Time Zones Matter: The Impact of Distance and Time Zones on Services Trade

Given the need for proximity in the provision of many services, factors such as geographical distance place a higher cost burden on the delivery of services in foreign markets as compared to goods trade. In addition, differences in time zones add significantly to the costs of service transactions. 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, by employing a Hausman-Taylor model for services trade by foreign affiliates. Both distance components as well as time zone differences have a significant positive effect on foreign affiliate sales. By decomposing the effect of distance the results show that increasing east-west or north-south distance by 100km raises affiliates sales by 2 per cent. Regarding time zone differences, the findings suggest that affiliate sales increase as hourly time zone differences get larger.