Economic Diplomacy and Bilateral Trade Flows in Times of Crisis: Evidence from Croatia

Danijel Mlinarić; Hrvoje Jošić; Antonio Vlahov

doi:10.2478/bsrj-2026-0015

.blurhash-client-img { display: none !important; }

Economic Diplomacy and Bilateral Trade Flows in Times of Crisis: Evidence from Croatia

Business Systems Research Journal

Volume 17 (2026): Issue 1 (April 2026)

By: Danijel Mlinarić, Hrvoje Jošić and Antonio Vlahov

Open Access

|May 2026

Abstract

Background

Economic diplomacy is widely regarded as an instrument of trade promotion, particularly for small open economies seeking to strengthen their position in international markets.

Objectives

This paper investigates the determinants of Croatian bilateral trade flows from 1992 to 2022 using an augmented gravity model. In addition to standard gravity variables, such as gross domestic product and geographical distance, the analysis focuses on the role of embassy presence as a proxy for economic diplomacy.

Methods/Approach

The study distinguishes between two forms of diplomatic presence: Croatian embassies abroad and foreign embassies in Croatia. Given the prevalence of zero trade flows in the bilateral trade dataset, the Poisson Pseudo-Maximum Likelihood estimator is applied.

Results

Embassy presence is positively associated with bilateral trade. Croatian embassies abroad are particularly relevant for facilitating exports, while foreign embassies in Croatia are more strongly associated with import flows.

Conclusions

The results suggest that economic diplomacy contributes to trade development, but its effects differ across trade directions. Crisis periods also affected trade unevenly: the 2008 global financial crisis had a stronger disruptive effect on Croatian trade flows, whereas the COVID-19 pandemic appears to have had a less pronounced negative impact.

References

Afesorgbor, S. K. (2018). Economic diplomacy in Africa: the impact of regional integration versusbilateral diplomacy on bilateral trade. Research Handbook on Economic Diplomacy. https://doi.org/10.4337/9781784710842.00028
Search in Google Scholar Back to article
Afman, E. R., & Maurel, M. (2010). Diplomatic relations and trade reorientation in transition countries. The Gravity Model in International Trade, 278-295. https://doi.org/10.1017/cbo9780511762109.010
Search in Google Scholar Back to article
Anderson, J. E., & van Wincoop, E. (2003). Gravity with Gravitas: A Solution to the Border Puzzle. American Economic Review, 93(1), 170-192. https://doi.org/10.1257/000282803321455214
Search in Google Scholar Back to article
Bagir, Y. E. (2017). Impact of the Presence of Foreign Missions on Trade: Evidence from Turkey, MPRA Paper 80845, University Library of Munich, Germany. https://ideas.repec.org/p/pra/mprapa/80845.html
Search in Google Scholar Back to article
Bilandžić, M., & Barun, I. (2013). Poslovna znanja u funkciji razvoja: gospodarska diplomacija u Republici Hrvatskoj, Market-Tržište, 25(1), 77-96.
Search in Google Scholar Back to article
Bugarčić, F., Ž, Stekić, N., & Tubić-Ćurčić, T. (2025). Economic diplomacy in the function of export promotion: The effects in EU versus non-EU partner countries. Politička revija, 83(1), 103-131. https://doi.org/10.5937/pr83-55146
Search in Google Scholar Back to article
DistanceFromTo. (2025). Distance between countries’ capital cities. https://www.distancefromto.net/
Search in Google Scholar Back to article
Fernandes, A., & Forte, R. (2022). The impact of economic diplomacy on exports: The Portuguese case. International Journal: Canada’s Journal of Global Policy Analysis, 77(2), 216-247. https://doi.org/10.1177/00207020221135382
Search in Google Scholar Back to article
Gil-Pareja, S., Llorca-Vivero, R., & Martínez-Serrano, J. A. (2007). The impact of embassies and consulates on tourism. Tourism Management, 28(2), 355-360. https://doi.org/10.1016/j.tourman.2006.04.016
Search in Google Scholar Back to article
Grgurević, D., Buntak, K., & Globočnik Žunac, A. (2017). Analysis models of economic diplomacy and Croatian experience, 18th International Symposium on Quality, Quality as a strategy, Vodice, Croatia, March 22nd - 24th, 2017. https://hdmk.hr/en/18th-international-symposium/
Search in Google Scholar Back to article
Hayakawa, K., Lee, H.-H., & Park, D. (2014). Do Export Promotion Agencies Increase Exports? The Developing Economies, 52(3), 241-261. https://doi.org/10.1111/deve.12048
Search in Google Scholar Back to article
Head, K., & Ries, J. (2010). Do trade missions increase trade? Canadian Journal of Economics/Revue canadienne d’économique, 43(3), 754-775. https://doi.org/10.1111/j.1540-5982.2010.01593.x
Search in Google Scholar Back to article
Martin, W., & Pham, C. S. (2020). Estimating the gravity model when zero trade flows are frequent and economically determined. Applied Economics, 52(26), 2766-2779. https://doi.org/10.1080/00036846.2019.1687838
Search in Google Scholar Back to article
Memeti, E., Abazi Alili, H., & Memeti Karemani, S. (2025). FDI inflows and employment dynamics in the Western Balkans. ENTRENOVA - ENTerprise REsearch InNOVAtion Journal, 11(1). https://doi.org/10.54820/entrenova-2025-0067
Search in Google Scholar Back to article
MFEA. (2025a). Embassies of the Republic of Croatia in the world, Available at: https://mvep.gov.hr/embassies-and-consulates/embassies-of-the-republic-of-croatia-in-the-world/244601 [15 November 2025].
Search in Google Scholar Back to article
MFEA. (2025b). Embassies of foreign countries in the Republic of Croatia https://mvep.gov.hr/embassies-and-consulates/embassies-of-foreign-countries-in-the-republic-of-croatia/244602
Search in Google Scholar Back to article
Martinčević, I. (2023). Enhancing financial performance through absorptive capacity: Evidence from Croatian export companies in domestic and international markets. Business Systems Research, 14(2), 214–238. https://doi.org/10.2478/bsrj-2023-0020
Search in Google Scholar Back to article
Mlinaric, D., Josic, H., & Thompson, C. (2022). Investigating the Effect of Diplomatic Representation on Trade: A Case Study of Croatia. Research Anthology on Macroeconomics and the Achievement of Global Stability, 1695-1713. https://doi.org/10.4018/978-1-6684-7460-0.ch089
Search in Google Scholar Back to article
Mlinarić, D. (2020). Konceptualni okvir gospodarske diplomacije. Zbornik Ekonomskog fakulteta u Zagrebu, 18(2), 155-172. https://doi.org/10.22598/zefzg.2020.2.155
Search in Google Scholar Back to article
Moons, S. J. V., & de Boer, R. (2014). Economic diplomacy, product characteristics and the level of development, ETSG 2014 conference. https://www.etsg.org/ETSG2014/Papers/105.pdf
Search in Google Scholar Back to article
Moons, S. J. V., & Bergeijk, P. A. G. (2017). Does Economic Diplomacy Work? A Meta-analysis of Its Impact on Trade and Investment, The World Economy, 40(2), 336-368. https://doi.org/10.1111/twec.12392
Search in Google Scholar Back to article
Msafiri, M., & Leyaro, V. (2024). Does economic diplomacy influence international trade? Evidence from Tanzania, Discussion Papers 2024-05, University of Nottingham, Credit. https://ideas.repec.org/p/not/notcre/24-05.html
Search in Google Scholar Back to article
Nitsch, V. (2007). State Visits and International Trade. The World Economy, 30(12), 1797-1816. https://doi.org/10.1111/j.1467-9701.2007.01062.x
Search in Google Scholar Back to article
Observatory of Economic Complexity. (2025). Trade balance of Croatia for the year 2022. https://oec.world/en/profile/country/hrv?selector404id=2022
Search in Google Scholar Back to article
Pejić Bach, M., Dumičić, K., Jaković, B., Nikolić, H., & Žmuk, B. (2018). Exploring impact of economic cost of violence on internationalization: Cluster analysis approach. International Journal of Engineering Business Management, 10, 1–15. https://doi.org/10.1177/1847979018771244
Search in Google Scholar Back to article
Peternel, I., & Grešš, M. (2021). Economic diplomacy: concept for economic prosperity in Croatia. Economic Research-Ekonomska Istraživanja, 34(1), 109-121. https://doi.org/10.1080/1331677x.2020.1774788
Search in Google Scholar Back to article
Plevnik, J. (2016). Croatia’s economic diplomacy needs long-term strategy as constructive axis for future reforms, Ekonomski pregled, 67 (2), 89-115.
Search in Google Scholar Back to article
Radošević, D. (2002). Hrvatska gospodarska diplomacija u globaliziranom svijetu, Ekonomski pregled, 53 (11-12), 1070-1086.
Search in Google Scholar Back to article
Rose, A. K. (2007). The Foreign Service and Foreign Trade: Embassies as Export Promotion. The World Economy, 30(1), 22-38. https://doi.org/10.1111/j.1467-9701.2007.00870.x
Search in Google Scholar Back to article
Santos Silva, J. M. C., & Tenreyro, S. (2006). The Log of Gravity, The Review of Economics and Statistics, 88(4), 641–658. https://doi.org/10.1162/rest.88.4.641
Search in Google Scholar Back to article
Santos Silva, J. M. C., & Tenreyro, S. (2011). Further simulation evidence on the performance of the Poisson pseudo-maximum likelihood estimator. Economics Letters, 112(2), 220-222. https://doi.org/10.1016/j.econlet.2011.05.008
Search in Google Scholar Back to article
Segura-Cayuela, R., & Vilarrubia, J. M. (n.d.). The Effect of Foreign Service on Trade Volumes and Trade Partners. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1126598
Search in Google Scholar Back to article
Škare, M., Radošević, D., & Radolović, S. (2020). Measuring the macroeconomic impact of economic diplomacy using VARFIMA model for Croatia 1990-2018. Economics & Sociology, 13(3), 230-243. https://doi.org/10.14254/2071-789x.2020/13-3/14
Search in Google Scholar Back to article
Škare, M., & Radolović, S. (2020). A Long Memory Model for Economic Diplomacy in Croatia, Journal of security and sustainability issues, 10(2), 669-682. https://doi.org/10.9770/jssi.2020.10.2(24)
Search in Google Scholar Back to article
Tinbergen, J. (1962). Shaping the world economy; suggestions for an international economic policy. New York, NY: Twentieth Century Fund.
Search in Google Scholar Back to article
Van Veestra, M. E. H., Yakop, M., & Bergeijk, P. A. G. (2010). Economic diplomacy, the Level of Development and Trade, Discussion papers in economy, 119.
Search in Google Scholar Back to article
Visser, R. (2019). The effect of diplomatic representation on trade: A panel data analysis. The World Economy, 42(1), 197-225. https://doi.org/10.1111/twec.12676
Search in Google Scholar Back to article
Volpe Martincus, C., Estevadeordal, A., Gallo, A., & Luna, J. (2010). Information barriers, export promotion institutions, and the extensive margin of trade. Review of World Economics, 146(1), 91-111. https://doi.org/10.1007/s10290-009-0043-0
Search in Google Scholar Back to article
WITS. (2025a). Croatia Exports in thousand of US$, 1992-2022. https://wits.worldbank.org/CountryProfile/en/Country/HRV/StartYear/1992/EndYear/2022/TradeFlow/Export/Partner/BY-COUNTRY/Indicator/XPRT-TRD-VL
Search in Google Scholar Back to article
WITS. (2025b). Croatia Imports in thousand of US$, 1992-2022. https://wits.worldbank.org/CountryProfile/en/Country/HRV/StartYear/1992/EndYear/2022/TradeFlow/Import/Partner/BY-COUNTRY/Indicator/MPRT-TRD-VL
Search in Google Scholar Back to article
World Bank. (2025). GDP (current US$). https://data.worldbank.org/indicator/NY.GDP.MKTP.CD
Search in Google Scholar Back to article
Yakop, M., & van Bergeijk, P. A. G. (2011). Economic diplomacy, trade and developing countries, Cambridge Journal of Regions, Economy and Society, 4(2), 253–267. https://doi.org/10.1093/cjres/rsr002.
Search in Google Scholar Back to article

Articles in this issue

DOI: https://doi.org/10.2478/bsrj-2026-0015 | Journal eISSN: 1847-9375 | Journal ISSN: 1847-8344

Journal RSS Feed

Language: English

Page range: 302 - 322

Submitted on: Nov 17, 2025

Accepted on: Apr 15, 2026

Published on: May 10, 2026

Published by: IRENET - Society for Advancing Innovation and Research in Economy

In partnership with: Paradigm Publishing Services

Publication frequency: 2 issues per year

Keywords:

augmented gravity model,

embassy,

bilateral trade,

Croatia,

panel data,

PPML

Related subjects:

Business and economics,

Business management,

Management, organization, corporate governance,

Business management, other,

Mathematics and statistics for economists,

Mathematics

© 2026 Danijel Mlinarić, Hrvoje Jošić, Antonio Vlahov, published by IRENET - Society for Advancing Innovation and Research in Economy
This work is licensed under the Creative Commons Attribution 4.0 License.

Volume 17 (2026): Issue 1 (April 2026)