The extensive and intensive trade-creation effects of business and social networks

This paper analyzes the effect of business and social networks on the extensive and intensive margins of trade. Using industry-level bilateral trade data for Spanish regions in the period 2004-2008, we show that both social and business networks have a very large trade-creating effect. We find the following results: (1) Networks have a much stronger effect on the extensive than on the intensive margin of trade. (2) Migrants do not have to participate actively in the labor market to smooth the informal barriers to trade. However, when migrants participate in the labor market they help to mitigate particularly the information barriers in the industries they are employed. (3) Business groups created to diversify risks have a much lower trade-creation effect while more vertically integrated business groups do not exhibit larger trade-creation effects. (4) There are large differences in the impact of networks across industries.