foreign office only if it is located within its borders and concluded that the effect was similar and relevant and thus we opt to use a broad definition of foreign office.

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Figure 2 – Evolution of Portuguese Foreign Offices (2008 – 2018)

Examining Figure 2, we can witness that, although relatively small, since the number of countries within our sample which have no offices is quite high (in 2018, around 55% of the countries of the study did not have any Portuguese office in its territory), the number of offices Portugal hosts overseas has in fact increased throughout the years. As a matter of fact, its peak was reached in 2018, when a total of 69 foreign offices in host states was reached (see Figure 2).

In this way, this work aims at understanding to which extent do these offices Portugal hosts in overseas countries impact the values of Portuguese merchandise exports to the countries in which they are based. Thus, and in order to know the model variables, it is important to analyse the descriptive statistics found in table 4.

0 10 20 30 40 50 60 70 80 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Nu mb er o f Of fic es Year

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Table 4 – Descriptive Statistics of the Model’s Variables

Variables Observations Mean Minimum Maximum Standard

Deviation Exports (million USD,

constant prices 2010) 1583 396.3842 0.0011 17762.6000 1564.4880 GDP (million USD, constant prices 2010) 1579 493169 732 17856477 1633911 Distance (km) 1584 5890.6860 500.9223 19335.4000 3473.7300 FOd (dummy) 1584 0.3478 0 1 0.4764 FOn (number of foreign offices) 1584 0.3826 0 4 0.5699 ECd (dummy) 144 0.4930 0 1 0.5017 ECn (number of embassies & consulates) 144 0.8264 0 10 1.4208 Land (dummy) 1584 0.2083 0 1 0.4062 Language (dummy) 1584 0.0347 0 1 0.1831 Trade_Bloc (dummy) 1584 0.1843 0 1 0.3879 Infra (index) 1510 4.1473 1.300 6.8173 1.1523 Pol_Stab (index) 1584 -0.0849 -3.0025 1.6154 0.9115

Starting with Exports, our dependent variable, its mean for the period under analysis was of 396 US million dollars, with the maximum value being of about 17763 million dollars, which refers to the Portuguese exports to Spain for the year of 2018. In fact, Spain was, throughout the years under analysis, the main destination of Portuguese merchandise exports, representing the destination of between 22 to 28% of total merchandise exports between 2008 and 2018. The minimum, on the other hand, was of 0,001 million of dollars, referring to value of the Portuguese exports to Rwanda for the year of 2008.

The GDP variable on the other hand, presents an average of 493169 million dollars, with the maximum being of 17856477 million dollars, which refers to the GDP of the United States for the year of 2018 and the minimum to about 732 million dollars referring to Timor-Leste’s GDP in 2008. This variable appears as quite scattered, which can be witnessed by the value

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of the standard deviation, since the sample of countries included in the study features economically big countries, such as the US or China, but also much smaller ones, as Seychelles or Gambia.

Concerning the variable Distance, its mean is of about 5891 kilometres, with the maximum of distance of 19 335 kilometres being the one that separates Portugal and New Zealand and the minimum being that between Portugal and its neighbouring country of Spain, whose capital stands a mere 501 kilometres from Lisbon.

When we focus on Economic Diplomacy, the mean of the variable FOd (dummy variable taking the value 1 if Portugal has a foreign office in the destination country and zero otherwise) indicates that during the period under analysis only 34.78% of the countries in the sample had a Portuguese office in their territory. Furthermore, looking into the number of Portuguese foreign offices (FOn), we can see that the means’ value of this variable is of 0.38, which is to say this is the average number of offices Portugal hosted in foreign states between 2008 and 2018. The maximum of 4 offices matches the number of offices Portugal held in Spain during several years. And the minimum is of 0, since around 65% of the countries included in the collected data did not have any Portuguese office in its territory throughout all the years under analysis. Concerning the dummy variable ECd (which takes the value of 1 if Portugal has an embassy or a consulate in the destination country and zero otherwise), its mean reveals that 49% of the countries included in this study hosted a Portuguese embassy or consulate in their territory in 2018. Finally, regarding the number of embassies and consulates (ECn), we see that the countries in the sample host, on average, about 0.83 embassies or consulates of Portugal in its territory. The maximum of 10 concerns the number of embassies and consulates Portugal hosted in Brazil and the minimum, which is 0, accounts for the inexistence of neither an embassy nor consulate in 73 of the countries included in the sample for the year of 2018.

Regarding the dummy variable Land, its mean indicates that only about 21% of the countries in the sample are landlocked and thus have no geographic connection to an ocean. Moreover, of the countries included in this research, only a mere 3% share a language with Portugal, having thus Portuguese as the official language as well. And lastly, around 18% of the 144 countries pertain to the same trade bloc as Portugal, which is to say that 18% of the countries included in the study are a part of the European Union.

For the quality of infrastructures variable (Infra), whose values vary between 1 (for extremely underdeveloped) and 7 (for well-developed and efficient), the mean of its values is of 4.15.

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Furthermore, the maximum figure is that of 6.8 – referring to the values of the Netherlands for a total of 5 years – which is to say that during these years, this country was the one whose port infrastructures were, according to international standards, the most developed. On the other hand, the lowest value recorded was of 1.3 – which indicates that, for the years of 2013 and 2014, the quality of Kyrgyz Republic’s port infrastructures was the weakest among the countries analysed.

When it comes to the political stability variable (Pol_Stab) obtained through the Worldwide Governance Indicators, which ranges from approximately -2.5 (for which the country can be seen as politically unstable and more favourable to violent and terrorist attacks in its territory) to 2.5 (when the country is politically stable and thus safer and less likely to host politically-motivated violence, including terrorism) its mean is -0.085, which can be considered as rather small. Moreover, its maximum value of 1.61 was achieved by Singapore in 2017 – from the countries considered, this country was the one whose compliance rate of the mentioned values was the highest and thus can be considered as a state with a strong political framework. On the other hand, with the minimum value and a rating of -3, Yemen was, in 2018, the least compliant country, having thus a fragile and vulnerable political structure.

3.3 Correlation between Model’s Variables

Before proceeding to the estimation of the model, it is essential to calculate the correlations between the variables, namely between the explanatory variables. Thus, table 5 shows the correlation coefficients and respective levels of significance (in brackets).

As table 5 illustrates, all variables are correlated with exports: all correlation coefficients are statistically significant and exhibit the expected sign. Indeed, distance and landlockedness are negatively correlated with Exports, while the remaining variables (GDP, the quality of infrastructures, a stable political framework, economic diplomacy, a common language and pertaining to the same trade bloc) are positively correlated.

Concerning the correlation between the explanatory variables, although most of the coefficients are statistically significant, these are relatively small and thus will not cause problems in the estimation of the model – with the highest correlation coefficient of 0.9194 being that between the dummy variable (FOd) and number of Portuguese foreign offices (FOn), two alternative proxies for economic diplomacy and therefore will not be simultaneously included in the model.

The Impact of Economic Diplomacy on Exports: the Portuguese Case