Culture and Trade: A Micro‐study from the Transaction Cost Perspective

Transaction costs are among the most important elements in theories of market segmentation. As interactions between individuals become increasingly frequent and interconnected, culture‐related costs have emerged as important determinants of trade in regional markets. Based on firm ‐level value‐added tax transaction data from Fujian province in China, this study employed a fixed‐effects model to examine the impact of culture on inter‐firm trade. The findings revealed that, for both suppliers and customers, improvements in transportation infrastructure promoted trade between firms that shared the same dialect, primarily by lowering trust costs. This positive effect was observed along both the intensive and extensive margins of trade. By offering a detailed account of the role of dialect‐based cultural proximity in shaping regional trade patterns, this study provides a valuable policy perspective for understanding the evolution of China's domestic trade landscape.