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Social Trust, Rule of Law, and Economic Exchange: Evidence from China and Its Major Trading Partners

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  • Changyun Wang
  • Zonglong Li
  • Teng Zhong

Abstract

Using cross-country panel data and employing the instrumental variable generalized method of moments (GMM) method, this article examines the effect of social trust on economic exchange between China and its major trading partners over the period 2005–2013. Social trust significantly increases bilateral trade and foreign direct investment (FDI) between China and its partners, and this effect is much stronger in nonmember countries of the Organization for Economic Cooperation and Development (OECD) than OECD member countries. Further exploration suggests that the heterogeneity could be explained by the substitution relationship between social trust and the rule of law: social trust matters more in countries where the rule of law is weaker. We also .find that the impact of trust on trade and FDI is weaker in countries that have greater language similarity to China, are adjacent to China, or are common-law-origin countries. Based on these results, in implementing the Belt and Road Initiative, the Chinese government and companies should not only focus on each country’s legal norms but also attach importance to the role of social capital in international economic exchange.

Suggested Citation

  • Changyun Wang & Zonglong Li & Teng Zhong, 2019. "Social Trust, Rule of Law, and Economic Exchange: Evidence from China and Its Major Trading Partners," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(14), pages 3134-3150, November.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:14:p:3134-3150
    DOI: 10.1080/1540496X.2019.1572505
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    Cited by:

    1. Zou, Ying & Zhong, Zhuoming & Luo, Jia, 2021. "Ethnic diversity, investment efficiency, mediating roles of trust and agency cost," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 410-420.
    2. Sila Mishra, 2023. "‘Cyclic syndrome’ of arrears and efficiency of Indian judiciary," SN Business & Economics, Springer, vol. 3(1), pages 1-27, January.

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