Culture and Economics

On Values, Economics and International Business

Eelke de Jong

• Publisher: Routledge
• Year: 2013
• eBook ISBN: 9781134720040
• Topic: Business
• Subtopic: Business General
• Index: Business

Since the early 1990s, culture, in the sense of norms and values, has entered economic analysis again, whereas it was totally absent from mainstream economics during most of the second half of the twentieth century. The disappointing results of mainstream economics and developments in the world economy triggered an awareness of the relevance of the context in which people make decisions. Developments which were triggering this were the unexpected high growth rates in Asia, (the Asian miracle), the transition of previously centrally planned economies and the increased attention for the role of religion after 9/11/2001.

Some of the areas this research covers are:

• The history of culture in economics from Adam Smith to the present
• The way culture is incorporated into economic analysis
• Methods used in empirical analysis on culture and economics
• Culture as an explanatory factor of cross-country difference in institutions and performance

Culture appears to be relevant for explaining differences between otherwise similar countries; in particular OECD-countries. Uncertainty avoidance, for example, significantly explains the relative importance of financial markets. This book is the first that provides an overview of the field of culture and economics and will be of use to postgraduate researchers in the field of economics and culture.

Chapter 1

Introduction

Since the early 1990s culture has entered economic analysis again, whereas it was totally absent from mainstream economics during most of the second half of the twentieth century. At that time the dominant view in economics was based on rational behaviour, and did not take the context of the decision-making process into account. The disappointing results of this approach as well as developments in the world economy (the Asian miracle and the transition of previously centrally planned economies into market economies) triggered an awareness of the relevance of the context in which people make decisions. Of course there has always been an undercurrent in economics which emphasized the importance of the context for decision making. Adherents of behavioural economics, with researchers such as Herbert Simon, Richard Nelson, Sidney Winter, and later Daniel Kahneman and Amos Tversky are examples in this respect. Moreover, other disciplines of social science studied the influence of morals and attitudes towards economic behaviour and economic success. Examples are Banfield’s (1958) study on the moral basis of the backward society in Southern Italy and McClelland’s (1961) book on the role of achievement motivation in persons’ and countries’ economic success.

Within economics the urgency of considering culture as an explanatory factor was first felt in two fields where researchers were confronted with cultural differences namely development economics and international business.¹ Since the majority of the researchers studying the development of underdeveloped countries are citizens from industrialized countries they are easily confronted with differences between their countries of birth and the societies they investigate. The larger these differences, the more likely researchers are inclined to explain them by culture (see DiMaggio 1994: 33). The lack of progress in economic development is thus easily seen as resulting from a backward culture, and unexpected economic progress is related to specific values of a foreign culture. Southern Italy has been treated by researchers as an example of the former and Japan (and South East Asia in general) as an example of the latter. This easily leads to the use of culture as an explanation of last resort; explaining what the researcher cannot understand: a remnant. In Chapter 3 we briefly deal with this use of culture. For now it suffices to mention that in the 1990s an increasing number of academics and practitioners became aware of the importance of cultural differences for investigating foreign societies or intervening therein. Within the World Bank this understanding leads to initiatives such as the World Faith Development Dialogue and the Bank’s Culture and Development Program.

International business scholars were among the first to acknowledge the relevance of cultural differences for international transactions.² The research of the role of culture in international business was greatly enhanced by the publication of Hofstede’s (1980) study on the international differences in work-related values. In this study Hofstede analyzes a questionnaire’s answers on work-related values from employees of IBM in 40 countries. From these answers he derives four cultural dimensions. Subsequently, these dimensions have been used for analyzing the success and failure of the entry mode of multinational enterprises: whether to start a new activity in a foreign country by means of a new factory, a joint venture or a subsidiary. Later an index summarizing cultural differences – the Kogut-Singh index – and a measure of mutual trust between inhabitants of different countries were used to explain bilateral trade flows, a topic traditionally more intensively studied by international economists than by researchers in international business studies.

Later, cultural explanations were offered for several topics in economics. Cultural dimensions of both Hofstede and Schwartz were used to explain cross-country differences in, among other things, labour market regulation (Black 1999, 2001a, 2001b, and 2005), financial systems (De Jong and Semenov 2004, Kwok and Tadesse 2006, Licht et al. 2001), ownership patterns (De Jong and Semenov 2006a), and the degree of central bank independence (De Jong 2002). Putnam’s (1993) study on the relevance of generalized trust for the working of democracy in Italy triggered an interest in the effects of trust on the functioning and performance of economies. This research was greatly enhanced by the release of several waves of the World Values Survey and the European Values Survey, which contain the well-known question on generalized trust, which reads: ‘generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people?’. The answers to these questions have been used for explaining differences in economic growth (Knack and Keefer 1997), the quality of government (Tabellini 2008b), and several other issues to be discussed in Chapter 8. The increasing interest in culture is also visible in the more prominent place the topic plays at international conferences. At the 2007 Annual Meeting of the European Economic Association, for example, the presidential address, the Alfred Marshall lecture and the Joseph Schumpeter lecture, all dealt with culture or related issues.

Despite this growing interest in the role of culture in economics, to my knowledge no book is available which contains an overview of the subject. Jones (2006) provides an historical overview but does not discuss the literature mentioned in the previous paragraph and other studies using quantitative measures. Other books only deal with a particular topic, which could be a particular sector (Austen 2003), or a particular measure of culture (trust in Bornschier 2005). The aim of this book is to fill this gap and to provide an overview and critical assessment of the literature.

This book’s structure

The remaining chapters are organized in four groups: the history of culture and economics (Chapters 2 and 3), methods and methodology (Chapter 4), applications (Chapters 5–9), and concluding remarks (Chapter 10). The history part deals with the departure of culture from economic science and its re-emergence. We explain the importance of culture in economics by developments in economic science and by changes over time in the economic and political environment. Chapter 2 sketches the role culture, ethics and morals played in the writing of economists from Adam Smith onwards. In the nineteenth and twentieth century economics moved towards more formal approaches. This led to a view of economics as economizing: agents are assumed to optimize an objective function subject to constraints. Intangible factors such as culture are left out of the analysis. The success of the formal approach is most likely partly due to the success of the use of formal analysis for solving logistic problems during World War II. Subsequently, the intellectual climate resulting from the Cold War prevented critical investigations into the diversity of the market economy and thus into the appropriateness of this one-size-fits-all assumption. Chapter 3 sketches the developments which led to a re-emergence of culture in economics. Once again attention is paid to the forces from the inside of economics as a scientific discipline and developments in the political economic circumstances. The view of economics based on optimizing agents appeared to be unsuccessful in explaining actual behaviour, and thus gave rise to approaches which take the context, including culture, into account. Such a move was also greatly enhanced by the availability of large cross-country databases on values and attitudes. Moreover, the Asian Values debate, the fall of the Iron Curtain, and the failure of the one-size-fits-all approach of development organizations, were all events which triggered the idea that values could be of importance for economic success. Chapter 3 ends with a description of the way culture has re-entered economic analysis. Three versions of the Culture and Economics approach can be distinguished: culture as explaining the residual, culture as constraints on economic behaviour and culture as preferences. The latter two approaches regard intergenerational transmission of values as the most important mechanism by which values are formed.

The part on methods and methodology (Chapter 4) deals with methodological considerations and methods used in empirical research of the relation between economics and culture. Methodological issues dealt with are: the definition of values used; means by which one can derive empirical measures of values; and the much debated issue whether countries are the appropriate units for empirical studies on culture and economics. Surveys are by far the methods most frequently used for obtaining information on values. Chapter 4, therefore, discusses various aspects related to conducting surveys, such as: the choice of the sample (matched or representative); the way questions are asked; the language used, and the methods available for enhancing the similarity of the questions’ contents across different languages. Many studies make use of the cultural dimensions derived from the surveys by other researchers, especially, Hofstede and Schwartz and the recently completed GLOBE-project. Appendix 1 summarizes these studies and discusses their main differences. It also briefly describes two important measures of values derived from the World Values Survey: the two cultural dimensions derived by Inglehart and the trust-variable.

This book’s main part concerns applications of the methods described in Chapter 4, and consists of Chapters 5 through 9. Intergenerational transmission has been argued to be the most important way by which individuals form their values during the first twenty years of their lives. If correct, the preferences and behaviour of second generation immigrants will partly reflect the attitudes typical for their parents’ country of origin. For the United States some datasets include information about the country of origin of the respondents’ parents. Chapter 5 starts with a review of the results of this epistemological approach. The rest of the chapter is devoted to cross-country studies of the relation between culture and institutions for the financial sector, labour markets, and welfare systems. These results are used for investigating whether the resulting national system of institutional arrangements is a coherent one: are the institutions of each subsystem complementary to those of the other subsystems and are they correlated with the same set of values? Meanwhile we discuss two methodological issues: the selection of countries in the sample and the possibility of a changing pattern between culture and institutions over time.

Chapter 6 is devoted to studies on the relation between culture and economic performance: economic growth and income per capita. Two themes stand out in this chapter. First, we consider the role of politicians in shaping public opinion in such a way that it favours their policy. Often these politicians refer to a ‘golden’ period in the past. Second, attention is paid to the endogeneity problem between culture and economic performance and the way economists deal with it.

Whereas Chapters 5 and 6 have considered various ways of approximating culture, Chapters 7 and 8 each deals with a particular proxy of culture. Chapter 7 considers religion, which is by many authors considered a very important element of culture, in particular for pre-industrialized societies. Issues dealt with are the supposed claim by Weber that Protestant values stimulate economic growth, the discussion through history about an interest ban both in Christianity and Islam, Islamic economics and identity, and whether the values associated with a particular religion are so homogenous that religion can be used as a proxy of culture. The historical study of Biblical and Christian views on paying interest forms a nice opportunity to shed light on the causality between culture, in the sense of values, and economic circumstances.

Social capital, including trust, is the other cultural variable to which we pay extra attention. Both these concepts are widely used in empirical studies on culture and economic performance. Chapter 8 argues that it is necessary to break down the concept of social capital into two levels. At the aggregate level social capital is deployed as a cultural construct related to norms of cooperation. At the individual level social capital is treated in a social-structural way related to networks. We study the cause and effect structure and the internal dynamics on both levels of analysis.

The previous chapters dealt mainly or exclusively with differences between societies. Chapter 9 focuses on the effects of cultural differences between societies on international activities. The main hypothesis in that chapter is that unfamiliarity with the working of formal institutions and unease with informal procedures (culture) hamper international transactions. Studies are reviewed which consider the effect of cultural differences in international trade, foreign direct investments, the entry mode of multinational enterprises, portfolio investments, migration, and political cooperation. Besides these various international transactions, we discuss the appropriateness of proxies of cultural differences between countries, such as the widely used Kogut-Singh index, difference in languages and genetic differences.

Chapter 10 contains the concluding remarks and some guidelines for future research in the field. One of the conclusions is that whereas in some other disciplines culture is a very broad concept, in economics culture is understood as values, which according to many definitions of culture constitute the core element, but just the core, of culture. Hence, the books subtitle: On values, economics and international business. The next section discusses these broad and narrow definitions of culture.

Definitions of culture

This section presents various definitions of culture, their use in social sciences and potential relevance for economic analysis. The American anthropologists Kroeber and Kluckhohn, for example, published 160 definitions of culture (Bodley 1994). These definitions can be very broad in the sense of containing almost all aspects of social behaviour. Anthropologists tend to use a broad definition of culture. The nineteenth-century British anthropologist Edward Tylor (1958 [1871]: 1) writes: ‘Culture or civilization, taken in its wide ethnographic sense, is that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as member of society’. Another broad definition can be found in The American Heritage Dictionary of the English Language (2000: 4th edn updated in 2003), where culture is defined as

(a) the totality of socially transmitted behaviour patterns, arts, beliefs, institutions, and all other products of human work and thought; (b) these patterns, traits, and products considered as the expression of a particular period, class, community, or population (such as the Edwardian culture, Japanese culture, the culture of poverty); (c) these patterns, traits, and products considered with respect to a particular category, such as a field subject, or mode of expression (such as religious culture in the Middle Ages, musical culture, oral culture); and (d) the predominating attitudes and behavior that characterize the functioning of a group or organization.

These definitions have in common that they refer to the entire social system; the ‘complex whole’ and the ‘totality’. By stressing the entirety, these definitions lack focus and become open-ended. If the entire system is a unit, can subsystems be distinguished and if so by what criterion? How are these aspects expected to be related? Can the different cultures be compared and in which sense? This type of definition easily leads to the creation of different categories, as the list of different cultures in the second definition illustrates. But these categories as such do not give any direction for explanation. In my view, a problematic feature of these definitions is that they contain both the possible sources of behaviour (e.g. beliefs), the behaviour itself and its results. In a similar mood the famous anthropologist Geertz writes ‘They [his essays] all argue, sometimes explicitly, more often merely through the particular analysis they develop, for a narrowed, specialized, and so I imagine, theoretically more powerful concept of culture to replace E.B. Tylor’s famous “most complex whole” ’ (Geertz 1993: 4).

More narrow concepts of culture still vary with respect to the issues explicitly mentioned as culture’s elements. According to Geertz himself, (1993: 89) culture ‘denotes an historically transmitted pattern of meanings embodied in symbols, a system of inherited conceptions expressed in symbolic forms by means of which men communicate, perpetuate, and develop their knowledge about and attitudes towards life’. A similar definition is penned by Kluckhohn, who writes that ‘culture consists in patterned ways of thinking, feeling and reacting, acquired and transmitted mainly in symbols, constituting the distinctive achievements of human groups, including their embodiments in artifacts: the essential core of culture consist of traditional (i.e. historically derived and selected) ideas and especially their attached values’ (Kluckhohn 1951: 86, n. 5). These two definitions explicitly mention symbols as part of culture. Kluckhohn explicitly mentions values, which is central in some other definitions of culture. Boyd and Richerson (1985: 2), for example, describe culture as ‘the transmission from one generation to the next, via teaching and imitation, of knowledge, values, and other factors that influence behavior.’ Hofstede (2001: 9), whose cultural dimensions are frequently used in empirical studies on culture and economics, derives a concise version of Kluckhohn’s definition by treating culture as ‘the collective programming of the mind that distinguishes the members of one group or category of people from another’. Finally, Inglehart’s definition explicitly introduces the idea that culture is complementary to the directly observable aspects of society. It reads ‘(b)y culture, we refer to the subjective aspect of a society’s institutions: the beliefs, values, knowledge, and skills that have been internalized by the people of a given society, complementing their external systems of coercion and exchange’ (Inglehart 1997: 15).

These more narrow definitions hav...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Contents
• List of figures and tables
• Preface
• Abbreviations
• 1 Introduction
• 2 A history of thought about culture and economy
• 3 The re-emergence of culture in economics
• 4 Methods and methodology of culture and economics
• 5 Culture and cross-country differences in institutions
• 6 Culture and economic performance
• 7 Religion as culture
• 8 Mapping the landscape of social capital: the need for a two-level approach
• 9 International relations and coordination
• 10 Conclusions and recommendations
• Appendix 1 Various cultural dimensions
• Appendix 2 Some experiments
• Appendix 3 Construction of cultural items from the World Values Survey
• Appendix 4 Some Biblical texts on interest
• Appendix 5 Survey measures of patriotism and attitude towards foreigners
• Appendix 6 The gravity equation
• Notes
• Bibliography
• Index