Discussion Paper No. 149 of 2013 on Diplomacy and Exports: The Case of Kenya

Abstract

Diplomatic representation structures aim at achieving several goals, among them, increasing export volumes and foreign direct investment (FDI). These structures within the Kenyan context include embassies, career consulates, honorary consulates and trade offices. Using the gravity model, the study empirically analyses the contribution of these structures in increasing export volumes for the period 1980-2010. The contribution made by diplomatic representation is measured alongside other traditional determinants of trade and trading partners. The Hausman Taylor Method (HTM) is used as it overcomes the weaknesses of the random and fixed effects methods. It allows for the estimation of time invariant variables and addresses the problem of endogeneity by using internal information in the model to eliminate correlation between the error term and the included variables. Traditional determinants of export volumes such as absorptive capacity of traditional partners and regional and preferential trade agreements are still very important. Further, diplomatic representation does contribute to Kenya’s export volumes. The presence of an embassy and trade office in the trading partner significantly contributes positively to increasing export volumes. The problem arises from the non-optimal use of these structures, as the annual export growth is still very low. On the other hand, career and honorary consulates are not significant in contributing to increased volumes...