While the effects of cultural disparity and common institutional foundations on international trade and foreign direct investment (FDI) have been much analyzed, little analysis of languages’ transaction costs has been done in either the international relations or international business literatures. This paper integrates literature from international political economy, international business and economics, and linguistics, to examine the transaction costs of languages under three different measures of language closeness, same language, direct communication, and language distance. Language is both a tool in international economic transactions and a vehicle to transmit cultural values, but our results point out that major trade languages are employed differently in international trade and in FDI. Communication costs, for both FDI and international trade, show a hierarchy, with English the most inexpensive among major trade languages. We introduce the concept of language intensity to explain why communication costs are much more important in FDI than in international trade. Major trade languages may obtain considerable power from their economic use; we examine the asymmetric nature of this power. We empirically test these ideas in gravity equation models.
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