Sweden´s Affinity towards Czech Republic : - A Gravity Model Approach

Abstract: Abstract It is well known that geographical distances between nations cause differences in cul-tural resemblances as well as affinity. Defined, affinity is inheriting similarities between nations in familiarity, language and mutual understanding. It cause variations in the uni-lateral trade volume flowing towards the destination countries and can be estimated by a traditional gravity model (GM). So far Swedish affinity towards Czech Republic (CZ) has remained unexplored. Hence, this paper investigates Swedish firm´s export perfor-mance and affinity towards CZ, both through the aggregate export and the extensive margin (average number of exporters). The investigation aims to seek clarification of what particular factors influence unilateral export towards CZ as well as stronger affini-ty in contrast to similar markets. To answer those questions, a one sided GM is re-gressed on two gravity equations, covering panel data for 177 destination countries from year 1997 to 2006. Results are in line with the expected behavior of the GM and show evidently; distance as well as land lock features have negative effects on unilateral ex-ports to CZ. Additionally, evidence of positive influence on unilateral export is found for GDP and familiarity to the nation. Both regressions for the gravity equations are showing high goodness of fit for the panel data. Findings of positive residuals in both the equations conclude that Swedish export have stronger affinity to CZ and solider country characteristics than its resembling countries Slovenia and Slovakia. However, positive residuals also indicate larger export flows to CZ than motivated by the tradi-tional GM coefficients. Various explanations are suggested as origins for those, such as differences in purchasing power and regions, were Prague was found to be the most suitable option for export and other regions rather for outsourcing possibilities.