Recalibrating the Gravity Model in International Trade: Innovation and Institutional Effects in the Serbia–Israel–Germany Trilateral Corridor

Abstract

International trade theory is revisited through a trilateral gravity trade model of Serbia, Germany, and Israel. Using GDP, geographic distance, innovation metrics (2015–2024), trade flows (2024), and longitudinal FDI data (2005–2025), we test the classical gravity equation, extending it to incorporate innovation complementarity and institutional proximity. Standard gravity parameters (β₁ = 1, β₂ = 1, β₃ = −2) required empirical recalibration. Our analysis yields β₁ = 0.96, β₂ = 1.58, and β₃ = −0.40 based on trade flows, and β₁ = 0.89, β₂ = 1.12, and β₃ = −1.85 for innovation-weighted extensions that reflect knowledge-based complexities. The core gravitational structure remains triadically robust. The Germany–Israel corridor exemplified substantial economic and innovation mass, offsetting geographic constraints, with $8.67 billion in trade despite a 2,900 km separation. Innovation-weighted extensions revealed asymmetric trade potentials. Germany–Israel exhibited the highest bilateral coefficient (0.00687–0.00722), driven by technological and institutional convergence. Outbound Chinese FDI control variable bolstered simulation predictive validity in Germany, partially supported it in Israel, and challenged it in Serbia, highlighting the role of innovation distance and WTO alignment. This study’s research represents the first comprehensive longitudinal analysis of the gravity model in international trade involving the triad of Serbia, Germany, and Israel, and it tests it against Chinese FDI. The verified proof-of-concept underscores the enduring relevance of the gravity model. Suggested are expanded dyadic sampling with sectoral granularity, geopolitical differentiation, testable future research hypotheses for the V4 region, and innovation-sensitive metrics in future econometric validation.