Longitude Matters: Time Zones, the location of FDI, and Trade

In recent years a lot of attention has been paid to geographic latitude and its relationship with key variables like economic growth, development, and institutional quality. In this paper we show that longitude (time zones) also matters. Using bilateral Foreign Direct Investment (FDI) data and gravity model estimations, we find that time zones have a significant impact on the location of FDI. Furthermore, we find that, once we control for time zones, distance is no longer significant. This indicates that for FDI, the relevance of distance is primary due to transaction and coordination costs (longitude) rather than transportation costs considered by the traditional specification. When we analyze trade flows, we also find a significant effect of the longitude dimension. The inclusion of time zone variables in a gravity model of trade leads to a reduction in the estimated effect of distance on trade flows. However, in the case of trade distance remains highly significant, so that both, transaction and transportation costs, seem to play an important role. These results are robust to different estimation techniques and specifications.