Marit Econ Logist

https://doi.org/10.1057/s41278-017-0094-4

ORIGINAL ARTICLE

The role of logistics performance in promoting trade

Dilay Çelebi1

Ó Macmillan Publishers Ltd., part of Springer Nature 2017

Abstract There is widespread evidence that efficiency of logistics systems is a

significant determinant of bilateral trade, but the magnitude of the effect may vary
according to economic and geographical characteristics. An important aspect con-
cerning the impact of logistics performance on trade volumes is the income level.
This paper presents the findings of a gravity model, which is empirically tested to
assess the extent to which logistics performance constitutes a facilitator to inter-
national trade. We compare the relative impact of various logistics performance
dimensions on trade, and explore the differences over country income levels. Our
research differs from previous studies in adopting an income-level approach, with
an analysis of the impact of various logistics performance dimensions. We observed
that the regulatory or trade facilitation environment could have divergent effects
depending on the level of per capita income. Particularly, low-income economies
realize highest benefits of their logistics excellence. For low- and lower-middle-
income economies, logistics excellence increases exports more than imports. On the
contrary, imports of upper-middle- and high-income economies tend to benefit more
from better logistics performance than their exports. Accordingly, collaborative acts
to improve logistics performance of partner countries may have a higher impact on
the exports of an upper-middle-income country than improving only the exporter’s
performance.

Keywords Logistics Performance Index (LPI)  International trade  Gravity model

& Dilay Çelebi

celebid@itu.edu.tr
1
Faculty of Management, Istanbul Technical University, Maçka, 34367 Istanbul, Turkey
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Introduction

Even though the share of services in the World Gross Domestic Product (GDP) has
far exceeded the share of manufacturing, the volume of world merchandise trade has
grown at a faster rate than global merchandise production (WTO 2016). This trend
demonstrates the extent globalization increases spatial interdependencies between
elements of the global economy and their level of integration (Rodrigue et al. 2009).
Opportunities are at a distance, and distances are reduced by cheaper transport and
better logistics. The growth of international trade and the increasing number of
origins and destinations promote the importance of international logistics as a
fundamental element of the global economy. Cutting average trade tariffs by half
over the past 20 years (World Bank 2015) has proven insufficient to promote trade
in desired levels, and greater reduction in trade barriers is required. For many
developing countries, trade liberalization has not necessarily led to substantial trade
integration (De Wulf and Sokol 2005). Particularly, high-income countries benefit
more from lower trade barriers and the decline in transaction costs, while low-
income countries have been marginalized in the current wave of globalization (Brun
et al. 2005). One widely accepted explanation for this phenomenon is the existence
of other determinants of trade, related to logistics inefficiencies as well as poor port
and transport infrastructure. Today, supply chain barriers are considered far more
significant impediments to international trade than trade tariffs (Moavenzadeh et al.
2013). Consequently, efficiency of logistics systems is often referred to as an
important empowering component of worldwide trade.
Numerous studies have shown a high association between improved logistics
performance and increased trade. Yet, an important aspect concerning the impact of
logistics performance on trade volumes is the income level. This requires a
differentiation in priority policy areas, because the reaction from the regulatory or
trade facilitation environment may differ according to levels of income. The main
focus of this paper is on the effect of national logistics performance on international
trade, with particular reference to country income levels. For an assessment of
logistics performance, we use the data from the World Bank’s Logistics
Performance Index (LPI), published in 2016.

A general review of literature on the impact of logistics performance

on trade

Despite the difficulties in defining and measuring performance, a number of studies

exist, examining the effect of logistics performance on trade. Limao and Venables
(2001) found a robust statistical link between transport costs and international trade
flows. Specifically, they showed that halving transport costs increases the volume of
trade by a factor of five. Wilson et al. (2005) estimated a gravity equation on the
effects of port efficiency, customs environment, service sector infrastructure, and
regulatory environment on trade flows. Nordas et al. (2006) analysed the relation
between time for exports and imports, logistics services, and international trade.
The role of logistics performance in promoting trade

Djankov et al. (2010) evaluated the effect of time sensitivity and time delays on
trade flows. Iwanow and Kirkpatrick (2009) assessed the impact of trade facilitation
and other trade-related constraints on export performance, with particular reference
to Africa. They defined three aggregate indices—trade facilitation, regulation index,
and business regulatory index—and showed that all three are highly significant
determinants of export performance. Behar and Manners (2008) found that logistics
performance is a significant determinant of trade, both for importer and exporter
counties and good logistics can reduce the impact of distance. They also show that
neighbouring countries’ logistics performance is significantly important for exports.
Particularly landlocked countries rely on the logistics of their neighbours to send
goods overseas. Hoekman and Nicita (2011) analysed the possible trade effects of
convergence by developing countries to the average levels of border protection and
trade facilitation prevailing in middle-income countries. Gupta et al. (2011)
measured the extent of restrictions on trade in logistics services in the ASEAN?6
economies by a logistics regulatory restrictiveness index. Guner and Coskun (2012)
analysed the relationship between development in logistics, measured by the LPI,
and other economic and social factors, focusing on the 26 OECD members.
Hausman et al. (2013) incorporated the effects of direct trade transactions costs,
such as charges and fees, time and variability, all of which lead to significant direct
or indirect costs that harm the export competitiveness of countries. Portugal-Perez
and Wilson (2012) constructed four aggregate indicators related to trade facilitation
from a wide range of primary indicators. Behar et al. (2013) observed consistent
evidence that an exporter’s logistics performance increases exports. Puertas et al.
(2014) analysed the impact of logistics performance on EU exports, over the period
2005–2010, to detect possible advances. They estimated various gravity equations
using the logistics performance components as proxy variables to represent trade
facilitation. In a similar study, Mart et al. (2014) have detected possible advances in
logistics in developing countries, which are grouped into five geographical regions.
Saslavsky and Shepherd (2014) focused on the distinction between final products
and components. They found that trade facilitation has a particularly strong impact
on parts and components trade.
In general, the literature supports the hypothesis that trade costs and the
efficiency of logistics systems are significant determinants of the trade flows
between countries. However, the impact of different components of logistics
performance may depend on countries’ income level, which may lead to a
differentiation of priority policy areas. There is a clear distinction among the
logistics performance of countries and income level. For example, top logistics
performers are mostly high-income countries, while worst performers mostly
consist of low- and lower-middle-income countries with severe logistics constraints
(Arvis et al. 2016). However, the relationship between the size of the logistics sector
and logistics performance is non-monotonic; the size of the logistics sector only
increases in per capita income up to a certain point, before the relationship turns
negative. Direct indicators of price and performance are related to economic
outcomes, and have a straightforward relation with per capita income (Rantasila and
Ojala 2012). Similarly, logistics bottlenecks and priorities change by income level.
For example, export lead times are twice as long in low-income countries relative to
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high-income countries (Arvis et al. 2016). Accordingly, low-income and lower-

middle-income countries have better chances of improvement by focusing on
customs operations, infrastructure, and the quality of logistics services. On the other
hand, concerns of middle- and high-income economies are sustainable logistics,
skill development and training, and international connectivity bottlenecks.
This paper presents the findings of an empirical study which aims at developing a
general understanding of the impact of LPI components on bilateral trade volumes.
Our focus is similar to the above-mentioned studies, in the use of a gravity model
for estimation procedure, as well as in the conclusion that efficiency of a country’s
logistics system is important for trade performance. Yet, our study differs from
previous studies in adopting an income-level approach, with an analysis of the
impact of various logistics performance dimensions, such as customs procedures,
quality of the infrastructure, and competence and quality of logistics services.

The role of LPI in improving trade

Description of the LPI

A multi-dimensional assessment of logistics performance, the LPI of World Bank, is

an international benchmarking tool focusing specifically on measuring the trade and
transport facilitation friendliness of a particular country. This helps understanding of
country-specific logistics challenges and opportunities. The LPI summarizes the
performance of countries through six dimensions that capture the most important
aspects of the current logistics environment (Arvis et al. 2016). Performance is
evaluated using a 5-point scale and the overall LPI is aggregated as a weighted
average of the six areas of logistics performance. Each component is defined in
detail in the following sections.

Efficiency of customs and border management clearance

The efficiency of customs w.r.t. borders clearance measures the efficiency and
effectiveness of the customs dispatch procedures in terms of speed, simplicity, and
predictability of customs agencies. Low customs performance is generally a result
of regulatory customs procedures, including time-consuming documentation,
repeated inspections by multiple agencies, and lack of border coordination and
clearance. Burdensome customs procedures are reported to pose the most significant
barrier to trade (Hummels et al. 2009). There is widespread evidence that improving
clearance procedures leads to dramatic reductions in the time taken for goods to
pass through customs (Milner et al. 2008). Logistics sector restrictiveness is another
major barrier to trade. Hollweg and Wong (2009) demonstrate a strong negative
correlation between the customs components of LPI and a foreign customs
restrictiveness.
The role of logistics performance in promoting trade

The quality of trade and transport infrastructure

Essential for assuring basic connectivity and access to gateways, infrastructure

explains much of the relative trade performance of countries. Poor transport and
communications infrastructure isolate countries and hinder their participation in
global production-transport-distribution networks. Remoteness is an important
determinant of the real costs of trade and a country’s ability to participate fully in
the world economy. The average landlocked country has transport costs 58% higher
than the average coastal economy. However, improving own infrastructure to the
level of the best quantile among landlocked countries cuts this cost penalty to 46%;
improvement by the transit cuts the penalty to 51%, and if both improvements are
made, the penalty drops to 39% (Limao and Venables 2001). In general, improving
infrastructure from the 75th to the 50th percentile increases trade by 50% and most
of Africa’s poor trade performance can be accounted for by poor infrastructure
(Limao and Venables 2001).
Even though the infrastructure dimension of LPI covers both physical and
communications infrastructure, the perceived quality of infrastructure of a country
is mainly determined by the quality of its roads and maritime facilities: the two
major modes of freight transport in developing countries. There exists a strong
positive relation between the LPI score and the quality of freight transport related
infrastructure, particularly in measures of port and road quality (Celebi et al. 2014).
Particularly, port efficiency is relevant for a large proportion of transactions related
to international trade. This is true not only for the quality of the physical
infrastructure, but also for the utilization of available facilities, the convenience of
connections to other transport modes, hinterland accessibility, and management of
administrative activities.

Ease of arranging competitively priced shipments

Availability of competitively arranged shipments is a significant determinant of

sourcing decisions and consequently of the level of national competitiveness.
Hausman et al. (2013) estimate that a 1% reduction in shipping costs increases trade
by 1.39%. Similarly, a 1% reduction in the total trade-related processing cost would
be associated with a 0.49% increase in bilateral trade.
A country’s ability to provide competitively priced shipments depends on the
cost of logistics services. The cost associated with the physical transfer of goods is
made up of a number of elements corresponding to the services provided along the
trade route. Direct costs are based on trade tariffs, which reflect the local market
conditions, macroeconomic conditions, the quality of the service, and the
management capacity of the service provider. Indirect costs are a consequence of
the service provided, which build up as financial costs resulting from poor
operations (e.g. low speed, unexpected delays), as additional costs (e.g. increased
insurance premiums), or as ‘‘consequential costs’’ (e.g. cost of lost sales). They
reflect the efficiency of the services, the level of risk involved, and the capacity of
the service providers to cope with administrative and operational problems
(Banomyong 2005).
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Competence and quality of logistics services

This subcomponent of the LPI covers different aspects of service quality

management and deals with the satisfaction of customer demand, not only with
regard to the physical nature of the products but also with regard to operational
constraints of reliability and flexibility of the logistics system. Hence, achieving
logistics excellence requires continuous improvement in reliability, responsiveness,
and supportability of the services, via continued and dedicated investment in
logistics operations through adaptation of performance specifications, commercial
standards, and resource enrichment. The quality of logistics services plays an
important role in facilitating the transportation of international trade. The LPI
results show that quality of service is driving logistics performance in both
developing and developed economies (Arvis et al. 2016). A 10% increase in an
exporter’s LPI score of competence increases the exports of developing economies
by 22–25% (Turkson 2011).

Ability to track and trace consignments

Traceability is the result of the activity of the logistics sector as a whole since all
parties in the supply chain are involved in the processes contributing to this
component. Since countries do benefit significantly from improved tracking and
tracing, it can be regarded as one of the priority areas for future investments in trade
logistics. Estimates show that the tariff equivalent of information costs barriers for
industrialized countries is 6% (Anderson and van Wincoop 2003). Nevertheless,
Evans (2003) criticizes this number as overestimated. Through a traditional gravity
equation—with GDP, distance, remoteness, and a border dummy as dependent
variables—she finds that the coefficient of the border dummy does not decrease
once a variety of industry-specific variables, related to the importance and difficulty
of information transfers, are included. Although trade costs associated with
information barriers cannot be directly measured precisely, information integration
and total supply chain visibility are viewed as integral parts for supply chain
excellence. Information visibility over trade networks provides access to location
and shipment status, which may reduce the uncertainty of shipment arrival.
Tracking and tracing shipments also provides a time-definite and controlled
sequence of logistics processes across the supply chain. As a result, a better tracking
system may enhance international trade by decreasing the uncertainties caused by
providing a more reliable, consistent and predictable flow of goods.

Timeliness of shipments in reaching destination

Time is a key factor in the tradeoff between service level and inventory costs. Time
costs are proportional to shipment size and sometimes value, which makes
timeliness a strong determinant of trade volumes. On average, each day in transit is
estimated to worth 0.8% of the value of manufactured goods (Hummels et al. 2009)
and every 10% increase in time reduces bilateral trade volumes by 5–8% (Hausman
et al. 2013; Djankov et al. 2010). Lead times, the amount of time between the
The role of logistics performance in promoting trade

placement and the receipt of the orders, can be prohibitively long, reducing trade
volumes even to zero (Nordas et al. 2006).
Not only the length but also the variability of lead times is a strong determinant
of logistics efficiency and trade volumes. The more variable the delivery time (or
demand during the delivery time), the larger the safety stocks that are needed. Thus,
even if the average lead time is low, high variability can render a supplier
uncompetitive and can be more damaging than having longer, but predictable lead
times (Nordas et al. 2006). This impact is even higher in large and complex supply
chains, due to the phenomenon known as ‘‘bullwhip effect’’, i.e. amplified
variability of demand on the upstream parts of the supply chain.
The importance of timeliness may vary according to the type of products being
exported. Exports of primary commodities are less sensitive to physical measures
and rather more sensitive to the services measures of infrastructure or, for exports of
perishable agricultural commodities, timeliness would be of utmost importance as
their value depreciates quickly (Turkson 2011). Time sensitivity of trade is
associated with the value density of the goods traded. Hence, the penalty of poor
performance in timeliness is diverse across countries. For example, for a country
that exports perishable agricultural commodities timeliness would be of utmost
importance as their value depreciates quickly. The magnitude of the timeliness
coefficient is also particularly high for exports of manufactures (Turkson 2011).

Assessment of trade facilitation over logistics performance

To capture the effect of logistics performance on trade, we use a traditional gravity

model that includes multilateral trade resistance variables augmented with logistics
performance indicators. We estimate several gravity models to quantify how
logistics performance influences trade flows using the LPI scores for 2016. After a
general analysis including all countries, we grouped countries based on estimates of
gross national income per capita. We use the four-level classification given by the
World Bank: low-income economies (LOW), lower-middle-income economies
(LMI), upper-middle-income economies (UMI), and high-income economies (HIC).
Our approach differs from earlier studies in this grouping aspect, which allows
observing if there are differences among countries with divergent income levels of
development. We also consider the direction of the trade flow, and add another
dimension of diversification by referring to country of origin and destination.

Model estimation

We model the relationship between exports and logistics using a gravity equation.
This equation has a long and successful history in explaining bilateral trade patterns,
with much of its explanatory power coming from the GDP levels of the two
countries under analysis and the distance between them. Theory has subsequently
provided foundation for the empirical success of the gravity model (Bergstrand
1985). The theoretical basis of the gravity model can be found in the work of
Anderson (1979). The widely used gravity model in international trade has its
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origins in Eq. (1). In its most elementary form, the model expresses bilateral trade
between countries i and j as a function of economic mass, inversely related to the
distance between them. This can be expressed as follows:
b b
Yi 1 Yj 2
Xij ¼ a b
; ð1Þ
dij3

where Xij is exports from country i to country j, a is a constant, Yi and Yj are the
GDPs of countries i and j, respectively, and dij is the distance between them. The
multiplicative form of (1) can be converted into a linear form, known as the tra-
ditional or empirical gravity model (Eichengreen and Irwin 1998). Anderson and
van Wincoop (2003) give a well-specified theoretically founded gravity equation in
the following form:
ln Xij ¼ b0 þ b1 Yi þ b2 Yj þ b3 ln tij þ eij ; ð2Þ
where tij includes a set of variables representing other determinants of trade,
including distance as a proxy for transport costs. The error term, eij, is assumed to be
independent and identically distributed. The geographic and historic country char-
acteristics, ln tij, in Eq. (2) take the form:

ln tij ¼ d1 ln dij þ d2 Bij þ d3 Lij þ d4 Cij þ d5 Fij þ d6 Tij þ d7 Rij þ d8 ln LPIi

þ d9 ln LPIj : ð3Þ

In Eq. (3), Bij, Lij, Cij, Fij, Tij, and Rij are dummy variables denoting, respectively,
whether the two countries have a common border, common language, and common
colonizer, whether one was a colony of the other at some point in time, whether one
of the two is a landlocked country, or whether the two countries are members of a
regional trade agreement. To reduce the problem of multicollinearity, arising
because of the correlation among the five LPI sub-components, after estimating the
impact of overall LPI score, we estimate the coefficients of the gravity model of
each sub-dimension separately.
Previous studies show that all above variables are significant determinants of
bilateral trade. With the standard specification, the gravity model does not allow
trade values to take the value of zero. Traditionally, two alternative approaches have
been used to estimate the model in levels: Heckman (1979)’s two-stage estimation
procedure and Pseudo-Poisson maximum likelihood (PPML). Poisson distribution is
numerically equivalent to Non-linear least squares (NLS) on a gravity model prior
to log-linearization (Saslavsky and Shepherd 2014). PPML has been proven robust
in the presence of heteroscedasticity (Santos Silva and Tenreyro 2006). Also to
correct for the over-dispersion problem in the standard PPML method and to
account for the unobserved heterogeneity between countries, we adopt a general-
ization of Poisson regression, the negative binomial pseudo-maximum likelihood
(NBPML), to estimate directly the non-linear form of the gravity model.
The role of logistics performance in promoting trade

Data

Our dataset covers bilateral trade data of 118 countries. We extract data of bilateral
trade for 2015 from the OECD STructural ANalysis Database (STAN)-Bilateral
Trade Database which is primarily based on Member countries’ national accounts
by activity tables, using data from other sources, such as UN Comtrade and national
industrial surveys/censuses, to estimate any missing detail (OECD 2014). Average
GDP for the same year is sourced from the World Development Indicators and
measured in constant US dollars. The set of bilateral covariates (distance,
landlocked, common language, colonial relationships, common border) is provided
from the CEPII website (CEPII 2016). To capture the latest status of trade
agreements between countries, Regional Trade Agreement (RTA) data are taken
from World Trade Organization (WTO)’s Regional Trade Agreements Information
System. The data contain several types of RTAs such as free trade agreement,
customs union, economic integration agreement, and ‘‘Partial Scope’’ Agreement.
Finally, data on the LPI and sub-indices were sourced from the World Bank (Arvis
et al. 2016). Given that our dataset includes both exporter- and importer-specific
variables, we did not impose any other dummies to control for other country-
specific effects.

Findings

We start with the simpler specification of all countries in the dataset in a traditional
cross-section gravity model, extended with overall and sub-dimensional LPI scores,
in addition to other common multilateral trade variables. Table 1 reports the trade-
related NBPML-estimated coefficients for a series of specifications given under
Eq. (3). The results in Table 1 on the full sample are widely in line with theory.
Economic size, in terms of the GDP of both exporters and importers, bilateral
distance, area, common border and language, and colonial link are significant
determinants of bilateral trade. The coefficients on the landlocked and distance
variables are of negative sign, and statistically significant. The rest of the
multilateral trade resistance variables exert a positive, statistically significant effect
on bilateral trade flows. In particular, countries that are partners in a regional trade
agreement are found to have about 47% more trade. The distance coefficient is
estimated at around 0.95, which means a 10% increase in distance would reduce
bilateral trade, by 9.5%. Remarkably, the impact of distance is higher for
developing economies.
Table 2 summarizes the regression findings under county income-level group-
ings. The first four columns present estimated coefficients when the exporting
countries are grouped under income levels, while last four columns give results for
the importing country groups. For example, for a typical high-income country A
(with score LPIA), trading with a typical country B (with score LPIB), if country A
is exporting to B, the estimated coefficient of LPIA is 2.094 and of LPIB is 1.431.
On the other hand, when country A is an importer, estimated coefficients of LPIA
and LPIB are 1.176 and 2.759, respectively.
Table 1 Estimates of gravity models of bilateral exports
Overall Customs Infrastructure Price Quality Traceability Timeliness

Dependent variable: exports

Constant - 17.448** - 17.089** - 16.669** - 18.268** - 17.177** - 17.172** - 18.185**
ln(Distance) - 0.956** - 0.967** - 0.963** - 0.945** - 0.945** - 0.951** - 0.936**
Common border 1.639 1.533** 1.607** 1.633** 1.575** 1.671** 1.569**
Common language 0.600** 0.592** 0.622** 0.620** 0.56** 0.590** 0.621**
Common colonizer 0.954** 0.935** 0.968** 0.906** 0.986** 0.942** 0.961**
Former colony 0.512* 0.512* 0.489* 0.522* 0.525* 0.512* 0.532*
Landlocked - 0.607** - 0.631** - 0.596** - 0.553** - 0.636** - 0.603** - 0.612**
RTA 0.380** 0.388** 0.396** 0.402** 0.411** 0.406** 0.375**
ln(GDP)
Exporter 0.984** 1.033** 0.987** 1.014** 0.973** 0.984** 0.969**
Importer 0.775** 0.811** 0.761** 0.810** 0.801** 0.775** 0.794**
ln(LPI)
Exporter 1.643**
Importer 1.828**
ln(Customs)
Exporter 0.792**
Importer 1.137**
ln(Infrastructure)
Exporter 1.407**
Importer 1.683**
ln(Price)
Exporter 1.381**
Importer 1.683**
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Table 1 continued

Overall Customs Infrastructure Price Quality Traceability Timeliness

ln(Quality)
Exporter 1.645**
Importer 1.272**
ln(Traceability)
Exporter 1.485**
Importer 1.674**
ln(Timeliness)
Exporter 1.960**
Importer 1.583**

* p \ 0.05, ** p \ 0.01
The role of logistics performance in promoting trade
Table 2 Estimates of gravity models by country income-level groups
Origin Destination

LOW LMI UMI HIC LOW LMI UMI HIC

Dependent variable: exports

Constant - 23.317*** - 18.984*** - 18.368*** - 16.094*** - 6.250*** - 15.590*** - 20.411*** - 20.601***
ln(Distance) - 1.677*** - 1.198*** - 1.152*** - 0.754*** - 2.105*** - 1.161*** - 1.048*** - 0.818***
Common border 2.454** 1.006** 1.437*** 1.173*** 1.342 1.271*** 1.842*** 0.968***
Common language 0.458*** 0.360*** 0.842*** 0.446*** 0.223*** 0.366*** 0.611*** 0.449***
Common colonizer 1.026 1.104$ 0.768*** 1.221*** 0.757$ 1.117** 1.179 1.061***
Former colony 0.978*** 0.359*** 0.886*** 0.592*** 0.405*** 0.999*** - 0.075*** 0.675*
Landlocked - 1.533*** - 0.376*** - 0.376** - 0.742*** - 1.714*** - 0.694*** - 0.638*** - 0.111**
RTA 0.957*** 0.426*** 0.202*** 0.422*** 1.011*** 0.313*** 0.757*** 0.144***
ln(GDP)
Exporter 1.040*** 1.236*** 0.980*** 0.860*** 1.034*** 0.958*** 1.048*** 0.990***
Importer 0.870*** 0.912* 0.723*** 0.726*** 0.612*** 0.836*** 0.674*** 0.827***
ln(LPI)
Exporter 9.345*** - 0.970*** 4.112*** 2.094*** 5.155* 2.625* 1.509*** 1.176***
Importer 3.977*** 1.252*** 2.715*** 1.431*** - 1.425*** 0.100*** 5.898*** 2.759***

* p \ 0.10, ** p \ 0.05, *** p \ 0.01

D. Çelebi
The role of logistics performance in promoting trade

The coefficient of distance decreases with increasing income level of countries.

A similar trend is also observed in the coefficient of being a landlocked country.
Low-income economies suffer the most from being landlocked, both as exporters
and importers. This implies that, other things being equal, remoteness decreases
bilateral trade in developing countries more than in developed ones. This result
supports the evidence in previous studies according to which high-income countries
benefit more from lower trade barriers and decline in transaction costs, while low-
income countries have been marginalized in the current wave of globalization
(Iwanow and Kirkpatrick 2009). All LPI-related variables have a significant positive
sign. Contrary to previous studies, the overall LPI score has slightly higher impact
on imports than on exports. Findings imply that a one per cent rise in logistics
quality of a typical importer would increase bilateral trade by 18.3%, and a one per
cent rise in logistics quality of a typical exporter would increase bilateral trade by
16.4%. For an importer country, price and infrastructure sub-components of the LPI
are most significant; countries with better infrastructure and lower shipment prices
are likely to have higher imports. Similarly, for an exporter country, major
determinants of trade are timeliness, quality, and traceability. Once controlled over
exporters’ income levels, the impact of logistics performance on trade becomes
more visible.
Particularly, low-income economies observe highest benefits of their logistics
excellence. The LPI coefficient of trade for low-income exporters is 9.34, implying
almost a 94% increase in exports for a 10% increase in LPI score. On the contrary,
when the importing country is a low-income economy (column 5), its LPI score
interestingly has a negative impact on trade. Consequently, all significant
coefficients of LPI sub-indices are negative for low-income importers. This result
can be interpreted in terms of association rather than causality. Average LPI score of
low income is lower than the world average, and low-income countries are generally
import-dependent (especially on strategic imports such as energy and food). On
average, upper-middle-income economies have the second highest coefficient for
LPI on trade. More specifically, for every 10% increase in the LPI of a typical
upper-middle-income exporter, bilateral exports increase by more than 41%,
holding the influence of the remaining determinants of trade fixed. For every 10%
increase in the LPI of a typical upper-middle-income country, bilateral imports
increase by almost 59% on average. For lower-middle-income country exports, LPI
coefficient of exporter is significant but negative in sign. On the other hand, the
imports of an average lower-middle-income country are expected to increase by
26% for a 10% increase in LPI score of the exporter. These results indicate that
when a lower-middle-income country is the exporter, the importing country’s LPI
score is a stronger determinant on the trade values than exporting country. For an
average high-income economy, both the exporter’s and importer’s LPI have a
moderate positive impact on the exports. Even though the logistics performance of
high-income economies are generally above median, countries with one per cent
higher logistics performance have 2.0% higher exports and 2.7% higher imports.
Generally, for low- and lower-middle-income economies, logistics excellence
increases exports more than imports. On the contrary, imports of upper-middle- and
high-income economies tend to benefit more from better logistics performance than
 D. Çelebi

their export. Apart from lower-middle-income economies, logistics excellence of

exporters is more important in supporting trade than that of importers. Particularly,
quality, customs, price, and traceability are the major determinants of trade for low-
income exporters. On the contrary, these coefficients are negative in sign for lower-
middle-income economies. For such countries, infrastructure and timeliness play the
major role in enhancing exports. The coefficients of all sub-dimensions of
importer’s LPI are around 2.0 for a lower-middle economy. A significant
observation for upper-middle-income economies is the importance of logistics
performance both in imports and exports. Timeliness of the shipments, competence
of logistics services, and lower transport costs are the most important factors in
determining the level of exports for such countries. For an upper-middle-income
economy, LPI score has even more positive impact on imports. For high-income
economies, destination country’s logistics performance has slightly less impact on
exports than origin country’s. Countries with better timeliness and logistics quality
tend to have more imports originating from upper-middle- and high-income
economies.
High coefficients of quality, timeliness, and better prices for low-income
economies indicate that, when importing to low-income economies, exporter
countries with better logistics services and competitive shipment prices are
advantageous. Significantly, negative coefficient of traceability coefficient implies
that tracking and tracing performance of destination country does not enhance trade
when it is a low-income economy. For lower-middle-income importers, infrastruc-
ture is again the most important factor of trade. This implies that, when the
destination country is a low-middle economy, bilateral trade is higher if the trade
and transport infrastructures of trading partners are of higher quality. Infrastructure
is again the most important determinant of exporters in trading with high-income
economies. For upper-middle- and high-income importers, coefficients of all
logistics performance sub-indices for origin and destination countries are both high,
but slightly higher for destination countries, which is an implication of the
compensating effect of logistics excellence of high-income economies in supporting
trade.

Conclusions and implications

The findings of this study contribute to an empirical assessment of the impact of

logistics performance on trade growth, thereby improving our understanding of the
relative contribution of logistics performance improvements. From a policy
perspective, our study may support resource allocation decisions by demonstrating
the areas of investments with greatest benefits. For example, among the six LPI sub-
dimensions, physical infrastructure has the greatest impact on exports in lower-
middle-income economies. On the contrary, infrastructure is not significant for
exports originating from upper-middle-income economies. Hence, policies targeting
improvements of transportation and communication infrastructure in lower-middle-
income economies are likely to be more supportive in promoting trade. Similarly,
on the average, logistics performance has a higher impact on imports of the upper-
The role of logistics performance in promoting trade

middle-income economies like China, Mexico, Thailand, and Turkey, which are
generally target markets and important trade partners of industrialized countries.
Accordingly, collaborative acts to improve logistics performance of partner
countries may have a higher impact on the exports of an upper-middle-income
country than improving only the exporter’s performance. It should be noted that
while the results of this study and the existing literature indicate that developing
countries can expect to benefit from logistics performance improvement, the
empirical results may overstate the magnitude of the potential gains. Firstly, a
potential reverse causality problem may be present, as better logistics performance
could also be driven by trade and integration, as well as the other way around.
Countries with higher trade volumes may have higher returns to invest in enhancing
logistics quality. Secondly, despite the apparent benefits of logistics performance
enhancement efforts, implementing trade facilitation reforms may require techni-
cally demanding and complex changes, and be expensive to put in place. In
addition, some measures may involve important immediate costs but deliver long-
term benefits. Even though this paper and studies alike provide a better
understanding of the relative impact of performance enhancement measures and
of the potential benefits, they may bring to global trade and to national economies,
there is still a need to provide a cost–benefit analysis of implementing such
measures.

Research limitations and directions for further research

Our methodological approach imposes the assumption that the LPI is a good
demonstrator of logistics performance. Yet, even though the LPI provides the most
comprehensive and comparable data on assessment of national logistics and trade
facilitation environments, it does not give an objective measure of logistics
performance. The compilation of the index is carried out primarily through the on-
line survey of professionals from multinational firms, engaged primarily in
international freight forwarding operations. The experience of freight forwarders,
however, may not be representative of the broader logistics environment in poor
countries, which often rely on traditional operators. Survey method is also open to
anchoring bias, which is the act of basing a judgement on a familiar reference point.
Benchmarking the countries in their geographical or economic reference set may
create a perception of inferior or superior performance; a country in a successful
anchoring group may be perceived as performing worse than another, even though
both countries have the same levels of efficiency. Environmental and geographical
constraints create a second concern of validity. The LPI reflects the perspective of
the global private sector on how countries are globally connected through their main
trade gateways. As such, the index might not fully capture changes at the country
level. For example, a low LPI score might reflect access problems outside the
country for landlocked countries and small-island states (Arvis et al. 2016).
In terms of future research, our study can be extended in various directions. For
example, our estimates are based on aggregated trade data, but the sensitivity of
trade flows with respect to logistics performance may differ systematically across
 D. Çelebi

product groups. Each product type has a particular set of technical, operational and
commercial characteristics. For example, timeliness and quality may be more
significant determinants of trade in agricultural goods, which require specific
logistics and transportation systems, able to cope with the additional challenges
arising from the perishability of products. Similarly, timeliness and customs
performance are expected to have higher impact on electronics and other high-
valued goods. On the other hand, logistics networks for items with low-value
density, such as coal, iron ore, and cement, would benefit more from better
infrastructure and lower costs of transport. Another extension of our study is
through implementing a panel data framework to have a better understanding of the
trade facilitation benefits of logistics performance over time. Finally, it is
worthwhile reminding the reader that trade growth and economic growth are not
the same thing. Logistics performance can have positive effects on economic
growth without affecting trade volumes. Our paper centres on the relationship
between trade volumes and logistics performance because this is the issue that has
received the most attention in the existing literature. We are aware that assessment
of contribution of logistics performance to economy is a controversial topic and
requires to be treated with caution.

Acknowledgements I would like to express my deepest thanks to the anonymous reviewers and
Professor Haralambides for their valuable time and effort. Their comments and suggestions helped
improve this manuscript to a great extent.

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