Journal of International Economics 71 (2007) 96 – 112

www.elsevier.com/locate/econbase

Longitude matters: Time zones and the location of

foreign direct investment
Ernesto Stein a,⁎, Christian Daude b
a
Inter-American Development Bank, 1300 New York Avenue NW, Washington, DC 20577, USA
b
Department of Economics, 3105 Tydings Hall, University of Maryland at College Park 20742, MD, USA

Received 20 October 2004; received in revised form 13 January 2006; accepted 20 January 2006

Abstract

Using bilateral foreign direct investment (FDI) data, we find that differences in time zones have a negative
and significant effect on the location of FDI. We show that this finding is robust across different specifications,
estimation methods and proxies for time zone differences. Time zones also have a negative effect on trade, but
this effect is smaller than that on FDI. Finally, the impact of the time zone effect has increased over time,
suggesting that it is not likely to vanish with the introduction of new information technologies.
© 2006 Elsevier B.V. All rights reserved.

Keywords: Foreign direct investment; Transaction costs; Time zones

JEL classification: F21; F23

1. Introduction

A lot has been written in the literature on geography and economic development about the
importance of latitude. Hall and Jones (1999), for example, find a positive correlation between the
distance to the equator and output per worker, mediated by the social infrastructure. Gallup et al.
(1999) argue that the tropical climate in locations near the equator has an adverse effect on human
health, agricultural productivity and consequently on economic growth. Acemoglu et al. (2001)
claim that tropical diseases, associated with latitude, affected the kind of settlements and
institutions colonizers established in the colonies, and thus had an important impact on their later
development path. However, little attention has been paid to the economic effects of longitude.

⁎ Corresponding author. Tel.: +1 202 623 2823; fax: +1 202 623 1772.
E-mail addresses: ernestos@iadb.org (E. Stein), daude@econ.umd.edu (C. Daude).

0022-1996/$ - see front matter © 2006 Elsevier B.V. All rights reserved.
doi:10.1016/j.jinteco.2006.01.003
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 97

In this paper, we center our attention on a variable that is closely related to longitude:
the difference in time zones between locations. In particular, we estimate the effects of time
zone differences on bilateral stocks of foreign direct investment (FDI), using OECD data for
17 OECD source countries and 58 host countries from 1997–1999. We show that
longitude–in the form of time zones–imposes important costs between the parties in a
transaction. To our knowledge, this paper is the first one to present systematic evidence of
the impact of time zone differences on the cost of doing business.
The empirical literature, in particular, the one related to the gravity model of bilateral
trade, has used two types of variables to control for transaction costs. On the one hand,
geographical characteristics of countries or country pairs, such as distance, adjacency,
remoteness, and whether one or the two countries in the pair are landlocked or islands, are
used to capture mainly transportation costs. On the other hand, variables related to cultural
and historical ties between the countries, such as common language, cultural similarities or
past colonial links, are frequently used to account for other transaction costs that may affect
the cost of doing business.1 However, none of these variables captures the transaction costs
related to the need for frequent interaction in real time between the parties. Distance, in
particular, does not capture this effect. If telephone, e-mail and teleconference
communication are close substitutes for face-to-face interaction, North–South distance
should not be such a large problem. In contrast, differences in time zones can matter even
given today's easy and low-cost communications, for the obvious reason that people at night
usually prefer to sleep.
An alternative way to communicate in real time is to travel. In this case, again, East–
West transaction costs may be more important than North–South ones, since jet lag can
affect the effectiveness of business travelers, or require longer trips to adjust to the time
difference. Jet lag, in effect, may lead to an exception to the rule that people tend to sleep
at night: those severely affected by jet lag in fact tend to sleep during the day!
The transaction costs associated to the difference in time zones should be important in
activities that are intensive in information and require a great deal of interaction in real
time. For this reason, we think that FDI offers a perfect setting in which to study the effects
of time zone differences. Frequent real-time communications should be particularly
important between headquarters and their foreign affiliates, as well as between a firm and
its prospective foreign partners.2 In this sense, while time zones may also affect bilateral
trade, the need for real-time communication is probably smaller among trading partners, so
we expect their effects to be relatively more important for FDI.
In a related paper, Kamstra et al. (2000) investigate the effect of daylight saving time
changes on equity returns. They find that returns are significantly lower immediately after
the weekend the change occurred. If sleeping disorders caused by minor time changes can
affect the patterns of judgment, reaction time and problem solving of stock market
participants, the jet lag associated to inter-continental travel should also lead to important

1
Rauch (1999), for example, finds negative effects of physical and “cultural” distance on trade, and the effect is
particularly large for differentiated goods.
2
It is possible that the effect may go in the opposite direction in some specific sectors (such as perhaps software
development), in which differences in time zones may allow multinational firms to gain some advantage by working
around the clock. Unfortunately, our data do not report FDI by sectors. Interestingly, studies in the business and
information technology literature identify time zones as a major obstacle of geographically dispersed teams in the
software sector (see, e.g., Espinosa and Carmel, 2004). Thus, this issue remains an open issue for future research.
98 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112

adverse effects.3 Portes and Rey (2005) have addressed the empirical determinants of
bilateral equity flows, finding a negative and significant impact of the bilateral distance.
Given that transportation costs should have no effect on asset trading, the authors interpret
this finding as distance being a proxy for informational costs and asymmetries between local
and foreign investors. Once they include proxies for informational aspects like the volume
of bilateral telephone call traffic, the estimated elasticity of distance is reduced, but remains
highly significant. Interestingly, when they include the number of hours that trading in the
host's and source's stock markets overlap–a variable closely related to the bilateral time
zone difference used in this paper–it has a significant and positive effect. Loungani et al.
(2002) extend Portes and Rey (2005) analysis to the case of bilateral FDI flows. Using the
same data source that we use in the present paper, they estimate gravity models for a panel
of FDI flows. They find that the coefficient of distance is significantly reduced and turns
actually insignificant in some specifications, once they account for the “transactional
distance” approximated by the bilateral telephone traffic volume. However, they do not
include in their analysis variables that may capture the time zone difference effect.4
The rest of the paper is organized as follows. Section 2 describes the data and discusses our
empirical strategy. In Section 3, we present our main results on the estimated effect of time zones
differences on the location of FDI. We find that time zones have a negative and economically
significant impact on the location of FDI. Furthermore, once we introduce time zones into the
analysis, the negative impact of distance on FDI is significantly reduced, by around 50% in our
baseline regression. We also present extensive robustness analysis of our results. In Section 4, we
present some extensions by analyzing the importance of time zones as a determinant of bilateral
trade. As expected, time zones matter also for trade, but their impact is much smaller than that on
FDI. In addition, we look at the evolution of the impact of time zones over time, using panel data
from the same OECD database, from 1988 to 1999. We find that the impact of time zones
increases over time, a result that we attribute to the development of new communications
technologies, which have reduced dramatically the cost of North–South distance, but have not
reduced the cost of East–West distance to the same extent. Finally, in Section 5, we conclude.

2. Data and empirical methodology

In order to analyze the effects of time zones on foreign direct investment, we use
bilateral data on FDI stocks from the OECD direct investment statistics. This variable is
available for 17 source countries–all of them from the OECD–and 58 host countries, which
results in a total of 986 observations. We use stocks rather than flows, because we are
interested in the level of activity of multinational enterprises, and capital stocks are a closer
proxy to multilateral activity than investment flows.5 In our cross-section regressions, we

3
The problems associated with the jet lag are obviously well known, as are the difficulties posed by time zone
differences for live communications, even in the era of internet and e-mail. In fact, the inspiration for this paper came
from the difficulties experienced while writing a recent paper with a co-author in Lebanon.
4
It is interesting to point out that the partial correlation–after controlling for the GDP of the host and source country–
between the difference in time zones and the volume of telephone traffic in 1997 is − 0.37 and significant at conventional
levels. This suggests that the volume of telephone traffic is potentially endogenous to the time zone difference.
5
Clearly, the ideal case would be to use production or affiliate sales, but given these data are not available for a large
sample of country pairs, foreign investment positions are–although imperfect–the best available proxy. It is reassuring
that Blonigen et al. (2003) find that the main results regarding their analysis are robust to using US affiliate sales or the
same FDI stock data we use here.
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 99

consider the average values for 1997–1999 to avoid the potential influence of sudden
changes in valuation of FDI. This database has been used previously by Wei (2000) to
study the effect of corruption on FDI; by Stein and Daude (2002) to address the impact of
the quality of institutions on the location of FDI; by Daude et al. (2003) to analyze the
relationship between FDI and regional integration; by Egger and Pfaffermayr (2004) to
analyze the impact of bilateral investment treaties (BITs) on FDI, and by Blonigen et al.
(2003) in order to test empirically different theories of FDI.6
Although there have been recent developments in laying the theoretical foundations of FDI
activity, as of today, there is no clearly dominant or universal theoretical framework to guide the
empirical work. Therefore, our empirical specification is designed to capture all potentially
relevant determinants of FDI. In the literature, different versions of the gravity model–which is
the standard specification in empirical models of bilateral trade–have also been used recently to
estimate the determinants of bilateral FDI stocks and flows. In its simplest formulation, the
gravity model states that bilateral trade flows (in our case bilateral FDI stocks) depend positively
on the product of the GDPs of both economies and negatively on the distance between them.
While in the trade literature the gravity model has good theoretical foundations, the use of this
model for the case of FDI is somewhat ad hoc. An alternative specification, which follows more
closely the recent theoretical work on multinational activity, is given by Carr et al. (2001) model
and a slightly different version by Blonigen et al. (2003).
Given that our priority is to identify the effect of a variable corresponding to the country-pair
that is invariant over time, we control for source and host characteristics by using source-country
and host-country dummies. By doing so, we also take care of potentially omitted variables and
unobserved heterogeneity, as well as the measurement errors and differences in reporting
methodologies across source countries previously discussed. In addition, we include other
bilateral variables that might affect the cost of doing business and whose effect–if omitted from
the analysis–could be picked up by the time zone difference, in particular several of the standard
gravity variables (like distance, adjacency, common language, common membership in a free
trade agreement, past colonial links), as well as a common bilateral investment treaty (BITs), a
common capital taxation treaty, and common legal origin. We also include some variables from
the CMM model, like the sum of GDPs, and the absolute difference in GDP per capita between
the source and the host country. Thus, the preferred specification is given by
lnðFDIij Þ ¼ bxij þ ai þ gj þ dtimezoneij þ ϵij ; ð1Þ

where FDIij is the average outward stock of FDI from source country i in host country j between 1997
and 1999 in millions of dollars, αi is a source country fixed effects, γj is a host country fixed effect, xij
is a vector that includes all bilateral control variables mentioned above, timezonesij is the variable that
captures the time zone difference between both countries, and ϵij is a random error term.7

6
The OECD recommends that a direct investment enterprise be defined as one in which a foreign investor owns 10% or
more of the ordinary shares and voting rights, and also recommends market valuation. In spite of these recommendations,
some countries use different criteria for the definition and valuation of FDI. The database also presents some problems
regarding the reporting of zeroes and missing values. In particular, source countries are not required to report values for hosts
with which FDI is zero. For this reason, the data on bilateral FDI stocks required some adjustments. The criteria we used to
distinguish the true missing values from the zeros are available upon request. More detailed information is available at http://
www.oecd.org/dataoecd/10/16/2090148pdf.
7
We also used a common religion dummy, but it is insignificant when the common legal origin dummy is included.
Therefore, we do not report results using this variable.
100 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112

The bilateral distance used is the great circle distance between the countries' capitals.8 The
adjacency, past colonial links and common language dummies were constructed using
information from the CIA's World Factbook.9 We include a dummy for common membership
in a regional trade bloc, since Daude et al. (2003) find that membership in a common regional
integration agreement increases FDI significantly. The information regarding entrance dates and
agreements was taken from Frankel et al. (1997).10 In addition, we include dummies for bilateral
investment treaties (BITs) and capital tax treaties, which Egger and Pfaffermayr (2004) and di
Giovanni (2005), respectively, have found to affect FDI.11 La Porta et al. (1998), and subsequent
research in the law and finance literature, stress the importance of legal origin on financial
market's development and institutions. Therefore, as Lane and Milesi-Ferretti (2004) for the case
of bilateral portfolio positions, we include a dummy for common legal origin, constructed using
data from La Porta et al. (2006).
Two additional control variables are included in our baseline regressions. First, we include the
sum of the GDPs (in logs) of the source and the host countries. The rationale for the inclusion is to
control for the joint “mass” that under almost any specification–whether the CMM or any gravity-
type equation–is a relevant determinant of bilateral FDI stocks.12 Second, we include the
difference in GDP per capita (in logs) between the source and the host. This variable can be seen
as a proxy for differences in factor endowments or alternatively capture relevant determinants
related to the differences in the level of development of both economies.
Finally, in order to measure the importance of time zones on FDI, in our benchmark
regressions, we use the time difference in hours between the countries' capitals. This variable
varies from 0 to 12.13 In the section on robustness, we use two alternative measures of time zone
differences, as well as a decomposition of distance into a North–South and an East–West
component. Table 1 presents summary statistics of the main variables.
The log specification is used because it has typically shown the best adjustment to the data in
the empirical trade literature. A problem that arises when using the log of FDI as a dependent
variable, however, is how to deal with the observations with zero values. Our data set includes a
large number of observations where FDI stocks are zero (about one quarter), which would be
dropped by taking logs. The problem of zero values of the dependent variable is typical in gravity
equations, and it has been dealt with in different ways. Some authors (e.g., Rose, 2000) simply
exclude the observations in which the dependent variable takes a value of zero. A problem with
this approach is that those observations may convey important information for the problem under
consideration. Zero observations could, for example, be more prevalent among countries that are
far apart in terms of their longitude. Given the importance of zero observations in our sample, this
strategy could lead to a serious estimation bias. Eichengreen and Irwin (1995) have proposed a

8
Following previous literature, in some cases other more centrally located cities were used in place of the capitals, e.g.,
Chicago in the United States in place of Washington, DC, or Shanghai in China instead of Beijing.
9
This information is available at http://www.cia.gov/cia/publications/factbook/index.
10
We only considered agreements where a significant portion of total trade (more than 50%) is liberalized, rather than
specific preferential trade agreements on only some specific goods. These decisions were based also on information from
Frankel et al. (1997).
11
The data on BITs come from UNCTAD's database at http://www.unctadxi.org/templates/DocSearch779.aspx. The
data on capital taxation treaties was kindly provided by di Giovanni. The primary data are from Taxanalysts' website
http://treaties.tax.org.
12
The correlation with the more traditional “gravity” approach of considering the log of the product of GDPs is around
0.92. Using the traditional gravity model instead does not affect the results in any significant way.
13
We construct the variable based on standard time zones, abstracting from the issue of daylight savings.
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 101

Table 1
Summary statistics of main variables
Variable Observed Mean Std. Dev. Minimum Maximum
Time zone difference 1140 4.314035 3.585109 0 12
FDI stock (avg. 1997–1999) 1046 2949.295 12,367.6 0 202,471.1
Log(1 + FDI stock) 1046 3.983091 3.505843 0 12.21836
Sum GDPs (log) 1120 24.67155 2.128342 18.21777 31.46873
Absolute difference GDP (logs) 1026 0.796939 0.676584 0.000137 2.651846
Common language 1140 0.074561 0.262798 0 1
Adjacency 1140 0.037719 0.1906 0 1
Colonial links 1140 0.007895 0.08854 0 1
Common legal origin 1000 0.221 0.415128 0 1
RTA 1064 0.178571 0.383173 0 1
Capital tax treaty 1140 0.65614 0.475203 0 1
BIT 1140 0.007895 0.08854 0 1
Distance (miles) 1140 4261.451 3202.145 35.22688 12,329.42
Log(distance) 1140 7.945225 1.041901 3.561809 9.419744
Latitude distance 1140 2000.694 1902.291 0 7278.747
Longitude distance 1140 3202.55 2434.732 3.16144 9269.531
Log(latitude distance) 1140 7.017266 1.275867 0 8.892714
Log(longitude distance) 1140 7.51407 1.325737 1.151028 9.134488
Absolute skill difference 980 3.149122 2.230307 0.01 10.36
Average nominal tariff (source) 1133 5.800247 1.865112 1.66 11.8
Average nominal tariff (host) 981 8.239919 7.456723 0 45.66
Institutions 1140 0.56373 0.770848 − 1.46259 1.712496
Tariffs host × squared diff. skills 901 163.1212 337.975 0 3856.265
Minimum time zone difference 1140 4.140351 3.55152 0 12
Office hours overlap 1140 3.960088 3.171279 0 8
Log(telephone traffic) 625 3.44302 1.704421 − 1.20397 8.867428

simple transformation to deal with the zeros problem: work with log (1 + trade), instead of the
log of trade. This has the advantage of simplicity, and the coefficients can be interpreted as
elasticities when the values of trade tend to be large, since in this case log (1 + trade)–or in our
case log (1 + FDI)–is approximately equal to log (trade). In turn, following Greene (1981), they
scale up the coefficients obtained from the OLS by a factor equal to the ratio between the total
number of observations and the number of non-zero observations. A disadvantage of this
approach is that it is somewhat ad hoc. Another approach has been to use Tobit instead of OLS.
Since we prefer this latter approach, we will derive our main results using the Tobit
specification. For robustness, however, we show that our results are robust to the use of
alternative approaches.

3. Empirical results

In the first column of Table 2, we present OLS estimations of the baseline equation using the
log of 1 + FDI as dependent variable, without including the time zone variable and without
source and host fixed effects. As discussed above, we prefer the TOBIT estimate, but it is
interesting to point out the baseline OLS regression explains successfully more than two thirds
of the total cross-country variation in bilateral FDI stocks. In addition, most estimates show the
expected sign and are statistically and economically significant. In particular, the distance
between both countries has a negative and significant impact on FDI. Its coefficient suggests
 102
Table 2
Baseline regressions
(1) (2) (3) (4) (5) (6)

E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112

Dependent Variable Ln(1 + FDI) Ln(FDI) Ln(1 + FDI) Ln(FDI) Ln(1 + FDI) Ln(FDI)
Estimation Method OLS TOBIT OLS TOBIT OLS TOBIT
GDP sum 1.023 (0.034)⁎⁎ 1.541 (0.073)⁎⁎ 1.318 (0.108)⁎⁎ 2.031 (0.211)⁎⁎ 1.353 (0.110)⁎⁎ 2.123 (0.207)⁎⁎
GDP per capita − 0.422 (0.120)⁎⁎ − 0.839 (0.243)⁎⁎ − 1.381 (0.399)⁎⁎ − 2.213 (0.783)⁎⁎ − 1.472 (0.399)⁎⁎ − 2.439 (0.784)⁎⁎
Absolute difference
Common language 1.6379 (0.246)⁎⁎ 2.108 (0.423)⁎⁎ 0.243 (0.257) − 0.154 (0.474) 0.212 (0.253) − 0.202 (0.465)
Adjacency − 0.190 (0.259) − 1.151 (0.464)⁎ − 0.066 (0.302) − 1.267 (0.542)⁎ 0.261 (0.317) − 0.577 (0.570)
Colonial links 1.2825 (0.501)⁎ 2.104 (0.872)⁎ 0.890 (0.361)⁎ 1.440 (0.741)# 0.944 (0.360)⁎⁎ 1.541 (0.716)⁎
Common legal 0.5358 (0.170)⁎⁎ 1.156 (0.327)⁎⁎ 0.856 (0.137)⁎⁎ 1.638 (0.269)⁎⁎ 0.910 (0.138)⁎⁎ 1.758 (0.266)⁎⁎
origin
Regional trade 0.010 (0.199) − 0.006 (0.350) 0.173 (0.213) 0.104 (0.407) 0.084 (0.215) − 0.092 (0.411)
agreement
Capital tax agreement 0.520 (0.187)⁎⁎ 2.180 (0.403)⁎⁎ 0.284 (0.207) 1.812 (0.428)⁎⁎ 0.130 (0.204) 1.476 (0.423)⁎⁎
Bilateral investment 1.843 (0.882)⁎ 2.894 (1.548)# 1.149 (0.707)# 1.659 (1.290) 1.034 (0.689) 1.425 (1.274)
agreement
Distance − 0.957 (0.077)⁎⁎ − 1.551 (0.159)⁎⁎ − 1.115 (0.103)⁎⁎ − 1.899 (0.204)⁎⁎ − 0.643 (0.169)⁎⁎ − 0.881 (0.325)⁎⁎
Time zone difference – – – – − 0.141 (0.038)⁎⁎ − 0.303 (0.073)⁎⁎
Observations 867 867 867 867 867 867
Censored observations – 202 – 202 – 202
R-squared 0.67 – 0.82 – 0.83 –
Log pseudo-likelihood – − 2036.70 – − 1792.71 – − 1781.91
Source effects – – 12.13⁎⁎ 135.60⁎⁎ 12.50⁎⁎ 147.74⁎⁎
significance test
Host effects – – 9.88⁎⁎ 368.84⁎⁎ 10.68⁎⁎ 374.26⁎⁎
significance test
GDP sum and distance are in logs. White-corrected robust standard errors are in parentheses. ⁎⁎, ⁎ and # denote statistical significance at 1%, 5% and 10% levels, respectively.
Source and host country tests are F-tests and chi-squared test for OLS regressions and TOBIT regression, respectively.
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 103

that when distance increases by 1%, bilateral stock of FDI falls by about 0.96%, an effect that
is slightly higher than that usually obtained in gravity models of bilateral trade, and in line with
the estimates of Portes and Rey (2005) on equity flows. In the next column, we present the
TOBIT estimates for the same specification. The statistical significance of all variables remains
the same, except for the dummy for adjacency which becomes significant. In addition, the
absolute size of all point estimates increases in line with the argument of Greene (1981)
discussed above.14 In columns 3 and 4 we include the source and host country fixed effects into
the regressions. The OLS regression shows an increase in the goodness of fit, increasing the R-
squared to 0.82. In addition, for both estimation methods the exclusion tests of these fixed
effects are statistically significant.
In the last two columns of Table 2, we include our time zone variable in the regression. The
time zone variable has a negative and significant effect on FDI. The TOBIT estimate shows that a
time zone difference of 1h reduces the bilateral FDI stock by around 26%.15 In addition, while the
magnitude and significance of all other regressors remains unchanged, the magnitude of the
distance is reduced by more than 50%, from − 1.899 to − 0.881. In the case of the OLS regression
the point estimate of the time zone effect is significant but somewhat lower, around 20%, after
adjusting the estimate by the fraction of non-censored observations. Again, as in the case of the
TOBIT estimation, the inclusion of the time zone difference reduces the coefficient of distance by
around 50%.
Next, we test the robustness of our results in several ways. First, we consider different
measures of time zone differences. Second, we analyze if our results are robust if we restrict our
sample only to industrial-developing country pairs. Third, we analyze the possibility of non-
linearities in the effect of time zones. We also check whether using a different specification, in
particular the CMM model, affects our results.
Table 3 presents the results of the TOBIT regressions using alternative specifications to capture
the time difference effects. In column 1, we consider the minimum time difference between both
countries, in order to address the problem posed by countries with multiple time zones. In column
2, we use the number of hours of overlap in office hours, assuming a standard workday from 9:00
a.m. to 5:00 p.m. in each of the locations.16 Both variables yield similar results to our basic time
zone variable.
We also decompose the distance between the source and the host countries into a latitudinal
and a longitudinal component and include both together in our regressions. Let the capital of the
source country be located at (Las, Los) and that of the host country at (Lah, Loh), denoting
longitude and latitude in gradients, respectively. We define latitudinal (or North–South) distance
as the logarithm of the great circle distance in miles from (Las, Los) to (Lah, Los), i.e., holding
constant the longitude at the source country's coordinate. Notice that this distance would be the
same if we held the longitude constant at the host country's coordinates instead. The measurement
of longitudinal (or East–West) distance is not as straightforward; a given difference in longitude
can represent a long distance, if countries are close to the equator, or a very short distance, if they
were close to the pole. Thus, the measure of longitudinal distance would differ according to

14
For example, the OLS coefficient on GDP Sum is 1.023 and the proportion of non-censored observations is
0.767 = 665/867. Therefore, adjusting the OLS according to Greene (1981) would yield an estimate of 1.334 = 1.023/
0.767, which is very similar to the TOBIT estimate, 1.318.
15
exp(− 0.303) − 1 = − 0.261.
16
This variable varies between 0 and 8 and, in contrast with the time zone difference variable, is expected to have a
positive coefficient. As mentioned above, Portes and Rey (2005) use a similar variable–the overlap in trading hours in the
respective stock exchanges–and find a positive and significant effect on bilateral equity flows.
 104
Table 3

E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112

Robustness checks to different measures of time zone differences and north–south sample
(1) (2) (3) (4) (5) (6)
Sample All All All All North–South North–South
GDP sum 2.104 (0.209)⁎⁎ 2.160 (0.205)⁎⁎ 1.949 (0.202)⁎⁎ 2.089 (0.206)⁎⁎ 0.604 (0.462) 0.583 (0.423)
GDP per capita absolute difference −2.336 (0.785)⁎⁎ − 2.533 (0.780)⁎⁎ − 2.303 (0.773)⁎⁎ − 2.468 (0.784)⁎⁎ − 6.549 (3.033)⁎ −5.556 (2.873)#
Common language − 0.115 (0.462) − 0.214 (0.470) − 0.094 (0.481) − 0.179 (0.464) 0.681 (0.822) 0.656 (0.779)
Adjacency −0.742 (0.567) − 0.511 (0.578) − 0.662 (0.562) − 0.304 (0.556) − 0.780 (1.106) 0.346 (1.187)
Colonial links 1.562 (0.723)⁎ 1.318 (0.662)⁎ 0.988 (0.726) 1.479 (0.723)⁎ 0.224 (1.025) 0.506 (0.934)
Common legal origin 1.762 (0.267)⁎⁎ 1.816 (0.267)⁎⁎ 1.866 (0.272)⁎⁎ 1.850 (0.265)⁎⁎ 0.953 (0.406)⁎ 1.110 (0.403)⁎⁎
RTA −0.024 (0.411) − 0.184 (0.417) 0.469 (0.419) − 0.004 (0.413) − 3.379 (1.986)# − 5.110 (2.062)⁎⁎
Capital tax agreement 1.475 (0.423)⁎⁎ 1.474 (0.422)⁎⁎ 1.790 (0.439)⁎⁎ 1.453 (0.424)⁎⁎ 2.929 (0.701)⁎⁎ 2.501 (0.678)⁎⁎
BIT 1.414 (1.256) 1.419 (1.267) 1.349 (1.451) 1.335 (1.311) 0.343 (1.302) 0.440 (1.114)
Distance −1.041 (0.303)⁎⁎ − 0.683 (0.355)# – – – –
Time zone difference – – – − 0.384 (0.067)⁎⁎ −0.448 (0.265)⁎⁎
Minimum time zone difference −0.266 (0.067)⁎⁎ – – – – –
Office hours overlap – 0.393 (0.089)⁎⁎ – – – –
Latitude distance – – − 0.332 (0.150)⁎ − 0.262 (0.143)# − 0.305 (0.284) −0.427 (0.408)
Longitude distance – – − 1.021 (0.143)⁎⁎ − 0.227 (0.208) − 1.796 (0.233)⁎⁎ − 0.711 (0.427)#
Observations 867 867 867 867 473 473
Censored observations 202 202 202 202 164 164
R-squared
Log pseudo-likelihood −1782.526 − 1780.14 − 1802.576 − 1783.531 − 885.624 −877.043
Test Latitude = Longitude (chi-squared [1]) – – 9.77⁎⁎ 0.02 13.38⁎⁎ 0.31
TOBIT estimates. GDP sum and distance are in logs. White-corrected robust standard errors are in parentheses. ⁎⁎, ⁎ and # denote statistical significance at 1%, 5% and 10% levels,
respectively. All regressions include source and host country fixed effects, which are not reported.
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 105

whether we hold latitude constant at the source coordinate, or at the host coordinate. Our measure
of longitudinal distance is just the average of the two.17
The results using the decomposition of distance in its North–South and East–West
components are presented in column 3. While both measures of distance are significant, the
effect of longitude distance is significantly greater than latitude, with a point estimate that is
roughly three times larger. Furthermore, column 4 shows that the difference between the East–
West and the North–South components is mainly driven by the time zone difference. When
including the time zone variable in the regression with the decomposition of distance, the
longitudinal distance turns insignificant, while the estimated time zone effect is significant and in
line with the baseline estimate from Table 2.18 Taking all the previous results together, our
findings are clearly robust to different measures of time zone differences.
In our data more than 80% of the total FDI stock is between industrial countries, which tend to
be located in the northern hemisphere. In addition, much of that FDI occurs between countries in
Europe, which are bundled together within a couple of time zones. To check whether this is
driving our results, we restrict our sample to industrial-developing country pairs.19 The results
presented in the last two columns of Table 3 show that the results with respect to the effects of
time zones differences on FDI remain similar to that for the whole sample. The longitude
coefficient is significantly greater than the latitude dimension, and once we include the time zone
difference variable, this variable is negative and highly significant, while the longitudinal distance
loses its significance.20
In order to explore the possible existence of non-linear effects of distance, we estimated the
model including dummy variables for each possible value of the bilateral difference in time
zones.21 Fig. 1 presents the estimated coefficients and the respective confidence intervals at a
95% of confidence.
Two interesting conclusions can be drawn from this graph. First, FDI declines as the time zone
difference increases. Second, the estimated effect becomes significant for differences in time
zones greater or equal to 6 h. The figure suggests that there are some non-linearities associated
with time zone differences, with the impact being larger once the difference in time zones goes

17
It is convenient here to clarify this with an example: The coordinates for Oslo, the capital of Norway, are (59°54′N,
10°45′E), while those of Bogotá, the capital of Colombia, are (4°37′N, 47°5′W). The longitudinal distance between
Oslo and Bogotá is calculated as follows: we first compute the great circle distance between (59°54′N, 10°45′E) and
(59°54′N,47°5′W). This turns out to be 2729miles. Next, we repeat the exercise, now computing the great circle
distance between (4°37′N,10°45′E) and (4°37′N,47°5′W), i.e., holding the latitude constant at the coordinate of Bogotá.
This distance turns out to be 5834miles. Not surprisingly, the second value is much greater than the first, since Oslo is
(relatively) close to the North Pole, while Bogotá is very close to the equator. Our measure of longitudinal distance
between Norway and Colombia is simply the average of these two values: 4281.5.
18
Although the correlation between the time zones variable and the longitude distance in 0.82, the significance and
relative stability in the estimated coefficient of the time zone effect compared to the baseline model indicate that
multicollinearity is not a serious issue.
19
All OECD countries except Korea, Poland, Mexico and Turkey were considered industrial countries and the
remaining countries in our sample were classified as developing. With this classification out of the final number of 982
observations, 364 are North–North and 618 are North–South.
20
We estimated the model including dummies for US investments in Latin America, European FDI in Africa and
Eastern Europe, as well as Japanese FDI in Asia, to see if the effect of time zones is driven by regional FDI patterns that
are not captured in our controls. However, the time zone coefficient remains significant and very close to the estimates
reported above.
21
Given that only 13 country pairs have a time zone difference of 12h, we aggregated them with those that have 11h
because of the imprecision in the estimate. The constant term in the regression captures the 0h time zone difference case,
such that all dummies are incremental with respect to this case.
106 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112

Fig. 1. Estimated dummy coefficients by time zone difference.

beyond a certain threshold. However, the fit of the hour-by-hour effects with respect to a linear
trend is quite good–with an R2 of 0.81–indicating that the linear structure of the effect of time
zone differences used in the previous estimations seems not to impose too rigid a structure.22
Finally, we also included a dummy for country-pairs with a time zone difference greater or equal
to 6 h. While the point estimate of the coefficient for this variable is negative, it is not significant.
Furthermore, the estimate for the time zone differences remains stable.23
We have also analyzed the sensitiveness of our results to the use of an alternative specification,
like the CMM model which follows more closely recent theory on FDI by Markusen (1997,
2001).24 In terms of our qualitative results, this alternative specification confirms our previous
findings. For all alternative measures of the time zone difference, there is a negative and
significant impact of time zones on FDI. In addition, the effects are economically significant.
Interestingly, distance was no longer significant, once we include the time zone variables. In line
with this result, when decomposing distance into latitude and longitude, only the latter had a
significant negative impact on FDI.
Finally, we also included the volume of bilateral telephone traffic used by Portes and Rey
(2005) as a proxy for information frictions, given that the time zone difference might be
picking up part of the information effect. The information variable has a significant and
positive effect on FDI, suggesting that, as in the case of portfolio flows, this variable is also
relevant for FDI. However, the time zone coefficient is still significant and negative, but the
estimate is slightly smaller. A possible explanation for this is that telephone traffic itself

22
In addition, the slope coefficient of this linear trend is − 0.33, which is in line with previous estimates. We also
explored whether the results were due to non-linearities in the distance variable, by adding a quadratic term for distance,
as well as by using distance in levels rather than logs. The results for the time zone variable do not change.
23
These regressions are not reported due to space limitations. They are available upon request.
24
For more a recent theory that incorporates firm heterogeneity in evaluating the trade-off between exporting or
investing abroad, see Helpman et al. (2004).
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 107

may be endogenous to the time zone difference. In this case, time zones would have an
effect through the volume of telephone traffic, but also a significant direct effect.25

4. Extensions

In this section, we consider two extensions of our results. First, we repeat the exercise
for bilateral trade, rather than bilateral FDI stocks. While we expect that time zones might
be important for trade as well, we expect the impact to be smaller than that in the case of
FDI. The reason is that trade transactions are not as demanding in terms of real-time
interaction between the parties as is generally the case for FDI. In the second extension, we
study the impact of time zone differences as it evolves over time. This second extension is
perhaps more fundamental, as it may provide some clues regarding the channel through
which time zone differences matter. We expect the impact to change over time, as the
development of communications and Internet technologies facilitate long distance real-time
interaction.

4.1. Time zones and bilateral trade

The OLS estimates for a traditional gravity model using trade as our dependent variables are
presented in Table 4. In our specification, we include the product of GDPs (in logs), the product of
GDP per capita (in logs), common language, adjacency, colonial links, an RTA dummy and
distance.26
In the first column of Table 4, we report the results of the basic gravity equation, without the
time zones variable. The effect of distance is smaller than that found for FDI, but roughly
consistent with the impact found in the empirical trade literature. An increase in distance of 1%
reduces bilateral trade by approximately 0.9%. In column 2, we include our basic time zone
difference variable. The coefficient for the time zone difference is negative and significant. In
columns 3 and 4, we show that the impact of time zone differences remains significant when we
use either of our alternative definitions of time zones. However, the impact of time zones for trade
is somewhat smaller than the impact on FDI. While an additional hour of time difference reduces
bilateral FDI by between 17% and 26%, the impact on trade ranges between 7% and 11%,
depending on the specification used. Second, and not surprisingly, distance itself continues to be
significant in all cases after controlling for time zone differences. In column 5 and 6, we analyze
the decomposition of distance in latitude and longitude. While the first regression shows that the
longitude effect is significantly greater than the latitude distance, the last column of Table 4 shows
that this difference is mainly driven by the time zone effect. Once we account explicitly for this
effect, the effects of latitude and longitude are both negative and significant and not statistically
different. In summary, time zones also matter for trade, although the effects are quite a bit smaller
than those on FDI.27

25
Again, the regressions are not reported due to space limitations, but are available upon request.
26
The data on trade are from the IMF Direction of Trade Statistics database for 1999. In our final sample, there are no
observations in which trade takes a value of zero. Thus, we consider just the log of exports plus imports. We also include
host and source country effects, following the suggestion by Anderson and van Wincoop (2003) to account for
“multilateral resistance”.
27
However, Melitz (2004) has proposed an alternative explanation for why latitude matters less than longitude with
regards to trade. In some cases, differences in latitude are associated with differences in comparative advantages, and
therefore increase trade.
 108
E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112
Table 4
Trade gravity model estimates and time zone differences (OLS)
(1) (2) (3) (4) (5) (6)
Product of GDPs 0.825 (0.033)⁎⁎ 0.835 (0.032)⁎⁎ 0.834 (0.033)⁎⁎ 0.849 (0.032)⁎⁎ 0.777 (0.035)⁎⁎ 0.810 (0.033)⁎⁎
Product of GDPs per capita 0.288 (0.049)⁎⁎ 0.319 (0.050)⁎⁎ 0.315 (0.049)⁎⁎ 0.336 (0.048)⁎⁎ 0.278 (0.049)⁎⁎ 0.339 (0.051)⁎⁎
Common language 0.365 (0.081)⁎⁎ 0.361 (0.077)⁎⁎ 0.383 (0.076)⁎⁎ 0.363 (0.074)⁎⁎ 0.466 (0.086)⁎⁎ 0.408 (0.078)⁎⁎
Adjacency 0.303 (0.119)⁎ 0.492 (0.124)⁎⁎ 0.477 (0.123)⁎⁎ 0.562 (0.123)⁎⁎ 0.683 (0.147)⁎⁎ 0.842 (0.134)⁎⁎
Colonial links 0.958 (0.184)⁎⁎ 0.996 (0.182)⁎⁎ 1.007 (0.182)⁎⁎ 0.959 (0.177)⁎⁎ 0.689 (0.206)⁎⁎ 0.940 (0.201)⁎⁎
RTA 0.283 (0.087)⁎⁎ 0.245 (0.087)⁎⁎ 0.252 (0.088)⁎⁎ 0.217 (0.088)⁎ 0.472 (0.104)⁎⁎ 0.321 (0.096)⁎⁎
Distance − 0.898 (0.045)⁎⁎ − 0.666 (0.072)⁎⁎ − 0.673 (0.069)⁎⁎ − 0.559 (0.073)⁎⁎ – –
Time zone difference – − 0.069 (0.015)⁎⁎ – – – − 0.139 (0.014)⁎⁎
Minimum time zone difference – – − 0.070 (0.014)⁎⁎ – – –
Office hours overlap – – – 0.110 (0.016)⁎⁎ – –
Latitude distance – – – – −0.167 (0.033)⁎⁎ − 0.141 (0.026)⁎⁎
Longitude distance – – – – −0.430 (0.045)⁎⁎ − 0.147 (0.052)⁎⁎
Observations 988 988 988 988 988 988
R-squared 0.932 0.935 0.935 0.936 0.9179 0.928
F-test Latitude = Longitude – – – – 18.91⁎⁎ 0.01
All regressions are OLS estimations and include source and host country dummies, not reported. White-corrected robust standard errors are in parentheses. ⁎⁎, ⁎ and # denote
statistical significance at 1%, 5% and 10% levels, respectively. Dependent variable is the log of exports plus imports between host and source in 1999.
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 109

Fig. 2. Time zone difference effect over time.

4.2. Evolution of the time zone effect over time

We now turn our attention to the evolution over time of the time zone effect. One of the reasons
to do this exercise is to study the impact that the development–or widespread adoption–of new
communications technologies might have on the relative cost of doing business in different
locations. Over the period under study, technologies such as the Internet or videoconference
became close substitutes to face-to-face communication, allowing cheaper and more fluid
interaction in real time among people in distant locations. While the Internet dates from the early
1970s, it was not until the beginning of the 1990s that its use–especially for business activities–
spread widely around the world.28 Similarly, while technologies for teleconference and
videoconference were available before the 1990s, the introduction of ISDN telephone lines in
the early 1990s substantially increased their reliability, and reduced their cost. But as important as
these technologies are to reduce the cost of real-time interaction, they cannot overcome the
problem on which we focus here: if time zones are very different, one or both parties in the
interaction will have to work beyond regular business hours. Thus, these technologies should
have differential effects on transaction costs, reducing those among North–South parties more
than those involved in East–West interaction.
In order to investigate the impact of time zones over time, we estimate Eq. (1) using
panel data from 1988 to 1999 and include in the regression the interaction of the time zone
difference with each of the year dummies. In this way, the coefficient of our variable of
interest is allowed to change over time.29 We restrict our analysis to those country pairs that
presented data for the whole sample, to make sure that the results are not driven by changes

28
Hobbes internet timeline at www.zakon.org/robert/internet/timeline identifies the year 1991 as the year in which the
World Wide Web was released by CERN (the European Organization for Nuclear Research), and the year 1993 as the
year in which “business and media really take notice of the internet”.
29
Note that the BIT, RTA and capital taxation treaty dummies are also time-variant.
110 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112

Table 5
Equality tests of time zone effect over time
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
1989 1.32
1990 3.57# 2.18
1991 9.06⁎⁎ 7.73⁎⁎ 5.85⁎
1992 11.89⁎⁎ 10.43⁎⁎ 8.32⁎⁎ 2.24
1993 12.51⁎⁎ 10.98⁎⁎ 8.77⁎⁎ 1.68 0.06
1994 15.39⁎⁎ 13.75⁎⁎ 11.35⁎⁎ 3.48# 1.46 1.88
1995 15.64⁎⁎ 13.93⁎⁎ 11.46⁎⁎ 2.93# 1.21 1.28 0.05
1996 19.8⁎⁎ 17.92⁎⁎ 15.15⁎⁎ 5.38⁎ 3.29# 3.73⁎ 1.82 4.32⁎
1997 22.49⁎⁎ 20.47⁎⁎ 17.49⁎⁎ 6.55⁎ 4.38⁎ 4.95⁎ 2.96# 5.04⁎ 1.26
1998 22.03⁎⁎ 19.82⁎⁎ 16.86⁎⁎ 5.26⁎ 3.27# 3.56# 1.76 2.28 0.19 0.18
1999 19.92⁎⁎ 17.79⁎⁎ 14.75⁎⁎ 3.39# 1.78 1.82 0.55 0.53 0.08 1.02 0.99
Chi-squared (1) tests. ⁎⁎, ⁎ and denote statistical significance at 1%, 5% and 10% levels, respectively. Estimated effects
#

are interactions of time zone differences with year dummies. The dependent variable is log (1 + FDI). The econometric
model includes the controls specified in Eq. (1), source-year and host-year dummies, year dummies. The estimation
method is Prais–Winsten to correct for autocorrelation.

in the sample resulting from changes in investment patterns over time. In addition, in our
preferred specification we include source-year and host-year fixed effects, in order to
account for changing unobserved country characteristics over time, as well as year dummies
to account for the trend of overall increase of FDI during the period. Given that our
dependent variable is a stock, we use the Prais–WInsten estimator to account for
autocorrelation. Since we are already controlling for distance, a differential impact of
communications technologies as discussed above would result in an increase over time in
the yearly time zone coefficients.
In Fig. 2, we plot the point estimates for four different specifications of our model. The
OLS cross-section estimates are the estimated coefficients that result from estimating year-by-
year Eq. (1). The OLS pooled results refer to the estimates of the interaction of each year
dummy with the time zone difference, including source and host country dummies, as well as
year dummies. Prais–Winsten with FE, reports the estimates of the pooled model, but
correcting for autocorrelation. Finally, Prais–Winsten FE-time allows the source and host
country effects to vary year by year. Clearly, independently of the estimation method, the point
estimates show a clear trend of a stronger time zone difference effect over time. This trend is
especially pronounced in the early 1990s, although the impact continues to change at least
until 1996.30
In Table 5 we test whether the change over time in the yearly time zone coefficients is
statistically significant and find significant evidence that the impact of time zones has been
decreasing during the early 1990s until around 1995–1996. These results are consistent with
the hypothesis that technological change is not likely to do away with the transactions costs
imposed by time zone difference. If anything, technological change may increase the
importance of this factor for the location decisions of multinational businesses.

30
It is worth mentioning that we also estimated the model using the Arellano–Bond GMM method. Although the
inclusion of the lagged dependent variable makes it harder to interpret the results, we still find a significant and negative
coefficient for the years 1991, 1995, 1996, 1997 and 1998. The results are available upon request.
 E. Stein, C. Daude / Journal of International Economics 71 (2007) 96–112 111

5. Conclusions

We have examined the effects of time zone differences on the location of FDI around the
world. The results show that time zone differences have a negative impact on bilateral FDI. This
impact is both statistically significant and economically important. Furthermore, once we
control for the time zone effect, the coefficient of the distance is significantly reduced. This
indicates that in the case of FDI an important component of distance is the East–West
component, since transaction costs in activities that require real-time interaction between a
firm's headquarters and its foreign affiliates are increasing in this dimension. Our results are
robust to different measures of time zone differences, as well as different estimation procedures.
These results suggest that empirical research on bilateral FDI should account for this effect in
order to obtain consistent estimates for their parameters of interest. They may also be helpful to
understand the patterns of competition to attract FDI. Specifically, host countries would be more
exposed to competition from other countries in proximate time zones and less exposed to
competition from potential host countries in more distant time zones, other things equal.
Finally, our results suggest that the problem posed by time zone differences has become
more relevant over time, with the introduction and widespread dissemination of new
information technologies. This link between technology and the impact of time zones is more
than mere speculation. It is a pattern that we observe more and more in everyday life, and is
supported by numerous examples: like that of an acquaintance, who works for a business
located in Washington, DC, but telecommutes from Buenos Aires; or that of the chief
economist for Latin America at the World Bank, who is currently based in Bogotá. These cases
would have been unthinkable just 10 years ago; and it would be hard to imagine the World
Bank's chief economist for Asia working from Bangkok. Interaction with the staff would be,
literally, a nightmare.

Acknowledgement

We thank the editor James Rauch and two anonymous referees for their comments; Josefina
Posadas for superb research assistance, Eduardo Levy-Yeyati, Ernesto Shargrodsky, Christian
Volpe, as well as conference participants at LACEA 2001 in Montevideo and seminar participants
at the World Bank, IDB and George Washington University for helpful suggestions. The views
expressed in this document are those of the authors and do not necessarily reflect those of the
Inter-American Development Bank.

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