Trade and logistics performance: does country size matter?

The literature on the Logistics Performance Index (LPI)-bilateral trade relationship argues that trade improves significantly with an increase in logistics excellence. The present study extends this evidence by adopting a country-size approach. We proxy a country's size by its population. Existing literature suggests that small countries perform better in terms of public sector effectiveness than larger countries and therefore are likely to have a higher LPI. Hence, the study presupposes that country size would affect LPI. Using a standard gravity model of bilateral trade, augmented with logistics measures, we endeavor to find out the differences in potential gains from improving logistics efficiency on bilateral trade flows by countries' population size. We utilize the bilateral trade data of 127 countries for the year 2016 and the weighted average values of their LPI for 2012-2018. The findings suggest that the impact of LPI on trade is the lowest among large countries, followed by small and medium countries. Beside analyzing the trade impact of LPI, we also investigate the impact of other variables, such as language, contiguity, colonialism and landlocked status. Examining the relative impact of remoteness, GDP, and regional trade agreement (RTA), while taking country population into account, our results suggest that small countries suffer the most from remoteness, both as exporters and importers. Moreover, the positive coefficient estimates of GDP and RTA tend to increase with increases in size of both exporting and importing countries, suggesting that both GDP and RTA are likely to have a lesser impact on smaller countries' trade than in the case of relatively larger countries. From a policy perspective, this study may help policymakers to determine significant areas of logistics where the investment of resources is needed the most and where such investments would give the highest returns.