An analysis of the efficiency of economic diplomacy on exports

The relationship between diplomacy and economy traces back to ancient civilizations. The first inter-civilization agreements signed were about economic privileges and bilateral trade relations. With the establishment of modern states diplomatic relations gained its formality and engaged in representation of the state's national interests. After the WW2, the new international environment characterized with globalization, deregulation and liberalization has emerged and led to changing of diplomatic relations towards use of more soft and smart power techniques. Economy is one of the key cornerstone of the soft/smart power engagement. Consequently, the other non-political dimensions of diplomacy surfaced: economic, culture, sport, energy.. diplomacy etc. Economic diplomacy encompasses the entirety of activities focused on achievement of the political targets by using economic policies and instruments. Nowadays, every single foreign mission besides ambassadors and consuls includes diplomats particulary engaged in economic issues as well. Economic diplomacy is being implemented through two channels: foreign investment and trade. The topic of this thesis is an analysis of the effects economic diplomacy has on export performance. According to the reasearches, the existence of the foreign mission in other countries significantly affects the volume of bilateral trade. Range of the effects depends mainly on the countries's income levels and differentiation level of the traded goods. Gravity model for selected countries is being used in order to quantify the scope of the effects of the economic diplomacy on the exports. Estimation is done using three models: OLS, fixed effects and Pseudo-Poisson Maximum Likelihood Model (PPML). Using cross-section data from 2018 year we established database linking 35 exporter and 59 importer countries and analyzing their bilateral relationship through selected model variables. As results showed, the coefficient of the foreign mission variable is, depending on estimation method, changing bewteen 1.5% - 3.3% with OLS estimator (with/out fixed effects) and 1.2% - 2.1% with using PPML estimator (with/out fixed effects). Therefore, it can be said that existence of the foreign mission supports exports from 1.2% to 3.3%. Besides, considering differences in income per capita, foreign mission coefficients record different results: by adding both countries's GDP pc average effect on the exports rises up to 20%. Additionally, classifying the countries in income groups it can be seen that the highest effect is recorded between middle/lower middle income countries (0.715) while much lower between high/middle high income countries (0.026).