Hofstede´s dimensions and their potential effect on trade openness

I. Theoretical part

3. National culture

3.2. Hofstede´s dimensions and their potential effect on trade openness

The Dutch professor and social psychologist G. Hofstede (2011) understood culture as collective programming that influences people´s behavior and that allows distinguishing members between groups. This means that the nations share common cultural aspects that characterize the society´s behavior however, at the same time these characteristics serve to distinguish between members of distinct societies. G. Hofstede, moreover, specifies what these cultural aspects are through the six-dimensional model of culture. These six dimensions are specifically:

1) Power distance

2) Uncertainty avoidance

3) Individualism vs Collectivism 4) Masculinity vs Femininity

5) Long-term vs Short-term orientation 6) Indulgence vs Restraint

These dimensions represent a scale of characteristics bounded with opposite extremes. In real data, the limits of this scale are 0 and 100. A country is then described by a value for each of the six dimensions, that corresponds to cultural aspects present in that country.

Jointly, by considering all the dimensions, Hofstede´s cultural model describes a

country´s national culture in its complexity. However, to understand the whole national culture, it is first necessary to explain separate dimensions (Hofstede 2011).

• Power Distance is the dimension that describes a level of acceptance and the equality of distribution of power among the society from the perspective of the less powerful.

The egalitarian cultures, quantitatively approaching 0, prefer flat structure in multiple spheres of life such as education, parenting, or work life. It means that the children are taken as equals and in school, the teacher pays attention to their individual needs.

In organizations, the presentation of subordinates´ opinions is welcomed and the right for decision making is not concentrated in one´s hands. Apart from the interpersonal interactions, the country with a small power distance is characterized by low corruption, rather equilibrated income distribution, and peaceful changes of the country´s pluralist government chosen by majority vote. On the other hand, the highly hierarchical countries, numerically expressed by values close to 100, are cultures with clearly defined structure, where each actor has strictly defined his/her competencies and duties. Obedience is required in school, at home, and at work. The government is rather autocratic and generally changed by the revolution. The inequality is visible in the income distribution and correlated with high corruption levels (Hofstede 2011).

The difference in corruption levels between hierarchical and egalitarian cultures is at the same time the indicator of the effect of power distance on trade openness. Since corruption represents intentional unfair behavior in people´s interactions, its higher levels lead to higher transaction costs in international trade. It is caused by the additional participation of the third party (for example interest groups) in bilateral trade transactions. A country with greater corruption levels is then perceived as a riskier trade partner. This negative relationship between corruption and international trade was proved for example by De Groot et al. (2004), who find that lower corruption may lead even to a 34% increase in international trade (De Groot et al.

2004). Based on these results I construct the following hypothesis.

Hypothesis 1: The dimension of power distance will affect trade openness negatively.

In addition to the general characteristics of the power distance dimension, I prepared a graphical representation of the distribution of the level of power distance. The

distribution is represented just among the sample countries analyzed in this thesis, so it gives a more accurate picture of their cultural heterogeneity in the power distance dimension.

Figure 5: Power distance in sample countries (100 - hierarchical country, 0 – egalitarian country)

Source: Own Elaboration, Geerthofstede.com (Hofstede 2021).

The map shows that the concentration of more hierarchical countries is mainly in Europe. The highest score was achieved by Slovakia and followed by countries as Romania, Mexico, Slovenia, Bulgaria, or Croatia. On the other hand, the most egalitarian country is Austria followed by Scandinavian countries, Ireland or New Zealand. Interesting is that the geographical closeness does not seem to be important for closeness in the level of power distance. An example of this is the neighborhood of Austria, the most egalitarian country, and Slovakia, the most hierarchical country.

Nevertheless, not all countries are so strictly characterized as egalitarian or hierarchical. For example, the Czech Republic in this dimension achieved a value of 57. This level of power distance places the Czech Republic between hierarchical countries however, its preference for hierarchical structure is just slight what means that the Czech Republic is willing to accept a change to egalitarian culture easier than Slovakia. It is important to work among the whole scale and distinguish the closeness

of a country´s culture to one of the extremes. The absence of such consideration may lead to a misleading description of the country´s national culture.

•

Uncertainty avoidance is the dimension that expresses tolerance of society for uncertain, unknown, and surprising conditions. The highly uncertainty-avoiding countries (score approaching 100) are not willing to make fast changes, they have a strong preference to have everything described by laws, rules, or at least unformal norms. They perceive uncertainty as a threat and in general, are characterized as a less tolerant society. They prefer steadiness in every aspect of life what is reflected for example in low job rotation. Societies with high uncertainty avoidance need clarity, structure, and a feeling of security. For that reason, the beliefs about ultimate truth are often in their religion, philosophy, and science. On the other hand, countries with low uncertainty avoidance (score approaching 0) are generally highly tolerant, they perceive uncertainty as part of everyday life and they prefer ambiguity and freedom instead of laws or rules. Society´s tolerance for uncertainty is reflected also in their religion, philosophy and science where relativism and empiricism prevail (Hofstede 2011).

From these characteristics seem to be clear, that the impact of this cultural dimension on trade openness should be negative. It has been shown in the study of Inglehart (1997) that exogenous risks and immigration are hardly accepted by the uncertainty-avoiding country. For that reason, such a society will try to prevent vulnerability and insecurity sourcing from the trade openness, (De Jong et al. 2006). From this intuition, I construct the following hypothesis.

Hypothesis 2: The higher uncertainty avoidance will negatively affect a country´s trade openness.

The specific uncertainty avoidance distribution among the sample countries is captured in Figure 6. It is visible, that uncertainty avoidance is present mainly in Europe and Latin America. On the other hand, the Scandinavian countries, North America, or Australia are relatively tolerant towards uncertainty.

Figure 6: Uncertainty avoidance in sample countries (100–uncertainty avoiding, 0–

uncertainty tolerant countries)

Source: Own Elaboration, Geerthofstede.com (Hofstede 2021).

The country with the highest tolerance for uncertainty is Denmark with a value of 23 and Sweden with a value of 29. On the other hand, the highest uncertainty avoidance is in Greece which achieved a value of 100. Interesting is that the distribution of uncertainty avoidance is similar to the power distance distribution. Nevertheless, this is not completely accurate because for example Austria, Slovakia, Hungary, Germany or Finlandia achieved opposite extremes in these dimensions. This fact stresses the importance of differentiating individual dimensions. If my hypotheses are correct, in all of these countries, there would operate two opposite forces on a country´s preference for trade openness. For example, in the case of Austria, there would be a positive effect sourcing from low power distance and a negative effect on trade openness caused by high uncertainty avoidance. By not differentiating these dimensions the effect of culture would be canceled out.

• Individualism vs Collectivism is a dimension that describes the degree of an individual´s integration into a group. In individualistic societies (approaching 100), the man acts for him/herself, feels independent and wants to make his/her own decisions. In this type of society, people do not expect that the state will take care of them, they rely just on themselves. The purpose of education for them is to teach how to learn, so kids could be independent in adulthood. However, they require privacy and the right to speak freely. The task is more important than the relationships and for that reason, there is greater competition between members of society. On the other hand, the collectivistic cultures (approaching 0) are highly cooperative, they make mainly collective decisions, and they see themselves as a part of a larger and more important group. The citizens of collectivistic countries act in favor of the whole society however, they also expect that the collective will protect them. The purpose of education is to learn how to do things, so kids could later seize their role in society.

They highly value harmony in society and they see relationships as much more important than tasks (Hofstede 2011).

From the above characteristics, it seems that for trade openness is beneficial when the country is more individualistic. The strong preference of collectivistic society to act in accordance with the group wishes creates a feeling of “we versus them”. This complicates the cooperation with other groups and makes the country more closed, (De Jong et al. 2006). Based on this I assume that the enforcement of individual (economic) profit will support the country´s openness.

Hypothesis 3: Individualistic countries will be more open to international trade than collectivistic societies.

The following map shows that mainly English-speaking countries from our sample seem to be highly individualistic. The most individualistic country is the USA with a value of 91 followed by Canada, Great Britain, and Australia. On the other side of the

spectrum is Colombia with a value of 13 followed by Chile, Mexico, Portugal, or Greece.

Figure 7: Collectivism (0) vs Individualism (100) in sample countries

Source: Own Elaboration, Geerthofstede.com (Hofstede 2021).

Interesting is that collectivism is frequent in southern countries which dominantly speak Spanish. However, this correlation is not random. Kashima & Kashima (1998) found out that the language rules tend to reflect the cultural aspects. More specifically the pronoun drop in language reflects the relationship between individual and group.

If the pronoun drop is not possible such as in English, the speakers emphasize the subject and for that reason, individualism is supported. On the other hand, the languages allowing the omission of subject pronouns such as Spanish, remove the emphases from specific subjects and support collectivism (Nash & Patel 2018).

• Masculinity vs Femininity dimension represents the value distribution between genders. The values are differentiated as women´s and men´s values, while the women´s values are much more consistent among the countries. The cultural differences observable in men´s values among distinct countries are in their closeness to the women´s values. If both types of values are close to each other, we speak about feminine society (numerically approaching 0). The most important values for these cultures are modesty and caring. The role of women and men is equilibrated both in

work life and family life. A balance is required also between work and family. The small gender differentiation is visible also in politics, where feminine societies tend to have more female politicians. The other extreme in this dimension forms masculine culture (numerically approaching 100). In societies with a high degree of masculinity, the gap between women´s and men´s values is huge. People in masculine societies are much more competitive and ambitious, while this holds for women as well. The work responsibilities stand above the family and the social gender roles are stereotyped.

This reflects mainly men´s political representation of masculine societies (Hofstede 2011).

Even though, from the social and moral context, it looks like feminine countries should be preferred, based on the Baldwin et al. (2015) study, I assume that masculine culture should be preferred in the context of trade openness. The women and men in masculine societies are assumed to be more competitive, ambitious, and assertive.

Baldwin et al. (2015) suggest that these characteristics lead to economic growth and enable to enjoy to a greater extent the benefits that open markets bring. Moreover, De Jong et al. (2006) suggest that in masculine cultures there is also a higher preference for foreign goods. Due to these facts, I assume that the masculine cultures will enhance trade openness since it would increase their possibility to purchase foreign goods, show their competitive advantage and success reflected in greater economic growth sourcing from international trade.

Hypothesis 4: The masculine societies will tend to be more open to international trade than the feminine cultures.

The following map shows the distribution of femininity and masculinity among sample countries. Similarly, as in the case of power distance, the lowest values were achieved by Scandinavian countries. More specifically, the most feminine country is Sweden with a value of 5, followed by Norway, Latvia, and Denmark. Interestingly, most countries that exhibit feminine culture are also among the top countries in gender equality measured by the Gender Inequality Index, (UNDP 2020). The countries with masculine culture are on the other hand situated mainly in Europe. The most masculine country is Slovakia with a value of 100, followed by Japan, Hungary, and Austria. However, there are a lot of countries that are somewhere between masculinity

and femininity such as the Czech Republic. Czechia achieved a value of 57, which means that is understood as a masculine society, however in some aspects, its characteristics might be partially feminine. For example, the traditional gender role in a family is the most usual nevertheless, the frequency of fatherhood leaves and the woman being the breadwinner of the family has an increasing tendency.

Figure 8: Masculinity (100) vs Femininity (0) in sample countries

Source: Own Elaboration, Geerthofstede.com (Hofstede 2021).

At this point I should continue with the last two dimensions however, before describing them, I consider important to stress that their origin is not the same as one of the already mentioned dimensions. The original cultural model created by Geert Hofstede consisted of just four already described dimensions. Nevertheless, professor Hofstede in 1991 enlarged the model by fifth dimension, originally created by M.H. Bond (1988). He had to enlarge the sample of countries for which the cultural data about the fifth dimension were available. Hofstede (2010) successfully achieved this enlargement with a help of M. Minkov, who in 2007 also formulated the sixth cultural dimension. The sixth dimension was the last which completed the cultural model and professor Hofstede implemented it to model also in 2010. This change was the final adjustment of the model.

Both of these dimensions were adapted in a way, that they are perfectly compatible with the original four dimensions and for that reason, there are no doubts about working whit the newer more complex six-dimensional model (Hofstede 2011).

• Long-term vs Short-term orientation describes the easiness with which society deals with changes. The short-term oriented countries (approaching 0) are more inflexible, they understand the past as the most important source of information. They prefer stability and steadiness and care about their national traditions. Moreover, they are proud of their nation, in other words, there is high nationalism in the country.

These societies in addition tend to have greater social spending and consumption. On the other hand, the long-term oriented countries have the ability to easily adapt to new circumstances, they understand the world as variable, and they are open to changing even their traditions. These societies give high importance to the future, and they are searching for possibilities to learn from other countries. The long-term orientation of society is reflected also in their tendency to save more and for that reason to invest more since they have greater available funds (Hofstede 2011).

Several aspects indicate that this dimension will have a positive effect on trade openness. First, the short-term orientation enhances nationalistic tendencies in society and the need for protectionism of national traditions. Bekhuis et al. (2013) showed that nationalistic attitudes, especially chauvinism and cultural protectionism lead to increase cultural protectionism. On the other hand, the long-term oriented countries will prefer an open market that, as we showed in previous chapters, allows cheap and fast information spreading. In this way, they can easily learn from other countries´

examples. In addition, the international market represents a possibility to enjoy more profitable investment opportunities, which would support the long-run economic growth of a country.

Hypothesis 5: The long-term orientation will enhance the trade openness of a country.

In addition to the characteristics of this dimension, the following map offers a distribution of long-term and short-term orientation among the sample countries. The most short-term oriented country is Columbia with a value of 13 followed by Australia, the USA, Mexico, and Chile. On the other side, the long-term oriented countries are mainly concentrated in Asia and Europe. The most long-term oriented country is South Korea with a value of 100 followed by Japan, Germany, and Belgium. Surprisingly, Scandinavian countries, on the other hand, are relatively short-term oriented. It seems that their low values in this dimension are mainly related to

the country´s strong protection of their national tradition and more normative thinking. Nevertheless, the small savings are not characteristic for them.

Figure 9: Long-term (100) vs Short-term (0) orientation in sample countries

Source: Own Elaboration, Geerthofstede.com (Hofstede 2021).

• Indulgence vs Restraint is the dimension that describes the life approach of a specific culture. The indulgent societies (approaching value of 100) highly value freedom, personal life, and leisure time. They are characterized by liberal values and impulsiveness. They tend to spend more on consumption just for their pleasure and in general, the birth rates are greater in these countries. On the other hand, the restrained cultures (approaching 0) tend to control themselves, they understand life as a duty, and they support order by strict social norms. Moreover, the regulation is reflected also in the number of births because the restrained cultures tend to have in general low birth rates (Hofstede 2011).

Based on a statement of Di Pietro & Butticè (2020) it might be presumed that indulgent societies will imply fewer constraints on the country´s pursuits since they are more hedonistic and appreciate diversity in goods. They will support freedom in international trade as well as in other aspects of their life and in this way, they will enhance the development of entrepreneurship. On the other hand, restraint societies will rather prefer the sub-optimal economic outcome than face the risk and

endangerment of their social principles sourcing from international trade. From these facts follow that trade openness will be enhanced by indulgent countries.

Hypothesis 6: The effect of the sixth dimension on trade openness will be positive since the indulgent culture supports free trade.

The following map shows the distribution of indulgent and restraint societies giving a more accurate picture of the cultural heterogeneity of the sample countries. It is visible, that in Europe the cultural characteristics are again different than in the rest of the sample. Most European countries are restrained while the rest of the sample countries are generally indulgent. The lowest value in this dimension achieved Latvia (13) followed by Estonia, Lithuania, and Bulgaria. The Czech Republic belongs to restraint countries as well, with an achieved value of 29. For that reason, even for the Czech culture holds that duty is more important than desires and free time. The opposite side of this cultural dimension is represented by Mexico (97), Colombia,

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