Culture as a moderator of the relationship between incoming Foreign Direct Investment and economic growth

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Culture as a moderator of the relationship between

incoming Foreign Direct Investment and economic

growth

Daan Kothman

Student number: S1629719

Adress: Koolstraat 28a

9717 KE Groningen

Phone: 0613355430

Date: 10-01-2013

First supervisor : dr Andre Van Hoorn

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Preface

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Abstract

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1 Introduction

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explanation might be that the volatility of FDI flows is an indicator for economic or political uncertainty. (Lensink and Morrissey, 2006). They state that volatility in FDI flow might create shocks in the economy which can have an destabilizing effect on the economic growth. (Lensink and Morrissey, 2006).

The main conclusion that can be drawn from the current literature on FDI is that many microeconomic studies provide pessimistic evidence on the growth-effects. (Mansfield and Romeo. 1980) and that many macroeconomic studies find a positive connection between FDI and growth. (De Gregorio et al., 1992). The literature is therefore inconclusive. (Blomstrom et al., 2005). Some researchers describe positive trends and other negative relationships. The interesting conclusion of Hermes and Lensink (2003) is that the development of the financial system improves the relationship between FDI and economic growth. Countries with better developed financial systems gain more from FDI. The main reason for this is that a more developed financial system positively influences the process of technological dispersion related with FDI. (Hermes and Lensink, 2003). The existing literature suggests that macro-economic variables as the level of education, the level of income, the financial development, the labour productivity and corruption might affect the relationship between incoming foreign direct investment and GDP growth. (Lensink and Hermes, 2003, Blomstrom et al., 2003. Habib et al., 2002, Girma., 2005, Blomstrom et al., 1994),

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incoming foreign direct investment and whether a country should stimulate FDI for its economic growth. From a management perspective I provide information for foreign investor which cultural contextual elements result in higher absorptive capacity and returns on their investments.

The main motivation for my research is that the current literature does not investigate the moderating effect of culture between the relationship of incoming FDI and GDP growth. Shane (1993) states that culture is important and that countries may not be able to increase their rates of innovation by simply augmenting their money spent on research and development or industrial infrastructure. Hussler (2007) concludes that culture influences the distribution and absorption of knowledge flows, innovation and creativity. This might result in positive spillover effects of incoming FDI. Other research suggests that these cultural variables can affect the knowledge, innovation, creativity and openness to foreign direct investment. (Barboza et al., 2012, Hofstede, 2001, Tiessen, 1997, Shane, 1993). This might also result in spillover effects of incoming FDI.

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between FDI and GDP growth. To test my research questions I am going to use the databases of the countries from the European Union since 1990. My research question therefore is:

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2. Background and Hypotheses

2.1 Background

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these positive spillovers. (Aitken and Harrison, 1999, Haddad and Harrison, 1993). To conclude: Most studies found a positive relationship between incoming FDI and GDP growth however this relationship seems to be contingent on country specific factors of the host economy. This thesis focusses on the cultural factors that might affect the relationship between incoming FDI and GDP growth.

2.2 Hypotheses

2.2.1: The level of individualism positively affects the relationship between incoming FDI and GDP growth.

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increased positive spillover effects of incoming FDI. (Tiessen, 1997). Ray and Turpin (1990) conclude that the individualist motives of creativity and self-actualization led to the foundation of high-technology startup firms which is positive for the innovativeness of a society. According to Birch (1987) the startup of small-businesses may lead to a high level of job creation. This might lead to an increase in consumption, and economic growth of the economy and thereby the profitability, absorptive capacity and spillover effects of incoming FDI.

However Tiessen (1997) also concludes that collectivist societies are better able to implement and incremental improve the innovations. Morris et al. (1994) found that a balanced level between individualism and collectivism increases entrepreneurship and innovation in America and South-Africa. In a collectivist society however it is not immoral to threat the in-group members of a cohesive group better than the other members. (Hofstede, 2001). Members in a collectivist society secure their resources by close ties with other firms, this is like a keiretsu network. (Tiessen, 1997). Organizations in a collectivist society are mostly part of a ‘clan’ and their behavior

and leveraging of resources comes from intimate ties and shared values and goals of the clan members. In these organizations trust and commitment instead of contracts make clan-members act in the group interest. (Tiessen, 1997). New technology innovation in a clan will be linked to the collective goals of the clan. (Tiessen, 1997). This might place foreign investors at a disadvantage because they are not part of the cohesive groups, networks or clans of the host country.

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beneficial for foreign investors. Unless if foreign investors place their investments in the domestic companies of the clan which might give them the advantages of the in-groups. It is however less likely that domestic companies allow foreign investments from companies which are not part of the clan in a collectivist society. Because in a collectivist society there is more conflict expected between members of the in-group and the out-group. (Tiessen, 1997). Therefore the absorptive capacity and positive spillover effects of FDI may decrease as the collectivism of a society increases.

According to Hofstede (2001) a company in more individualistic societies has more control over job and working conditions and employees work longer hours. Also employees in more individualistic societies have more commitment to the organization. (Hofstede, 2001). These advantages may for foreign investors lead to an increase in the productivity and efficiency of their investments which may result in increased positive spillover effects. Another advantage of more individualistic societies is that in business task and company are more important than personal relationships, in more collective societies it is the other way around. (Hofstede, 2001). For foreign investors who don not have much personal relationships this higher employee commitment could result in greater productivity and thereby higher absorptive capacity of their investments.

According to Shane(1993) Hofstede’s individualism index represents beliefs that

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is positively related to autonomy of groups and individuals in a company. This might result in innovational championing of groups and individuals which may increase the absorptive capacity. (Shane and Venkataraman, 1993)

Individualistic societies are also more outward oriented which is important for innovation. (Shane, 1993). Contact with outsiders increases and stimulates creativity (Shane, 1993). Shane (1993) also states that innovation requires the support and interest of senior managers and that more individualistic societies have a stronger belief in the importance of contact with senior managers. To conclude: more individualistic societies have a higher degree of innovation and creativity and there are less collective groups and clans, which results in higher absorptive capacity and spillover effects of incoming FDI.

2.2.2 : The amount of power distance negatively affects the relationship between incoming FDI and GDP growth.

The power distance of a society expresses the extent to which the less powerful members of a society accept and expect that power is not equal distributed. It is a measure of the perception by the less powerful of the interpersonal power between two persons. (Hofstede, 2001). According to Hofstede (2001) more powerful persons tend to devalue the importance of the performance of less powerful ones. This could lead to constrained implementation of ideas of less powerful individuals which may lead to decreased innovativeness and creativity of a society.

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to decreased spillover effects of incoming FDI. In most organizations the power distance is formalized in hierarchies. Shane (1993) concludes that minimizing these hierarchies increases the rate of innovation. Some other researchers also conclude that policies that reduce equality, reduce the rate of innovation in the US. (Maidique and Hayes, 1985). Shane (1993) states that in power distant societies there is a deficit on informal communication between employees in different hierarchical levels. The lack of free communication across levels could according to Shane (1993) lead to a decrease in innovation. Shane (1993) also states that in less power distant societies there is an increase in level of trust in subordinates. The increase in trust allows subordinates to conquer inaccuracies in venture plans and forecasts. (Quin, 1979). Rigid control mechanisms of high power distant countries on the other hand has been found to constrain the flexibility that is needed for innovation. (Sathe, 1988). Rigid control mechanisms also reduce creative thinking while more loose control mechanisms enhance new idea generation. (Kanter, 1982). Kirkman and Shapiro (2001) found a positive relation between power distance and resistance to team and self-management. This might reduce the creativity and creation of new ideas as a result of teamwork. According to Sue-Chang et al. (2002) power distance negatively moderates the relationship between goal assignment on goal commitment, self-efficacy and performance. Thus the lower the power distance the higher the positive results of goal assignment on these three factors and the higher the absorptive capacity of a country.

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there were no students from high power distant countries included in the experiment. Perhaps these results also apply in companies and government organizations in a country which might result in increased absorptive capacity. An advantage of hierarchies in high power distant societies is that they assure desired behavior and it increases employees willingness to internalize commitments. (Siegel et al., 2012). This may result in more efficiency in organizations which might positively influence the absorptive capacity. It is also stated that in high power distance societies there is more respect for authority which results in less inefficiency because of conflicts between superior and subordinate. Basabe et al. (2005) concludes that personal achievement is positively related to high power distance hierarchical societies. Their research also shows that competitive success attitudes are more common in more power distant hierarchical societies. Also an employee’s sense of uniqueness is

more common in power distant societies. (Basabe et al., 2005). This may result in more input of innovative ideas from all the employees of a company. These arguments indicate that high power distant countries have higher absorptive capacity and that power distance could have a positive moderating influence on the relationship between FDI and GDP growth.

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that when power distance is low, individuals develop entrepreneurship initiatives and innovative ideas that enhance economic activities and thereby increases the positive spillover effect of incoming foreign direct investment.

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from a society and organizational point of view less power distance increases the innovation and creativity which results in higher spillover effects on incoming FDI.

2.2.3: The uncertainty avoidance negatively affects the relationship between incoming FDI and GDP growth.

Uncertainty avoidance is according to Hofstede (2001, p.145 ) “the degree to which

the persons of a culture feel threatened by uncertain or unknown situations.”

According to Hofstede (2001) members of a nation with a high degree of uncertainty avoidance perceive a stronger threat from uncertain and unknown situations than members of low uncertainty avoidance nations and therefore they have stronger need for rules, structure and rigidity. They perceive differences as dangerous. This results in competitive disadvantage for foreign investors relative to local investors because they may face discrimination by the government, consumers and suppliers. (Hymer, 1976). Reimann et al. (2008) concludes that customers from high uncertainty avoidant cultures are less tolerant for unclear situations. They therefore may be less likely to buy the products or services from companies they don’t know

which is a disadvantage for foreign investors. New competition that foreign investors bring is therefore possibly not welcome in high uncertainty avoidance nations which might decrease the spillover effects of incoming FDI.

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there is a negative relation between uncertainty avoidance and economic freedom because people in low uncertainty avoidant countries are more acceptant for risk and are more tolerant for different behavior and opinions. High uncertainty avoidant countries are more suspicious for outsiders behavior and opinions, they avoid risk and regulate behavior. (Johnson et al., 1999). The absorptive capacity of FDI of a society and its spillover effects therefore increases as the uncertainty avoidance decreases because foreign investors are more accepted, societies are more innovative and there is more economic freedom.

Another disadvantage of high uncertainty avoidance societies is that foreign investors have to incur a lot of costs to acquire the information on the rigid structures and written rules. ( Hofstede, 2001). Local investors have to incur less costs because they have greater tacit and localized knowledge of the bureaucratic complexities. (Bhardway et al., 2007). High uncertainty avoidance therefore increases the costs of information gathering for foreign investors and place them on a competitive disadvantage.

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uncertain occurrences. (Hofstede, 2001). This could reduce the flexibility of the company in case of uncertain events which might reduce the profitability and therefore the absorptive capacity if foreign investors place their investments in these domestic companies or acquire them.

Ayoun et al. (2008) however concludes that uncertainty avoidance has only minor impacts on the approach of managers to adopt their business strategies. Managers from different uncertainty avoidant backgrounds showed a lot of similarities towards strategy formulation. Newman et al. (1996) also concludes that clarity of policies and strategy are not dependent on uncertainty avoidance but on good management practice. These arguments indicate that uncertainty avoidance does not have much impact on the absorptive capacity of a country and its spillover effects on FDI

High uncertainty avoidance might be a disadvantage for foreign investors because they may be perceived as a threat to the host country companies environment. Shane (1993) states that more uncertainty accepting countries are more tolerant for risk and this increases the innovation of a society. Reimann et al. (2008) states that the higher the uncertainty avoidance of a country, the less satisfied the customer will be when the product or service is not entirely sufficient according to the customers’ requirements. This is a disadvantage for foreign investors because they

are in the beginning less familiar with the customer requirements than domestic companies. They will therefore be more heavily penalized by the customers in high uncertainty avoidant countries which might decrease the spillover effects of the foreign company’s investments. Unless foreign investors place their investments in

domestic companies who are familiar with the customer requirements.

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routines that where founded to make the organization legitimate according to the stakeholders. Powerful individuals also may resist change and innovation because they fear that they might lose their power. At last bounded rationality of individuals could make then reliant on hierarchies and routines. (Shane, 1995). He also states that organizations need championing roles to overcome this inertia and to enhance innovation. These championing roles allow innovators to break rules and routines, allow creativity, persuade others to support the innovation and establish informal communication channels that support the innovation. (Shane, 1995). According to (Shane, 1995) the greater the individuals uncertainty acceptance of his/her culture the more likely it is that he or she would take such a champion role. So societies with low uncertainty avoidance might create more champion roles and may therefore be more successful in organizational change and innovation which may increase the absorptive capacity of a society.

To conclude: because of the competitive disadvantages of foreign investors relative to local investors the contribution to GDP in countries with high uncertainty avoidance is less than in countries with low uncertainty avoidance.

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2.2.4: Tolerance positively affects the relationship between incoming FDI and GDP growth.

Florida et al. (2006) found that universities, service diversity, openness and tolerance positively affect the distribution of human capital. These factors do not operate in competition with each other but attract or influence different types of talent. He also argued that tolerance plays a role in stimulating creativity in cities and regions. Florida et al. (2007) confirms the positive relationship between tolerance and creativity and conclude that tolerance has a stronger influence on human capital and creativity than universities. Florida (2002) also argues that tolerance positively influences that geographic concentration of talent, increased innovations and regional development. Tolerance is also important for attracting high technology innovative companies and that therefore tolerance matters for technology growth, strength and concentration. (Florida et al., 2001). Florida (2007) explains that the more open a society is to new ideas and new people the more education and skill it is able to capture. More tolerant societies are also better able to exploit the benefits of demographic diversity which also may lead to increased innovativeness, creativity and technology success. (Florida et al., 2001).

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expression which may lead to higher levels of innovativeness, creativity and entrepreneurial attitude.

Florida et al. (2001) states that creativity is nowadays so important that is has become the new driving force for economic growth and prosperity. At last, societies with greater levels of tolerance signal mechanisms which might increase the productivity of entrepreneurial behavior. These mechanisms together might enhance productivity and efficiency of the human capital of a society and improve its innovation and entrepreneurship. (Florida et al., 2007). The mechanisms may therefore lead to increased absorptive capacity and spillover effects of incoming FDI and thereby positively affect the relationship between incoming FDI and GDP growth. A higher level of tolerance is also beneficial for foreign investors because it leads to more acceptance from consumers, distributors and partner companies which might increase the likelihood of success and profitability of the foreign investors and thereby increases the spillover effects of their investments.

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Conceptual model

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The conceptual model describes a positive relationship between incoming FDI and GDP growth. According to the literature individualism and tolerance have a positive moderating influence. This means that these variables positively affect the relationship between FDI and GDP growth. According to the literature uncertainty avoidance and power distance have a negative moderating influence. This means that these variables negatively affect the relationship between FDI and GDP growth.

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3. Data and Method

3.1 Sample

The sample for my research are the countries of the European Union. I chose the countries of the European Union because these countries are integrating their policy and economic activity but their cultural variables are still very divergent because culture is very static. Hartman (1985) for example states that different host countries have often different tax policies regarding foreign direct investment. This could lead to different profitability’s of these investments and therefore different spillover effects.

Different countries might also have different policies regarding the barriers to entry their markets and institutional development. (Globerman et al., 1999). Canada uses for example free-trade agreements, (Globerman et al., 1999) while in most emerging markets the legal and institutional environment is not much developed. (Meyer et al., 2001). Institutional development, policy and barriers to entry might therefore also result in different absorptive capacity and spillover effects of FDI in a country. The choice to pick the EU results therefore in more control for other factors than culture that may affect the relationship between FDI and GDP growth. I am going to use the timeframe 1990 till 2011 because since the 1990 the countries of the EU are actively integrating their economic activities and policy.

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integration gives an important trigger to trade and FDI (Di Mauro et al., 1999). Investment in and by the EU members have increased more since 1985 than the other OECD countries (Barrel and Pain, 1999). In the Central and Eastern European countries of the European Union FDI has contributed to increased economic growth. (Schadler et al., 2006). Uppenberg et al. (2004) confirms that in the EU countries of Central and Eastern Europe there is strong evidence that FDI has increased GDP growth. He also states that in the more advanced fifteen economies of the European Union it is not clear whether FDI has increased economic growth or if the relationship is the other way around. For the more advanced countries of the EU there might reversed causality. Sohinger (2005) states that the FDI that the countries in European Union receive improves the integration process of the Union which increases the economic growth of the members of the EU.

3.2 Data

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3.2.1 Dependent variable: GDP growth:

I am going to use the annual GDP growth per capita of a country just like other researchers did. (Borensztein et al., 1998, Alfaro et al., 2004). The data is obtained from the website of the Worldbank.

3.2.2 Independent variable: FDI:

I am going to measure the FDI as the net inflow of foreign direct investment. This is the amount incoming foreign direct investment less the foreign disinvestment. To control for the size of the economy I am going to use FDI of a country as a percentage of GDP of the country just like other research papers did. (Alfaro et al., 2004 and Borensztein et al., 1998). The data is obtained from the website of the Worldbank.

3.2.3 Moderator variables:

Culture will be operationalized according to the Hofstede dimension: uncertainty avoidance, power distance and individualism/collectivism. Look for definitions at the hypotheses section. These data are available on the Hofstede website. Also tolerance will be used which is in line with the work of Richard Florida (2007).

Uncertainty Avoidance:

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Power distance:

Hofstede dimensions data. The higher the number of power distance, the more power distant a country is.

Individualism/Collectivism:

Hofstede dimensions data. The higher the number of individualism/collectivism, the more individualistic a country is.

Tolerance: Acceptance to minority groups index from Worldgallup. The higher the number of tolerance, the more tolerant a country is.

Control variables

To measure the correct influence of FDI to GDP growth and the moderating influences the following control variables will be used. These variables might also influence the GDP growth.

Corruption:

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Labor productivity:

Girma (2005) states that increasing labor productivity has a positive impact on the efficiency of the workforce which might increase GDP growth. Globerman (1979) concludes that increased labor productivity might increase spillover effects of a company’s investment because it increases the value added to the investment which

might result in enhanced GDP growth. I am going to measure labor productivity as the amount of GDP per hour worked. The data is obtained from the website of the Conference Board.

Education:

Lim (2001) states that the higher the level of education the more able a country is to exploit the benefits of its investments. Tamura (1991) concludes that education in investment technology results in positive productivity and return of a countries investments which may lead to an increase in GDP growth. Hejazi et al. (1999) confirms that knowledge in particular in R&D might result in increased innovativeness and creativity of country which positively effects the GDP growth of a country. The influence of education to GDP growth is increasing over time. (Noorbakhs et al., 2001). I am going to measure education according to the United Nations Education index. The Education Index is measured by two-thirds weighting of the adult literacy rate and by one-third of the combined primary, secondary and tertiary gross enrollment ratio. The data is obtained from the website of the United Nations.

Gross National Income:

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infrastructure, techniques, distribution and understanding of their market demand. Therefore the income of a country might also increase the GDP growth of a country. I’m going to measure income as the Gross National Income of a country. To control for the size of the country I’m going to use the GNI per capita. The data is obtained

from the website of the Worldbank.

Financial development:

Arestis et al. (2001) concludes that stock-markets are able to produce economic growth by enhancing corporate control, encouraging specialization and acquisition of information and reducing the costs of mobilizing savings which results in facilitating investments. Financial development is measured as the total stock market capitalization of listed shares on domestic exchanges. To control for the size of the economy I am going to use stock market capitalization divided by the GDP of country. (Alfaro et al. 2004). The data obtained from the website of the Worldbank.

3.3 Method

For my research questions I made a database for the GDP growth, incoming FDI, cultural variables and control variables of the EU countries in the period 1990-2011. For not all the countries there’s all the data available for the whole timeframe. Also for

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the assumption of the Ordinary Least Squares (OLS) regression are violated for all the equations by measuring the degree of multicollinearity, autocorrelation and heteroscedasticity. Than I am going to apply a bootstrap panel regression in SPSS for all the cultural variables separately with respect to the control variables. Testing the variables separately is useful because adding all the variables in one equation might result in more bias and noise. I am however also going to apply a bootstrap multiple regression with all the cultural variables together to check if the variables are also significant than. Based on the results of the regressions I am going to check if the cultural moderator term is statistically significant, this is the . Term. In the model the GDP per capita growth is not normally distributed. (See appendix 1). Transforming it into a logarithm did also not result in a normal distribution. That is why to partially solve this problem I am going to apply bootstrapped regressions. The equations of these regressions are as follows:

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This equation tests what kind of moderating influence individualism has on the relationship between FDI and GDP growth. It will be tested if the coefficient

is statistically significant

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This equation tests what kind of moderating influence power distance has on the relationship between FDI and GDP growth. It will be tested if the coefficient

is statistically significant.

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This equation tests what kind of moderating influence uncertainty avoidance has on the relationship between FDI and GDP growth. It will be tested if the coefficient

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This equation tests what kind of moderating influence tolerance has on the relationship between FDI and GDP growth. It will be tested if the coefficient

I am also going to apply a multiple regression to check if the cultural variables are statistically significant if all the variables are included. The coefficients

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3.4 Descriptive Statistics

The descriptive statistics of the dependent, independent and moderator variables can be found in table one.

Table 1

Observations Minimum Maximum Mean St dev Skewness Kurtosis GDP growth per cap 588 -0,31 0,13 0,019 0,043 -1,87 8,83 FDI/GDP 560 -0,29 5,65 0,14 0,61 6,83 48,62 PD 528 11 104 51,42 21,5 0,36 -0,42 UA 528 23 112 71,46 23,77 -0,46 -0,69 Indv 528 27 89 59,17 17,67 -0,53 -0,70 Tol 594 32 80,1 59,84 15,80 -0,44 -1,53

3.5 Data problems

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the problem of non-normality of GDP growth resulted in the choice of the bootstrapped regressions.

4. Results

4.1 Empirical outcomes

In the table on the next page are the bootstrap linear regression results of the equations. * means that the coefficient is significant at 90 % confidence level ** means that the coefficient is significant at 95% confidence level and *** means that the coefficient is significant at a 99% confidence level. (PD stands for power distance, UA for uncertainty avoidance, Indv for individualism and Tol for tolerance). The terms in the brackets are the standard deviations of the coefficients.

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Model 1 Model 2 Model 3 Model 4 Model 5 Intercept 0,026*** (0,003) 0,029*** (0,003) 0,027*** (0,003) 0,028*** (0,004) 0,031*** (0,005) Gross national income

per cap -0,026*** (0,006) -0,025*** (0,007) -0,027*** (0,006) -0,021*** (0,005) -0,023*** (0,005) Labor productivity 0,006 (0,005) 0,005 (0,006) 0,008 (0,005) 0,009* (0,006) 0,010 (0,008) Stock development/GDP 0,003 (0,002) 0,003 (0,002) 0,003 (0,002) 0,005*** (0,002) 0,004* (0,002) Corruption 0,010 (0,004) 0,011 (0,005) 0,005 (0,004) 0,009** (0,004) 0,006 (0,005) Education 0,001 (0,004) 0,001 (0,004) -0,002 (0,004) -0,003 (0,003) -0,003 (0,004) FDI/GDP 0,006 (0,013) 0,029** (0,013) 0,004 (0,010) 0,028 (0,023) 0,043** (0,026) Lag FDI/GDP 0,010 (0,012) 0,007 (0,009) 0,007 (0,010) 0,007 (0,010) 0,007 (0,025) Individualism -0,007** (0,003) - - - -0,007* (0,004) Power distance - 0,009* (0,006) - - 0,012 (0,010) Uncertainty avoidance - - -0,003 (0,005) - -0,012* (0,008 Tolerance - - - -0,013** (0,006) -0,007 (0,007) Indv * FDI -0,042*** (0,013) - - - -0,030* (0,019) PD * FDI - 0,050** (0,020) - - 0,061* (0,045) UA * FDI - - 0,025 (0,020) - -0,029 (0,039) Tol * FDI - - - -0,030 (0,026) -0,011 (0,022) Adjusted R squared

without cultural terms

0,121 0,121 0,121 0,121 0,121

Adjusted R squared with cultural terms

0,165 0,144 0,160 0,128 0,165

Number of observations

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4.2 Interpretation of the results

The table on the former page presents the results of five bootstrapped linear

(Ordinary Least Squares) regressions. Model one till four tested the cultural variables separately. The fifth model contains all the cultural dimensions. The models also have error terms because there are other factors than the independent variables used that affect the GDP growth of a country/union. The units of the coefficients from the interaction terms (moderators) of the cultural dimensions are cultural dimension* FDI/GDP. The coefficients describe the increase or decrease of GDP growth per cap. per one unit increase of cultural dimension* FDP/GDP. The null-hypotheses state that the cultural dimensions do not have an moderating influence on the

relationship between FDI and GDP growth. The interaction term of individualism has a p-value of 0,01 and a coefficient of -0,042 and the interaction term of power distance has a p-value of 0,011 and a coefficient of 0,050. This means that the coefficients of the moderators of individualism and power distance are statistically significant. Tolerance has a p-value of 0,170 and a coefficient of -0,030. Uncertainty avoidance has a p-value of 0,199 and a coefficient of 0,025. The coefficients of the interaction effects of tolerance and uncertainty avoidance are therefore not

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for the moderators of power distance and individualism the null-hypotheses are rejected and for tolerance and uncertainty avoidance the null-hypotheses are not rejected. This indicates that individualism has a negative significant moderating influence on the relationship between FDI and GDP growth and power distance has a positive significant moderating influence on this relationship. Tolerance and

uncertainty avoidance do not have a significant moderating influence on the

relationship between FDI and GDP growth. My results also indicate that incoming FDI has a positive significant influence on GDP growth. But we have to interpret this with caution because only in model two and five this influence is statistically significant with coefficients of 0,029 and 0,043 and P-values of 0,019 and 0,044. The unit of this coefficient is FDI/GDP and the coefficient describes the change of GDP growth per cap. per one unit increase of FDI/GDP. Individualism, tolerance and uncertainty avoidance also have a direct negative statistically significant influence on the GDP growth with coefficients of -0,007**(indv), -0,013**(Tol) and -0,012*(UA). This indicates that individualism, tolerance and uncertainty avoidance negatively affect the economic growth of a country/union. Uncertainty avoidance is however not significant in model two and tolerance is not significant in model five so we have to interpret this with caution. Power distance has a direct significant positive influence on GDP growth with a coefficient of 0,009*. This indicates that power distance

positively affects the economic growth of a country/union. Power distance is however not significant in model five so we also have to interpret this with caution. The

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positive and significant in model four which slightly indicates that they positively affect the GDP growth. Corruption is positive and significant in model four as well. This indicates that the corruption of a country/ union negatively affects its GDP growth.

When you look at the adjusted R-squares it can be concluded that including the cultural terms in the regressions resulted in higher adjusted R-squares for all the regressions. Including the cultural terms resultedtherefore in higher fit and explanatory power of the models.

Robustness check one:

To check the robustness of my data I divided the sample in two samples of the timeframe 1990-2000 and 2000-2010.

Table 3 Sample EU 1990-2000

Model 1 Model 2 Model 3 Model 4 Model 5

Indv * FDI -0,045 (0,046) _- _- _- -0,072 (0,158)

PD * FDI - -0,015 (0,071)_- _- 0,012 (0,211)

UA * FDI - _- -0,012 (0,040)_- -0,052 (0,174)

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Table 4 Sample EU 2000-2011

Indv * FDI -0,045** (0,014) - - - -0,038* (0,024) PD * FDI - 0,055** (0,012) - - 0,012 (0,049) UA * FDI - _- 0,029 (0,025) _- -0,014 (0,053) Tol * FDI _- _- _- -0,033 (0,026) -0,014 (0,025)

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Robustness check two

I also divided the sample in two sub-samples of countries that were member of the EU since 1995 and countries that joined the union later. The former are mostly the western European countries and the latter are mostly the eastern European countries.

Table 5 Sample EU countries who became member until 1995

Indv * FDI -0,008 (0,022) _- _- _- 0,001 (0,045)

PD * FDI - 0,018 (0,017)_- _- 0,008 (0,072)

UA * FDI - _- 0,011 (0,022)_- 0,018 (0,068)

Tol * FDI _- _- _- -0,004 (0,057) -0,009 (0,091)

Table 6 Sample EU countries who became member after 1995

Indv * FDI -0,030 (0,030) _- _- _- 0,093 (0,160) PD * FDI - 0,148** (0,078) - - 0,394 (0,264) UA * FDI - _- -0,013 (0,145)_- -0,287 (0,344) Tol * FDI _- _- _- -0,162 (0,134) 0,044 (0,191)

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5. Conclusion and discussion

5.1 Summary of findings

This paper has investigated the moderating effects of the cultural variables on the relationship between incoming FDI and GDP growth. Four regressions were run to investigate each cultural variable separately and one regression to investigate their influences simultaneously. The contribution of this paper is to investigate the cultural moderating influences of the relationship between incoming FDI and GDP growth. The regressions show that FDI has a positive influence on GDP growth. This result is in line with other research. (Borenzstein et al., 1998, De Gregorio et al., 1995). Individualism has a significant negative moderating influence with a coefficient of -0,042 on the relationship between incoming FDI and GDP growth. This means that

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5.2 Discussion

The negative significant coefficient of individualism is not in line with most of the current literature. The literature suggested that individualistic societies have more absorptive capacity than collectivist societies because of their higher degree of innovation and creativity and there are less collective groups and clans, which results in higher absorptive capacity and spillover effects of incoming FDI. (Shane, 1993, Hofstede, 2001, Kanter, 1988). However Tiessen (1997) concludes that collectivist societies are better able to implement and incremental improve innovations. It is also possible that the barriers to enter the collectivist groups is quite low. Or that in-groups are trans-border and foreign investors are already part of these in-groups. Another explanation could be that the FDI is mainly in domestic organization which are already part of the clan or in-group. This may give foreign investors indirect access to the in-group. This might provide the foreign investors the benefits of low transaction costs, teamwork, efficient information and innovation sharing. (Tiessen, 1997). In this case the investors could benefit from the profitability of the in-group members and the collective values could motivate entrepreneurs of in-group members to develop business and innovation for the whole group. So collectivism does not necessarily prevent innovation. (Tiessen, 1997). Also the group loyalty is higher is collectivist societies. (Basabe et al., 2005).

Their research also concludes that competitive success attitudes of persons are more common in collectivist societies. (Basabe et al., 2005). Perhaps this resulted in the higher absorptive capacity and spillover effects of collectivists societies.

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strength of these small businesses. This could explain why the innovativeness of small business is only little dependent on individualism.

The positive significant coefficient of power distance is also not in line with most of the current research. This research states that less power distance increases the innovation and creativity which results in higher spillover effects on incoming FDI. (Shane 1993, Hofstede, 2001, Sathe, 1988). However Hofstede ( 2001) also states that on an organizational level a certain amount of power distance is needed for control and for preventing disorder. Less power distance could therefore result in disorder with a negative impact on the absorptive capacity. Also the experiment from Erez et al. (1987) and the willingness to internalize commitments might explain the higher absorptive capacity of high power distant countries and why my results indicate that power distant societies have a positive moderating influence on the relation between FDI and GDP growth.

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Tolerance does not have a significant impact on the relation between FDI and GDP growth either. This is also not in line with most of the literature which suggests that tolerance increases the creativity, innovation, knowledge, talent and acceptance to foreign investors of a society. An explanation for the insignificant result could be that regional development is dependent on technology, talent and tolerance together. (Florida, 2004). Tolerance on its own may therefore be not enough for a society to increase its absorptive capacity. Another explanation might be that most of the current research about tolerance is applied on regional development in the United States. The results therefore might differ for countries of the European Union.

The multiple regression shows that power distance and individualism are statistically significant at a 90% confidence level. Perhaps the noise in the regression or the influences between the dependent variables among each other resulted in the insignificant results for larger confidence levels .

5.3.1 Policy implications

From my research several recommendations to policymakers can be done:

1: For collectivist societies incoming FDI is beneficial for the economic growth of the country. It is therefore beneficial for these countries to stimulate foreign direct investment in their economy.

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3: Tolerance and Uncertainty avoidance are irrelevant for a country when considering to stimulate incoming foreign direct investment.

5.3.2 Managerial implications

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5.4 Limitations

The main limitation of my study is that my sample only contains EU countries. Including all the countries of the world might lead to different results. The EU countries are all quite advanced economies. The results may therefore differ for developing economies. I chose the EU countries because it gave more control for the influence of policy and institutional development of a country on the spillover effects of incoming FDI. Another limitation of my study is that I used the timeframe 1990-2011. I chose this timeframe because since 1990 the EU countries are actively integrating policy. A longer or different timeframe may result in different results.

The third limitation is that not for every country in the EU there is data available for the whole timeframe and all the variables. For Latvia, Lithuania and Cyprus there is no data available of the Hofstede dimensions for example.

The forth limitation is that there are a lot of potential macro-economic factors that might affect the GDP growth. Because of time and data constraints I only tested the main factors that are based on the literature.

Also a limitation of my study is that there are a lot of moderating factors that might influence the relation between FDI and GDP growth. It was however statistically too complex to control for those other moderating variables.

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5.5 Directions for future research

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Appendices

Histogram normality check GDP per capita growth.

Appendix 1

Appendix 2 DW statistic equation 1

Tests of Normality

Kolmogorov-Smirnova Shapiro-Wilk

Statistic df Sig. Statistic df Sig.

GDP Growth cap ,143 588 ,000 ,874 588 ,000

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Culture as a moderator of the relationship between incoming Foreign Direct Investment and economic growth