UNIVERSITÄT POTSDAM - Prof. Dr. Paul JJ Welfens

this. Transaction and information costs basically are like tariffs so that exports and imports
are affected negatively. At the same time such costs add to overall costs which
reduces overall profitable output.
Establishing and expanding international business always involves the use, storage
and processing of relevant information – information about suppliers, markets,
prices, technology trends and export or import markets. Precise and adequate information
is required for choosing optimum market penetration strategies. With reduced international
communication costs expanding into international markets becomes more
easy, and therefore modern and more efficient telephone systems can be expected to
have a positive impact on trade. From a theoretical perspective – taking into account
that foreign direct investment can be an alternative for serving foreign markets which
depends on the size of firm-internal transaction costs relative to the costs of market
transactions – technological progress in telecommunications might create a bias in favor
of more firm-internal transactions. Indeed, in a dynamic perspective there might be
both more foreign direct investment and more trade, the latter reflecting creation of a
larger market radius as a consequence of falling international information and transaction
costs while a rise of FDI could reflect the interplay of the enlargement of market
radius and of reduced firm-internal transaction costs.
Given the gradual EU liberalization of telecommunications services – beginning
in 1984 already and culminating in the 1998 deadline for the liberalization of network
operation and telecommunications services – one may anticipate that international information
and communication costs will fall; it would indeed be interesting to assess
the potential impact of telecommunication systems on trade in Europe and elsewhere.
In this paper we focused on the link between the telecommunication system and trade
within the gravity approach (WELFENS / JUNGMITTAG, 2001b).
EU integration created a customs union by 1968 and thereafter the single market
by end-1992 so that trade barriers have been reduced over time. Among the important
elements of the single market program the opening-up of public procurement is rather
important; moreover, the elimination of customs controls has reduced international
transaction costs. This could mean that the role of information costs for trade has increased
over time.
International trade relations can be modeled in various ways. Particularly
prominent is the gravity equation which is based on market size in the importing and
the exporting country on the one hand; on the other hand distance plays a crucial role.
Certainly, there are also other important variables, including the role of telecommunications
which will be analyzed here.
The natural point of departure is that international telephone calls are an important
element for finding out about and arranging sales abroad or profitable imports. The
number of telecommunication minutes is one potential proxy variable for measuring
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