Time zones have also been found to play an important role in determining the locations of FDI.
According to Stein and Daude (2007), time zone difference imposes an important transaction cost related to the need for frequent interaction in real time between the countries, an issue that has been overlooked by the empirical literature associated with the gravity modelof bilateral trade. The authors believe that although recent advances in communication technologies have replaced the need for face-to-face interaction but still real time interaction involves serious costs when countries are located in non-overlapping time zones since people would naturally prefer to sleep during the night. An alternative way to make real time interaction possible is to travel. In that case east-west transaction costsare expected to be higher than north-south transaction costs as travelers may be affected by jet lag and require time to adjust to the time difference. Thus for information-intensive activities that require considerable real time interaction transaction costs due to time zone difference should be substantial. This study empirically corroborates that time zone differences between source and host countries havea negative and significant impact on bilateral FDI. However the impact of time zone on bilateral trade is found to be smaller than in the case of FDI as real time interaction is expected to be not as demanding in case of trade transactions as in the case of FDI. Finally the authors investigate the evolution of the time zone effect over time recognizing the improvement in technologies such as internet or video conferencing over the years which pose to be a close substitute of real time interaction.The study finds that the effect of time zone difference is increasing over time. The authors postulatethat
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technological advancement may actually reinforce the time zoneeffect because parties exposed to such technologies and located in very different time zones are now expected to work beyond regular business hours whenever real time interaction of doing business is deemed important.
Christen (2012) examines the role of distance and time zone difference as a measure of transaction cost for the delivery of services. Because service provision requires proximity and interaction between the buyer and the supplier, distance and time zone difference increase the coordination cost between service suppliers and consumers. Christen (2012) finds that both distance and time zone difference positively drive U.S. outward affiliate sales. In order to preciselycapture the transactions costs associated with distance and time zone difference, three different model specifications are used.The first specification decomposes distance into a longitudinal and latitudinal component and looks at its impact on outward affiliate sales.The empirical resultsshow a highly significant positive effect of both longitudinal and latitudinal distance on affiliate sales. An increase in any one of the two distance measures by 100 kilometers is found to increaseforeign affiliate sales by 2%.In the second specification countries are grouped with respect to different ranges of time zone difference. Compared to the reference group with no time zone difference,it is found that time zone difference of 1 or 2 hours has no significant impact on affiliate sales. However time zone difference of more than 5 hours significantly raises the need for an affiliate but again there is no impact of the time zone group of 8 to 9 hours on affiliate sales. The author suggests that there are some ranges in which time zone differences play a more important role than in others. Specifically three thresholds, 5 to 6 hours, 9 to 10.5 hours and 11 to 12 hours, are observed to significantly raise the cost of doing business abroad enhancing the level of affiliate activity in these areas. The third specification takes into account the possibility of non-linear effects of time zones by using dummy variables for every
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time zone difference in the data set. Again the results show a positive impact of time zone difference on affiliate sales as countries are located further away from the United States to the tune of 5 hours and 9hours or more in terms of time differences. These results suggest that countries within these ranges of time difference suffer from higher transaction costs due to less or no overlap in working hours and hence due to longer distance thus raising the need for provision of services through foreign affiliates. The author also reports that results are more robust for information intensive service sectors such as professional, scientific and technicalservices.
4 Conclusion
Trade between countries has traditionally been explained in terms of difference in taste, technology and endowment. New trade theory suggests that a critical factor in determining international trade patterns rests on the presence of increasing returns to scale that occurs in key industries. Following the widespread development in communication technology, however, there comes another factor that can allow two countries to involve in a trade relationship: the difference in time zones of the trading countries. When the location of two countries is such that one country's day is equivalent to the other country's night, given an efficient communication network, the production process can be effectively fragmented between these two countries. In such a scenario one country works on a product during daytime and communicates the semi-finished product at the end of the day to the other country where the day has just begun.
Therefore, there is efficient utilization of time as the production operation can occur seamlessly for twenty four hours. As a result each of these countries specializes in a particular stage of the production process. Production can be completed at a lower cost (given negligible
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communication cost) and hence the countries acquire a comparative advantage in the production of the concerned product (service) compared to the rest of the world. Even under circumstances when night shift work is possible, substituting home night shift work with other countries’ day time labor services can still make the overall production process more cost effective since night time wage rates are usually higher than daytime wages. In fact locations of firms can also bealtered to take advantage of time zone differences. This type of trade impactsthe prices and compositions of the factors used in the production of both tradeable and non-tradable goods.
Such activity also has a positive impact on welfare and growth of the trading countries.Then a natural conclusion that follows is that the more the distance between two countries less overlapping will be their time zones and hence more benefit can be extracted. Although some studies have expressed a concern that for FDI, time zone difference createsa hindrance in terms of lack of real time interaction between buyers and sellers, some other research in this area however findsthat this lack of interaction in fact positively affects foreign affiliate sales.
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