Literature review

3.3. Literature review

In this chapter, I aim to stress the important role of culture in international trade and its direct effect on trade openness. The provided literature review shows that culture belongs to key indicators of international trade and trade openness and for that reason, further research of its impact is desired. The importance of cultural consideration in international trade is even more significant these days when situations as Covid-19 pandemics enhance the fear of national vulnerability caused by trade openness and related globalization. A deeper understanding of the cultural impact on trade openness can reduce undesirable restrictions and protectionism.

The first category of researches that studies the effect of culture on international trade belongs to the field of institutional economics. One of them is the research of Butter &

Mosch (2003) that studied the effect of trust on international trade. The main concern of the authors was to explain why the real volume of international trade is smaller than the one suggested by classical trade theory. They suggest that the key reason is the transaction cost. However, the transaction costs do not represent just costs related to transportation, trade barriers, or tariffs. They also comprehend expenses in search of information about the reliability of trade partners, the costs sourcing from the formation of a legal contract and its consequent control. These sources of additional transaction costs represent the mechanism through which the trust significantly affects the traded volume of goods and services. By building mutual trust between trade partners and considering potential low values of trust in specific countries, the traders can substantially reduce their transaction costs and in this way increase the volume of trade. More specifically, the empirical research showed that the legal closeness (formal trust) of trade partners increases the trade volume by 50%, while the increase in informal trust leads up to a 40% rise in bilateral trade. The effect of informal trust was however stronger when it was expressed as the average level of informal trust in the country. This type of trust leads up to a 100%

increase in trade. Based on these results, the authors strongly suggest the consideration of trust in international trade. In addition, they warn that the impact of trust will be even stronger due to the extent globalization and the development of informational and communication technologies (Butter & Mosch 2003).

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A similar point of view has another study from the field of institutional economics written by Helble (2006). He in his study analyzes the effect of distinct religions on international trade. Specifically, he investigates the impact of Hinduism, Judaism, Buddhism, Christianity, and Islam on a sample of 151 countries. Helble beliefs that individuals are the movers of economic activity and that their behavior is significantly affected by cultural traits. Moreover, he stresses that the impact of culture is strengthened by globalization which provides a significantly greater amount of intercultural interactions, especially in trade. For that reason, the author took a complex look at the possible impact of religion studying distinct ways in which it may affect international trade. The first point of view is the direct effect of distinct religious beliefs. The author´s description of studied religions showed that Judaism and Islam are religions that enhance trade and the formation of new trade relationships. On the other hand, Buddhism is a religion that has a negative relationship with the trade. Christianity and Hinduism are somewhere in between because they contain beliefs that support the trade bud also beliefs that weaken it. The second view that the author took was to investigate whether the shared religion may enhance bilateral trade between countries. The empirical results showed that only Islam prefers trade partners with the same religion. The rest of the studied religions reflected a greater impact of their key religious beliefs on trade. In addition, the author showed that religious pluralism in a country is the most trade-enhancing tool because it increases country´s tolerance and capability to understand various cultures (Helble 2006).

All in all, the researches of Helble (2006) and Butter & Mosch (2003) are important because they point out the significance of the national characteristics in the context of trade. The fact that the average levels of informal trust in a country affect the trade more strongly indicates that the ability of a society to trust others is more important than a specific mutual trust between two trade partners. Similarly, the fact that the impact of specific religious beliefs has a stronger impact on trade than the religious closeness of trade partners supports the importance of barriers caused by countries´ cultural characteristics and not just their cultural distance. Such findings are key for this thesis since they stress the relevance of the chosen subject of the study.

The second category of researches, which is studying the effect of culture on trade does not belong to institutional economics but forms part of cultural economics. These studies use the dimensional form of cultural approximation since it should lead to more

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accurate results. One of them is the research of Kristjánsdóttir et al. (2017). They analyze the effect of cross-country cultural characteristics on international trade in 21 developed countries between the years 2000-2011. More specifically, the authors study the effect of the first 5 cultural dimensions formed by Hofstede, the impact of GDP, population, religion, government policy, and legal regulations. Nevertheless, the key exogenous variables are the cultural dimensions since the authors believe that the study and understanding of national cultural characteristics open the door to new potential markets.

In their analysis they consider two aspects, the first is the effect of culture in general and the second is the effect of specific cultural dimensions. From the empirical analysis of the impact of individual dimensions, they found out that the masculinity vs. femininity dimension has a significant and positive effect on international trade. It means that masculine societies should support more international trade. The authors supported this result with the findings of other researchers, who found out that masculine societies are more open towards foreign products and the competitiveness motivates them to face larger markets and “stronger” rivals. Regarding the other variables, the economic size (GDP) has a significant and negative effect that supports the statements that larger economies tend to be more self-sufficient than small ones. A similar effect was observed in the case of the market size (population) however, this impact is not significant. Other significant exogenous variables were the religion and legal system. The authors also studied the general effect of national culture however, the results might not be representative in my point of view. The issue is that authors computed a new index to express the whole national culture. This variable was represented by the value between 0-500 and it was computed as a simple sum of the values obtained in separate cultural dimensions (Kristjánsdóttir et al. 2017). This expression of culture, in my point of view, brings two main issues. First, the same values of this index will not represent the same or similar cultural characteristics.⁶ Second, the resulting sign of the estimated coefficient could be misleading since it is assumed that higher values in cultural dimensions do not

6 The Czech Republic and Great Britain would achieve the same value (345) nevertheless, the Czech Republic is described as a hierarchical, individualistic, masculine society with high uncertainty avoidance, long-term orientation, and restrained preferences. On the other hand, England is a collectivistic, individualistic, masculine society with low uncertainty avoidance, slightly predominant short-term orientation, and indulgent preferences. All in all, despite the same index value, these countries are similar in just two cultural dimensions out of six.

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affect the trade equally. Nevertheless, the above commented results are an important indicator that culture has a significant impact on trade.

The last study belonging to cultural economics, that will be mentioned, is the study of De Jong et al. (2006). This research analyzes the effect of four Hofstede´s cultural dimensions on trade openness. The authors researched a sample of 53 economically diverse countries to find out the cultural determinants of trade openness. They chose to work with a trade openness index developed by Quinn as their endogenous variable. This index is based on the IMF´s Annual Reports on Exchange Restrictions and represents the openness policy level. In other words, this index concentrates on currency transaction restrictions and restrictions on international commercial transactions. The authors saw a benefit in this openness index because it allows to leave out macroeconomic indicators, necessary for other types of indexes, and its scale form makes it more precise compared to alternative dummy variables measures. To properly express the cultural impact on the endogenous variable, the authors used Hofstede´s dimensions. However, they worked just with the first specification of the cultural model that consisted of dimensions of power distance, individualism vs collectivism, masculinity vs femininity, and uncertainty avoidance. In addition, they worked also with the size of the economy measured through per capita GDP, since this economic indicator is considered to highly influence the country´s openness. Moreover, De Jong et al. (2006) were concerned about the dynamic effect.

They studied the influence of national cultural dimensions during the years 1959, 1973, 1982, 1988, and 1997. It was expected that the impact of cultural dimensions will be variable through time. The authors assumed that years during which the country suffers scarcity, the cultural impact will be restricted. The same should hold for a time when there is some dominant and unified trade policy accepted as the best trade option (the multilateral trade agreements).

To investigate all assumed effects, the authors used a random effect model following a stepwise procedure, aiming at analysis of the separate relationship of each cultural dimension with trade openness and its eventual change in time. Their empirical analysis showed that three out of four studied cultural dimensions have a significant impact on trade openness. Specifically, individualism affects trade openness positively while power distance and uncertainty avoidance have a negative effect. The masculinity vs femininity dimension resulted to be insignificant for trade openness. The effects of three significant

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cultural dimensions change non-linearly in time. The authors observed that their effect is the strongest during the years 1973, 1982, and 1988 however, weakens in the years 1959 and 1997. These results are in line with their assumptions about the dynamic effect.

However, the cultural impact changed significantly when the economic size was added to a model. As expected by the authors, the GDP per capita affects trade openness positively, nevertheless, by its consideration in the model just one cultural dimension persists to have a significant effect on trade openness. This cultural dimension is uncertainty avoidance. The signs of the coefficients of cultural dimensions stayed the same except for the power distance dimension. Under this specification of the model, the power distance has a positive effect on trade openness. Regarding the change in the significance of cultural effects, the authors assume that their effect is partially captured by the influence of GDP per capita since it was demonstrated by various studies, that cultural dimensions have a significant positive effect on economic development.

Nevertheless, the persistence of significance of uncertainty avoidance indicates that this cultural dimension affects trade openness the most. Authors for that reason suggest that the economic factors should not be the unique indicators considered in openness research.

The national cultural dimensions showed their power to affect the country´s trade openness and for that reason are also its important indicators (De Jong et al. 2006).

In conclusion, this chapter stressed the importance of national cultural characteristics in international trade. The studies showed that the effect of cultural dimensions is significantly affecting the traded volume and that the national cultural characteristics by themselves are more important than the cultural closeness of trading partners. This indicates that the national culture is affecting the ability of a country to open its economy.

In the next part of this thesis, I aim to build on the above presented studies, and I run my own analysis of cultural impact on trade openness. In contrast to De Jong et al. (2006), I opted to work with a complete six-dimensional Hofstede´s cultural model. Moreover, I chose to define trade openness from the commodity market perspective instead of the index expressed from the policy point of view. The valuable contribution of my work also consists of its consideration of the time dynamic effect related to the increasing intensity of globalization and of the effect of the strong economic and socio-political union such as the one of the EU. All in all, my study is unique and represents one step ahead in contrast to previous studies through its complex view on the analyzed issue.

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