ETHNIC CHINESE NETWORKS IN INTERNATIONAL TRADEJames E. Rauch and Vitor Trindade*Abstract—We  nd that ethnic Chinese networks, proxied by the productof ethnic Chinese population shares, increased bilateral trade more fordifferentiated than for homogeneous products. This suggests that businessand social networks have a considerable quantitative impact on interna-tional trade by helping to match buyers and sellers in characteristics space,in addition to their effect through enforcement of community sanctionsthat deter opportunistic behavior. For trade between countries with ethnicChinese population shares at the levels prevailing in Southeast Asia, thesmallest estimated average increase in bilateral trade in differentiatedproducts attributable to ethnic Chinese networks is nearly 60%.I. IntroductionTHE importance of business and social networks inovercoming informal barriers to international trade isbeing increasingly recognized, both in empirical work(Gould, 1994; Belderbos & Sleuwaegen, 1998) and theoret-ical work (Greif, 1993; Rauch & Casella, 1998). Inf ormaltrade barriers may consist of weak international legal insti-tutions or inadequate information about international trad-ing opportunities. Such barrie rs, in turn, are leading candi-dates to help explain “the mystery of the missing trade”(Tre er, 1995) or the home bias in international trade foundby McCallum (1995) and many others (such as Helliwell(1998)).Among the many types of business and social networksthat exist, coethnic networks have the advantage for empir-ical research that it is much easier to identify networkmembers.1Of coethnic networks active in internationaltrade, the over seas Chinese have received the most atten-tion. (See, for example, Redding (1995).) Studies show thatnot only the overseas Chinese but also many other ethnicgroups living outside their countries of origin create formalor informal associations to which coethnic businesspeoplefrom both the host countries and the mother country haveaccess.2These associations serve as nodes for informationexchange. In this sense, the ethnic Chinese are best seen asforming a set of interlinked national networks rather than auni ed international network, although since 1991 the in-ternational links have become more formalized and perhapsstrengthened through biennia l meetings of the World Chi-nese Entrepreneurs Convention.3We will mainly addre ss two issues in this paper. First, bywhat mechanism(s) do coethnic networks overcome infor-mal barriers to international trade? Provision of informationregarding trading opportunities suggests different lessonsfor policymakers than does the me chanism of deterringopportunistic behavior through enforcement of communitysanctions. Second, what is the quantitative importance fortrade of what is probably the world’s largest and mostinternationally dispersed set of interlinked business andsocial networks? The answer is of interest in its own right,and also because it implicitly provides a lower bound on thetrade-reducing impact of informal barriers.Section II prese nts our strategy for identifying the meansthrough which ethnic Chinese networks overcome informalbarriers to international trade. In section III , we specify ourempirical model and describe our data. We present ourresults in section IV and check their robustness to somechanges in sam ple and speci cati on. In our concludingsection, we brie y discuss what guidance our re sults couldfurnish for the formulation of policy.II. Theoretical F rameworkWe study the impact of ethnic Chinese networks onbilateral trade. The work of Greif (1989, 1993) has  rmlyestablished in the literature the idea that coethnic networkscan promote inte rnational trade by providing communityenforcement of sanctions that deter violations of contracts ina weak international legal environment. This is consistentwith descriptions of the operation of ethnic Chinese net-works. For example, Weidenbaum and Hughes (1996) re-port “if a business owner violates an agreement, he isblacklisted. This is far worse t han being sued, because theentire Chinese network will refrain from doing businesswith the guilty party” (p. 51).More recent work by Gould ( 1994) and Rauch andCasella (1998) has emphasized that coethnic networks alsopromote bilateral trade by providing market information andby supplying matching and referral services, for examplehelping producers  nd the right distributors for their con-sumer goods or assemblers  nd the right suppliers for theircomponents. This is also consistent with the descriptiveReceived for publication July 6, 1999. Revision accepted for publicationJanuary 5, 2001.* University of California–San Diego and N ational Bureau of EconomicResearch, and Syracuse University, respectively.We would like to thank Alessandra Casella, John McMillan, ChrisWoodruff, and two referees for helpful comments and Max Auffhammerand Neville Francis for excellent research assistance. Previous versions ofthis paper were presented at the U.S. International Trade CommissionAPEC Symposium, the UCSD Conference “Cooperation Under Dif cultConditions,” and the Sloan Projects Globalization Conference. Financialsupport was provided by NSF grant SBR-9709237 (Rauch).1Census takers will not record the characteristic “former employee ofIBM,” yet the fact that many of the key decision-makers in the harddisk-drive industry shared this characteristic contributed to the rapid spread ofpopularity of Singapore as a site for FDI, according to industry observers(McKendrick, 1998).2The overseas Chinese, however, have been exceptional in this regard.Freedman (1967) states that “the society built up by the Overseas Chinesein Southeast Asia has always been remarkable for its wealth of voluntaryassociations” (p. 17). Lever-Tracy, Ip, and Tracy (1996) report, “ChewChoo Keng of Singapore remembered how ‘It was through my friends atthe clubs that I was able to expand my businesses into Thailand, Malaya,Burma and Indonesia’ ” (p. 104). Unfortunately, the reasons why someethnic groups form successful associations and others do not are still amystery.3Singapore was recently chosen as the venue for the  rst permanentsecretariat of the Convention (Leong, 1999).The Review of Economics and Statistics, Feb ruary 2002, 84(1): 116–130’2002 by the President and Fellows of Harvard College and the Massachusetts Institute of Technologyliterature on ethnic Chinese networks.