cultural values
Master’s Thesis
Author: J.M. Postma Student number: S2965291 E-mail: j.m.postma@student.rug.nl Supervisor: dr. S.R. Gubbi Co-assessor: A. KuikenMSc International Business and Management Faculty of Economics and Business
University of Groningen
Duisenberg Building, Nettelbosje 2, 9747 AE Groningen, The Netherlands P.O. Box 800, 9700 AV Groningen, The Netherlands
http://www.rug.nl/feb
2
Abstract
One of the factors that has been studied in the context of both foreign direct investment (FDI) and economic growth individually, but never simultaneously, is the national culture of countries. Extending and combining prior research, I argue that uncertainty avoidance moderates the relationship between FDI and economic growth negatively. Moreover, I suggest that the relationship between FDI and economic growth is moderated positively by values related to an achievement motivation and values associated with social capital. To test these hypotheses, a generalized linear model (GLM) is constructed using a sample consisting of 52 countries worldwide in the period 2009 to 2018 and proxies for national cultural values created through a factor analysis of World Value Survey (WVS) variables. The results point out that uncertainty avoidance affects economic growth negatively when interacted with FDI. In addition, the findings suggest that values related to an achievement motivation, a rejection of the limited goods syndrome and placing importance on entrepreneurial values to be specific, affect economic growth positively when interacted with FDI.
3
Acknowledgement
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Table of Contents
Abstract ... 2 Acknowledgement ... 3 List of tables ... 4 List of figures ... 4 List of abbreviations ... 5 1. Introduction ... 6 2. Literature review ... 82.1 Foreign Direct Investment and Economic Growth ... 8
2.2 National Cultural Values ... 10
3. Methodology ... 15 3.1 Data collection ... 15 3.2 Data analysis ... 15 3.3 Control variables ... 17 4. Results ... 20 5. Discussion ... 22
Limitations and directions for future research ... 24
6. Conclusion ... 26
Bibliography ... 27
Appendices ... 30
List of tables
Table 1: Description of variables ... 18Table 2: Descriptive statistics ... 20
Table 3: GLM results ... 21
5
List of abbreviations
FDI Foreign direct investment
GDP Gross domestic product
GLM Generalized linear model
HFDI Horizontal foreign direct investment
LOF Liability of foreignness
ML Maximum likelihood
TFP Total factor productivity
VFDI Vertical foreign direct investment
WDI World development indicators
6 “Culture makes people understand each other better. And if they understand each other better in their soul, it is easier to overcome the economic and political barriers. But first they have to understand that their neighbors are, in the end, just like them, with the same problems, the same questions. People have to understand that their neighbors are not different even if they have a different religion, different sociological background.” Paulo Coelho (2015)
1. Introduction
How and when FDI affects host country economic growth remains inconclusive to date. Conditional effects, such as host country’s human capital stock (Borensztein, De Gregorio & Lee, 1998), market effectiveness, trade policies (Balasubramanyam, 1996), level of property rights protection (Javorcik, 2004), and level of financial system development (Hermes & Lensink, 2003) are known to moderate the relationship between FDI and economic growth. While extensive, this list of factors is by no means exhaustive. One factor that has not been taken into account as of yet is the culture that is present in the host country. Research conducted by Bhardwaj, Dietz, and Beamish (2007) reveals that countries characterized by low levels of uncertainty avoidance are more likely to receive foreign direct investment. Further down the line, certain cultural aspects are revealed to affect economic performance, as pointed out by research conducted by Maridal (2013). A logical extension of the work carried out by the previously mentioned authors is that cultural values play a role in the relationship between FDI and economic growth. In order to determine whether cultural values play a moderating role in the aforementioned relationship, the following research question is developed: What is the moderating effect of national cultural values (of host country nationals) on the relationship between (inward) FDI and (host country) economic growth?
7 culture. Finally, I argue that social capital strengthens the relationship between FDI and economic growth. Foreign investors will be more successful in host countries where the nationals trust them (Maridal, 2013) and do not discriminate against them, allowing them to create constructive ties that foster economic growth.
In order to test the hypotheses, I make use of a two-step empirical analysis. First, factor analysis is utilized in order to pool relevant variables from the World Values Survey (WVS) together. In doing so, factors that represent the constructs of uncertainty avoidance, social capital, and achievement motivation are created. Second, a generalized linear model (GLM) is constructed using the factors generated in the first step. This analysis is carried out using a sample consisting of 52 countries worldwide in the period 2009 to 2018. Low-, middle-, and high-income countries are included in the sample.
The analysis reveals results that contradict the work of both Iamsiraroj and Ulubasoglu (2015) and Maridal (2013). The main relationship, that of FDI and economic growth, is revealed to be negative for this sample. In addition, the proxies for national cultural values appear to have no direct effect on economic growth. When it comes to the hypotheses, the results display that uncertainty avoidance has the hypothesized negative effect. Furthermore, two out of the four sub-hypotheses of the achievement motivation have the hypothesized positive effect when interacted with FDI. The sub-hypotheses belonging to social capital come back insignificant and, therefore, appear to have no effect on the relationship between FDI and economic growth.
This study contributes to existing literature in the following ways. First, an addition is made to the literature concerning economic growth. This research helps to explain why some countries experience rapid economic growth, while others lag behind. Second, an addition is made to the literature concerning the effectiveness of foreign direct investment. It does so by explaining why foreign direct investment is often successful in some countries, while it is doomed to fail in others. This second point also illustrates the practical relevance of this research. It may help managers to make a decision between certain foreign direct investment options, based on the prospects of success that they bear.
8 Section 4 presents the results of the conducted analysis and the findings that they offer. Section 5 discusses these findings and addresses limitations, contributions and directions for future research. Section 6, ultimately, concludes the paper by underlining the essential findings of the conducted research.
2. Literature review
2.1 Foreign Direct Investment and Economic Growth
Foreign Direct Investment, according to the OECD (2001), pertains to “the category of international investment that reflects the objective of a resident entity in one economy to obtain a lasting interest in an enterprise resident in another economy”. According to Griffin and Pustay (2007), we can speak of FDI when at least 10 percent of a firm its voting rights are owned by a foreign entity. We speak of outward FDI for investments made by local investors in host economies and of inward FDI for investments made by foreign investors in the reporting economy. Inward FDI is argued to affect economic growth in the reporting economy. Economic growth, the growth of output per head (Lewis, 2005), is the result of increased productivity. As a result of improved efficiency, more products can be manufactured using the same amount of resources.
The relationship between foreign direct investment and economic growth has received an extensive amount of attention in the past decades. However, the body of literature that has been established does not provide us with a conclusive answer. Research conducted by Iamsiraroj and Ulubasoglu (2015) illustrates that, of the 108 empirical studies conducted, utilizing data from all over the world, preceding their analysis, 43% reveal a positive and significant effect, while 17% reveal a negative and significant effect and 40% find a statistically insignificant effect. Their ensuing econometric analysis, based on a sample of 140 countries worldwide between 1970 and 2009, clarifies the blurred picture partially by revealing a positive significant relationship. This relationship holds worldwide, so for both the developed and the developing world.
9 Beugelsdijk, Smeets, and Zwinkels (2008) distinguish between two types of FDI. Horizontal (HFDI), also known as market-seeking investment as a firm copies its business to a different country, and vertical (VFDI), also known as resource-seeking investment as a firm locates certain production processes in places where they can be carried out as cheap as possible. Of these two, the former may cause greater spillover effects as a result of more exhaustive usage of intellectual capital in the host country (indirect channel). The latter may, however, have a greater impact on host country labor demand (direct channel). Should their proposition hold, VFDI would be the most important driver in the relationship between FDI and growth according to the results of the research by Makiela and Ouattara (2018). Yet, Beugelsdijk et al. find that, while both HFDI and VFDI have a positive and significant effect in developed countries, the growth-enhancing effect is 50% larger in the case of HFDI compared to that of VFDI.
10 earlier, national culture is not among the factors that have been looked at in this context. The following section will shed light on why this is important nevertheless.
2.2 National Cultural Values
Multiple scholars have come up with their own idea of how culture can and should be measured (Kluckhohn and Strodtbeck, 1961; Inglehart, 1971; Hofstede, 1980; Hall, 1976; Schwartz, 2006). Hofstede, for example, defines culture as “The collective programming of the mind which distinguishes the members of one group or category of people from another.”. His model was developed by examining the results of a global survey regarding values of IBM employees and using factor analysis in order to group correlating values and create dimensions (Hofstede, 1980; Hofstede, 2001; Hofstede et al., 2010). Schwartz (2006), on the other hand, defines culture as “The rich complex of meanings, beliefs, practices, symbols, norms, and values prevalent among people in a society.”. In contrast to Hofstede, Schwartz his cultural value orientations are derived by a priori theorizing and, subsequently, testing their fit to empirical data.
Despite their different approaches, the authors in this domain agree on one thing; cultural values mold the beliefs, values, and behavior of the members within a society and cause them to behave in a certain way. These factors are at the basis of the immense cultural distance literature and I argue that they, in turn, may determine the success that companies entering a new market have. This ultimately determines whether their presence is beneficial to the host country in terms of economic growth.
In support of this conjecture, research conducted by Bhardwaj, Dietz, and Beamish (2007) points out that firms investing in foreign countries prefer to do so in countries characterized by lower levels of uncertainty avoidance. Uncertainty avoidance also appears to weaken the relationship between trust and FDI inflows. This means that the lower the level of uncertainty avoidance is, the higher the level of potential inward FDI flows. According to the authors, this relationship can be accredited to an increased liability of foreignness (LOF). This increased LOF may be formed by negative perceptions towards the unknown, competition, and a combination of the two, and may result in discrimination and heightened costs for entrants of foreign descent.
11 characteristics that develop social capital and honesty in the population. An achievement motivation is found to be approximately 2.5 times more important than education when it comes to economic growth.
By extension of logic, the research mentioned above suggests that the cultural values of host country nationals play a role in the relationship between FDI and economic growth. I argue that this is the case because the two channels through which FDI can influence economic growth in a country both involve host country nationals. The direct channel, the build-up of input factors, is associated with an increase in labor demand. This demand will, however, only be created if host country nationals are willing to buy from foreign companies. Furthermore, the increased labor demand will only be met if host country nationals are willing to work for and with foreign companies. The indirect channel, growth of total factor productivity, is associated with spillovers of technologies and know-how. These spillovers can only occur when host country companies are willing to work with foreign companies.
In line with the research mentioned above, I propose the following theory and hypotheses that will be tested in order to answer the main research question:
I argue that the relationship between FDI and economic growth is weakened by uncertainty avoidance as a result of an increased liability of foreignness (Hymer, 1976). Nationals from countries characterized by high levels of uncertainty avoidance perceive uncertain and unknown situations as threatening (Hofstede, 2001) and have a negative attitude towards competition (Jones & Teegen, 2001). Together, these factors may cause host country governments, consumers, and suppliers to discriminate against foreign investors and cause foreign investors to face substantial additional costs compared to local firms. i.e. increase the liability of foreignness (Hymer, 1976). This increased liability of foreignness causes firms to avoid countries with high levels of uncertainty avoidance because of the prospects of success they offer (Bhardwaj, Dietz & Beamish, 2007). In addition, the enhanced liability of foreignness causes foreign investors that do enter these countries to be less successful than their local counterparts (Zaheer, 1995). When they are not successful, they are not beneficial to the host country its economy because they are unable to generate competition and productivity increases. Thus, I propose:
12 Second, I theorize that the relationship between FDI and economic growth is strengthened by values that can be attributed to an achievement motivation. Achievement motivation, or the “need for achievement” (McClelland, 1961), is characterized by both values that provide motivation and beliefs that stimulate these values. Examples of such values and beliefs are discussed below. Collins, Hanges & Locke (2004) show that achievement motivation is correlated with both the choice to pursue an entrepreneurial career and entrepreneurial performance. Granato, Inglehart & Leblang (1996) argue that models incorporating both economic and cultural variables yield better results than models prioritizing only one. Their findings suggest that achievement motivation is a particularly relevant dimension for economic growth. The logic behind achievement motivation as a moderator in the relationship between FDI and economic growth is the following: Ceteris paribus, FDI increases the level of competition in a market as more firms have to compete over the same pool of revenue. Competition in the form of pressure from foreign firms stimulates innovation (Carlin, Schaffer & Seabright, 2004) and innovation fosters economic growth (Pece, Simona & Salisteanu, 2015). Maridal (2013) shows that an achievement motivation, and beliefs supporting such a motivation, positively affect economic growth. I belief that factors and beliefs belonging to an achievement motivation, such as independence and thrift, allow aforementioned innovation to reach its full potential. Such factors drive people to think outside the box, accept new and different ideas, and save money to invest. Thus, I propose:
H2: Ceteris paribus, FDI will have a greater effect on economic growth in countries where the national culture is characterized by higher levels of values related to an achievement orientation.
This hypotheses is tested through the following four sub-hypotheses:
H2a: In countries where the limited goods syndrome is rejected, FDI will have a greater effect on economic growth.
The limited goods syndrome is characterized by the belief that wealth is limited and cannot grow. In line with this belief is the idea that people have a predetermined fate and that working hard will not bring them success. These views do not stimulate a need for achievement and, therefore, rejecting them would be beneficial to economic growth.
13 Entrepreneurial values are values that motivate people to be inventive and open-minded. Independence and thrift are two factors that belong to this category, whereas obedience and blind respect for authority can be considered the opposite. Entrepreneurial values stimulate the need for achievement and are, therefore, beneficial to economic growth.
H2c: In countries where economic growth is considered to be important, FDI will have a greater effect on economic growth.
People who consider economic growth to be important are more likely to be motivated in the workplace. In addition, a high percentage of people who consider economic growth to be important, may be reflected in the governmental body of a country and result in policies that stimulate economic growth.
H2d: In countries where technological progress is considered to be important, FDI will have a greater effect on economic growth.
People who consider technological progress to be important are more likely to accept new technologies. In addition, these people are more likely to strive for progress, and thus achievement. As a result, it may be easier to abandon old and inefficient ways of production, facilitating positive effects on economic growth.
14 growth. I believe that in those countries FDI will have a greater effect on economic growth as host country nationals will not discriminate against foreign investors. Thus, I propose:
H3: Ceteris paribus, FDI will have a greater effect on economic growth in countries where the national culture is characterized by higher levels of values related to social capital.
This hypothesis is tested through the following two sub-hypotheses:
H3a: In countries where the nationals are more welcoming to outsiders, FDI will have a greater effect on economic growth.
People may fear or dislike outsiders for all kinds of reasons ranging from the preservation of ones culture to the protection of national security. When people are unwilling to move out of their comfort zone, they may never find out that outsiders may be quite similar to themselves. When they are more welcoming, however, this facilitates the exchange of information and the creation of bonds.
H3b: In countries where the nationals are more honest, FDI will have a greater effect on economic growth.
Honesty relates to conducting fair business and fosters trust between producers and their partners and consumers. As mentioned above, this should facilitate the growth of markets through a reduction in transaction costs. Figure 1 shows the conceptual model with the main hypotheses.
Foreign direct
investment (inward) Economic growth
Uncertainty avoidance Achievement
motivation Social capital
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3. Methodology
3.1 Data collection
A variety of data sources is utilized in order to conduct this study. Data on economic growth and FDI inflows, as well as some control variables, are derived from the World Development Indicator (WDI) database offered by the World Bank (2019). In this database, relevant global development statistics of high quality are compiled in a way that allows for international comparison. I study the period 2009 to 2018 as this period is characterized by a high amount of data availability. National cultural values are derived from the most recent wave of the World Values Survey (WVS). The WVS is made up of surveys that represent nations and are conducted in almost 100 countries. The WVS documents human values and beliefs using a standardized questionnaire and, as a result, offers a dataset that lends itself perfectly for studies in the domain of international economics and management (Au and Cheung, 2004). Finally, the Economic Freedom of the World 2019 annual report (Gwartney, Hall, Lawson & Murphy, 2019) is consulted in order to collect data for control variables.
Economic growth is measured as the percentage growth of GDP from 2009 to 2018 in current US$. The data on GDP in current US$ are derived from the WDI database and transformed in Microsoft Excel. The resulting variable is continuous and ranges from -23.3367% for Libya to 220.724% for Zimbabwe.
FDI inflow is measured as the total FDI inflow from 2009 to 2018 in current US$. The data on FDI inflows in current US$ are derived from the WDI database and transformed in Microsoft Excel. The resulting variable is continuous and ranges from US$-27.782.800.000 for Iraq to US$3.095.516.000.000 for the United States.
3.2 Data analysis
16 Exploratory factor analysis is conducted on 30 WVS variables that may be related to the aspects of culture relevant to this study. All variables are re-scaled to rank from 0 to 100 in order to simplify the interpretation. The factor analysis is repeated until factors with the highest possible factor loadings are found. Only variables with a factor loading of 0.60 or higher are retained, other variables are considered to be independent of the constructed factor. The principal-component factor method is used in order to analyze the correlation matrices, meaning that communalities are assumed to be 1. Varimax rotation is utilized in order to maximize the variance between factors.
For hypothesis 2a, the factor analysis reveals that 4 WVS variables load on a factor that can be classified as a rejection of the limited goods syndrome. These variables are: the belief that success can be achieved through hard work, the belief that there is enough for everybody and wealth can grow, the belief that people have no predetermined fate, but can shape their own, and the belief that people should be rewarded according to their contribution. The Cronbach’s alpha of the created factor is: 0.69.
For hypothesis 2b, the factor analysis reveals that 4 WVS variables load on a factor that can be classified as the importance of entrepreneurial values. Variables that load positively on this factor are: the belief that thrift is an important quality children should have and the belief that independence is an important quality children should possess. Variables that load negatively on this factor are: the belief that obedience is an important quality children should have and the opinion that respect for authority should be emphasized more in the future. The Cronbach’s alpha of the created factor is: 0.73.
For hypothesis 2c, the factor analysis reveals that 3 WVS variables load on a factor that can be classified as the importance of economic growth. These variables are: the belief that the primary objective of a country should be to increase economic growth, the belief that a stable economy is of the utmost importance, and the opinion that poverty and need are the most serious problems in the world. The Cronbach’s alpha of the created factor is: 0.70.
17 For hypothesis 3a, the factor analysis reveals that 3 WVS variables load on a factor that can be classified as being welcoming to outsiders. Variables that load positively on this factor are: the opinion that other religions are acceptable and the belief that having immigrant neighbors is no problem. The variable that loads negatively on this factor is: the opinion that when jobs are scarce, home country nationals have more rights to a job than immigrants. The Cronbach’s alpha of the created factor is: 0.66.
For hypothesis 3b, the factor analysis reveals that 4 WVS variables load on a factor that can be classified as honesty. These variables are: the belief that it is never acceptable to cheat on taxes, the belief that it is never justifiable to accept a bribe, the belief that it is never acceptable to claim government benefits that one is not entitled to, and the belief that is it is never justifiable to steal property. The Cronbach’s alpha of the created factor is: 0.91.
Second, a generalized linear model (GLM) is constructed using Stata. I make use of a GLM as it offers a Maximum Likelihood (ML) function, which regular linear regression does not. The default model specifications are used as linear-response data are being examined. Standard error type is set to Robust however, so that the standard errors are robust to misspecifications. I include all countries for which all the necessary data is available and do not distinguish between low-, middle-, and high-income countries. This results in a sample consisting of 52 countries from all over the world and, therefore, a diverse sample that offers a fairly complete picture of the relationship at hand. A description of all variables that are included in the model, including the hypothesized direction of effect can be found in Table 1.
3.3 Control variables
18 Table 1: Description of variables
Variable Description Factor load Hypothesis and
direction
Dependent
GDP growth 2009-2018 Growth of GDP from 2009 to 2018 (%) (WDI 2019)
Independent
Total FDI inflow 2009-2018
Total FDI inflow in the period 2009 to 2018 in current US$ (WDI)
+
Uncertainty Avoidance Distrust-Trust (Beugelsdijk and Welzel, 2018)
-
Rejection of limited goods syndrome
Success can be achieved through hard work
0.74 +
There is enough for everybody and wealth can grow
0.85 People shape their own fate 0.71 People should be rewarded according to
their contribution
0.61
Importance of entrepreneurial values
Thrift is an important quality children should have
0.76 +
Independence is an important quality children should have
0.76 Obedience is an important quality children should have
0.65 Respect for authority should be
emphasized more in the future
0.84
Importance of economic growth
The primary objective of a country should be increasing economic growth
0.89 +
A stable economy is of the utmost importance
0.86 Poverty and need are the most serious
problems in the world
0.61
Importance of
technological progress
Science and technology make life easier for everyone
0.93 +
Science and technology create opportunities for the next generation
0.92 More emphasis should be placed on
science and technology
0.67
Being welcoming to outsiders
Having immigrants as neighbors is no problem
0.79 +
Other religions are acceptable 0.83 When jobs are scarce, home country
nationals have more rights to a job
0.74
Honesty It is never acceptable to cheat on taxes 0.93 + It is never justifiable to accept a bribe 0.96
It is never acceptable to claim government benefits one is not entitled to
0.76 It is never justifiable to steal property 0.96
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Hypothesis 1 Interaction term of Total FDI inflow 2009-2018 and Uncertainty Avoidance
H1: -
Hypothesis 2a Interaction term of Total FDI inflow 2009-2018 and Rejection of limited goods syndrome
H2: +
Hypothesis 2b Interaction term of Total FDI inflow 2009-2018 and Importance of entrepreneurial values
H2: +
Hypothesis 2c Interaction term of Total FDI inflow 2009-2018 and Importance of economic growth
H2: +
Hypothesis 2d Interaction term of Total FDI inflow 2009-2018 and Importance of technological progress
H2: +
Hypothesis 3a Interaction term of Total FDI inflow 2009-2018 and Being welcoming to outsiders
H3: +
Hypothesis 3b Interaction term of Total FDI inflow 2009-2018 and Honesty
H3: +
Controls
Initial GDP 2009 GDP in the year 2009 (WDI 2019) - Legal structure and
property rights 2009-2017
Average score on legal structure and property rights in the period 2009 to 2017 (Economic Freedom of the World 2019)
+
Unemployment rate 2009-2018
Average unemployment rate in the period 2009 to 2018 (WDI 2019)
-
Population growth rate 2009-2018
Average population growth rate in the period 2009 to 2018 (WDI 2019)
+
Ex-Communist Dummy variable for Ex-Communist countries
20
4. Results
Table 2 depicts the descriptive statistics of the sample, including the mean, standard deviation, minimum and maximum. The interaction terms are left out as those numbers are irrelevant and cannot be interpreted directly.
Table 2: Descriptive statistics
The table shows that the dependent variable, the growth of GDP from the year 2009 to the year 2018, has a mean of 52.8. This entails that, on average, the GDP of the countries within this sample has grown by 52.8%. The minimum for this variable belongs to Libya, which has experienced a decline in GDP of -23.3%. The maximum for this variable belongs to Zimbabwe with a growth rate of 220.7%. The countries in the sample received, on average, 2.37e+11 in FDI inflows. The variables GDP growth 2009-2018, Total FDI inflow 2009-2018, Uncertainty Avoidance, Importance of entrepreneurial values, and Initial GDP 2009 have quite high standard deviations, meaning that there is considerable variation around the mean. Regarding the proxies for national cultural values, the table shows that the means for the variables Importance of technological progress and Honesty are relatively high, meaning that these two factors are considered to be important by most of the countries in the sample.
Table 3 displays the results of the GLM. Heteroskedasticity is controlled for by the use of robust standard errors. Model 1 includes only the dependent and control variables. Model 2 includes the dependent, independent, and control variables. Model 3 includes the dependent,
Variable Mean Standard
Deviation
Minimum Maximum GDP growth 2009-2018 52.73307 44.12176 -23.33665 220.724 Total FDI inflow 2009-2018 2.37e+11 5.49e+11 -2.78e+10 3.10e+12 Uncertainty Avoidance 35.15926 16.18044 6.7 85.7 Rejection of limited goods
syndrome
61.57417 6.616657 30.575 74.225 Importance of entrepreneurial
values
46.72625 13.37371 11.475 76.45 Importance of economic growth 57.825 9.334184 36.13333 78.23333 Importance of technological
progress
73.19333 6.636967 58.96667 90.36667 Being welcoming to outsiders 51.51639 14.68882 20.33333 89.53333 Honesty 78.53375 6.784886 48.575 86.35 Initial GDP 2009 7.21e+11 2.10e+12 3.00e+08 1.44e+13 Legal structure and property
rights2009-2017
21 independent, moderating, and control variables. The hypotheses are tested in Model 4 through the addition of the interaction terms. Full GLM results for Model can be found in Appendix A.
Table 3: GLM results
GDP growth 2009-2018 Model 1 Model 2 Model 3 Model 4
Total FDI inflow 2009-2018 2.55E-11
(0.00) 2.33E-12 (0.00) -1.38E-09** (0.00) Uncertainty Avoidance 1.65 (0.71) 1.15* (0.70)
Rejection of limited goods syndrome 0.59 (0.93) -0.20 (1.26) Importance of entrepreneurial values
-0.99 (0.83)
-2.35** (0.94) Importance of economic growth 0.31 (0.69) 0.50 (0.64) Importance of technological progress -0.74 (1.01) -1.50 (1.00) Being welcoming to outsiders 0.44 (0.58) 0.55 (0.62)
Honesty -0.88 (0.83) -1.13 (0.87) Hypothesis 1 -6.77E-12** (0.00) Hypothesis 2a 1.72E-11*** (0.00) Hypothesis 2b 1.71E-11*** (0.00) Hypothesis 2c -4.03E-12 (0.00) Hypothesis 2d -4.91E-12 (0.00) Hypothesis 3a -5.25E-12 (0.00) Hypothesis 3b 5.22E-12 (0.00) Initial GDP 2009 -6.99E-13 (0.00) -5.72E-12 (0.00) -1.73E-12 (0.00) -1.03E-11** (0.00) Legal structure and property rights
2009-2017 -3.39 (3.79) -4.75 (4.02) -8.54 (7.99) -3.57 (7.91) Unemployment rate 2009-2018 -2.96*** (0.86) -2.80*** (0.84) -2.69*** (1.08) -2.28** (1.01) Population growth rate 2009-2018 4.50 (3.57) 5.12 (3.36) 0.62 (5.89) -0.00 (6.72) Ex-Communist -16.46 (11.40) -13.75 (11.35) 7.51 (17.10) 11.23 (15.66) Constant 92.54*** (28.69) 94.84*** (28.70) 154.48 (125.44) 329.16 (136.68) *** p<0.01, ** p<0.05, * p<0.1
The most surprising result is that of the coefficient of FDI inflow itself. After adding the interaction terms to the model, the coefficient becomes negative. This negative effect is only significant at the 0.05 level, but is interesting nevertheless as it contradicts the results of the meta-analysis conducted by Iamsiraroj and Ulubasoglu (2015).
22 have a statistically significant positive direct effect on economic growth in the period 2009 to 2018. On the contrary, it appears that, in this sample, countries in which entrepreneurial values are considered to be important, economic growth is lower in terms of direct effects. Therefore, these findings contradict the results of the research conducted by Maridal (2013).
Not all coefficients for the hypotheses are in the predicted direction. However, no matter which p-value is utilized, there are no hypotheses that have a statistically significant effect other than hypothesized. Hypotheses 1 is statistically significant at the 0.05 level, whereas hypothesis 2a and 2b are statistically significant at the 0.01 level.
With regards to the control variables, the average unemployment rate between 2009 and 2018 has a statistically significant negative effect at the 0.05 level. The same can be said for the negative effect of initial GDP.
5. Discussion
The findings once again show the complex nature of the relationship between FDI and economic growth. The negative effect of FDI on economic growth that is statistically significant at the 0.05 level and contradicts the results of the research conducted by Iamsiraroj and Ulubasoglu (2015) may be the result of several factors of which some are unknown.
Some examples of known factors that may have caused this discrepancy are: First, the fact that this research focuses on the period 2009 to 2018, whereas the meta-analysis covers the period 1970 to 2009. Relationships may change over time and the countries that are experiencing the greatest growth at this point in time are not necessarily the same as those that held such positions years ago. Second, the fact that the sample utilized in this research only covers 52 countries, whereas the meta-analysis utilizes a sample covering 140 countries. Individual countries have more influence on the results in case of a small sample compared to their influence in a large sample.
The same factors may apply to the disparity between the results of this research and the research conducted by Maridal (2013), albeit with smaller differences. However, an additional factor that may play a role here is the fact that the proxies for national culture are not exactly the same.
23 avoidance. The idea here is that lower levels of uncertainty avoidance interacted with FDI inflows result in higher levels of economic growth. This can of course only be considered a “greater effect” of FDI on economic growth in case of a positive main relationship. As the main relationship is negative for the sample at hand, this does not hold. This is, however, only a matter of phrasing. What matters is the actual effect on economic growth, which is reflected in the sign of the coefficient.
The result for Hypothesis 1, uncertainty avoidance, displays that uncertainty avoidance has a statistically significant negative effect on economic growth when interacted with FDI. This means that in countries characterized by high levels of uncertainty avoidance, the effect of FDI on economic growth is more negative than in countries characterized by low levels of uncertainty avoidance. The variable measuring uncertainty avoidance (Distrust-Trust) is the result of a factor analysis combining the following factors: people their confidence in politics, people their confidence in justice and the degree to which people belief that other people can be trusted.
The results for Hypothesis 2, the achievement motivation, reveal that rejecting the limited goods syndrome and placing importance on entrepreneurial values support economic growth when interacted with FDI. This means that in countries where more people reject the limited goods syndrome and/or place importance on entrepreneurial values, the effect of FDI on economic growth is less negative. The variable measuring the rejection of the limited goods syndrome is the result of a factor analysis combining the following four types of beliefs: the belief that success can be achieved through hard work, the belief that there is enough for everybody and wealth can grow, the belief that people have no predetermined fate, but can shape their own, and the belief that people should be rewarded according to their contribution. The variable measuring the importance placed on entrepreneurial values is the result of a factor analysis combining the following four types of beliefs: the belief that thrift is an important quality children should have, the belief that independence is an important quality children should possess, the belief that obedience is an important quality children should have and the opinion that respect for authority should be emphasized more in the future. Here the former two beliefs increase the score on this dimension, whereas the latter two decrease the score.
24 people in the poorest countries in the sample consider these factors to be more important than people in the richer countries.
When it comes to Hypothesis 3, social capital, the results reveal that neither being welcome to outsiders nor being honest is a significant predictor of economic growth when interacted with FDI. The coefficient for Honesty is positive, but statistically insignificant.
Regarding the control variables, initial GDP is revealed to have a statistically significant negative effect on economic growth in this sample, meaning that the countries characterized by high GDP levels in 2009 experienced lower levels of economic growth in the period 2009 to 2018. This is not surprising as growth in developed Western markets is stagnating, while emerging markets are experiencing rapid growth.
Moreover, the average unemployment rate in the period 2009 to 2018 is revealed to affect economic growth negatively, meaning that countries with higher levels of unemployment experienced lower levels of economic growth in the period 2009 to 2018. This is not surprising either, as unemployment costs an economy money instead of providing it.
Despite lacking statistical significance, the unexpected positive coefficient for Ex-Communist countries is worth mentioning. This positive coefficient indicates that it is possible that Ex-Communist countries no longer experience the same difficulties as they did years ago. More research is required in order to draw a meaningful conclusion here.
Limitations and directions for future research
A couple of limitations to this study should be addressed. These limitations are the result of either unavailability of data or time constraint. In the case of the latter, these limitations can be seen as areas for future research. First, the results of this study and their implications are based on a sample of 52 countries. Despite the geographical coverage of these countries, there are far more countries in the world. In addition, each unit within a sample has a greater impact on the results the smaller the sample is. Therefore, the possibility that a larger sample would yield different results cannot be left out. At the moment, the WVS does not offer the required data for other countries, making it impossible to increase the sample size.
25 possible to create alternative measures. As a result, it is not possible to carry out robustness tests to see whether similar measures from different sources yield the same findings.
Third, as mentioned in the Literature review, we can distinguish between two types of FDI, horizontal and vertical. The available databases do not allow for a distinction between these two different types. Therefore, it is not possible to research whether they affect economic growth differently and whether cultural values moderate the relationships between these types and economic growth dissimilarly.
26
6. Conclusion
In an attempt to provide new insights into the relationship between FDI and economic growth, this paper aimed at answering the research question:
What is the moderating effect of national cultural values (of host country nationals) on the relationship between (inward) FDI and (host country) economic growth?
Using a sample consisting of 52 countries worldwide in the period 2009 to 2018 and proxies for national cultural values created through a factor analysis of WVS variables, I find some results that contradict the work of Iamsiraroj and Ulubasoglu (2015) and Maridal (2013). These relate to the direct effects of FDI and national cultural values on economic growth. Regarding the hypotheses, I find that uncertainty avoidance affects economic growth negatively when interacted with FDI. The assumed channel here is that uncertainty avoidance increases the liability of foreignness (Hymer, 1976), causing foreign investors to incur higher costs and face greater difficulty in establishing themselves in a host country. This hinders their ability to increase competition and productivity in the host country market and ultimately economic growth. I also find that a rejection of the limited goods syndrome, the belief that one can only get rich at the expense of another as wealth does not grow, has a positive effect on economic growth. The same applies to placing importance on entrepreneurial values such as thrift and independence, opposed to values as obedience and respect for authority. These positive contributors can be related to an achievement motivation as identified by McClelland (1967).
27
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30
Appendices
Appendix A: Full GLM results for Model 4
GDP growth 2009-2018 Coefficient Robust Standard Error
z P>z Confidence Interval [95%] Total FDI inflow 2009-2018 -1.38e-09 4.62e-10 -1.79 0.018** -1.74e-09 7.63e-11 Uncertainty Avoidance 1.148316 .6958954 1.65 0.099* -.2156139 2.512246 Rejection of limited goods
syndrome
-.2001191 1.26078 -0.16 0.874 -2.671202 2.270964 Importance of entrepreneurial
values
-2.351471 .9353446 -2.51 0.012** -4.184712 -.518229 Importance of economic growth .4970189 .6361398 0.78 0.435 -.7497922 1.74383 Importance of technological
progress
-1.498291 .9900461 -1.51 0.130 -3.438746 .4421637 Being welcoming to outsiders .551245 .6194396 0.89 0.374 -.6628342 1.765324 Honesty -1.130852 .8749617 -1.29 0.196 -2.845745 .5840416 Hypothesis 1 -6.77e-12 2.36e-12 -2.10 0.013** -9.57e-12 -3.25e-13 Hypothesis 2a 1.72e-11 4.50e-12 2.87 0.002*** 4.11e-12 2.17e-11 Hypothesis 2b 1.71e-11 4.99e-12 2.87 0.002*** 4.53e-12 2.41e-11 Hypothesis 2c -4.03e-12 2.25e-12 -1.79 0.876 -8.44e-12 3.77e-13 Hypothesis 2d -4.91e-12 3.40e-12 -1.44 0.149 -1.16e-11 1.76e-12 Hypothesis 3a -5.25e-12 3.81e-12 -1.38 0.168 -1.27e-11 2.22e-12 Hypothesis 3b 5.22e-12 5.81e-12 0.90 0.369 -6.17e-12 1.66e-11 Initial GDP 2009 -1.03e-11 5.52e-12 -1.86 0.042** -2.11e-11 5.55e-13 Legal structure and property
rights2009-2017
-3.572331 7.912826 -0.45 0.652 -19.08119 11.93652 Unemployment rate 2009-2018 -2.276984 1.01196 -2.25 0.024** -4.260389 -.2935798 Population growth rate
2009-2018
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