International trade, foreign direct investment, and transaction costs in languages

We examine the roles of major trade languages in international trade and foreign direct investment (FDI) flows. Empirical results confirm that speaking a common language increases trade and FDI flows, yet the effect of major languages is more substantial in FDI than in international trade. In addition, we find evidence of a hierarchy in transaction costs of major languages in both trade and FDI.

► This study examines the roles of major trade languages in international trade and foreign direct investment flows. ► Results find that the effect of major languages is more substantial in FDI than in international trade. ► This study highlights a hierarchy in transaction costs of major languages in both trade and FDI.