Using distance and time zone differences as a measure for coordination costs between service suppliers and consumers, we employ
a Hausman-Taylor model for services trade by foreign affiliates. Given the need for proximity in the provision of services,
factors like distance place a higher cost burden on the delivery of services in foreign markets. In addition, differences
in time zones add significantly to the cost of doing business abroad. Decomposing the impact of distance into a longitudinal
and latitudinal component and accounting for differences in time zones, it is possible to identify in detail the factors driving
the impact of increasing coordination costs on the delivery of services through foreign affiliates. Working with a bilateral
US data set on foreign affiliate sales in services this paper examines the impact of time zone differences and East-West and
North-South distance on US outward affiliate sales. Both distance as well as time zone differences have a significant positive
effect on foreign affiliate sales. By decomposing the effect of distance our results show that increasing East-West or North-South
distance by 100 kilometers raises affiliate sales by 2 percent. Finally, focusing on time zone differences our findings suggest
that affiliate sales increase the more time zones we have to overcome.
Forschungsbereich:Industrie-, Innovations- und internationale Ökonomie