Cultural distance and international trade: a non-linear relationship

This paper investigates the effect of culture on trade using measures of cultural distance based on various dimensions of national culture from Hofstede (Culture’s Consequences: International Differences in Work-Related Values, 1980; Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations across nations, 2001). Previous papers using such measures find a positive effect of cultural distance on bilateral trade, suggesting that cultural differences lead to more trade between countries. This paper indicates that the relationship between international trade and cultural differences is in fact non-linear: international trade decreases with cultural distance, but only once cultural differences between two countries surpass a certain threshold. Benefits due to differences in comparative advantages and substitution of FDI by trade may explain the positive effect of cultural distance on trade for lower levels of cultural distance.