Indirect Transactions at a Global Scale

Abstract

This paper advances theory on arm’s length transactions by considering their causes and consequences in a novel context- global trade transactions. The study is made possible by merging comprehensive bilateral trade data from the United Nations (UNCOMTRADE) with a propriety dataset capturing bilateral payments provided by the Society of Worldwide Interbank Financial Transfers (SWIFT). The resulting dataset reveals that more than two-thirds of bilateral trade relationships are structured indirectly- African countries export their products to a trade partner, but that importing partner does not pay the exporter directly. My analysis reveals the attributes of country-level transaction relationships that use this indirect payment structure, what the performance implications are for indirect payments ties, and why countries that initially use indirect payments ties subsequently switch to direct payments (the triad closes) or vice versa. Results show that indirect payments are more likely when countries have higher gravity-based distances, dissimilar administrative institutions, weaker governance institutions, and trade in more substitutable goods. Indirect transactions, however, are associated with lower stability and lower growth in all these relationships with the exception of those with weaker governance institutions, where intermediaries are a benefit to the transacting parties. Overall, the evidence strongly suggests that direct, embedded transactions at a global level are associated with similar positive benefits that scholars have found at local, inter-firm levels. A concluding discussion highlights five important questions for future research to consider than cannot be answered by this study.