Background: Economic diplomacy is widely regarded as an instrument of trade promotion, particularly for small open economies seeking to strengthen their position in international markets. Objectives: This paper investigates the determinants of Croatian bilateral trade flows from 1992 to 2022 using an augmented gravity model. In addition to standard gravity variables, such as gross domestic product and geographical distance, the analysis focuses on the role of embassy presence as a proxy for economic diplomacy. Methods/Approach: The study distinguishes between two forms of diplomatic presence: Croatian embassies abroad and foreign embassies in Croatia. Given the prevalence of zero trade flows in the bilateral trade dataset, the Poisson Pseudo-Maximum Likelihood estimator is applied. Results: Embassy presence is positively associated with bilateral trade. Croatian embassies abroad are particularly relevant for facilitating exports, while foreign embassies in Croatia are more strongly associated with import flows. Conclusions: The results suggest that economic diplomacy contributes to trade development, but its effects differ across trade directions. Crisis periods also affected trade unevenly: the 2008 global financial crisis had a stronger disruptive effect on Croatian trade flows, whereas the COVID-19 pandemic appears to have had a less pronounced negative impact.
Mlinarić et al. (Thu,) studied this question.