Does the Confucius Institute Network Impact Cultural Distance? A Panel Data Analysis of Cross‐Border Flows in and out of China

• Date: 01 September 2017
• Published date: 01 September 2017
• DOI: http://doi.org/10.1111/asej.12125

Does the Confucius Institute Network Impact

Cultural Distance? A Panel Data Analysis of

Cross-Border Flows in and out of China*

Sucharita Ghosh, Donald Lien and Steven Yamarik

Received 10 May 2016; Accepted 21 August 2017

This paper examines the impact of cultural distance in general and the Confucius

Institute Network in particular on cross-border flows of tourists, goods and invest-

ment in and out of China. We estimate a panel gravity model of inbound and out-

bound flows between 2004 and 2012. We find that the presence of Confucius

Institute(s) in the source country increases inbound tourism and equity flows and

outbound export and FDI flows for China, while other measures of cultural dis-

tance have less of an impact.

Keywords: Confucius Institute, China, culture, tourism, international trade, for-

eign investment, portfolio equity.

JEL classification codes: F14, F21, F22, L83, Z1.

doi: 10.1111/asej.12125

I. Introduction

While the notions of the ‘death of distance’(Cairncross, 1997) and the ‘world is

flat’(Friedman, 2005) may make for popular mainstream discussions, econo-

mists continue to investigate one of the best-established results in international

economics: that bilateral trade decreases with distance (Deardorff, 1998; Disdier

and Head, 2008; Wang et al., 2010; Buehler and White, 2015; and Bosquet and

Boulhol, 2015). Empirical studies using the gravity model show that distance

matters not only for international trade but also for foreign direct investment

(FDI; Giovanni, 2005; Guerin 2006; Petroulas, 2007), tourism flows (Gil-Pareja

et al., 2007; Keum, 2010; Anderson and Dalgaard, 2011) and portfolio equity

flows (Portes and Rey, 2005; Guerin, 2006; Aggarwal et al., 2012). Because this

negative relationship holds despite the decrease in transportation and communi-

cation costs over time, it supports the idea that intangible barriers are persistent

*Ghosh (corresponding author): Department of Economics, The University of Akron, Akron,

Ohio 44325, USA. Email: sghosh@uakron.edu. Lien: Department of Economics, University of

Texas, San Antonio, Texas 78249, USA. Yamarik: Department of Economics, California State Uni-

versity, Long Beach, CA 90840, USA and School of Economics, Henan University, Kaifeng, Henan

475001, China. We would like to thank participants at the 2016 Midwest Economics Association

Meetings for their insightful comments and suggestions.

Asian Economic Journal 2017, Vol.31 No. 3, 299–323 299

© 2017 East Asian Economic Association and John Wiley & Sons Australia, Ltd

and important in explaining the resistance to trade (Anderson and van Wincoop,

2004; Head and Mayer, 2013). These intangible barriers are transaction costs

arising from search costs, information costs and contract enforcement costs,

which could potentially increase when firms have less knowledge about foreign

cultures and markets due to cultural gaps between countries (Möhlmann

et al., 2009).

Cultural differences and inadequate information manifest themselves most

strongly at national borders and over distance (Head and Mayer, 2013). Guiso

et al. (2006; p. 23) defines culture as a set of ‘customary beliefs and values that

ethnic, religious, and social groups transmit fairly unchanged from generation

to generation’. Cross-country measures of culture have been constructed using

religion, genetics and beliefs of the population. Tabellini (2005), Guiso

et al. (2009) and Giuliano et al. (2014) find that these culture measures impact

economic development and bilateral exchange between countries.

The present paper examines the impact of cultural distance in general and the

Confucius Institute network in particular on cross-border flows of tourists, goods

and investment in and out of China. We estimate a panel gravity model of the

flow of tourists, goods and investment in and out of China between 2004 and

2012. We measure cultural distance as the number of Confucius Institutes and

Classrooms in each source country and also as overseas Chinese population and

a national cultural distance index of Kogut and Singh (1988). We find that the

presence of Confucius Institute(s) in the source country increases inbound tour-

ism and equity flows and outbound export and FDI outflows. Likewise, greater

differences in national culture decrease professional tourism and import inflows

and outbound exports and FDI outflows. For FDI inflows, only the percentage

of overseas Chinese population has its expected positive sign.

The Office of Chinese Language Council International established the Confu-

cius Institute in 2004 to promote knowledge of Chinese culture and language.

The number of Confucius Institutes has gone from 1 in 2004 to close to

500 today (Hanban, 2016). At the same time, China’s merchandise exports (and

imports) have increased three times (World Development Indicators, 2016).

Inward FDI flows grew by over 365 percent between 2004 and 2015, while port-

folio equity flows increased by 375 percent during the same period (World

Development Indicators, 2016). The number of tourists entering China increased

by 175 percent between 2004 and 2012 (Chinese Statistical Yearbook, various

issues). This dramatic increase in international trade, FDI flows, portfolio equity

inflows and tourism to China compels us to ask whether the establishment of

the Confucius Institutes, by promoting Chinese culture and raising people’s

awareness in the world of China’s reputation, has reduced the cultural distance

and, thus, increased these inward flows to China.

Previous work by Lien et al. (2012, 2014) examines the impact of Confucius

Institutes on Chinese exports and outward FDI and tourist flows into China. This

paper advances this work in three important ways. First, besides exports and out-

ward FDI, we also estimate the impact of Confucius Institutes on the inflow of

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