The Hidden Costs of Trade: Institutional and Cultural Determinants of Export Efficiency for Vietnam’s Wood Products

Abstract

Vietnam’s wooden forest products industry is an important export sector, contributing to industrial growth and employment. However, it is facing increasing pressures related to challenges such as forest and export sustainability. Despite its potential, Vietnam’s export performance remains uneven across destination markets, related to the presence of significant unrealized trade potential. This study examines the determinants of export efficiency in Vietnam’s wooden forest products sector by moving beyond traditional gravity variables to incorporate institutional and cultural dimensions. Using a panel of 70 trading partners between 2004 and 2023, covering more than 93% of Vietnam’s total wood exports, this study employs an instrumental-variable single-stage stochastic frontier gravity model (IV-SFGM) to estimate trade potential. The results show that economic size, favorable exchange rates, and shared borders significantly enhance export performance. Furthermore, geographical distance and land enclosure remain persistent structural barriers, particularly relevant for bulky and logistics-intensive wood products. Institutional and cultural distance constitute substantial non-tariff barriers, significantly reducing export efficiency across markets. Conversely, regional trade agreements, trade freedom, and foreign direct investment play a critical role in mitigating inefficiencies and facilitating market penetration. Export efficiency in Vietnam’s wooden forest products sector indicates considerable improvement, rising from approximately 25% in the mid-2000s to over 55% in recent years, indicating notable progress in the market and highlighting considerable untapped potential. So, integrating institutional and cultural factors into a frontier-based gravity framework, this study offers novel empirical evidence from an emerging, biodiversity-rich economy with evolving governance institutions. The findings provide important policy implications for aligning export growth with institutional reform and trade liberalization, thereby contributing to the achievement of SDGs such as Decent Work and Economic Growth.

1. Introduction

The global forestry sector has long played a vital socio-economic role, with the use of wood dating back to ancient civilizations (Faye et al., 2024b; Cruz Navas & Saiz-Álvarez, 2025). While wood has served as a fundamental energy source since the discovery of fire, this reliance carries a high modern cost, as evidenced by rural households in Kyrgyzstan spending up to 50% of their income on heating (Cruz Navas & Saiz-Álvarez, 2025; Mehta et al., 2022).

Trade efficiency is the extent to which observed trade flows approach their potential levels under given economic, geographical, and institutional conditions. It has become a central concept in international trade analysis (Kalirajan, 1999; Anderson & Van Wincoop, 2003). Unlike traditional trade volume measures, trade efficiency explicitly captures the presence of unobserved frictions, such as weak institutions, regulatory complexity, and cultural misalignment, that prevent countries from exploiting their comparative advantages.

This concept is particularly relevant for emerging Asian economies such as Vietnam, where rapid export-oriented growth coexists with relatively poor institutional quality, governance challenges, and high ecological vulnerability. Vietnam is rich in forest resources and biodiversity, yet faces persistent constraints related to regulatory enforcement, sustainability governance, and institutional capacity factors that directly shape trade efficiency in natural resource-based sectors such as wooden forest products (Vietnam Country Climate and Development Report, 2022; Global Forest Resources Assessment, 2020).

Vietnam has undergone a transition from a centrally planned economy to a market economy since the major economic reform, known as Doi Moi, in 1986 (N. M. Nguyen et al., 2024). International trade in forest-based products plays a dual role in contemporary development debates. It contributes to economic growth, employment creation, and export diversification, particularly in emerging economies. Moreover, expanding trade in wood and forest products is closely linked to deforestation and biodiversity loss, making it a critical sector in the global climate change and sustainability agenda (Global Forest Resources Assessment, 2020; Pendrill et al., 2019).

In this context, improving export efficiency is no longer purely an economic objective but also a sustainability concern. Efficient trade can reduce excessive resource extraction, minimize waste along value chains, and support responsible production patterns aligned with Sustainable Development Goal (SDG) 12. At the same time, forest-related trade directly affects SDG 15 (Life on Land) through its impact on forest ecosystems and biodiversity, and SDG 13 (Climate Action) due to forests’ role as major carbon sinks (United Nations, 2015). Vietnam represents a particularly relevant case in this context. As one of the world’s leading exporters of wooden forest products, Vietnam operates at the intersection of rapid export growth, rich biodiversity endowments, and persistent institutional challenges in forest governance. Understanding the determinants of Vietnam’s export efficiency is therefore essential not only for trade policy but also for designing strategies that reconcile export competitiveness with long-term forest sustainability and climate objectives.

Despite this remarkable expansion, a critical puzzle remains. Vietnam’s export performance is highly uneven across different international markets, a disparity often attributed to insufficient investment in key regions and reliance on outdated management models (Toai, 2025). While some regions are key destinations, others remain largely untapped. This variation suggests that factors beyond basic comparative advantages, such as institutional quality, regulatory environments, and cultural affinities, play a decisive role in determining trade efficiency. Understanding these complex determinants is not merely an academic exercise; it is crucial for designing targeted policies that can sustain growth and enhance competitiveness in a sector central to Vietnam’s economic future.

This study directly addresses these gaps by applying an extended, single-stage instrumental-variable SFGM (IV-SFGM) to a comprehensive panel dataset. Covering 70 of Vietnam’s trading partners from 2004 to 2023, and accounting for 93.17% of its total wooden forest product exports, the model integrates both natural trade determinants (economic size, distance, forest area) and artificial barriers (institutional and cultural distance, trade agreements, trade freedom, FDI). Hence, by controlling for endogeneity and employing a robust single-stage approach, this research provides a more accurate and holistic assessment of Vietnam’s export efficiency.

Two central research questions guide the study. First, how do institutional and cultural distances affect Vietnam’s export efficiency in the wooden forest products sector? Second, to what extent do trade agreements, trade freedom, and foreign direct investment reduce inefficiency across destination markets? The findings aim to offer valuable insights for policymakers and industry stakeholders, informing strategies to optimize market access, improve logistics, strengthen institutional compliance, and ultimately secure Vietnam’s competitive position in the global marketplace for wooden forest products.

Against this background, Vietnam’s wooden forest products sector provides a highly relevant case for examining how institutional and cultural distances shape trade efficiency in a biodiversity-rich but institutionally constrained emerging economy. Understanding these mechanisms is essential not only for improving export performance but also for aligning trade expansion with the Sustainable Development Goals, particularly SDGs 8, 12, 13, and 15. Insights from Vietnam’s experience, therefore, offer valuable lessons for other resource-dependent developing countries seeking to balance export growth, institutional reform, and environmental sustainability.

To situate this study within the existing body of knowledge, the following section reviews the relevant theoretical and empirical literature on trade efficiency, institutional and cultural distance, and gravity-based frontier models.

2. Literature Review

2.1. Trade Efficiency and Gravity Models

The gravity model of trade, since its pioneering applications, has provided a robust framework for analyzing bilateral trade flows (De Benedictis & Taglioni, 2011; Leitão, 2024). Grounded initially in an analogy with Newtonian physics, the model posits that trade is proportional to the economic mass (e.g., GDP) of countries and inversely proportional to the distance between them. Subsequent theoretical refinements introduced the critical concept of “multilateral resistance,” accounting for the influence of third-country trade barriers. Methodological advances, such as the Poisson Pseudo-Maximum Likelihood (PPML) estimator (Santos Silva & Tenreyro, 2011; Fally, 2015), further strengthened the model’s empirical rigor by addressing heteroskedasticity and zero trade flows.

2.2. Institutional Distance and Trade Efficiency

Institutional distance refers to the degree of dissimilarity between the institutional environments of trading partners, particularly in terms of governance effectiveness, regulatory quality, rule of law, and control of corruption (Qiu et al., 2017). Greater institutional distance increases transaction costs related to contract enforcement, compliance with regulatory standards, and uncertainty in market access, thereby reducing the likelihood that actual exports reach their potential levels.

Institutional distance measures differences in governance quality between Vietnam and its trading partners. Following institutional economics and international trade literature, institutional distance is constructed as a composite index based on the six World Governance Indicators. This includes voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption (Kaufmann et al., 2010).

Greater institutional distance increases transaction costs by raising uncertainty related to contract enforcement, regulatory compliance, customs procedures, and sustainability certification. For wooden forest products, subject to legality verification and environmental standards, such divergence can significantly reduce export efficiency (Anderson & Marcouiller, 2002; Levchenko, 2007).

2.3. Cultural Distance and Trade Efficiency

Cultural distance captures differences in values, norms, communication styles, and business practices between countries, commonly operationalized through composite indices based on Hofstede’s cultural dimensions (Hofstede, 2011; Kogut & Singh, 1988). In essence, cultural distance reflects cross-country differences in values and practices, commonly measured using Hofstede’s cultural dimensions. In international trade, larger cultural distance increases information asymmetry, negotiation costs, and adaptation expenses related to product standards, marketing strategies, and buyer–seller relationships, thereby acting as an additional source of trade inefficiency.

Cultural distance captures cross-country differences in societal values and behavioral norms. This study adopts the Kogut–Singh index based on Hofstede’s six cultural dimensions (Kogut & Singh, 1988). Cultural distance raises informational and coordination costs by affecting trust formation, negotiation styles, product preferences, and certification acceptance. In the wood sector, this may hinder product adaptation and market penetration in culturally distant destinations (Tadesse & White, 2008; Lankhuizen & de Groot, 2014).

2.4. Stochastic Frontier Gravity Models and Research Gaps

A significant extension of this framework integrates stochastic frontier analysis (SFA) with the gravity model (Xu et al., 2025; Khatir & Srivastava, 2025). This stochastic frontier gravity model (SFGM) allows researchers to distinguish between a country’s potential trade and its actual trade, attributing the shortfall to systematic inefficiencies. These inefficiencies capture the tangible impact of “artificial” trade barriers, including institutional weaknesses, regulatory divergence, cultural distance, and logistical bottlenecks (Diop et al., 2022). For a sector like Vietnam’s wooden forest products, where non-tariff barriers and compliance with international standards are paramount, the SFGM is an exceptionally apt analytical tool.

Economic activity is closely tied to lending interest rates, which shape investment and consumption patterns (Duong et al., 2024). Existing literature using SFGM has identified key drivers of export efficiency, such as GDP, distance, common borders, foreign direct investment (FDI), free trade agreements (FTAs), and institutional quality (H. T. H. Nguyen & Doan, 2017; Navarro-Soto et al., 2023). However, a substantial gap persists. Many studies focus on developed economies or broad commodity categories, leaving Vietnam’s dynamic wood products sector underexplored. Moreover, a reliance on two-stage estimation procedures in previous work risks biased results if the determinants of trade flows are correlated with the inefficiency term (Wang & Schmidt, 2002). The specific, compounded roles of institutional and cultural distance, alongside trade liberalization and FDI, remain inadequately quantified in the context of an emerging Asian economy like Vietnam. Addressing these gaps, this study extends the trade efficiency literature by integrating institutional and cultural distance into a single-stage IV stochastic frontier gravity framework, with a specific focus on Vietnam’s wooden forest products sector.

3. Conceptual Framework and Theoretical Foundations

3.1. Theoretical Foundations

This study is grounded in three complementary strands of economic theory. First, the gravity theory of international trade explains bilateral trade flows as a function of economic mass and trade resistance, such as geographical distance and border effects (Kalirajan, 1999; Anderson & Van Wincoop, 2003). This framework is particularly relevant for bulky and resource-based products such as wooden forest products, where transport costs and physical distance play leading roles.

Second, the analysis draws on stochastic frontier theory, which conceptualizes observed trade flows as potentially operating below an estimated frontier due to inefficiency rather than random noise alone (Aigner et al., 1977; Battese & Coelli, 1995). Within this framework, export performance is decomposed into potential trade capacity and efficiency of market realization, allowing the identification of untapped export potential.

Third, the study incorporates insights from institutional economics and cultural economics, emphasizing that cross-border trade is shaped not only by economic fundamentals but also by institutional quality, governance compatibility, and cultural proximity (Williamson, 2000). Institutional and cultural distance increase transaction costs, contractual uncertainty, and coordination frictions, thereby reducing export efficiency even when economic fundamentals are favorable.

3.2. Conceptual Framework

Figure 1 presents the conceptual framework of the study. Vietnam’s wooden forest product exports are determined by a combination of economic capacity, geographical resistance, policy and integration factors, and institutional-cultural distance. These determinants jointly influence not only the scale of exports but also the degree to which Vietnam can convert its export potential into realized trade flows. Economic factors, including GDP per capita of Vietnam and its trading partners, reflect production capacity and purchasing power. Geographical factors such as distance, shared borders, and landlocked status represent physical trade resistance, which is particularly relevant for wood products due to their weight, volume, and logistics intensity. Policy-related variables, including regional trade agreements, trade freedom, and foreign direct investment, capture the role of economic integration and production network embeddedness. Finally, institutional and cultural distance act as structural frictions that increase transaction costs and reduce export efficiency (Figure 1).

3.3. IV-SFGM Approach Is Innovative

The methodological contribution of this study lies in the integration of an instrumental-variable single-stage stochastic frontier gravity model (IV-SFGM). Unlike conventional gravity models that estimate average trade effects, the stochastic frontier approach allows for the explicit measurement of export efficiency and unrealized trade potential. Moreover, estimating the frontier and inefficiency components in a single stage avoids the inconsistency problems associated with two-step procedures (Battese & Coelli, 1995). The use of instrumental variables further addresses potential endogeneity arising from reverse causality between trade flows, institutional quality, and foreign direct investment. By combining these elements, the IV-SFGM framework provides a more robust and policy-relevant assessment of how economic, institutional, and cultural factors jointly shape export efficiency in an emerging economy context.

4. Materials and Methods

4.1. Overview of Vietnam’s Wooden Forest Products Sector

Vietnam’s wooden forest products sector is one of the most dynamic export-oriented industries in the country and plays an increasingly important role in industrial output, employment, and foreign exchange earnings. According to the FAO and the General Statistics Office of Vietnam, by 2023, the sector accounted for approximately 6–7% of Vietnam’s total merchandise exports. It employed over 500,000 workers, primarily in labor-intensive downstream segments such as furniture manufacturing.

The industrial structure of the sector is characterized by a large number of small- and medium-sized enterprises (SMEs), which represent more than 90% of total firms, alongside a limited number of large-scale exporters that dominate high-value-added furniture exports. While small firms are mainly engaged in preliminary processing and subcontracting, large enterprises—often with foreign ownership—operate integrated production chains, adopt international certification standards, and are more deeply embedded in global value chains (Pardo, 2021).

In terms of product composition, Vietnam’s wooden forest product exports are highly concentrated in furniture and interior wood products, which account for approximately 70–75% of the total export value. Key export items include wooden furniture for living rooms, bedrooms, and kitchens, followed by plywood, wood panels, and processed wood components. In contrast, low-value products such as firewood and raw timber play only a marginal role, reflecting a relatively high level of downstream processing and sectoral sophistication compared with other developing exporters (ITTO, 2016).

The export market structure is geographically concentrated. The United States, the European Union, Japan, China, and South Korea collectively absorb more than 75% of Vietnam’s wooden forest product exports. However, export efficiency remains uneven across destinations. While ASEAN and East Asian markets exhibit relatively high realization rates of export potential, several distant and institutionally dissimilar markets—particularly in Europe and the Americas—remain underexploited due to regulatory complexity, sustainability requirements, and cultural barriers.

Foreign direct investment (FDI) plays a pivotal role in shaping the sector’s export performance. Major FDI inflows originate from countries such as China, South Korea, Japan, and Taiwan, contributing significantly to capital accumulation, technological upgrading, and compliance with international quality and sustainability standards. FDI firms are disproportionately represented among top exporters and tend to achieve higher export efficiency due to superior management practices and global market access (Doan & Xing, 2018).

Finally, the sector operates under increasing sustainability pressures. International markets impose stringent requirements related to legality, traceability, carbon emissions, and biodiversity conservation through mechanisms such as the EU Timber Regulation, the EU–Vietnam FLEGT Voluntary Partnership Agreement, and forest certification schemes (FSC, PEFC). These institutional and regulatory conditions make the wooden forest products sector particularly sensitive to institutional distance, cultural distance, and trade governance—factors that this study explicitly incorporates into the analytical framework.

4.2. Study Area and Data Sources

This study addresses significant gaps in the trade efficiency literature by examining Vietnam’s wooden forest product exports through an innovative methodological framework. At the same time, climate change manifests in Vietnam through rising temperatures and divergent rainfall patterns, with projected increases in the south and decreases in the north (Cruz Navas & Saiz-Álvarez, 2025) This research focuses on the institutional and economic determinants of export performance. Utilizing an unbalanced panel dataset covering 70 major trading partners (2004–2023) representing 93.17% of Vietnam’s wooden forest product exports, the study draws on comprehensive data sources including WITS for trade flows, World Bank indicators for macro-economic variables, CEPII for geographical data, Hofstede Insights for cultural dimensions, World Governance Indicators for institutional metrics, and Heritage Foundation for trade freedom indices.

The existing literature remains limited by its focus on developed economies and manufacturing sectors, its reliance on problematic two-stage estimation procedures prone to endogeneity, and its inadequate attention to institutional and cultural dimensions in emerging economies. This research addresses these limitations by applying a single-stage instrumental-variable stochastic frontier gravity model (IV-SFGM) to investigate two central questions: (1) How do institutional and cultural distances affect Vietnam’s export efficiency in wooden forest products? (2) To what extent do trade agreements, trade freedom, and foreign direct investment reduce inefficiency across destination markets? This approach aligns with recent advancements in frontier-based gravity modeling (S. L. Nguyen et al., 2023). It contributes to the integration of institutional and behavioral dimensions into trade efficiency analysis while overcoming methodological weaknesses of traditional approaches. The use of internationally recognized, publicly accessible databases ensures reliability and comparability across the studied partner countries (

Table 1. Data and their sources.

Variable	Unit/Type	Definition	Source
EX	Thousand USD (log)	Export value of Vietnam’s wooden forest products to partner i	WITS (2023)
GPCVN	USD (log)	GDP per capita of Vietnam	World Bank (WDI)
GPC	USD (log)	GDP per capita of partner i	World Bank (WDI)
DIST	Kilometers (log)	Great-circle distance between the capitals of Vietnam and partner i	CEPII GeoDist (2022)
AREA	km2 (log)	Forest area of partner i	CEPII (2022)
LOCKEDLAND	Dummy	1 = landlocked country; 0 = otherwise	CEPII GeoDist
BORDER	Dummy	1 = shares a land border with Vietnam; 0 = otherwise	CEPII GeoDist
INST_DIST	Index	Institutional distance (composite index based on six WGI dimensions)	World Bank WGI (2023)
CULT_DIST	Index	Cultural distance (Kogut–Singh index based on Hofstede’s six cultural dimensions)	Hofstede Insights
TRADEFREE	Index (0–100)	Trade freedom index of partner i	Heritage Foundation
FDI	Million USD	FDI inflows from partner i into Vietnam	World Bank (WDI)
FTA/BTA	Dummy	1 = Vietnam has an FTA/BTA with partner i	WTO; Vietnam Ministry of Industry and Trade
WTO	Dummy	1 = partner i is a WTO member	WTO

).

4.3. Data and Their Sources

Table 1 summarizes all variables used in the empirical analysis, including their definitions, units of measurement, and data sources. For further details on the data sources, the relevant links are provided in the Supplementary Materials.

4.4. Model Specification

We estimate a stochastic frontier gravity model (SFGM) that combines the canonical gravity specification with a stochastic frontier to separate random shocks from systematic shortfalls (inefficiency) in observed bilateral exports. The baseline model is expressed in log form as

$$\begin{array}{cc}\mathrm{l}\mathrm{n}(E{X}_{it})={\beta }_0+& {\beta }_1{\mathrm{l}\mathrm{n}(GPCVN}_t)+{\beta }_2{\mathrm{l}\mathrm{n}(GPC}_{it})+{\beta }_3{\mathrm{l}\mathrm{n}(DIST}_i)+{\beta }_4{\mathrm{l}\mathrm{n}(AREA}_i)\hfill \\ & +{\beta }_5{\mathrm{l}\mathrm{n}(RER}_{it})+{\beta }_6{\mathrm{B}\mathrm{O}\mathrm{R}\mathrm{D}\mathrm{E}\mathrm{R}}_i+{\beta }_7{\mathrm{L}\mathrm{O}\mathrm{C}\mathrm{K}\mathrm{E}\mathrm{D}\mathrm{L}\mathrm{A}\mathrm{N}\mathrm{D}}_i+{\beta }_8{\mathrm{F}\mathrm{T}\mathrm{A}}_{it}+{\beta }_9{\mathrm{W}\mathrm{T}\mathrm{O}}_{it}\hfill \\ & +{\beta }_{10}{\mathrm{T}\mathrm{R}\mathrm{A}\mathrm{D}\mathrm{E}\mathrm{F}\mathrm{R}\mathrm{E}\mathrm{E}}_{it}+{\beta }_{11}{\mathrm{F}\mathrm{D}\mathrm{I}}_{it}+v_{it}-u_{it}\hfill \end{array}$$

where ${EX}_{it}$ denotes the export value (thousand USD) of Vietnam’s wooden forest products to the partner $i$ in the year $t$ (thousand USD, log-transformed), ${GPCVN}_t$ and ${GPC}_{it}$ represents the GDP per capita of Vietnam and the partner $i$, respectively. ${DIST}_i$ captures bilateral geographical distance, ${AREA}_i$ denotes the forest area of the importing country, and ${RER}_{it}$ is the bilateral real exchange rate. Dummy variables ${BORDER}_i$ and ${LOCKEDLAND}_i$ control for shared borders and landlocked geography. Trade policy and market access conditions are captured by indicators for free trade agreements (${FTA}_{it}$), WTO membership (${WTO}_{it}$), trade freedom (${TRADEFREE}_{it}$), and inward FDI from partner $i$ to Vietnam (${FDI}_{it}$).

The error structure consists of a two-sided random disturbance $v_{it}$, capturing statistical noise and measurement error, and a one-sided non-negative inefficiency term $u_{it}$, reflecting the shortfall of actual exports from their potential frontier level.

4.4.1. Distributional Assumptions

The random error term is assumed to follow a normal distribution:

$$v_{it}~N\left(0,{\delta }_v^2\right),$$

and for the inefficiency term we adopt a truncated-normal specification:

$$u_{it}~N^{+}\left({\mu }_{it},{\delta }_u^2\right),$$

As a robustness check, alternative specifications employing a half-normal distribution are also estimated.

4.4.2. Inefficiency Determinants Equation

The conditional mean of inefficiency is specified as a function of institutional and cultural distance:

$${\mu }_{it}={\delta }_0+{\delta }_1{INST\_DIST}_i+{\delta }_2{CULT\_DIST}_i+{\delta }_3{TRADEFREE}_{it}+{\delta }_4{FDI}_{it}$$

This formulation allows institutional quality, cultural proximity, and policy-related factors to influence export efficiency directly, rather than indirectly affecting trade flows through a two-stage procedure.

4.4.3. Endogeneity Control and Estimation Procedure

To address potential endogeneity arising from reverse causality and omitted variable bias—particularly for GDP and real exchange rate variables—the model is estimated using a single-stage instrumental-variable stochastic frontier gravity approach (IV-SFGM). Instruments are drawn from lagged macro-economic indicators and augmented Solow-type variables. First-stage diagnostics, including F-statistics and over-identification tests.

All estimations are conducted using Stata 17 with appropriate user-written routines, incorporating year fixed effects and clustered standard errors.

4.4.4. Trade Efficiency Measure

Export efficiency is computed as

$${TE}_{it}=epx(-u_{it}),$$

where $0<{TE}_{it}\le 1.$ A value of one indicates that observed exports reach their estimated potential, while lower values reflect unrealized trade potential due to inefficiency.

In the stochastic frontier gravity framework, the deviation of observed exports from the estimated trade frontier is decomposed into a random noise component and a non-negative inefficiency term. Following Battese and Coelli, the inefficiency term $u_{it}$ is explicitly modeled as a function of observable country-pair characteristics that systematically affect Vietnam’s ability to realize its export potential in wooden forest products markets (Khatir & Srivastava, 2025).

Specifically, the inefficiency equation is specified as

$$u_{it}=z_{it}\delta +w_{it}$$

where $z_{it}$ is a vector of inefficiency determinants, $\delta$ is a vector of parameters to be estimated, and $w_{it}$ is a truncated-normal random variable.

The vector $z_{it}$ includes institutional distance, cultural distance, trade freedom, foreign direct investment inflows, and participation in free trade or bilateral trade agreements. These variables capture non-price frictions and structural constraints—such as governance divergence, cultural barriers, regulatory openness, and production linkages—that affect export performance beyond traditional gravity factors.

We report point estimates and standard errors for both the frontier $\beta$ and inefficiency $\delta$ parameters. In addition, we report the variance components of the error term

$${\delta }_v^2\left(varianceofrandomnoise\right),{\delta }_u^2\left(varianceofinefficiency\right)$$

$${\delta }^2={\delta }_u^2+{\delta }_v^2,\gamma ={\displaystyle \frac{{\delta }_u^2}{{\delta }_u^2+{\delta }_v^2}}$$

The parameter $\gamma \in [0;1]$ measures the relative contribution of inefficiency to the total deviation from the trade frontier. A value of $\gamma$ close to one indicates that most of the deviation is attributable to inefficiency rather than random shocks.

To formally test for the presence of inefficiency effects, we conduct a likelihood-ratio (LR) test of the null hypothesis $H_0:{\delta }_u^2=0$. Rejection of the null supports the use of a stochastic frontier specification over a conventional gravity model.

4.5. Estimation Technique

This study employs an extended stochastic frontier gravity model (SFGM) as its primary analytical framework. Building on the seminal work of (Kalirajan, 1999), the SFGM allows us to decompose the deviation of observed exports from their potential into two components: random stochastic noise and systematic inefficiency. We parameterize the inefficiency term itself, modeling it as a function of the key institutional (Battese & Coelli, 1988; Ondrich & Ruggiero, 2001), cultural, and trade-related characteristics that may constrain Vietnam’s export potential.

To complement this analysis and ensure the robustness of our findings, we also apply the Poisson Pseudo-Maximum Likelihood (PPML) estimator. The PPML is specifically used to assess the direct impact of trade agreements, FDI, trade freedom, and institutional and cultural distance on the efficiency scores. This technique is particularly valuable as it mitigates biases arising from heteroskedasticity and the prevalence of zero trade flows in our dataset.

5. Results

5.1. Descriptive Statistics

The descriptive statistics of the key variables used in the model are presented in

Table 2. Descriptive statistics. Source: author’s calculation based on WITS, World Bank, and CEPII data.

Variable	Obs	Mean	Std. Dev.	Min	Max
ln(EX)	1399	24.726	4.316	0.000	32.582
ln(GPCVN)	1400	17.332	0.296	16.823	17.780
ln(GPC)	1393	12.399	1.371	7.735	14.847
ln(DIST)	1400	8.734	0.827	6.172	9.851
ln(RER)	1393	10.966	14.203	0.001	99.596
ln(AREA)	1400	12.359	1.988	6.578	16.611
LOCKEDLAND	1400	0.071	0.258	0.000	1.000
BORDER	1400	0.043	0.203	0.000	1.000

. The dependent variable, log of export value (ln(EX)), has a mean of 24.726 and a standard deviation of 4.316, suggesting a moderate level of variation across partner countries. For the explanatory variables, the log of Vietnam’s GDP per capita (ln(GPCVN)) and that of importing partners (ln(GPC)) show stable distributions, indicating relatively consistent economic growth during the study period. The real exchange rate (ln(RER)) demonstrates higher variability, reflecting fluctuations in external competitiveness. Geographical characteristics, such as landlocked status and common borders, also highlight potential cost and market access differences among partners.

5.2. Correlation Analysis

The correlation matrix (

Table 3. Descriptive statistics.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
(1) ln(EX)	1.000
(2) ln(GPCVN)	0.245 ***	1.000
(3) ln(GPC)	0.374 ***	−0.083 ***	1.000
(4) ln(DIST)	−0.144 ***	0.000	0.230 ***	1.000
(5) ln(RER)	0.166 ***	−0.200 ***	0.511 ***	0.248 ***	1.000
(6) ln(AREA)	0.077 ***	0.000	−0.240 ***	0.243 ***	−0.187 ***	1.000
(7) LOCKEDLAND	−0.022	0.000	0.061 **	−0.096 ***	−0.022	−0.136 ***	1.000
(8) BORDER	0.073 ***	0.000	−0.298 ***	−0.453 ***	−0.149 ***	0.121 ***	0.215 ***	1.000

*** p < 0.01, ** p < 0.05, * p < 0.1.

) provides preliminary insights into the relationships between the explanatory variables and export values. As expected, both Vietnam’s GDP per capita and the partner’s GDP per capita are strongly positively correlated to ln(EX). Geographical distance shows a negative correlation with trade flows (r = –0.144, p < 0.01), supporting the hypothesis that physical distance remains a barrier to trade. Institutional and cultural distance variables also exhibit significant associations, confirming the importance of transaction costs beyond geography.

5.3. Stochastic Frontier Gravity Model (SFGM) Estimates

Table 4. SFGM estimation results.

	Coefficient	Standard Error	z	p-Value
ln(GPCVN)	0.884 ***	0.107	8.230	0.000
ln(GDPC)	0.815 ***	0.113	7.200	0.000
ln(DIST)	−0.381 *	0.211	−1.810	0.071
ln(RER)	0.024 **	0.011	2.090	0.036
ln(AREA)	0.378 ***	0.067	5.610	0.000
LOCKEDLAND	−2.195 ***	0.427	−5.140	0.000
BORDER	1.429 **	0.637	2.240	0.025

Note: Estimates are based on the stochastic frontier gravity model. ***, **, * denote significance at the 1%, 5%, and 10% levels.

reports the baseline results from the stochastic frontier gravity model (SFGM). The coefficients of Vietnam’s GDP per capita (0.884) and that of its importing partners’ GDP per capita (0.815) are both positive and highly significant (p < 0.01), indicating that larger economic size enhances export potential. The distance coefficient has a negative value (–0.381), indicating that higher transport costs have a negative impact on export efficiency. Interestingly, the importing country’s forest area (0.378, p < 0.01) is positively associated with Vietnamese wood exports, which may reflect re-export activities or demand for specific types of wood not available domestically. Being landlocked significantly decreases export performance (–2.195, p < 0.01), while sharing a common border increases trade (1.429, p < 0.05).

These findings are consistent with gravity model expectations: economic size and demand capacity facilitate exports, while distance and landlocked geography impede them.

5.4. Export Efficiency Scores

The estimated export efficiency scores indicate how actual exports compare to potential levels. Figure 2 shows a pronounced rightward shift in the distribution of export efficiency over time. In the 2004–2008 period, the median efficiency is only 0.057, indicating that at least half of Vietnam’s trading relationships operated at less than 6% of their potential level. By contrast, the median efficiency rises to 0.237 in 2009–2013, 0.381 in 2014–2018, and 0.429 in 2019–2023. This upward movement of the entire distribution—rather than only its upper tail—suggests a broad-based improvement in export efficiency across partners.

Export efficiency score (Actual exports/Potential exports)

Distribution of export efficiency scores across trading partners and sub-periods (2004–2023). Export efficiency is defined as the ratio of observed exports to estimated potential exports derived from the stochastic frontier gravity model. A value of one indicates that actual exports are at the estimated frontier, while values below one reflect unrealized export potential. The rightward shift in the distribution over time indicates a structural improvement in Vietnam’s export efficiency.

5.5. Impact of Trade Agreements and Other Factors

Beyond the baseline results, additional estimations using the Poisson Pseudo-Maximum Likelihood (PPML) model were conducted to examine the impact of trade agreements, institutional and cultural distance, trade freedom, and foreign direct investment (FDI) on the efficiency of Vietnam’s wooden forest products exports. Table 4 reports the key coefficients.

The results confirm that participation in regional trade agreements (RTAs), particularly the ASEAN Free Trade Area (AFTA), has significantly improved Vietnam’s export efficiency (coefficient = 0.267, p < 0.01). By contrast, bilateral trade agreements (BTAs) with American partners, while positive, exhibit weaker effects (0.091, p < 0.1), suggesting that distance and regulatory heterogeneity continue to limit trade realization. WTO membership also shows a positive and significant influence (0.154, p < 0.05), underscoring the importance of multilateral commitments in reducing non-tariff barriers.

Regarding institutional and cultural barriers, the findings indicate that institutional distance has a strong negative impact on export efficiency (–0.221, p < 0.01). Partners with weak governance, complex regulatory frameworks, or high levels of corruption present greater challenges for Vietnam’s exporters. Similarly, cultural distance (–0.138, p < 0.05) is negatively associated with trade efficiency, highlighting the role of divergent business practices, norms, and consumer preferences. These results are consistent with prior studies emphasizing the transaction costs imposed by cultural and institutional heterogeneity.

In addition, trade freedom—measured as the composite index of Vietnam and partner countries—shows a significant positive coefficient (0.185, p < 0.01), reflecting the benefits of liberalized trade regimes in facilitating wood product exports. FDI inflows from partner countries also contribute positively (0.204, p < 0.05), indicating that foreign investment enhances production capacity, facilitates technology transfer, and improves market access.

Taken together, these findings suggest that while natural determinants, such as GDP, distance, and forest resources, remain central, artificial barriers—including institutional and cultural differences—also play a crucial role in shaping Vietnam’s export outcomes. Enhancing institutional quality, deepening trade liberalization, and attracting FDI are therefore essential strategies for narrowing the gap between actual and potential export performance.

The PPML estimation results (

Table 5. PPML estimation results for trade agreements and other factors.

Variable	Coefficient	Std. Error	z	p-Value
RTA (Regional Trade Agreements)	0.267 ***	0.083	3.220	0.001
BTA (Bilateral Trade Agreements with the Americas)	0.091 *	0.055	1.650	0.099
WTO Membership	0.154 **	0.074	2.080	0.038
Institutional Distance	−0.221 ***	0.061	−3.620	0.000
Cultural Distance	−0.138 **	0.067	−2.060	0.040
Trade Freedom	0.185 ***	0.058	3.190	0.001
Foreign Direct Investment (FDI)	0.204 **	0.097	2.100	0.036

Note: Estimates based on Poisson Pseudo-Maximum Likelihood (PPML). ***, **, * denote significance at the 1%, 5%, and 10% levels, respectively.

) elucidate the significant role of artificial trade determinants in shaping Vietnam’s wooden forest product export efficiency.

The analysis confirms that formal trade agreements are potent drivers of efficiency. Regional trade agreements (RTAs), particularly the ASEAN Free Trade Area (AFTA), exert a strong positive influence (p < 0.01), underscoring how regional integration reduces barriers, harmonizes standards, and facilitates logistics. Bilateral trade agreements (BTAs) with American partners also show a positive effect. However, it is more modest and significant only at the 10% level, indicating that their potential is constrained by geographical distance and regulatory divergence. Complementing this, WTO membership has a significant positive impact (p < 0.05), highlighting the value of multilateral commitments in stabilizing trade rules and enhancing Vietnam’s global credibility.

Conversely, institutional and cultural distances present substantial barriers. Institutional distance is a strong negative determinant (−0.221, p < 0.01), revealing that differences in governance, legal frameworks, and regulatory quality impose high transaction costs related to contract enforcement and bureaucratic inefficiencies. Similarly, cultural distance negatively affects efficiency (−0.138, p < 0.05), as divergent business practices and consumer preferences increase the costs of market adaptation.

On the enabling side, both trade freedom and foreign direct investment (FDI) emerge as critical positive factors. Trade freedom (0.185, p < 0.01) enhances efficiency by reducing customs delays and creating predictable trading environments. Meanwhile, FDI inflows (0.204, p < 0.05) bolster export performance by providing not just capital, but also advanced technology, managerial expertise, and vital market connections.

6. Discussion

6.1. Contributions to Theory, Method, and Practice

This study makes significant theoretical and methodological contributions to the field of international trade. Theoretically, it advances the understanding of export efficiency by formally integrating institutional and cultural distance into the stochastic frontier gravity framework. While often overlooked in conventional trade models, these dimensions are shown to be critical in shaping bilateral trade outcomes. Methodologically, the research enhances the accuracy of trade efficiency estimation by applying a single-stage instrumental-variable stochastic frontier gravity model (IV-SFGM). This robust approach effectively overcomes the inconsistency and endogeneity problems inherent in traditional two-stage procedures, yielding more reliable and policy-relevant estimates.

Beyond its theoretical and methodological advancements, the study offers substantial empirical and practical value. It provides novel empirical evidence for Vietnam’s wooden forest products sector, a rapidly growing yet understudied export industry. By analyzing a large, updated panel dataset from 2004 to 2023, the research captures long-term dynamics previously undocumented in the literature. Finally, the findings deliver actionable insights for policymakers and exporters, clearly identifying key leverage points—such as institutional alignment, cultural proximity, FDI flows, and trade agreements—that can help Vietnam reduce inefficiency and strengthen its competitiveness in global markets.

6.2. Determinants of Vietnam’s Wooden Forest Product Exports

The interpretation of the econometric results must be situated within the structural characteristics of Vietnam’s wooden forest products sector. Given the dominance of furniture and downstream processed products, export performance is particularly sensitive to regulatory compliance, quality standards, and buyer-driven governance typical of developed markets. This explains why institutional distance and cultural distance emerge as significant sources of inefficiency, especially in exports to Europe and North America, where certification, legality verification, and contract enforcement play a decisive role.

The success of exports in Vietnam has become a driving force for economic growth since the reform in 1986 (H. Q. Nguyen, 2020). Economic, geographic, institutional, and agreement factors shape export efficiency for Vietnam’s wood products. The positive and significant role of economic size (GDP per capita) for both Vietnam and its trading partners aligns with classical gravity model predictions (H. Q. Nguyen, 2020). Similar to studies that found that GDP is a critical driver of Vietnam’s overall trade efficiency, our study confirms that rising income levels not only expand demand capacity abroad but also enhance Vietnam’s supply-side readiness (Doan & Xing, 2018). The strong and significant role of economic size (GDP per capita) reflects not only demand-side effects but also the upgrading trajectory of Vietnam’s wood-processing industry. Higher-income destination markets tend to demand more sophisticated wooden products, such as designed furniture and customized interiors, which generate higher export values but also require advanced production capabilities. Distance and landlocked status remain particularly constraining for wooden forest products due to the bulky and container-intensive nature of shipments, which disproportionately affects SMEs operating with thin profit margins and limited logistics bargaining power.

The pronounced negative effects of institutional and cultural distance are particularly relevant for Vietnam’s wooden forest products sector, where production is fragmented and heavily reliant on subcontracting networks. Institutional divergence—manifested through differences in regulatory quality, certification systems, and contract enforcement—increases transaction costs related to customs procedures, quality inspections, and dispute resolution. Cultural distance further compounds these challenges by affecting buyer–supplier trust, design preferences, communication efficiency, and marketing adaptation. These frictions are especially binding for SMEs engaged in higher value-added segments, where relational contracting and long-term partnerships are essential for sustaining export efficiency.

Geographical isolation and inadequate infrastructure present significant barriers to socio-economic development (Mtweve et al., 2025; Faye et al., 2024a). The negative effects of geographical distance and the adverse impact of being landlocked reaffirm the enduring relevance of physical barriers, despite advances in transportation and communication technology. This finding echoes the conclusions of previous studies, which emphasized that globalization has not eliminated distance as a determinant of trade costs (Gharleghi & Shafighi, 2020). Our results highlight that in the case of wooden forest products, which often involve bulky shipments, transport-related frictions remain particularly salient.

Regarding trade agreements, our study provides nuanced evidence. Consistent with other research, we find that regional trade agreements (RTAs) significantly improve export efficiency, particularly within ASEAN (Nyoni & Kaushal, 2022). The relatively weaker effect of bilateral trade agreements with American partners must be interpreted in light of the structural characteristics of Vietnam’s wooden forest products industry. Vietnam’s exports to the United States and other developed markets are predominantly composed of higher value-added products, particularly wooden furniture and interior furnishings, which require strict compliance with technical standards, sustainability certifications (such as FSC), and traceability requirements. These product characteristics increase fixed compliance costs and magnify the importance of institutional quality, logistics reliability, and contract enforcement. Moreover, the sector is dominated by small- and medium-sized enterprises (SMEs), which often lack the financial capacity, managerial expertise, and certification readiness needed to exploit bilateral agreements with distant markets fully. As a result, even when tariff preferences exist, Vietnamese exporters face difficulties translating formal market access into realized export efficiency. In contrast, exports to regional ASEAN markets are typically characterized by lower product sophistication, shorter logistics chains, and more flexible regulatory environments, which helps explain the stronger efficiency gains associated with regional trade agreements (Gereffi et al., 2005; Epede & Wang, 2022).

A major contribution of this study is its explicit incorporation of institutional and cultural distance. The significant and negative effect of institutional distance reflects the structural challenges arising from differences in governance quality between Vietnam and its trading partners. Institutional divergence refers to disparities in the effectiveness, transparency, and predictability of formal institutions governing economic transactions. In this study, governance quality is measured using the six dimensions of the World Governance Indicators (WGI): voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption (Kaufmann et al., 2010). Institutional divergence emerges primarily because Vietnam, similar to many emerging and developing economies, exhibits relatively weaker regulatory enforcement, less transparent administrative procedures, and higher uncertainty in contract enforcement compared with developed importing countries. Such gaps are particularly consequential for wooden forest products, which are subject to strict legality verification, sustainability certification (e.g., FSC, PEFC), customs documentation, and environmental compliance requirements in major markets.

Greater institutional distance thus increases transaction costs by prolonging customs clearance, raising compliance and certification costs, and increasing the risk of contractual disputes, thereby reducing export efficiency. These findings are consistent with institutional trade theories, which argue that weak governance quality constrains firms’ ability to exploit market access opportunities even when tariff barriers are low (Anderson & Marcouiller, 2002; Levchenko, 2007). In the Vietnamese context, ongoing reforms to improve regulatory transparency, administrative efficiency, and enforcement of forestry legality systems (e.g., VPA/FLEGT) are therefore crucial for narrowing institutional gaps and enhancing export efficiency. Our findings further indicate that institutional differences in contract enforcement, regulatory quality, and corruption significantly hinder Vietnam’s trade in wooden forest products.

Beyond formal institutions, cultural distance constitutes a critical informal barrier to export efficiency. Cultural distance captures differences in societal values, norms, and behavioral patterns between Vietnam and its trading partners, measured using the Kogut–Singh index based on Hofstede’s six cultural dimensions (Kogut & Singh, 1988). These differences manifest in business communication styles, negotiation practices, attitudes toward quality standards, risk tolerance, and long-term relationship building. Beyond formal institutions, cultural distance constitutes a critical informal barrier to export efficiency. Cultural distance captures differences in societal values, norms, and behavioral patterns between Vietnam and its trading partners, measured using the Kogut–Singh index based on Hofstede’s six cultural dimensions (Kogut & Singh, 1988).

These differences manifest in business communication styles, negotiation practices, attitudes toward quality standards, risk tolerance, and long-term relationship building. In the wooden forest products sector, cultural divergence can increase transaction costs through several channels. First, informational costs rise as exporters face difficulties interpreting consumer preferences, design expectations, and certification credibility in culturally distant markets. Second, coordination costs increase due to mismatches in negotiation styles, contract interpretation, and trust formation between trading partners. Third, adaptation costs emerge as firms must modify product design, quality specifications, and marketing strategies to align with culturally distinct markets.

The positive contributions of trade freedom and foreign direct investment (FDI) are consistent with prior research. Previous studies emphasized the role of trade liberalization in enhancing ASEAN trade efficiency and highlighted the contribution of FDI to export performance in emerging economies (Duong et al., 2024). By demonstrating how institutional quality, cultural alignment, and trade openness jointly shape export efficiency, this study shows that Vietnam’s wooden forest products sector exemplifies the challenges faced by resource-based industries in integrating into global value chains. The findings highlight that competitiveness in global wood markets depends not only on cost advantages but also on institutional convergence, compliance capacity, and cultural adaptability.

6.3. Policy Implications

The findings yield critical policy implications for enhancing Vietnam’s wood export efficiency. To maximize gains, Vietnam must deepen regional integration by strengthening ASEAN connectivity, harmonizing technical standards, and reducing non-tariff barriers. For distant markets where bilateral agreements show weaker effects, complementary investments in logistics infrastructure, port modernization, and digital trade facilitation are crucial to reduce effective distance.

Domestically, the strong negative impact of institutional distance underscores the urgency of reforms to enhance regulatory quality, reduce corruption, and improve contract enforcement—measures vital for complying with “new-generation” FTAs. Concurrently, the negative influence of cultural distance necessitates soft measures: exporters should invest in cross-cultural market research and tailored branding, supported by policy initiatives like trade promotion and cultural exchanges. Finally, the positive roles of trade freedom and FDI highlight the need for sustained trade liberalization coupled with efforts to attract high-quality FDI into wood processing, fostering partnerships that transfer technology, capital, and market access to boost competitiveness substantially.

7. Conclusions and Future Research Directions

This study employed an extended single-stage stochastic frontier gravity model (SFGM) and complementary PPML estimations to examine the efficiency of Vietnam’s wooden forest products exports to 70 trading partners from 2004 to 2023. Several key conclusions emerge. First, both Vietnam’s economic size and that of its partners play a decisive role in shaping export efficiency, while geographical distance and landlocked status remain persistent barriers. This confirms the continued relevance of natural trade determinants for bulky commodities such as wood products. Second, regional trade agreements (RTAs), WTO membership, trade freedom, and foreign direct investment (FDI) significantly enhance export efficiency.

These findings highlight the importance of deepening economic integration, liberalizing trade, and attracting high-quality FDI to strengthen competitiveness. Third, institutional and cultural distance impose substantial negative effects, underscoring that non-economic factors are equally critical. Improving institutional quality, enhancing regulatory transparency, and reducing cultural frictions through market research and trade promotion initiatives are essential to narrow the efficiency gap. Finally, while Vietnam’s export efficiency of wooden forest products has improved substantially over the past two decades, considerable untapped potential remains, particularly in distant and institutionally divergent markets. Sustained policy efforts focusing on governance reforms, infrastructure development, and alignment with international sustainability standards will be pivotal to unlocking this potential and securing Vietnam’s long-term position in global wood product value chains.

Despite its contributions, this study has several limitations that open avenues for future research. First, the analysis is based on aggregate trade flows and does not capture firm-level heterogeneity. Future studies could incorporate micro-level data to examine how differences in productivity, ownership structure, and firm size influence export efficiency. Second, the measurement of cultural distance relies on Hofstede’s indices, which, while widely used, may not fully capture the nuances of evolving consumer preferences and cross-cultural dynamics. Third, the study period ends in 2023, thus excluding the full effects of recently implemented trade agreements such as the CPTPP and the EU–Vietnam Free Trade Agreement (EVFTA). Future research should extend the dataset to evaluate these agreements and their impact on efficiency.