Economic impacts of cultural institutes

Since familiarization in language and culture enhances trust and reduces transaction costs, we hypothesize that there are positive economic effects of cultural institutes on trade and FDI. Data for the (German) Goethe-Insitut are used for the study. Our analysis based on gravity models finds significant positive effects from the establishment of the Goethe-Insitut on both trade and FDI, with stronger effects on FDI than on trade. In addition, the effects on outward FDI, imports and inward FDI are stronger for non-advanced economies than for advanced economies. The results of our analysis for the British Council are similar.