University of Economics and Business, Prague
Faculty of Economics
Study program: Economics
I MPACT OF CULTURE ON TRADE OPENNESS IN THE AGE OF GLOBALIZATION
Diploma thesis
Author: Bc. Terézia Anna Kernátsová
Supervisor: doc. Ing. Helena Chytilová, Ph.D., M.A.
Academic year: 2021/2022
I hereby declare on my honor that I have written my diploma thesis on my own using only literature referenced in the bibliographies.
Bc. Terézia Anna Kernátsová In Prague, on 6th December 2021
Acknowledgment
I would like to thank my supervisor doc. Ing. Helena Chytilová, Ph.D., M.A. for being my mentor while writing this diploma thesis. I honestly appreciate her expert leading, advices, and relevant feedbacks that always motivated me to improve the quality of my work.
Abstract
This diploma thesis aims to verify whether the national culture affects a country´s trade openness and how such an effect changes with increasing globalization or under a strong political and socio-economic union. The national culture is expressed by Hofstede´s dimensional model (2010) that through six dimensions describes the country´s culture in its complexity. To capture the evolution of globalization, two periods are studied in this thesis. The period 1980-1989 reflects the era before the globalization boom and the period 2010-2019 represents the era of intensive globalization. The empirical analysis conducted for the OECD and EU countries reveals that the cultural dimensions are a significant indicator of trade openness. In addition, their impact is intensified by increasing globalization. Last, the cultural effect, in the case of EU member countries, resulted to be weaker despite its higher globalization level. The reason might be a strong suppressive impact of the dominant view on best strategies set and required by the European Union.
Keywords: Culture, Hofstede´s dimensions, Trade openness, Globalization JEL classification: E71, Z10, F15
Abstrakt
Cieľom tejto diplomovej práce je overiť ako národná kultúra vplýva na obchodnú otvorenosť krajiny a do akej miery je jej efekt ovplyvnený narastajúcou úrovňou globalizácie, alebo členstvom v silnej politickej a sociálno-ekonomickej únii. Národná kultúra je vyjadrená Hofstedeho modelom, ktorý komplexne popisuje kultúru s využitím šiestich kultúrnych dimenzií. Evolúcia globalizácie je v modely zahrnutá analýzou dvoch periód. Prvou je perióda 1980-1989, ktorá reprezentuje dobu pred globalizačným boomom a druhou sú roky 2010-2019, ktoré predstavujú obdobie intenzívnej globalizácie. Empirická analýza krajín OECD a EU poukázala na významný vplyv kultúrnych dimenzií na obchodnú otvorenosť. Taktiež bolo preukázané, že narastajúca globalizácia ich vplyv zintenzívňuje. Ako posledné sa ukázalo, že členstvo krajín v EU výrazne znižuje efekt kultúry napriek intenzívnejšej úrovni globalizácie v jej rámci. K takémuto efektu dochádza kvôli existencii presadzovaného názoru o osvedčených stratégiách, ktorých Európskou Úniou vynútená aplikácia minimalizuje vplyv kultúry.
Kľúčové slová: Kultúra, Hofstedeho dimenzie, Obchodná otvorenosť, Globalizácia JEL klasifikácia: E71, Z10, F15
Table of content
Introduction ... 1
I. Theoretical part ... 3
1. Trade openness and its economic importance ... 3
2. Increasing globalization and its effect on cultural protectionism ... 7
3. National culture ... 18
3.1. The definition of national culture ... 18
3.2. Hofstede´s dimensions and their potential effect on trade openness ... 21
3.3. Literature review ... 33
II. Analytical part ... 38
4. The sample ... 39
5. The model specification and data description ... 40
5.1. The model specification ... 40
5.2. The expected impact of explanatory variables ... 44
5.3. The data description ... 46
6. Methodology ... 49
7. Regression analysis ... 52
7.1. Do cultural dimensions affect the trade openness of the OECD countries? . 53 7.2. Does the impact of cultural dimensions on trade openness differ in time? .. 56
7.3. Do cultural dimensions affect the trade openness of European Union members differently? ... 63
8. Summary of the results ... 67
9. Drawbacks of the model and suggestions for future research ... 74
Conclusion ... 77
Abbreviations ... 80
The list of tables ... 81
The list of figures ... 82
References ... 83
Appendix ... 92
1
Introduction
Culture, in general, can be defined as a sum of values, beliefs, and traditions that are common for a specific society and affect the decision-making of its members. However, cultural heritage does not influence just the preferences of individuals. At the aggregate level, it may affect the economic behavior of whole nations. This thesis pays attention especially to the impact of national culture on a country´s trade openness. The previous studies of De Jong et al. (2006), Kristjánsdóttir et al. (2017) or Helble (2006) proved the causal relationship between a country´s national culture and its trade openness or volume of international trade. This thesis builds on previous researches and provides a comprehensive view of this topic. The importance of this study is increasing these days when the Covid-19 pandemic recalls potential negatives of trade openness and globalization and creates fear of national vulnerability. I believe that by identifying a specific impact of national culture on a country´s trade openness, unnecessary and undesirable protectionism and trade wars could be prevented. However, for suitable analysis, it is important to properly approximate the abstract concept of national culture.
The commonly used approximations are religion, social trust, or dimensional cultural models. To capture the national culture in its complexity, I chose the dimensional model of national culture. In contrast to previous studies, I made one step further and I used a complete six-dimensional Hofstede´s model of national culture. Professor Geert Hofstede (2010) formulated these six dimensions to describe a country´s national culture: the power distance dimension, dimension of uncertainty avoidance, individualism vs collectivism, masculinity vs femininity, long-term vs short-term orientation, and indulgence vs restraint dimension. Due to such a country´s complex cultural profile expressed by separate dimensions, it is possible to investigate which aspects specifically enhance or limit the trade openness of a country.
Based on the aforementioned comments, the main hypothesis of this thesis is: “How do the cultural dimensions affect trade openness?”. In addition to the general analysis of the cultural impact on trade openness, the analysis is expanded by the following research questions: “Does the impact of cultural dimensions on the trade openness differ in time?”
“Do cultural dimensions affect trade openness of European Union members differently?”.
The first research question aims to enlarge the analysis by the consideration of
2
globalization on the cultural impact. Globalization is a phenomenon whose intensity is continuously increasing through time, for that reason enters the analysis as a time dynamic effect. The analysis will contain two periods, the period 1980-1989 that represents the era before the globalization boom, and the period 2010-2019 that represents the time of the most intensive globalization. The second research question evaluates the cultural influence on trade openness under a strong economic and socio-political union such as is the European Union. To verify the hypothesis and the research questions the regression analysis is used. The endogenous variable is represented by the index of trade openness, the exogenous variables are Hofstede´s six cultural dimensions and economic control variables chose based on the study of Tahir et al. (2018). The specific estimation method is the Ordinary least squares method (OLS) and the Two-stage least squares method (2SLS). The added value of the empirical approach used in this thesis consists in the estimation of complete Hofstede´s cultural model and not its earlier four or five dimensional versions. In addition, the commodity market perspective used to approximate trade openness allows analyzing the cultural impact along with the influence of main macroeconomic indicators what captures a more relevant picture about their real effect.
Last, the complementary research questions provide a comprehensive view of the studied topic that is moreover conducted on chosen countries for the first time.
The thesis is divided into two major parts, the theoretical and analytical part. The theoretical section contains three chapters. The first explains the concept of trade openness and its economic relevance. The second chapter, contrary to the first, shows possible negatives of trade openness and related globalization, while the main attention is paid to the issue of cultural homogenization and related cultural protectionism. The last chapter is divided into three subchapters that present the concept of national culture, explain Hofstede´s cultural dimensions and offer the literature review on the role of culture in international trade. The analytical part consists of six chapters that gradually cover the complex empirical analysis. The first three chapters present the model specification, especially the description of the sample, the data characteristics, and the used methodology. The next chapter is divided into three subchapters from which, each of the subchapters provides the regression analysis related to the specified research question. The last two chapters summarize the empirical results and contain suggestions of possible improvements and implications for further research.
3
I. Theoretical part
The theoretical part aims to explain the concept of trade openness and advert on its socio-economic impact. Moreover, it presents distinct views on how the notion of culture can be understood and what is its role in international trade. Complexly, it forms a base for my further research, showing the influence of culture on the trade openness of the countries.
1. Trade openness and its economic importance
The importance of trade openness and the benefits of free trade were stressed for the first time by Adam Smith:
“Were all nations to follow the liberal system of free exportation and free importation, the different states into which a great continent was divided would so far resemble the different provinces of a great empire. As among the different provinces of a great empire the freedom of the inland trade appears, both from reason and experience, not only the best palliative of a dearth, but the most effectual preventative of a famine; so would the freedom of the exportation and importation trade be among the different states into which a great continent was divided.” (Smith 1977, p. 708)
Adam Smith presents free international trade, or in his words the liberal system, as a tool that can end the scarcity and starvation of the nations. His pioneering thoughts were an inspiration for many other substantial economists such as David Ricardo (1951), Grossman and Helpman (1991) or Barro and Sala-i-Martin (1999), who saw an international specialization and free trading as means through which a country will achieve greater efficiency and will improve its economic outcome, (De Jong et al. 2006).
The importance of trade openness in terms of economic growth is nicely shown in Figure 1, which captures the effect of the import substitution industrialization policy, introduced mainly in the 1950s and 1960s as a protectionist trade strategy for developing countries.
The import substitution industrialization policy was supporting the use of trade barriers implied on imports of manufactured goods from developed countries to secure the economic development of poor countries. It was believed that exponentially increasing
4
demand for manufactured goods related to increasing national income of developing countries would overcome the demand for primary goods, leading to a decrease of their prices and consequent inhibition of further economic growth in developing countries. The solution should have been the production of domestic manufactured goods and the restriction of imports from developed countries. However, after 30 years it was clear that the denial of benefits of comparative advantage ended with the opposite effect (Gould et al. 1993).
Figure 1 represents the evolution of trade protectionism and per capita GDP growth in a time when the consequences of the import substitution industrialization policy can be empirically observed. More specifically, the graph captures the period 1976-1985, whereas the represented indicators are the average values from this period. The level of trade protectionism is measured based on the real exchange rate distortions provided by Dollar (1992). He suggests that the real exchange rate-distortions measure the degree to which prices of tradable goods are distorted by the domestic trade regime. The country with a greater level of protectionism reports higher real exchange rate distortion.
Figure 1 clearly shows that higher protectionism in the developing countries correlates with much slower growth than is present in countries that chose to open their markets.
Important to say is that the data is primarily oriented on the developing countries1. The developed countries included in the dataset are marked with blue color to prevent doubts about the bias caused by already highly economically advantaged markets. The countries with the highest level of protectionism are Nigeria, Ghana, Tanzania, Zambia with values between 277 and 207. These countries at the same time belong to countries with one of the lowest per capita GDP growths which achieve values from - 5.1% to 0.5%. On the other hand, Sri Lanka, Hong Kong, Bangladesh, or Singapore chose to open their economies, apply minimum restrictions and in this way integrate into the global economy.
The results indicate that trade liberalization is the proper way to achieve economic growth and that such an effect is especially fast and strong in developing countries. The observed per capita GDP growth for these countries was from 3% to 9%. It cannot be said that this rule holds for each of the countries, but there is a significant difference between the two
1 „Developing economies are defined as those with per capita income below 6 000,00 dollars in 1976.”
(Dollar 1992, p. 527)
5
extremes of the trade protectionism scale, and with the confirmation of other studies such as Keho (2017), Raghutla (2020), Awokuse (2008), or Gries & Redlin (2012), I consider it as a suitable argument for the beneficial influence of trade openness on the economic growth.
Figure 1: The trade protectionism and per capita GDP growth between years 1976-1985
Source: Own Elaboration Based On The Data From David Dollar (1992, p. 540–542).
In addition, I would like to stress one more interesting fact, which I observed in the represented dataset. By comparing the results based on the geographical belonging of the countries, states from Asia and Oceania had on average the level of protectionism just 86.4 and their average per capita GDP growth was 3.38%, whereas Africa had on the average level of protectionism 147 and their average per capita GDP growth was - 0.36%.
Such observed clustering tendencies are interesting because they indicate the existence of specific determinants affecting the country´s choice of trade protectionism level. In the case of Asia and Africa specifically, some of the differentiating aspects are the quality of institutions and infrastructure, the differently developed labor market in the colonization era and distinct increasing ratio of working-age to a dependent population whose effect on country´s trade openness was shown by Fukumoto & Kinugasa (2017), (Morrell 2006).
However, there are undoubtedly other factors that also affected the cross-country differences in the level of trade openness and GDP growth.
-8 -6 -4 -2 0 2 4 6 8 10
0 50 100 150 200 250 300
Nigeria Niger Guinea Angola Rwanda Honduras Chad Swaziland Kenya Panama Switzerland Finland Japan Jordan Ecuador Isreal Norway Nicaragua Chile United Kingdom Brazil Philippines Italy United States Peru Syria South Africa Sri Lanka
Real exchange rate distortion per capita GDP Growth
6
As was shown above, trade openness is an important aspect that significantly affects the economic development of the country. For that reason, it is important to continue in the study of its determinants. However, the first step is to properly understand the concept of trade openness.
Trade openness is a concept whose meaning seems to be clear at first glance. In general, it might be defined as “… expression of how free or how strictly it is in country ´s trade relations with the outside world.” (Duran et al. 2019, p. 47) In other words, when the trade is fully opened, the economic agents have the possibility to freely make economic transactions with trade partners from any country.
But how to express or measure such an index of trade openness? This is a trickier question because there is no consistent methodology for that. Some authors interpret trade openness from the capital market perspective. They express openness through capital flows or differences in interest rates, (De Jong et al. 2006). With this approach, it is more suitable to define trade openness as an index of accessibility to foreign investment in international trade, (Gupta et al. 2020). Another view is consistent with the one used by De Jong et al (2006), who interpret trade openness from the policy point of view. They measure the trade openness index based on the currency transaction restrictions and the restrictions on international commercial transactions. For that reason, they understand the term trade openness as “unrestricted integration of national markets in the global economy.” (De Jong et al. 2006, p. 113)
In this thesis, I will use the third and the most usual measurement of trade openness, which measures the index from a commodity market perspective. Trade openness is defined as the orientation of the economy towards international trade, (Mazumdar et al.
2019). From the methodological point of view, the measurement of trade openness indicates a real intensity of international trade in a country. In other words, it expresses the importance of international transactions relative to domestic transactions and for that reason, it is a reliable indicator of the country´s integration level into the world economy.
Undoubtedly, many factors affect the trade openness index. The most important ones are the economic size of the country, geography, culture, trade policy, and the structure of the economy (ratio of non-tradable goods) (OECD 2011).
7
2. Increasing globalization and its effect on cultural protectionism
In chapter 1 of this thesis, I delineated the position of trade openness in economics.
However, other aspects of everyday life are affected by trade liberalization and associated globalization as well. The country by opening up allows not just goods, services, and new technologies to enter the country but also new ideologies, new cultures, or even new illnesses. Consequently, situations like the fast spread of illnesses, economic crises, or imperialist cultures create a feeling of fear from national vulnerability. In this chapter, I concentrate on the effect of globalization on culture and how it affects the trade trends of nations. Moreover, it will be stressed that non-economic aspects of trade liberalization, such as cultural homogenization, should not be taken lightly because they may lead to deflection from trade openness policy that is, for now, the most beneficial one.
As I indicated before, trade liberalization goes hand in hand with globalization which first appeared in the era of the scientific revolution in the 15th century. Since then, this phenomenon was interrupted just by World War I, postwar protectionism, and World War II. After that, with the establishment of new institutions (GATT, World Bank, IMF, or UN), globalization gained again its strength. Nowadays, in our digital age, the interdependence of the world’s economies, cultures, and populations achieved extreme size (Kolb 2018). Thinking about the means that provide globalization, cross-border trade, flows of capital, free movement of people and information are the most common ones. They bring attractive opportunities and benefits which nowadays are seen as a matter of course but at the same time, they cause fear from making the country vulnerable.
Events as the financial crisis, global pandemics, or extensive cultural imperialism initiate doubts about the optimality of the free trade regime. Such doubts have a strong impact despite the overweighting benefits of trade liberalization. One of the reasons for that is a psychological phenomenon called negative bias, which describes the tendency of adults to use negative information far more than positive. Moreover, adults learn from it and transmit such knowledge with a negative connotation to the next generations (Vaish et al.
2008). In this way, the negative judgement persists longer and may cause severe changes in the preferred policy. The result of such a process is also cultural protectionism.
8
Cultural protectionism arose as a safeguard in times of national adaptation to globalization. Since the trade openness and an international specialization took place also in the cultural industries, citizens, government officials and journalists started to fear, that the promotion of similar behaviors, purchases and similar lifestyles will erode national cultural heritage. The fright from distortion of national cultures was strengthened by the fact that cultural industries like cinematography, musical industry or publishing are directly reflecting and promoting the producer's culture. This thinking is nicely promoted by French film producer Cohen, who said: “Sound and pictures have always been used for propaganda, and the real battle at the moment is over who is going to be allowed to control the world's images, and so sell a certain lifestyle, a certain culture, certain products, and certain ideas.” (Baughn & Buchanan 2001, p. 6) His perspective is consistent with the so-called cultivation theorists. On the other hand, there are also theorists, who understand globalization as a mean to unite people. They see the trade with cultural goods as the provision of alternatives to the domestic cultural products and as a birth of the opportunity to form a new hybrid version of culture, which fuses previously existing and through trade offered cultures. The process of such a cultural fusion is called glocalization and the example of the union of countries that approaches it is the European Union (Bekhuis et al. 2013).
Aforementioned discussion suggests that there are diverse opinions about globalization and trade liberalization in the sector of cultural products. In my point of view, this polarity is caused by a distinct understanding of the character of cultural goods supported by the cross-country differences in culture. By looking at the character of cultural products, there are two aspects through which it is possible to perceive them. One is that the cultural products have specific cultural characteristics, they reflect the sense of national and cultural identity and that their distribution allows diffusion of cultural values and ideas (Voon 2007). Consistently with the previous description, the Universal Declaration on Cultural Diversity issued by UNESCO in 2001 defines cultural goods and services as
“vectors of identity, values and meaning, which must not be treated as mere commodities or consumer goods.” (Voon 2007, p. 39) On the other hand, cultural products have an economic side as well. They are goods and services providing entertainment for consumers and their selling is generally motivated by profit. Because of this dual
9
character of cultural goods, it can be hard to distinguish between economically motivated protectionism and the restrictions motivated by the incentives of cultural preservation.
However, on the side of the supporters of cultural protectionism, there is the fact that various market failures are related to the cultural industries. It means, that there is a need for certain protectionist policies that will prevent such failures. One of the lapses related to cultural goods is that they provide positive externality. The demand for domestic cultural goods reflects just the benefits of the present generation and does not consider the benefits to future generations. It also does not consider the indirect benefits that the consumption of cultural products brings. For example, the encouragement of social bonding or increased motivation of consumers to contribute to their community is caused by the promotion of local culture through cultural products. It may also improve the reputation of a country internationally. Nevertheless, since the consumers are unwilling to pay for these indirect benefits, either because they do not know about them, they do not care, or they just enjoy the free-riding, the cultural products embodying local culture may be at risk of insufficient consumption and production (Voon 2007).
In addition, the production of cultural products and preservation of the national culture was due to the globalization threatened by the dominance of larger countries with wealthier domestic markets, which allowed them to dominate the market for cultural products. One of such countries is the USA that thanks to the easy and cheap copyability of cultural products, and their property of being used by multiple consumers simultaneously, could dominate the market of audiovisual products. The producers from larger domestic markets tend to count with greater potential revenues because the revenue is mainly driven by the quantity sold and not the price. Due to that, they could work with higher production budgets and enjoy the tendency of worldwide consumers to prefer movies with bigger production budgets. In turn, the globalization and accessibility of large international markets caused that the revenues from the audiovisual industry increased exponentially and the USA could easily dominate the international market of audiovisuals. The result of the USA´s dominance for its trade partners was that smaller domestic film producers were pushed out even from their markets (Voon 2007). However, the United States had two additional benefits that played them in cards. First, transaction costs of international distribution of their movies are in general smaller because there is no need to translate the movies to another language since English is a leader in linguistic
10
imperialism. In 2001 English was “… the primary language of only 380 million people
… [but it was] used by approximately 1.6 billion.” (Baughn & Buchanan 2001, p. 7)2 Second, the USA´s comparative advantage in the information technology sector enables cheaper, and more effective program creation, distribution and delivery systems which reduce the overall production costs in USA´s audiovisual industry (Baughn & Buchanan 2001).
However, these advantages are not exclusive to the United States. China has become to be strong competition for the USA. The trade liberalization, among others, allowed China´s fast economic development, and it caused that China splits, since the year 2000, the leader position of globalization with the USA. Moreover, from 2008 China dominates even in the export of cultural goods. As you may see in Figure 2, there are huge differences in the redistribution of total cultural exports of the top 20 cultural exporters between 2004 and 2013.
Figure 2: Distribution of total exports of cultural goods between 2004 and 2013 (% of total exports proceeding from the 20 largest exporters of cultural goods in these years)
Source: Own Elaboration, The Journal Of UNESCO Institute For Statistics (2016).
2 The fast and large extension of the English language began in times of colonization and continues until these days. The main promotors of English in recent times are globalization and its almost exclusive use in international scientific circles. Moreover, its global use is reflected on the Internet as well, where ¾ of the whole content is in English. (Baughn & Buchanan 2001)
0%
5%
10%
15%
20%
25%
30%
35%
2004 2013
11
In the year 2004, there was the proportion between exports of cultural goods among these countries equilibrated, except for the United States (17%) and the United Kingdom (15%). However, in the year 2013, there is undoubtedly one dominant leader. China´s exports of cultural goods represented 33% of total cultural exports among these countries.
It means that China´s export increased by 22 percentage points over 9 years. This significant change raised concerns about cultural preservation even in the case of the United States, the second most dominant “cultural emperor”. Nevertheless, in countries where the export of cultural goods means big revenues, cultural protectionism is accepted in a little bit contradictory way.
Let us assume the example of the United States that receives remarkable revenues from the export of audiovisual products. To prevent protectionism in this sector, the USA during The Uruguay Round of General Agreement on Tariffs and Trade (GATT) negotiations (1986-1994) tried to eliminate Article IV of GATT which captures the exemptions for cultural protectionism. Due to strong opposition formed by European nations and the need for the successful signing of The Uruguay Round of GATT the US intents were unsuccessful. On the other hand, in times when the USA faced cultural imperialism, its reaction was quite opposite. When the Columbia Pictures and MCA were purchased by Japan´s companies Sony and Panasonic, the USA strongly protested against these acquisitions and made a great effort to gain them back. Similarly, the United States reacted protectively when they faced extent immigration of Latin Americans, who brought with them their language and culture. The USA initiated the “English only”
movement which was in addition supported by the installation of V-chips to televisions that allowed to block undesired programming (Baughn & Buchanan 2001). In more recent years, the USA shows an inclination towards protectionism again. This was reflected in the election of Donald Trump, who won the presidential elections with the famous slogan
“Make America Great Again”. He was supporting trade protectionism, justifying it through its positive effect on job positions in manufacturing, the possibility of renegotiation of trade agreements, and protection of national security. Donald Trump promoted international interdependence and specialization as a threat to national security.
Moreover, he paid attention mainly to traditional American industries as the automobile industry or heavy industry that already formed a part of the United States’ culture. The combination of fear from possible national vulnerability and the loss of traditional
12
industries was one of the aspects why proud American society supported this candidate and the following wave of extensive protectionism3 (Gertz 2020).
All these examples indicate that the preservation of national culture and state independence really matters for everyone, even for significant exporters of cultural goods.
Nevertheless, the extent and form of embodied protectionism depend on various cross- country characteristics. To show some specific examples of implemented protectionist policies outside the USA, Table 1 presents a few of the adopted barriers to cultural products from the audiovisual industry.
Table 1: Examples of trade restrictions on a cultural sector of audiovisuals
Country Cultural protectionism in film/cinema and broadcast/television
Australia There is a rule that 55% of all the television programming broadcast between 6:00 a.m. and midnight must be of Australian origin.
Canada
In Canada, the foreign acquisitions of Canadian-owned film distribution firms are prohibited. Moreover, the government subsidies the Canadian-controlled production companies. In television broadcasting the foreign content is limited to 40% as maximum and the privately owned broadcasting firms are obligated to broadcast at least 50% of Canadian production during evening hours.
Egypt
Film distributors are limited to the importation of three prints unless they obtain special approval from the Chamber of Cinema to import more. In addition, the entertainment tax on foreign films is 40% instead of the 20% tax for Arab movies.
France In France, the government provides substantial subsidies to assist local film producers. Of the feature films and total transmission times allocated to audiovisual
3 The fear from the loss of a leading position in some industries or the fright from cultural imperialism are some of the external factors that enhance countries' protectionist tendencies. Another example of such an external factor is the pandemic of Covid-19. To prevent the spread of this disease, countries all over the world after decades closed their borders. This represented, among others, a strong negative shock to international trade. Such a protectionist strategy was from the epidemiologic point of view a reasonable step and when these regulations were not needed the international trade should have returned to its original volume. Nevertheless, the question is whether the negative impact really expired so fast. At the beginning of this chapter was discussed, that events as Covid-19 remind the potential negatives of globalization and they stress the vulnerability which the country´s openness brings with itself. These consequences may then cause that protectionist tendencies persist longer. The reason whether, why, or in which country, the negative effect takes longer represents an interesting topic for further research.
13
works, 40% must be of French origin and an additional 20% (60% total) must be of EU origin.
Spain EU works, by rule, must comprise more than 50% of the whole broadcast time and at least half of them must be originally filmed in Spanish.
Hungary
State-owned channels must commit 70% of programming to European works of which 51% must be Hungarian. For private national television, there is an annual quota of 35% (excluding commercials, films, news, sports, and quiz shows) must be Hungarian.
Mexico
Under NAFTA, Mexico reserves the right to prohibit English-language advertising on television. Every cable operator and direct-to-home (DTH) satellite television service must provide at least 15% of Mexican programming.
Source: Own Elaboration Based On The Article Baughn & Buchanan (2001, p. 10–11).
In addition to a regular list of restrictions, it is interesting to notice the common procedure for countries from European Union (EU). The examples show that by the rule, each of the countries from the European Union is obligated to reserve more than 50% of the broadcasting time to work proceeding from the EU. Nevertheless, the countries can choose the upper limit and they can add additional restrictions related to the minimum content of their domestic work. The examples reflect that in neither of the three mentioned European countries, the restriction just to European work is sufficient. France reserves the most (40%) of the audiovisual work to its domestic origin (Baughn & Buchanan 2001). The existence of cultural protectionism inside of the European Union is important because it suggests that the members of the EU might not support the glocalization and in times of intense globalization, they try to protect their national cultural heritage. Such observation indicates that the EU membership could be one of the cross-country characteristics that are related to stronger cultural protectionism.
The specific case of cultural protectionism in the European Union was studied also by Bekhuis et al. (2013). They understand the EU as an ultimate test case of the effects caused by intensive globalization. In the case of the member countries of the European Union, globalization achieves even greater levels as in global merits. In general, as is shown in Figure 3, worldwide globalization increases almost constantly during the observed period. However, the dominance of de facto globalization over de jure
14
globalization has changed.4 Before the year 1990, globalization was provided mainly through trade in goods and services and its increase was moderate. The de facto globalization increased by 5 points in these 20 years and the de jure index by 6 points. On the other hand, after 1990 the legislative regulation started to lead the global integration and boosted the rise of both types of globalization. During these following 28 years, de jure globalization increased by 23 points and de facto globalization by 14 points. Even though, the gap between these two types of indexes increased a little, compared to the evolution of cultural globalization it achieves very small volumes.
The evolution of cultural globalization is captured by the right graph of Figure 3. In this case, the cultural de jure integration dominates the de facto globalization throughout the whole period. Its increase moreover reflects relatively constant speed compared to aggregate globalization. However, it cannot be said the same about de facto cultural globalization. In the period 1979-1992, the level of de facto cultural integration exhibits decreasing trend, which means that the actual transmission of culture was restricted. After this year it has begun to rise again however, the average gap between de jure and de facto measure increased to 13 points. Such a huge gap indicates that even the cultural protectionism is not the key point in international agreements (agreements promote cultural integration), the real transmission of culture through traded cultural goods is much more limited. This supports the statements of cultivation theorists who claim that countries understand the increasing globalization as a threat to the preservation of their cultural heritage.
4 Globalization is measured by the KOF index, so a country´s level of globalization is expressed on a scale from 0 to 100. Moreover, the index differentiates the de facto globalization (measured through the actual volume of traded goods and services) and de jure globalization (index based on the quantity of customs duties, taxes, and trade restrictions). The differentiation between these two types of globalization is important because they provide integration through very distinct channels. The de jure globalization provides the integration between countries through laws or multilateral agreements but the liberalization at this level does not secure real globalization provided through actual trade. For example, the earlier mentioned “English only” movement limited the real globalization but did not affect the de jure globalization. The additional benefit of the KOF index is that it also allows separating cultural globalization on its own. It enables a profound analysis of the eligibility of culturally motivated protectionism (Gygli et al. 2019).
15 Source: Own Elaboration, Gygli et al. (2019).
In addition to the world´s globalization, I constructed a separate graph capturing just the evolution of globalization in Europe. Figure 4 captures the fact, that the globalization of European countries is stronger than the world´s average globalization.
Source: Own Elaboration, Gygli et al. (2019).
Since the economic and socio-political cooperation started in Europe even before 1970, its initial level of globalization is much higher than in the aggregate level for the world.
The de jure globalization again dominates the de facto globalization throughout the whole period however, the gap in the case of aggregate globalization and in the case of cultural globalization is very small. It indicates that the European countries face economic and
0 20 40 60 80 100
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Aggregate levels of globalization
GI_de facto GI_de jure
0 20 40 60 80 100
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Evolution of cultural globalization
Cu-GI_de facto Cu-GI_de jure
Figure 4: The evolution of de jure and de facto globalization and cultural globalization in Europe
Figure 3: World´s evolution of de jure and de facto globalization and cultural globalization
0 20 40 60 80
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Aggregate levels of globalization
GI_de facto GI_de jure
0 20 40 60 80
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018
Evolution of cultural globalization
Cu-GI_de facto Cu-GI_de jure
16
socio-political integration through adopted multilateral agreements and almost equally strong through actual transactions. This supports the opinion, that the European Union aims towards globalization. Nevertheless, the question is to what extent this intensive globalization is a wish of all European countries.
The observations made above are not new in economics. The evolution of globalization and the study of its possible impacts belongs to current economic, sociological, and political topics. One of the studies which paid attention to such a topic is the research of Bekhuis et al. (2013). They studied the effect of cross-country differences and contextual characteristics on national cultural protectionism. More specifically, they concentrated on the effect of globalization, membership in the EU, and the country´s nationalistic attitudes. Their analysis was run on a sample of 23 developed countries with data from 2003. Globalization was expressed through the economic dimension of the KOF globalization index without distinguishing the de jure and de facto levels. On the other hand, nationalistic attitudes were divided into three dimensions: chauvinism, cultural patriotism, and societal patriotism. After running a multi-level regression analysis, the authors found out, that the globalization level has a small significant negative effect on national cultural protectionism. This would contradict the previous assumption which I made at the beginning of this chapter. Nevertheless, the EU membership, earlier described by the authors as the highly globalized union, resulted to have a significant positive effect on cultural protectionism. Similarly, chauvinism and cultural protectionism significantly increase protectionist tendencies. On the other hand, societal patriotism enhances cultural openness. Such results at first view indicate mixed conclusions and for that reason, a deeper analysis was needed. The authors tested the effect of globalization on nationalistic attitudes and they found out that globalization is positively related to all dimensions of nationalism. However, not all dimensions have the same effect. The influence of societal patriotism fights with the effect of cultural patriotism and chauvinism. This means, that the final effect of globalization on national protectionism depends on the distribution of these three dimensions of nationalism among studied countries. Nevertheless, by also considering the European Union aspect, the authors found out that the correlation between EU membership and chauvinism is positive, while its correlation with societal and cultural patriotism is negative. It means that the cultural and societal patriotism of a country fights against each other and the positive effect of EU membership on cultural
17
protectionism is mainly driven by chauvinism. Moreover, this effect is strengthened through increasing globalization (Bekhuis et al. 2013).
The results of the study of Bekhuis et al. (2013) indicate other two cross-country characteristics that play role in cultural protectionism. Apart from the mentioned EU membership, the level of globalization and form of nationalism affect the intensity of cultural protectionism. However, this study does not answer the question what are the factors that cause the dominance of one or another dimension of nationalism in a country.
In my point of view, one of these factors is culture. I build such a proposition on the definition of nationalism that says: Nationalism is “… malleable and narrow ideology, which values membership in a nation greater than other groups … seeks distinction from other nations, and strives to preserve the nation and give preference to political representation by nation for the nation.” (Bieber 2018, p. 520) This definition suggests that the heart of nationalism forms the nation and the necessary factor for the group to evolve to a nation is a feeling of national identity. Nevertheless, the feeling of national identity may arise just through common history and cultural cultivation, (Leerssen 2006).
This proves that the national culture should be one of the factors that shape the specific appearance of a country´s nationalistic attitudes and in this way at least indirectly affects the countries protectionist tendencies.
But the question is whether cultural impact goes also beyond the cultural industries. Based on the aforementioned discussion, I assume that the consideration of cultural characteristics is important to whole trade and not just to cultural industries. The first reason for that is the non-unified understanding of cultural industries. Generally, the cultural industries are cinematography, musical industry, or publishing. However, the long tradition of family farms in agriculture of a country may cause, that this sector will be protected by trade policies because the nation with such a tradition will understand the free trade and international specialization as a threat to the country´s national heritage.
The resulting effect could be the same as the implementation of the import substitution industrialization policy, which was described in chapter 1. The specific example was actually shown above for the USA and Trump´s protectionism of traditional automobile and heavy industries that resulted in a mainly negative effect on the American economy.
In general, the same can be expected for any country and its industry which is considered to be a significant part of its history and the reason for the country´s national
18
pride (Baughn & Buchanan 2001). Apart from this reason, the constant ignoration of the importance of preservation of national culture can result in the unsuccessful formation of trade agreements. An example of that was the almost unsuccessful signing of The Uruguay Round of GATT, which was on hold just because of the disagreements about the cultural protectionist policies.
To conclude, this chapter showed negative socio-economic aspects of trade openness.
It was stressed that the rapidly increasing globalization creates a feeling of national vulnerability especially in sense of the country´s cultural heritage. This fear enhances the cultural protectionism practices however, their intensities are distinct across countries.
Some of the observed cross-country characteristics that affect the level of protectionism were EU membership, globalization intensity, nationalism, and national culture.
Moreover, I offered some examples of why the consideration of culture is important for whole international trade and not just for the narrowly defined cultural industries.
3. National culture
Culture is a concept used on daily basis. Everyone knows what culture means however, not all definitions of this notion are actually the same. Even though culture is a usual world its abstractness allows us to understand it from diverse perspectives. In the following subchapters, I present diverse perspectives on how culture or more specifically national culture can be understood and what is its role in international trade.
3.1. The definition of national culture
The following definitions represent the most commonly used specifications of national culture, that is the culture shared among a specific nation.
“Culture consists of patterns, explicit and implicit, of and for behaviour acquired and transmitted by symbols, constituting the distinctive achievements of human groups, including their embodiment in artifacts; the essential core of culture consists of traditional (i.e. historically derived and selected) ideas and especially their attached
19
values; culture systems may, on the one hand, be considered as products of action, on the other, as conditional elements of future action.” (Adler 1997, p. 14)
“[Culture] is the collective programming of the mind which distinguishes the members of one group or category of people from another.” (Hofstede 1994, p. 5)
“Culture is a fuzzy set of basic assumptions and values, orientations to life, beliefs, policies, procedures and behavioural conventions that are shared by a group of people, and that influence (but do not determine) each member’s behaviour and his/her interpretations of the ‘meaning’ of other people’s behaviour.” (Spencer-Oatey 2008, p. 3) Despite the differences between these definitions, some basic characteristics share all of them. The culture is a complex set of elements that were created by a specific society and are exclusive to this group of people. However, these shared beliefs are not just formed by society, but society is also shaped by these values. The cultivation of the culture allows the formation of national identity and in this way affects individual and national behavior.
Due to this reason, culture started to be recognized as an important influential factor not just in sociology but also in economics. In economic research, the culture can be found as an influential factor of the economic performance (Barro & McCleary (2003), Sapienza et al. (2006), Kernátsová (2019)), of trade openness and international trade (De Jong et al. (2006), Kristjánsdóttir et al. (2017)), of the level of investment (Mac-Dermott &
Mornah (2015)), the labor productivity (Ek (2018)) and many other microeconomic and macroeconomic indicators. Nevertheless, the incorporation of national culture into economic and econometric models is quite challenging. The abstract concepts as the culture are measurable in a rather complicated way. This causes that the national culture is usually expressed by some proxy variable that represents just a few elements that define the culture in its complexity. In addition, the national culture is not a static factor however, its measures are based on long-lasting surveys that until now took in the majority of the cases just one round.5 The reason why the cultural measures are not repeated more often is that the cultural changes used to vary slowly, taking several decades to be accomplished, so there was no need to repeat national cultural surveys more often. The
5 It means that the culture has a character of cross-sectional data and its analyses with panel data is not an easy task since the endogeneity is a common issue.
20
question is whether this assumption holds also now, in times of intense international interactions and interdependence of nations. Based on the researches presented in the previous chapter I presume that globalization boosts these changes and the measure of cultural parameters should be repeated more often. Nevertheless, despite these challenges, the cultural impact on people´s behavior is an important factor that has its place in economics and the researchers should try to improve its possible approximations in econometric models.
Between the most used cultural measures in economics belongs the institutional perception of the culture. The main representant of institutional economics was D. C.
North, who suggested that the informal institutions come from “socially transmitted information and are part of the heritage that we call culture.” (North 1990, p. 37) This definition indicates that the complexity of informal institutions is captured by the national culture. Nevertheless, in the analysis the institutionalists have not worked with the abstract concept of culture, they worked with a measurable approximation such as the religion or religious beliefs and church attendance used for example by R. J. Barro & R.
M. McCleary (2003). Due to the developing researches in institutional economics, new and better approximations of the culture started to be used along with religion. R. D.
Putnam (1993) introduced the concept of social capital, which in his point of view represents the key element of the national culture. On the other hand, F. Fukuyama (1995) who further developed Putnam´s work, understood the trust as a key aspect of culture, (Sapienza et al. 2006).
The development of new and more appropriate measures of culture however, has not stopped with the mentioned institutionalists. The sociologists and consequently economists are constantly looking for new and better approximations of the culture. An example of such an improvement is represented by the dimensional models of national culture. A perfect example of such an approximation is the six-dimensional model of national culture formulated by professor Hofstede (2010). He described six dimensions that represent specific aspects of national culture and jointly characterize a country´s culture in its complexity. In this way, Hofstede´s model represents a significant improvement compared to previously mentioned religion, trust, or social capital, which were capturing the culture just partly (Hofstede 2011). Moreover, the examination of the effects of individual cultural dimensions allows analyzing which aspects of culture are
21
for example beneficial for economic development and which are not. This takes the analysis of the cultural effect to a higher level and enables more accurate work with culture in economic models. Mainly due to the existence of these benefits, I chose to work with Hofstede´s six-dimensional model that will be described in more detail in the next chapter.
To conclude, national culture represents an abstract notion that is widely known but not uniformly understood. For that reason, there are various definitions of national culture and even more approximations used in economic models. Based on the specific benefits of the dimensional form of expressing culture, in my thesis, I work with Hofstede´s six- dimensional model.
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
22
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
23
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
24
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.
25
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.
26
• 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
