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Applied Economics Letters ISSN: 1350-4851 (Print) 1466-4291 (Online) Journal homepage: https://www.tandfonline.com/loi/rael20 Cultural and geographical distance: effects on UK exports Helga Kristjánsdóttir, Þórhallur Örn Guðlaugsson, Svala Guðmundsdóttir & Gylfi Dalmann Aðalsteinsson To cite this article: Helga Kristjánsdóttir, Þórhallur Örn Guðlaugsson, Svala Guðmundsdóttir & Gylfi Dalmann Aðalsteinsson (2020) Cultural and geographical distance: effects on UK exports, Applied Economics Letters, 27:4, 275-279, DOI: 10.1080/13504851.2019.1613495 To link to this article: https://doi.org/10.1080/13504851.2019.1613495 Published online: 09 May 2019.
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4, 275–279 https://doi.org/10.1080/13504851.2019.1613495 ARTICLE Cultural and geographical distance: eﬀects on UK exports Helga Kristjánsdóttir and Gylﬁ Dalmann Aðalsteinsson b a, Þórhallur Örn Guðlaugsson b, Svala Guðmundsdóttir b aBusiness, University of Akureyri, Akureyri, Iceland; bFaculty of Business Administration, University of Iceland, Reykjavík, Iceland ABSTRACT This research focuses on how cultural and geographical distance aﬀect trade.
The question is whether UK exports are similarly aﬀected by Hofstede national culture distance and geographical distance.

OECD data is applied to the United Kingdom’s exports as well as Hofstede cultural distance.

The research also accounts for the trading countries’ economic size, as well as their market size, in order to account for economies of scale.

Results indicate that exports are more impacted by geographical distance than the cultural distance between the UK and its main trading partners.
KEYWORDS Exports; Hofstede national culture; trade; UK; gravity model JEL CLASSIFICATION F10; F14; F23; M14; M20 I.

Introduction The outcome of the UK’s referendum will shape the future of the country’s relationship with its trade partner – the European Union largest (EU).

Researchers have considered the value of having membership to trade blocs like the EU in time of crisis (IMF, 2018).
Membership in the EU has been argued to reduce trade costs between the UK and the rest of Europe, as the EU is the UK’s largest trade partner.

It has been argued that leav- ing the EU will lower trade between the UK and EU because of higher tariﬀ and non-tariﬀ barriers to trade.

This is likely to encourage the UK’s workers and businesses to look for export oppor- tunities in new markets.

This research examines how UK exports are impacted by geographical distance and national culture.
The United Kingdom (UK) faces an interesting trading crossroads with Brexit, and this paper seeks to answer the question of whether cultural distance (Hofstede, 2001; Kristjánsdóttir, 2017, 2019) and Kristjánsdóttir, Guðlaugsson, Guðmundsdóttir, and Aðalsteinsson (2017) and geographical distance (Krugman 1991) have similar eﬀects on trade in the UK.
More speciﬁcally, the research seeks to analyse whether exports (OECD 2016) are similarly aﬀected by geographical distance and national Hofstede cul- ture dimensions (Hofstede 1980).

Trade ﬂows have been found to increase as areas are geographically closer (Oguledo and Macphee, 1994; Kristjánsdóttir, 2013).

Gravity equation is origi- nated in physics; however, it has been applied to economic and business purposes as well.
Gravity equation explaining ﬂows between areas was devel- oped by Tinbergen (1962) and Pöyhönen (1963).

The economic version of the gravity equation explains how exports are a function of GDPs of countries, as well as the distance between countries (Larue and Mutunga 1993), and studies have been made on trade between OECD countries for diﬀerent groups of products (Bojnec and Fertő 2009, 2010) II.
Model setup Bergstrand (1985) explained exports as a function of some economic variables (1): PXij ¼ β β 0 Yj β 1 Yj 2 Dij β 3 Aij β 4uij (1) The equation explains exports from country i to coun- try j as PXij over time t. Variable Yi,t denotes gross domestic product (GDP) of country i over time t, and Yj;t is the gross domestic product (GDP) of country j over time t. GDP is included since countries are expected to trade more as they increase in economic size.
Dij denotes geographic distance, in kilometres, between the economic centres of country i and helga@unak.is; dr.helga.kristjansdottir@bc.edu CONTACT Helga Kristjánsdóttir Helpful comments received on seminars at the IMF (2018) conference in Iceland and at the University of Iceland are highly appreciated.

This article was originally published with errors, which have now been corrected in the online version.
Please see Correction (http://dx.doi.org/10.1080/ 13504851.2019.1633779) © 2019 Informa UK Limited, trading as Taylor & Francis Group 276 H. KRISTJÁNSDÓTTIR country j. VariableAijdenotes factors aﬀecting trade between counties i and j, often having A present population, with ς ij being a log-normally distributed error term E(lnς ij) = 0.

In Equation (2), the country exporting is denoted with (i), with UK exports denoted as EXPij;t, while the recipient country is denoted with (j).
γ γ γ γ γ 0 Yi;t 1 Yj;t 2 Dij 3 Aij EXPij;t ¼ e ζ 4e ij;t (2) Equation (3) sets up the relationship to capture, with Y replaced with UK_GDP to account for eco- nomic size of the UK and OTH_GDP to account for the GDP of other countries, and UK_POP to account for population size (market size) of the UK and OTH_POP to account for population of other countries.
Also, DIS_GEOij presents the geo- graphical distance of the UK from other countries, not changing over time.

Distance is here measured as geographical distance, in kilometres.
0 UK GDPi;t 3 OTH POPj;t # 5e ς UK EXPij;t ¼ e 1 OTH GDPj;t UK POPi;t DIS GEOij ς ς ς ς ς 2 4 (3) Equation (4) setup is the same as for Equation (3), except Equation (4) measures cultural distance (DIS_CULT), including the Hofstede cultural dis- tance between countries, also constant over time.
ω2 UK EXPij;t ¼ e ω1 OTH GDPj;t ω4 ω0 UK GDPi;t UK POPi;t ω3 OTH POPj;t ω5e DIS CULTij (4) The Hofstede cultural distance has been applied before to estimate culture impact on international trade.

Davies, Ionascu, and Kristjánsdóttir (2008) have estimated the impact of the Hofstede cultural distance as a time-invariant variable on foreign direct investment as one form international trade.
The deﬁ- nition of the Hofstede cultural distance is provided in Table 1, with the diﬀerent measures summarised with weighted average.

This is common in the gravity model presentation (Bergstrand 1985).

Variables applied in this current research are deﬁned in Table 1.

Table 1.

Variable deﬁnition.

UK EXPij;t Exports of the UK (United Kingdom) (i) going to country (j), over time (t).

Exports are presented in US Dollar, USD.

Obtained from the OECD (2016) on the web page stats.

oecd.org.
oecd.org.

Gross Domestic Product (GDP) of the UK (United Kingdom) as country (i) running over time (t).

Reported in US Dollars, current prices.

Millions.

Obtained from the OECD (2016) on the web page stats.oecd.org.

Population in the UK country (i) over time (t).

All ages.

All persons.

Annual.

Obtained from the OECD (2016) on the web page stats.oecd.org.

UK GDPi;t UK POPi;t OTH GDPj;t Gross Domestic Product (GDP) of OECD countries (j) other than UK, running over time (t).
Reported in US Dollars, current prices.

Millions.

Obtained from the OECD (2016) on the web page stats.oecd.org.

OTH POPj;t Population (POP) of OECD countries (j) other than UK.

All ages.

All persons.

Annual.

Obtained from the OECD (2016) on the web page stats.oecd.org.

Geographical distance from the UK to other countries.
Measured as distance in km from the United Kingdom’s capital city, London, to other capital cities of countries, except that in the US, New York City is used rather than Washington, D.C. (Distance Calculator, 2016; Kristjánsdóttir, 2017).).

Cultural distance.

This the normalized1 DIS GEOij DIS CULTij III.

Data The United Kingdom recently accepted Brexit in a referendum, so the UK is leaving the European Union at some point.

This makes UK exports an interesting subject for study.
The dataset analysed covers exports from the UK to other OECD countries, based on the OECD database (OECD, 2018) which provides information on UK exports to individual trading partner countries on yearly basis Summary statistics for the sample is provided in Table 2.
The OECD countries receiving exports from the UK include Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea (Republic of South Korea), Luxembourg, Mexico, The Netherlands, New Zealand, Norway, Poland, Table 2.

Summary statistics for the basic sample.


 Variable ln UK EXPij;t ln UK GDPi;t ln OTH GDPj;t ln UK POPi;t ln OTH POPj;t ln DIS GEOij ln DIS CULT ð Þ Obs 705 Mean 19.67726 Std.

Dev.
Dev.

1.493289 Min 16.40446 Max 22.79829 1176 14.28597 .3124355 13.77242 14.68813 804 12.59501 1.539574 8.574854 16.59776 1176 17.89607 .0274194 17.85989 17.9564 814 16.37921 1.524325 12.44014 19.56526 1152 7.777442 1.059243 5.771441 9.841612 696 4.457049 .8364267 .7442554 5.237164 1Where it holds that: HOFSTEDEi = Pow_dis+ind+Mas+Uncer+Ori.

Pow_dis = (pow_dis/104)*100.

Mas = (mas/110)*100.

Uncer = (uncer/112)*100.


Ori = (ori/118)*100.weighted average Hofstede value for the UK minus the same value for other trading countries.

Table 3.

Geographical distance eﬀects on UK exports, based on Equation (3).

APPLIED ECONOMICS LETTERS 277 Linear regression ln(UK_EXP) ln(UK_GDP) ln(OTH_GDP) ln(UK_POP) ln(OTH_POP) ln(DIS_GEO) Constant Coef.

−.4626** 1.9229*** −1.9752 −1.1377*** −.5219*** 59.8536* Robust t-statistics are reported in parentheses.

*** Signiﬁcant at the 1% level.


** Signiﬁcant at the 5% level.

* Signiﬁcant at the 10% level.

Number of obs = 703 F(5, 697) = 775.61 Prob > F = 0.0000 R-squared = 0.7864 Root MSE = .69236 Robust Std.

Err.

.192636 .0796299 2.01677 .0862332 .0211348 33.73381 t −2.40 24.15 −0.98 −13.19 −24.69 1.77 P > t 0.017 0.000 0.328 0.000 0.000 0.076 [95% Conf.
−.8408355 1.766571 −5.934898 −1.307065 −.5633986 −6.37846 Interval] −.0844025 2.079257 1.984447 −.9684487 −.4804075 126.0857 Portugal, Slovakia (the Slovak Republic), Slovenia, the United Spain, Sweden, Switzerland, Turkey, Kingdom and the United States.

The total number of the OECD countries in the data sample is 34 (OECD, 2018).

Data covers the 1989–2012.

(‘As of 8 September 2016, the Distance Calculator listed the kilometre data applied here on its website’).
Some OECD countries are omitted from the sample, as not all ﬁve of the Hofstede (2001) cultural distance are reported for particular sample countries.

The countries elimi- nated in this current research, as they only report four dimensions, are the following: Chile, Greece, Slovenia and Turkey.

The UK Hofstede culture diﬀerence, referred to is deﬁned as each as the DIS_CULT variable, sample country culture measure minus the UK cultural distance.
As for the UK distance, it is calculated as the distance from London to the other OECD countries’ capital cities, with the exception of the United States, where New York City is used rather than Washington, D.C.

Some previous research (Carr, Markusen, Maskus, 2001) has applied skilled labour diﬀerences when estimating international activities.

This current research applies distance diﬀerences and culture dif- ferences when estimating international activities.

IV.
IV.

Regression results Table 3 presents Equation (3) results’ measuring geographical distance eﬀects on exports from the UK to OECD countries.

The importing countries’ gross domestic product GDP is found to positively impact UK exports but not, however, the UK GDP.

UK exports are found to be negatively aﬀected by the population size of the UK and the population of the importing countries.

Table 4 presents Equation (4) Hofstede culture eﬀects on UK exports.

They are found to have Table 4.


Hofstede culture eﬀects on UK exports, based on Equation (4).

Linear regression Number of obs = 577 F(5,571) = 258.54 Prob > F = 0.0000 R-squared = 0.6904 Root MSE = .75696 Ln(UK_EXP) Ln(UK_GDP) Ln(OTH_GDP) Ln(UK_POP) Ln(OTH_POP) Ln(DIS_CULT) Constant Coef.

−.6073*** 2.1364*** −1.5108 −1.5417*** −.1133** 54.3111 Robust t-statistics are reported in parentheses.

*** Signiﬁcant at the 1% level.

** Signiﬁcant at the 5% level.

* Signiﬁcant at the 10% level.

Robust Std.


Err.

.2260781 .0901161 2.541438 .0910624 .0199366 42.8795 t −2.69 23.71 −0.59 −16.93 −5.69 1.27 P > t 0.007 0.000 0.552 0.000 0.000 0.206 [95% Conf.

−1.051368 1.959466 −6.502564 −1.720575 −.1525136 −29.90969 Interval] −.1632753 2.313465 3.48085 −1.362859 −.0741974 138.5319 278 H. KRISTJÁNSDÓTTIR signiﬁcantly less impact on exports than the dis- tance eﬀects, as indicated by sign and size of the variable coeﬃcient together with the t value obtained.
However, when economic and market size eﬀects are combined, the per capita eﬀects is ln(GDP-ln(POP) = ln(GDP/POP] are [that found to negatively aﬀect UK exports, since -ln (UK_GDP)-ln(UK_POP) can be interpreted to have a negative sign, -ln(UK_GDP/ UK_POP).

that is V. Summary and conclusions The estimations of UK exports are twofold.
First, exports are estimated as a function of geographical distance together with economic size and market size, as in the conventional model of gravity.Second, the research continues by estimating exports in the grav- ity model setting, this time estimating the culture distance eﬀects on exports together with the eco- nomic variables.

The main ﬁnding is that the geographical distance is found to aﬀect UK exports more than the culture distance does.
As for other variables, accounting for market size and economic size, UK exports are found to be driven more by the economic size of the importing countries than by the economic size of the UK or the market size of the UK.

Disclosure statement No potential conﬂict of interest was reported by the author.
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