Gravity, the English Language and International Business

Article excerpt

1 Introduction

The surge in international trade and foreign direct investment (FDI) has been well documented ([23] OECD, 2005). At the same time, there is extensive anecdotal evidence on the role of English in the global economy. As reported in the New York Times , "Over the last three years, the number of master's programs offered in English in schools with another host language has more than doubled to 3,300 programs in 1,700 universities" ([6] Carvajal, 2007). Or as reported in the Times Online :

President Chirac and his Foreign, Finance and Europe ministers walked out of an EU summit when the leader of a European business lobby, a fellow Frenchman, insisted on speaking in English because it is "the language of business" ([4] Browne, 2006).

[5] BusinessWeek (2001) magazine published an article entitled "The great English divide: in Europe, speaking the lingua franca separates the haves from the have-nots". The article notes that:

Indeed, English is becoming the binding agent of a continent, linking Finns to French and Portuguese as they move toward political and economic unification. A common language is crucial [...] to take advantage of Europe's integrated labour market.

In thinking about the impact of English on international business, there will be two effects: the intra-language effect and the inter-language effect. The intra-language effect would relate to the impact that English has in stimulating international business activity between English-speaking countries. The inter-language, commonly referred to as "lingua franca", effect refers to the impact English would have on stimulating FDI activities between countries which have different official languages. The inter-language effect would have two dimensions: the first involves the use of English by a non-English-speaking country when carrying out international business with English-speaking countries; the second involves the situation in which English is used as a vehicle language between two non-English-speaking countries that use different official languages.

The objective of this paper is to econometrically model the intra-language and inter-language effects for FDI activities at the country level and thus to document the role of language in deploying international business strategies. In the field of international economics, there exist ample empirical studies that document these two language effects for bilateral trade flows. However, there are no previous studies that have tested these two effects simultaneously. What is more important, in the field of international business, is that there are no studies measuring these two language effects for bilateral FDI activities at a macro level. In light of the availability of bilateral FDI data, we restrict our analysis to the impact that languages in general, and English in particular, have on FDI within the OECD.

We first consider the intra-language effects. It is a well-documented result in international business that a common language is associated with more FDI. We extend this line of study to measure whether any particular language yields an above- or below-average impact on FDI patterns. In a gravity model framework, we include the common language variable, and then add to the specification seven language-specific dummy variables denoting the seven common languages present within the OECD. Our results show that after accounting for these seven common languages, the common language dummy remains significant. However, only the English dummy is statistically significant for both outward and inward FDI, indicating an above-average impact of the English language. This constitutes our evidence on the intra-language effect and the special role played by English in international business.

We next consider the inter-language effects. First, we test whether the linguistic distance (LD) from English of any given language impacts the amount of FDI with English-speaking countries. …