International Trade in Motion Picture Services

Gordon H. Hanson
University of California, San Diego
and National Bureau of Economic Research

Chong Xiang
Purdue University

January 2008

Abstract. In this paper, we present data on U.S. trade in motion pictures and examine thedeterminants of U.S. motion-picture exports to Europe. Publicly available data on tradeflows in motion pictures, and other information services, appear to be of dubious quality.
In Europe, U.N. Comtrade data on motion-picture trade vastly understate box officerevenues earned by foreign films compiled from private industry sources. The motion
picture industry is an attractive case to study because bilateral trade in the industry iseasily measured at the point of consumption (movie cinemas, video rental stores, pay-TV
operators). In European countries, U.S. movies account for 70% of box-office revenues,
with the remaining share divided between domestic and non-U.S. foreign films. We use
data from Screendigest.com to estimate a modified gravity model for trade in motionpicture services, the results for which indicate how market size and trade costs affecttrade in the industry.

1. Introduction
In the last dozen years, empirical research in international trade has blossomed.
There are now extensive bodies of work on testing the Heckscher-Ohlin trade model(Davis and Weinstein, 2002), examining the impact of globalization on wages andproductivity (Feenstra and Hanson, 2002; Tybout, 2002), and estimating how trade flows
respond to trade costs (Anderson and van Wincoop, 2004), among other topics. Thesestrands of literature, however, are almost entirely about international trade in
manufactures. Due in part to a paucity of data on service trade flows, relatively few
papers address international trade in services (e.g., Freund and Weinhold, 2002, Amiti
and Wei, 2005, and Marvasti and Canterberry, 2005). Indicatively, Feenstra’s (2004)
recent graduate text on international trade includes no references to research on trade
involving service industries.
Yet, for the United States and other advanced countries it is services in which
their export strength increasingly lies. The 2004 Economic Report of the President touts
information services (internet publishing and service provision, motion pictures, printed
media, radio and TV programming, software, sound recordings, telecommunications) andprofessional services (accounting, advertising, architecture, consulting, engineering, law,
R&D services) as sectors with the highest recent growth in U.S. net exports. In 2002,
U.S. exports and foreign sales of information services were $90 billion, relative to total
service exports of $295 billion and manufacturing exports of $627 billion (Siwek, 2004).
In 2003, information services were 5% of U.S. GDP (relative to 14% for manufacturing),
and exports of U.S. motion pictures accounted for 73% of box-office revenues in Europe(Siwek, 2005).

1

Why are services such an important part of the U.S. tradables production? One
possibility is that the U.S. has a comparative advantage in tradable services, due to thecountry’s abundant supply of workers (either native or foreign born) with advanced
degrees (computer scientists, engineers, lawyers, MBAs) or specialized skills (actors,
musicians, recording technicians, screenwriters), which information and professional
services use intensively. Reductions in trade costs – associated with improvements in
information technology or falling cultural barriers to trade – may have accentuated the
U.S. comparative advantage in services. A second possibility is that scale economies
may give service providers an incentive to locate in the large U.S. market (Rauch andTrindade, 2006). For many information services, average costs decline sharply in output.
Where these services are provided in a specific language or cultural context, large
markets may be the optimal site for global production (Krugman, 1980; Helpman andKrugman, 1985). So far, empirical literature has found evidence that large markets affecttrade only in manufacturing (Feenstra, Markusen, and Rose, 1998; Davis and Weinstein,
1999 and 2003; Head and Ries, 2001; Hanson and Xiang, 2004).
In this paper, we present data on U.S. trade in motion pictures and examine thedeterminants of U.S. motion-picture exports using a modified version of the gravity
model. Our focus on motion pictures is warranted by the importance of information
services to the U.S. economy and their role in current debates about trade policy.
Information services embody large amounts of intellectual property, whose accumulation
appears to be important for economic growth but whose ownership rights are often
difficult to enforce across national borders (McCalman, 2004). Beyond the threat of2piracy, many governments aggressively restrict imports of motion pictures and soundrecordings, ostensibly to preserve domestic production of cultural goods (Janeba, 2004).
In section 2, we derive a gravity model of trade in which a country’s imports of
U.S. motion-picture services relative to its expenditure on domestically produced motionpicture services depends on the country’s size relative to the U.S., proximity to the U.S.
in terms of geography and culture, and other trade costs. We measure cultural trade costs
using indicators of linguistic distance between countries in Dyen et al. (1992), Melitz(2002), and Chiswick and Miller (2004), and policy trade barriers using data on the
motion-picture industry collected in Marvasti et al. (2005).
Given limited public data, empirical research on trade in services requires one toassemble information from private sources. In section 3, we describe available data on
U.S. exports of motion pictures. The publicly available data on motion-picture tradeflows appear to be of dubious quality.1 The U.N. Comtrade database reports trade inmotion pictures in terms of the value of cinematographic film exposed or developed,
which is a commodity rather than a service. Importers appear to have considerable
discretion in reporting the value of physical film prints, as Comtrade trade flows are up to
two orders of magnitude smaller than foreign box office revenues for U.S. films compiled
by Screendigest.com, a private industry source.

What makes motion pictures anattractive case to study is that bilateral trade in the industry is easily measured at the pointof consumption (movie cinemas, video rental stores, pay-TV operators), which facilitates
their collection by private consultancies.

We use data from Screendigest.com, asreported in Hancock and Jones (2003), to estimate a gravity model of trade for the1

The difficultly of measuring economic activity in services has been studied in much other work. On
measurement issues related to services, see Hooper and Richardson (1991), Griliches (1992), Baldwin,
Lipsey and Richardson (1998), and Berndt and Hulten (2007).

3

motion-picture industry, the results for which we report in section 4. The estimatesindicate how market size and trade costs affect trade in motion pictures.
Though information services are among the most dynamic sectors in the U.S.
economy, they have been the subject of little research by international economists. Key
to new research efforts will be the collection of data on service trade flows. Since service
trade rarely passes through ports, airports, or land borders, it is difficult to detect using
standard government methods for measuring imports and exports. A further problem isthat the channels through which firms export or import services change continually overtime. In the early 1990s, most foreign revenue on U.S. motion pictures was generated at
the box office. By the late 1990s, videos, DVDs, and pay-TV had become importantsources of foreign film distribution.

Going forward, the internet may become thedominant mode for film distribution. Given rapid change in the distribution of services,and the slow speed with which government data collection strategies tend to change,
private-industry sources are likely to be the most useful data source for research on trade
in services in the near term.

2. Trade Theory and Trade in Information Services
We base our model of information services on Hanson and Xiang (2004), which
extends the monopolistic-competition model of trade (e.g., Helpman and Krugman, 1985)
to a continuum of industries. The setup has a large country and a small country, eachwith one production factor, labor (though the extension to a many-factor setting isstraightforward). There are many industries, some of which are information services(movies, music) and others of which are manufactures (cars, clothes). Production of each4

good or service is subject to increasing returns to scale. Consumers have identical CobbDouglas preferences. Each industry consists of many Dixit-Stiglitz-type varieties (action
movies, comedies), the number of which is endogenous. For industry m, let nm denotethe number of varieties and σm denote the elasticity of substitution between varieties,
where σm > 1. Each manufacturing industry is subject to an iceberg transport cost, τm>1.
Information services are subject to a cultural discount and perhaps a policy tradebarrier (in the form of a tariff or quantity restriction). For a consumer, one unit of adomestic service brings as much satisfaction as 1/δ units of a foreign service, where 0 < δ< 1. We expect δ to be higher the more similar are two countries’ culture and language.
Domestic and foreign varieties of an information service are symmetric in consumption.
For each information service i, σi > 1 is the elasticity of substitution between varieties.
Given increasing returns to scale and CES preferences, in equilibrium eachservice firm and each manufacturing firm is monopolistically competitive and sets a pricethat is a constant markup over marginal cost. Prices for a given variety of a good orservice produced in a given country vary across destination markets according to trade
costs.
Based on this framework, let Siuk and Sikk be total sales of information service i bycountry u (the United States) to country k and by country k to itself. Exploiting the CES
structure of preferences, we obtain the following expression for relative sales:
1−σ

1−σ i

1−σ
Siuk Eik niu (δ iuk ) i ( piuk / Pik ) i niu ⎛ wiu ⎞
=
=
⎜
⎟
Sikk
nik ⎝ wik ⎠Eik nik ( pikk / Pik )1−σ i(δ iuk )1−σ ( tiuk )1−σ ,
i

i

(1)

where Eik is expenditure by country k on service i, Pik the CES price index in country k
for service i, and piuk is the delivered price (including customs, insurance, and freight5

charges) in country k of service i produced by country u, wiu is marginal production costin service i and country u, and tiuk is the ad valorem trade cost on exports from country u
to country k. The second equality follows from solving for price in terms of marginalcost. Expressing sales in relative terms removes the CES price index and domestic
expenditure from the expression, as shown in the second equality. In the estimation, we
will associate the cultural discount (δiuk) with linguistic distance and ad valorem trade
costs (tiuk) with geographic distance, import tariffs, and other policy trade barriers.
One can implement (1) empirically by taking a first-order Taylor approximationof the equation that determines the relative number of product varieties produced in thetwo countries, the derivation of which we do not show in the informal discussion in thispaper. For information services, the relative number of product varieties is increasing in
relative country size, given certain assumptions.

Thus, we can replace the relative

number of varieties in (1) with a measure of relative country size, Yu/Yk.
The main empirical exercise is to estimate the effect of market size and the effectsof trade costs on information services, using the following specification:

ln

Sluk
Y
W
= β 0 + β1 ln u + β 2 ln GDuk + β3 ln LDuk + β 4 ln Tluk + β5 ln u + ε iuk ,
Slkk
Yk
Wk

(2)

where u is the United States, k is the importing country, Yu/Yk is the relative size ofcountries u and k, GDuk is geographic distance between u and k, LDuk is linguistic
distance between u and k, Tluk is k’s ad valorem tariff on imports of product i fromcountry u, Wu/Wk is relative production costs in countries u and k, and εiuk is a disturbanceterm associated with unobserved trade costs between country pair uk.

Again, byexamining relative sales of U.S. and domestic films, we remove expenditure on motion
pictures as a determinant of trade flows in (2). In theory, the only role that relative6

country size plays in determining relative sales is through its impact on the relative sizeof the motion-picture industry in the two countries. A positive coefficient on relative
income would indicate that large countries are a relatively attractive site for motionpicture production.
In estimating (2), we confront several important econometric and measurement
issues. These include measuring cultural trade costs and policy trade barriers, allowing
for the endogeneity of policy trade barriers, and incorporating the threat of piracy as asource of trade frictions. Each of these is an important issue. In this paper, we will focus
on the first problem of measuring trade costs and leave accounting for their endogeneity
to future work. The empirical exercise in this paper should be seen as a preliminary
exploration of whether trade in information services obeys the laws of gravity.

3. Data and Empirical Application

In this section, we present data on international trade on motion pictures. We
begin by discussing relevant previous research on the motion-picture industry, proceed to
examine data sources on international trade in motion-picture services and on trade costs
that may be relevant for motion pictures, and conclude by using data from private
industry sources to describe U.S. exports of motion pictures to Europe.

3.1 Previous Literature on Trade in Motion Pictures

What has previous research discovered about trade in motion pictures? Thereappears to be tremendous heterogeneity in the performance of movies. De Vany andWalls (1999, 2004) and Walls (2005) find that the distributions of production cost, boxoffice revenue and profits (box-office revenue minus production cost) have heavy right7

tails. For example, the mean of production costs is the 62nd percentile of the distribution,
the mean of box-office revenues is the 71st percentile, and 78% of movies lose money
while 6% of movies account for 80% of total profits.

Perhaps in response to theuncertainty in movie revenues, Goettler and Leslie (2005) find that studios are more
likely to co-finance movies that account for a large fraction of their total annual
production budget. De Vany and Eckert (1991) and De Vany and Walls (1996)
emphasize that the difficulties with forecasting movie demand necessitate the use of
short-term, contingent contracts between distributors and exhibitors. Filson et al. (2005)
argue that these contracts have evolved to help distributors and exhibitors share risks andovercome measurement problems, rather than to resolve information problems.
The attraction of individual films to consumers appears to be short-lived. De
Vany and Walls (1999) show that movies earn 66% of their box-office revenues during
their first 3 weeks of showing. De Vany and Walls (1997) show that a movie has lessthan a 25% chance of lasting 7 weeks or more in the top-50 chart and less than a 15%
chance of lasting 10 weeks or more. In a similar vein, Elberse and Eliashberg (2003) findthat the U.S. movies with stronger domestic market performance tend to have higher
opening-week box-office revenues when they are released in the foreign markets (where
this correlation becomes weaker the longer the time lag between the movies’ U.S.
releases and foreign releases).
There is increasing interest in the protection of intellectual property in motion
pictures, either domestically or internationally. Byers et al. (2004) study successful
movie downloads from peer-to-peer file sharing networks. Of the successful downloads,
60% appeared on the peer-to-peer networks prior to the movies’ DVD release dates. Of

8the movies that had been released on DVD as of the time of their study, only 5% first
appeared after their DVD release date on a network. Together, these facts suggest
consumer DVD copying is minor compared with insider leaks of DVDs. Turning totrade, McCalman (2004) finds that while Hollywood studios are more likely to use
licensing in countries with moderate protection of intellectual property rights (IPR), theytend to use more integrated governance structures in countries with both high and low
IPR protection. McCalman (2005) finds that while moderate IPR protection encourages
the spread of U.S. movies, either very weak or very strong IPR protections decrease thespeed with which U.S. movies are released abroad.

3.2 Data on Trade in Motion-Picture Services

Data on international trade in motion pictures or other information services arevery difficult to obtain. The U.S. Bureau of Economic Analysis (BEA) publishes limited
bilateral trade flows for the film industry. BEA surveys of U.S. multinational firms
provide some industry data on service trade flows (Kozlow and Borga, 2004), but onlyfor U.S. parent firms that own subsidiaries located abroad. The BEA Quarterly Survey ofTransactions in Selected Services and Intangible Assets with Foreign Persons does givedata on foreign receipts from film and television tape rentals, but does not list data on
foreign box-office revenues earned by U.S. motion pictures.
The U.N.’s Comtrade lists motion-picture trade as a commodity, Cinematographic
Film Exposed or Developed (SITC 883), which is the reported value of physicalshipments of exposed film across borders. The value of physical film shipments appears
to vastly understate film revenues. For instance, Comtrade reports 2000 U.S. exposed
film exports of $0.5 million to France, $0.5 million to Germany, and $6.5 million to the9

U.K., while Screendigest.com reports 2000 box-office revenues for U.S. films of $513
million in France, $615 million in Germany, and $429 million in the U.K. (Hancock andJones, 2003).
We evaluate the demand for U.S. films, other foreign films, and domesticallymade films using data on box-office revenues by country and year. Box-office revenues
are equivalent to the c.i.f. (customs, insurance, freight) value of motion-picture services
consumed in cinemas, plus retail markups.

These revenues include import duties,

transport costs, and other trade costs incurred in delivering the service to the consumer, as
well as sales taxes and exhibition fees collected by cinemas. Box-office revenues are
consistent with the trade-cost-inclusive measure of sales in (1). Individuals may consume
motion-picture services through cinemas (for new movie releases) or through video
rentals, video purchases, or pay TV (for previous movie releases).2 Distributors tend torelease movies to cinemas first and to retail outlets and pay-TV operators later in time,suggesting for a given film these services do not compete contemporaneously. Recently,
studios have experimented with releasing films in the U.S. market in cinemas and invideo format simultaneously, but this practice appears to be rare in foreign markets. Asof yet, the provision of motion-picture services through the internet accounts for a verysmall share of global film revenues. In this paper, we limit our analysis to motion-picture
revenues earned through cinema exhibition (box-office revenues).
Data on box-office revenues for the period 1995-2004 are available from
Screendigest.com. For this paper, we use data on cinema exhibition and distribution in
19 European countries from Hancock and Jones (2003). In each country and year,
2

Data on DVD/video sales and rentals are very difficult to get. For example, Screendigest.com charges£5,000 for access to its Video and DVD Global Intelligence database. We are still in the process ofacquiring such data.

10

Screendigest.com reports the number of films screened, total film attendance, and total
box-office revenues for films imported from the United States, films imported from othermajor producing countries, and films produced domestically. The company also reports
attendance and revenue for each of the 10 top-grossing films by country and year andother national market data. Screendigest.com compiles these data from government
agencies, national film bodies, film exhibitor and distributor associations, and company
spokespeople.
An important issue in using data on box-office revenues is how to classify thenationality of a motion picture. Screendigest.com defines the origin country for a film by
the location of the company that produces the film. Production companies (e.g., 20th
Century Fox in the United States) oversee the writing or purchase of screenplays andmusical scores; casting; costume and set design; animation, filming, sound recording, andediting; marketing and distribution; and financing.3
To consider how data on trade in motion pictures from Comtrade andScreendigest.com compare, Figure 1a plots the value of total film imports reported by
Comtrade and box-office revenues for foreign films reported by Screendigest.com for 19
European countries for the period 1992-2002; Figure 1b shows a similar plot for film
imports from the United States and box-office revenues for U.S. films in Europe. For
either total imports or imports from the United States, box-office revenues greatly exceed
film imports reported by Comtrade. The magnitude of the differences are perhaps more
apparent in Table 1, which shows the Comtrade value of film imports and theScreendigest.com value of box-office revenues for foreign films, by year for Europe.

3

Independent exhibition companies tend to oversee the screening of movies to consumers in destination
markets.

11

Over the sample period, the average ratio of the former to the latter is 46.2. Table 2
shows averages over 1992-2002 by country for Comtrade film imports andScreendigest.com foreign film box-office revenues. There appears to be little systematic
relationship between the two series. Over the sample period, the average ratio of boxoffice revenues to film imports varies from a low of 20.7 in Austria to a high of 155.8 in
Italy. It appears that Comtrade data on film imports (at least for Europe) give no
meaningful indication of foreign sales of motion-picture services.

3.3 U.S. Exports of Motion Pictures

The data we use for our analysis is from Hancock and Jones (2003), which gives
information on U.S. exports of motion pictures to Europe. While the United States is by
far and away the dominant player in the European film industry, there is substantial
variation across countries in the share of the market held by U.S. studios. It is thisvariation that we exploit in the gravity estimation in the following section.
Figure 2 shows total box-office revenues and average ticket prices in the 19
European countries.

Revenues grow modestly over the sample period, showing

considerable volatility. The surge in revenues in 1998 is associated with the movie,
Titanic, which at the time was the highest grossing movie in history. Ticket prices fall
over the sample period, due in part to a rising share in European film revenues of lowerpriced markets in central and eastern Europe. The importance of high-grossing films isfurther evident in Figure 3, which shows the share of the top-10 films in total box-officerevenues. The top-10 share fluctuates considerably, reaching its height in 1998 withTitanic, with an average of the period of 0.48.

12For Europe as a whole, the United States is the most important source of motion
pictures. Figure 4 shows the share of box-office revenues of U.S. films, domesticallymade films, and other foreign films. Over the sample period, the U.S. revenue share
averages 0.69 and is quite stable. Revenue shares for domestic films and films from third
countries are roughly equal. The dominance of U.S. studios is due largely to a relatively
small number of high-grossing films. This is seen in Figure 5, which shows the average
number of films released in Europe by origin country or region. While the U.S. share ofbox-office revenues is over twice that for domestic and non-U.S. foreign films combined,
the number of U.S. film releases is slightly smaller than the sum of domestic and nonU.S. foreign releases. Domestic and non-U.S. foreign releases tend to have small grossrevenues.
Countries in Europe vary in the size of their domestic motion-picture industries.
Figure 6 shows the ratio of local box office revenues for U.S. films to local box officerevenues for domestically produced films by European country averaged over 1995-2002,
which is the period for which data on every country is available. The log of this ratio isthe dependent variable in equation (2). Relative U.S. film revenues range from over 50
times domestic film revenues in Belgium and Ireland to less than 5 times in France.
Differences in the size of national movie industries in part reflect differences in country
size. Relative U.S. film revenues are strongly positively correlated with the ratio of US
GDP to national GDP, with the log correlation between relative film revenues andrelative GDP a highly significant 0.45. Differences in trade costs vis-à-vis the UnitedStates may also affect the size of national movie industries.

As we discuss next,

13

countries in Europe vary both in their cultural proximity to the U.S. and in the protection
they afford their domestic motion-picture industries.

3.4 Trade Costs in Motion Pictures

Before turning to the estimation, we need to identify data on trade costs relevant
to motion pictures. We measure cultural trade costs between the United States and its
trading partners using indicators of the linguistic distance between English and othercountries’ primary languages.4 Distances between languages capture the extent to which
two countries share a common linguistic heritage, which may indicate how easily culturalideas flow between them. Linguists group languages according to family trees. English
belongs to the Indo-European language family, whose speech varieties have been
examined extensively. In a classic study, Dyen et al. (1992) measure the similarity
between 95 Indo-European speech varieties. They create a percentage cognate matrix,
which identifies for each pair of languages the fraction of words for 200 basic meanings(e.g., all, and, father, ice) that can be traced back to a common ancestral word. In
Europe, the Dyen index for English ranges from a high of 0.60 for Dutch (indicating that
60% of English and Dutch words for the 200 basic meanings share a common ancestralword) to 0.23 for Czech.5
As an additional indicator of linguistic distance, we use the relative ease withwhich U.S. citizens learn foreign languages. After receiving a foreign job posting,
employees of the U.S. Department of State (DOS) undergo 24 weeks of foreign-language
training, at the end of which they are tested on their proficiency. Chiswick and Miller
4

Two countries in our sample, Belgium and Switzerland, do not have a single dominant language. For
these countries, we calculate linguistic distance as the weighted average of the distance between English
and their primary languages, using data in Melitz (2002) and Gordon (2005) to calculate language weights.
5
For other work on trade using the Dyen index, see Ginsburgh, Ortuno-Ortin, and Weber (2005).

14

(2004) use the average scores of DOS test takers by language in the early 1990s as a
metric of the distance between English and 43 other languages.

The DOS index

encapsulates both linguistic differences between English and other languages and theexposure of U.S. citizens to other cultures. U.S. citizens have an easier time learning
Spanish (average score of 2.25) than Japanese (average score of 1) in part because
Spanish is more similar to English and in part because U.S. citizens have been more
exposed to Spanish.6 A disadvantage of the DOS measure is that language tests are notrandomly assigned. DOS employees may be posted to particular countries based in parton their perceived ability to learn a language. Thus, test takers may be selected into a
specific exam based on their unobserved ability, which could compress variation in DOS
exam scores. The correlation between the Dyen and DOS indices is 0.65.
To measure policy barriers on motion-picture trade, we use a country-level tradebarrier index (TBI) constructed by Marvasti et al. (2005) for 33 countries in the early
1990s. Their index is the average across six dummy variables for trade barriers in motion
pictures. These dummies capture the presence of tariffs on film imports, quantitative
restrictions on film imports, levies on imported video sales, subsidies to domestic film
producers, overall trade barriers on service imports, and obstacles in enforcing property
rights. In Europe, France and Italy have the most restrictive barriers on motion pictures,
followed closely by Spain.

The Netherlands, Norway and Sweden have the least

restrictive barriers. Belgium, Germany, Switzerland, and the United Kingdom haveintermediate levels of trade barriers. Marvasti et al. (2005) find that their trade barrier
index is positively correlated with imports of U.S. motion pictures. However, they use agravity specification that does not control for multilateral resistance, contrary to the6

The highest average score is 3 for both Afrikaans and Swedish.

15

estimation strategy suggested by Anderson and van Wincoop (2004).

Using atheoretically grounded gravity specification, as in (2), we find a negative correlation
between trade levels and trade costs in motion pictures.

4. Gravity Estimation Results

Table 3 reports estimates of equation (2). The dependent variable is the log ratioof box-office revenues of U.S. films to box-office revenues of domestic films by country.
The independent variables are the log ratio of U.S. to domestic GDP; the log ratio of U.S.
to domestic average annual earnings for skilled labor in manufacturing (from the UNIDO
Industrial Database); log geographic distance to the United States; the log trade barrier
index from Marvasti and Canterbury (2005) and a dummy variable for whether thecountry has no TBI data; the log Dyen index and a dummy variable for whether acountry’s primary language is non-Indo-European (for which the Dyen index isundefined); and the log Department of State language exam index from Chiswick andMiller (2004) and a dummy variable for whether a country’s primary language is English(for which the DOS index is undefined). The specification also includes year dummies,
which are unreported. The sample is the 19 European countries included in Hancock andJones (2003) over the period 1992 to 2002. Since there are only 19 countries and the six
trade-cost variables do not vary across time, it is not feasible to include all trade costmeasures in the same regression. For some trade cost measures, the results are sensitive
to which other trade costs are included as regressors.

16

Relative U.S. film revenues are increasing in relative U.S. GDP.7 The U.S. has amore dominant position in the motion-picture industries of smaller countries. These
results suggest that larger countries have an advantage as a production location in motion
pictures, consistent with results on market-size effects in the theoretical models in
Krugman (1980) and Helpman and Krugman (1985) and gravity results for differentiatedmanufacturing industries in Feenstra, Markusen, and Rose (1998) and Hanson and Xiang(2004). Given fixed costs in producing motion pictures and trade costs (associated withlanguage, culture, and trade policy) in delivering motion-picture services, studios appear
to have an incentive to situate production in large countries. As a result, the dominanceof U.S. studios is weakest in the larger European markets, including France, Germany,
Italy, Spain, and the United Kingdom, which is apparent in Figure 6.
U.S. film exports are smaller in countries where U.S. wages are relatively high.
This is consistent with higher production costs deterring U.S. exports. Trade costs appear
to affect the ability of U.S. studios to penetrate foreign markets. Relative U.S. film
revenues are decreasing in each of the trade cost measures.
The estimated coefficient on the trade barrier index is negative in two
specifications, as expected, but precisely estimated in only one case. There is an obvious
concern about the endogeneity of policy trade barriers. Countries whose unobserved
characteristics are associated with weaker domestic film industries may be more likely to
impose import protection for motion pictures, which would tend to introduce positive
bias in the coefficient estimate on the trade barrier index. A further problem is that we do
not observe trade barriers for all countries in the sample. Controlling for the endogeneity
7

The coefficients on GDP are not directly comparable to standard gravity model estimates (which arecloser to one), since our dependent variable is not log trade but log trade relative to log domestic
consumption.

17

of trade barriers and expanding the coverage of this measure to include additionalcountries are important tasks for further research.
The coefficient on the Dyen index, which is the most precisely estimated tradecost parameter, indicates that, all else equal, moving from an English-speaking country(Dyen index of 1) to a Czech- speaking country (Dyen index of 0.23) would reduce U.S.
film revenues relative to domestic film revenues by 72 log points, based on results incolumn (3), which is a large effect. Relative U.S. film revenues are also substantiallylower in non-Indo-European-language countries, which in our sample include Finland,
Hungary, and Norway.

Languages that belong to the same family share common

ancestral origins in their speech varieties. Countries whose languages belong to different
language families may have relatively few historical links between their cultures, which
could tend to dampen trade in cultural goods such as motion pictures.
The coefficient on the DOS language index is negative, again indicating that tradeis lower between countries that are more linguistically distant from the United States, but
is quite sensitive to which other regressors included in the estimation.

5. Summary

In this project, we develop a theoretical framework to examine international trade
in information services and apply this framework to an empirical study of trade in motion
pictures.

Despite the growing importance of services, in general, and information

services, in particular, for U.S. trade, the export performance of these sectors has been thesubject of little empirical research.

18

The intellectual merit of our research comes from identifying the extent to which
the size of the U.S. market has contributed to the global concentration of the motionpicture industry in the U.S. and using newly available measures of linguistic distance toestimate the impact of cultural trade barriers on trade in motion pictures. Market size,
language, and trade are each important determinants of U.S. motion picture exports.
To date, the poor quality of published data on trade in services has hampered
research on the sector’s role in the global economy. However, poor data quality does notmean the U.S. current account is mismeasured. Foreign revenues earned by U.S. motion
pictures still appear in the current account, either as exports or as investment income(resulting from license agreements, royalties, or foreign sales by affiliates of U.S.
multinationals).

19

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22

Table 1: Imports of Motion Pictures in Europe(millions of U.S. dollars)Year

Total Film Imports(Comtrade)

Total Box Office Revenues
for Foreign Films(Screendigest.com)

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002

140.9
99.9
96.0
103.1
109.8
92.5
90.5
93.3
91.2
78.0
95.8

3,756.2
3,520.3
3,902.5
4,226.9
4,502.5
4,612.5
5,062.5
4,891.5
4,409.3
4,868.7
5,245.2

Notes: Column 2 reports total imports of SITC 8830 from Comtrade for 19 countries in
Europe; Column 3 reports total box office revenues for foreign films in these countries(as reported by Hancock and Jones, 2003). The 19 countries are Austria, Belgium, Czech
Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
Netherlands, Norway, Poland, Portugal, Spain Sweden, Switzerland, and the UK.

23

Table 2: Imports of Motion Pictures by Country(millions of U.S. dollars)Country

Austria
Belgium
Czech Republic
Denmark
FinlandFranceGermany
GreeceHungary
Ireland
Italy
Netherlands
NorwayPolandPortugal
Spain
SwedenSwitzerland
United Kingdom

Mean Box Office Revenues
Mean Film Imports
for Foreign Films(Comtrade)(Screendigest.com)

4.1
2.4
0.6
1.0
1.2
34.1
6.4
1.3
1.0
0.4
3.3
1.5
2.4
1.8
1.9
13.9
1.9
11.9
9.7

85.5
110.8
15.5
70.8
42.2
880.3
812.3
50.3
23.5
51.7
518.9
118.5
70.9
51.9
49.5
425.7
119.8
141.7
822.9

Notes: Column 2 reports the average value of imports for SITC 8830 from Comtradeacross the years 1992- 2002; Column 3 reports average box-office revenue for foreign
films from Sceendigest.com across the years 1992-2002.

24

Table 3: Gravity Model Estimation Results for U.S. Exports of Motion-Picture Services

(1)

(2)

(3)

(4)

(5)

(6)

ln Yus/Yk

0.450(0.073)0.552(0.114)0.456(0.092)0.483(0.072)0.790(0.132)

0.812(0.110)ln Wus/Wk-0.324(0.128)-0.175(0.133)-0.23(0.139)-0.480(0.157)-0.007(0.140)-0.452(0.144)ln Distance-1.526(0.893)-0.523(1.161)-0.412(1.037)-2.077(0.988)1.202(1.448)-2.119(1.207)ln TBI-0.268(0.360)0.774(0.435)-0.878(0.289)

No TBI-1.123(0.7020)0.336(0.7700)-3.458(0.6860)ln Dyen-0.493(0.162)-0.882(0.234)

Non Indo-Euro-0.634(0.256)-1.106(0.281)ln DOS-1.309(0.662)-5.534(0.880)English-0.799(0.691)-4.515(0.829)

R2
N

0.235
171

0.271
171

0.271
171

0.261
171

0.337
171

0.423
171

25

Notes to Table 3: The dependent variable is the log ratio of box-office revenues of U.S.
films to box-office revenues of domestic films. The independent variables are the log
ratio of U.S. to domestic GDP (ln Yus/Yk); the log ratio of U.S. to domestic average annual
earnings for skilled labor in manufacturing (ln Wus/Wk); log geographic distance to theUnited States (ln Distance); the log trade barrier index from Marvasti and Canterbury(2005) and a dummy variable for whether the country has no TBI data (ln TBI, No TBI);
the log Dyen index and a dummy variable for whether a country’s primary language is
non-Indo-European (ln Dyen, Non Indo-Euro); the log Department of State language
exam index from Chiswick and Miller (2004) and a dummy variable for whether acountry’s primary language is English (ln DOS, English). The specification also includes
year dummies, which are unreported. The sample is the 19 European countries (seeTable 1) over the period 1992 to 2002.

26

Film Imports from Comtrade vs. Box Office Revenues of Foreign Films in Europe

0

Total Imports (COMTRADE)
500
1000

Figure 1a: Total Imports and Total Box Office Revenues

0500
Total Box Office Revenues

1000

0

Imports from US (COMTRADE)
200
400
600

800

Figure 1b: Imports from US and US Box Office Revenues

0

200

400
600
US Box Office Revenues

800

27

Figure 2: Box Office Revenues in Europe
EU Box Office Revenue

EU Average Ticket Price
7

5000
6

4500

Ave. Ticke Price, 2000 USD

Box Office, Mn 2000 USD

5500

5
4000
92

94

96

98

00

02

Year

28

Figure 3: Share of High Grossing Films in European Box Office Revenues

Revenue Share of Top Ten Films

1

.5

0
92

94

96

98

00

02

Year

29

Figure 4: U.S. Share of Box Office Revenues in Europe
US Share
Other Country Share

Domestic Country Share

Share of EU Film Exhibition Market

.8

.6

.4

.2

0
94

96

98

00

02

Year

30

Figure 5: Number of Films Released in Europe
US Films
Other Country Films

Domestic Films

Mean Number of Films Released

150

100

50

0
92

94

96

98

00

02

Year

31

Figure 6: Revenues of U.S. and Domestic Films in Europe, 1995-2002

Austria
Belgium
Czech Republic
Denmark
FinlandFranceGermany
GreeceHungary
Ireland
Italy
Netherlands
NorwayPolandPortugal
Spain
SwedenSwitzerland
United Kingdom
0

10
20
30
40
50
Revenue of US Films/Revenue of Domestic Films

32