International Service Transactions: Is Time a Trade Barrier in a Connected World?

Firms’ international fragmentation of production has recently widened its focus from outsourcing of intermediates to off-shoring of business services such as software program development and international call center networks. Although many services are intangible and non-storable, gravity model estimates show that geographical distance between business partners matters less for commercial service transactions. Rather, time zones can be a driving force of international service trade by allowing for continuous operation over a 24 hours business day (continuity effect) when a proper division of labor is feasible and countries are connected to electronic communications infrastructure (ICT). But even when ICT provides alternatives for face-to-face interaction, time zones can act as a barrier when coordination problems with sleeping business partners occur (synchronization effect). In this paper, we find empirical evidence for the continuity effect in trade of business services, which is robust to measurement and sample size. Even more important is that the effect of time zones on service trade depends on access to ICT. An improvement of ICT infrastructure will affect business service trade at long time zone distances significantly more than trade at short time zone distances.