Cultural distance and bilateral trade: A transitional economy perspective

Abstract Cultural differences represent significant trade barriers between transitional economies and their trading partners, which has been overlooked in recent studies. This paper investigates the effect of cultural distance (CD) on bilateral trade from Bangladesh. We conceptualize a research model by employing the extended gravity model as a theoretical base, where we amplify the theory by proposing that linguistic distance (LD) as a part of cultural distance has a profound effect on bilateral trade based on bilateral trade data from 1995 to 2019 and Hofstede's culture indices between Bangladesh and 157 trading partner countries. Using a pseudo‐poisson maximum likelihood model, we find that cultural distance has a significant and negative impact on Bangladesh's trade, with a significance level of 1%. Our empirical results indicate that one unit increase in cultural distance decreases trade by 40.84% and cultural distance has a greater impact on Bangladesh's exports than on its imports. Findings also reveal that the effect is substantial with high‐income nations than with low‐income nations, and for manufacturing products than primary products trade. Further, this study suggests that in addition to cultural distance (CD), linguistic distance (LD) from trading partners has a tantamount effect on bilateral trade, which is significant at 1%. Theoretically, this study suggests that linguistic distance (LD) should be added on gravity model for analyzing effects of cultural distance on bilateral and multilateral trade. Practically, this study contributes by providing valuable insights to policymakers to pay attention to cultural differences, especially during these economic transition periods to increase bilateral trade.