Cultural Differences and Economic Globalization

Effects on trade, foreign direct investment, and migration

Roger White

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317485957
• Edition: 1
• Topic: Economia
• Subtopic: Teoria economica

Economic globalization is the process of increased integration among nations, characterized and fostered by three elements of international trade- goods and services, international capital flows, and international migration. In recent decades, international economic integration has increased both in depth (more pronounced bilateral connections) and in breadth (connections have become more commonplace), thus, the global economy has become increasingly integrated. Societies receive tremendous net benefits from economic globalization, however, accessing these benefits may be limited by cross-societal cultural differences.

This book examines cultural differences as a potential impediment to economic integration. Relying on rigorous statistical and econometric techniques, the analyses indicate that higher transaction costs, due to greater cultural distance, inhibit both the volume of trade flows and the successful completion of trade deals. Cultural distance appears to reduce foreign direct investment, as well as divert investment to less culturally-distant destinations. This book finds a negative relationship between migration flows and cultural distance. It considers the common criticism that repeated and intensified integration diminishes cultural differences, resulting in cultural homogeneity.

This book offers the first comprehensive examination of the relationships between cross-societal cultural differences and economic globalization. It will be of great interest to scholars and students who study globalization, international economics, and cultural studies.

Part I

Globalization, economic integration, and cultural differences

This book addresses an important topic in international economics that, thus far, has received only scant attention. Our goal is to provide information that contributes to a better understanding of the potential influences of cultural differences on international economic interactions. More specifically, we seek to provide new information, garnered largely from econometric analyses, on the relationships between cross-societal cultural differences (i.e., the “cultural distance” between countries) and three distinct facets of economic globalization: international trade, foreign direct investment (FDI), and international migration.

The importance of our topic is underscored by the fact that we live in a world that has become increasingly interconnected while also being populated by individuals and societies that are incredibly diverse in their attitudes, beliefs, traditions, values etc. In short, economic activities are among the most common means by which international interactions occur, and these activities often involve quite dissimilar peoples and cultures. We have, however, a very limited understanding of the extent to which bilateral trade flows, FDI, and international migration are influenced by cultural differences. The work presented here seeks to improve our understanding of these relationships. Further, the results and conclusions provided in this work are beneficial, in a more general sense, as they afford a more complete understanding of the world in which we live.

We begin with some basic questions. What does the word “culture” represent? What are we referring to when we use the word? What is meant when we use the term “globalization” or the phrase “economic integration”? Defining these words and concepts, which are quite vague, even in a general sense, is necessary, as doing so provides the context for the analyses that follow in later chapters. Once our working definitions are in place, we provide an overview of the three most recent waves of globalization, while placing our emphasis on aspects of economic integration. This allows us to provide details of the degree to which economies have (or have not) integrated into the global economy, and to discuss related changes that have occurred over time.

In this initial portion of the book, we present several globalization indexes and discuss their construction. We also provide information about the component dimensions on which each of the indexes is based, placing a particular focus on the dimensions that are most related to international economic interactions. Complementing our discussion of the three most recent periods of globalization, we introduce four composite measures of the cultural distances between countries. We make connections between cultural differences and the three waves of globalization where appropriate. Finally, we introduce and discuss a number of other variables that are used in later chapters as proxy variables for cultural differences.

By introducing the concepts of cultural distance and economic globalization, providing descriptive overviews of both concepts, and presenting the research questions that we address, this initial portion of the book sets the stage for the analyses that follow in Chapters 5 through 8. Moreover, these first four chapters provide the foundational material on which the contents of later chapters build.

1 Introducing culture and globalization

We live in a world that is characterized by extraordinary differences. In a sense, it is our differences that define us as individuals. That is, they permit us to identify as unique members of our communities and societies. Collectively, at a societal level, our cultural identities are informed by our individual and group differences. These differences represent who we are, in a collective sense, and they sometimes result in frictions that color the nature of the interactions we undertake. At a societal (or economy-wide) level, we see key differences among economic systems that have evolved over lengthy periods of time – decades, generations, and centuries. From what may be described as traditionally market-centric, capitalist economies, to the former members of the Soviet Union that continue their transitions, at varying paces, toward greater market-orientations, to the new traditional economies that feature religiously-influenced economic doctrines, the differences that exist between societies often manifest in the form of increased transaction costs. Even among groups of countries that share similar economic structures, we often see considerable and pronounced cultural differences that may result in diminished economic interaction.

The increased transaction costs that correspond with cultural differences may limit, or hinder, international trade flows. They may also make foreign direct investment (FDI) less likely to occur, and they may make international migration more costly and, therefore, a less common occurrence. In short, our cultural attributes make ourselves and our societies unique, but our differences may also impact our ability to benefit from economic interaction by raising the related transaction costs. In this book, we explore this possibility, examining the relationships between higher transaction costs, which may hinder economic globalization, and the greater cross-societal differences to which they may be attributable. Specifically, we employ a series of variables that represent cultural differences to consider whether cultural distance is a determinant of international trade flows. We also consider whether cross-societal cultural differences reduce FDI flows, and we examine a possible influence of cultural differences on international migration.

During the past 150 years or so, the world has witnessed three distinct periods of globalization. In a sense, these three periods, or “waves”, of globalization can be thought of as eras within a more prolonged, almost continuous period of globalization that was interrupted by the start of the First World War and largely not restarted until after the close of the Second World War. The first two waves of globalization spanned the years, roughly, from 1870 through 1913 and from 1946 through about 1980. The disruption of international economic integration that is bookended by the two World Wars, along with the continued retreat toward isolationism during the interwar period, clearly delineates the first two waves of globalization.

The current and most recent wave of globalization differs from the previous two in that there was no interruption per se in the globalization process to separate the second wave from the third wave. It is true that, during each of the three waves, there has been a clearly observed increase in the intensity (or scale) of economic globalization; however, the end of the second wave of globalization and the start of the third was not marked by an interruption of the process. Beginning in the late 1970s and early 1980s, a larger number of developing countries became increasingly active in world markets. Further, following the collapse of the Soviet Union in 1991, the past two-plus decades have witnessed the increased integration of Russia and the former Soviet Republics, to varying degrees, into the global economy. Thus, even though a clear demarcation is lacking, marked changes can be found in terms of the scope of international economic integration as we move from the second wave to the current, third wave. In effect, one principal difference between the current wave of globalization and the prior waves is that today there is a broader cross-section of countries engaged in the global economy. In this sense, the globalization process is now more global.

Although we live in a world that can legitimately be described as more integrated, or connected than at any point in human history, economic interactions – such as international trade in goods and services and international factor movements (FDI flows and migration) – occur in a space that is characterized, in part, by great differences between countries. As these differences may correlate with greater frictions and, hence, higher transaction costs, it seems reasonable to examine the relationship between cultural differences and economic globalization. To that end, in this book, we examine the influence of cross-societal cultural differences as a potential impediment to international economic integration.

The analysis that follows is considerably data-focused. This means that rigorous statistical and econometric techniques are employed as we consider whether higher transaction costs, potentially attributable to greater cross-societal cultural differences (i.e., “cultural distance”), inhibit the volume of trade flows and/or the successful completion of new trade deals. Likewise, we consider whether cultural distance reduces foreign direct investment and, as noted, we explore a potential relationship between cultural distance and international migration. Our econometric analysis begins with an examination of the general relationships between cultural distance and these three facets of economic globalization. We then turn to examine, as far as possible, the common criticism that repeated economic interaction and intensified economic integration diminish cultural differences and result in a loss of cultural diversity (i.e., that economic globalization leads to greater cultural homogeneity).

Defining culture and globalization

It is necessary to establish, at the outset, working definitions of the terms “culture” and “globalization”. Admittedly, as has been noted, these are rather amorphous terms. Perhaps this might explain why such a great number of possible definitions exist. Even so, it is beneficial to consider a sampling of definitions from the variety that has been offered, as doing so allows us to identify commonalities across definitions and, from these commonalities, to construct working definitions to guide the efforts that are presented here.

A handful of definitions for the term “culture” from the more distant past include: “those historically created designs for living, explicit and implicit, rational, irrational, and non-rational, which exist at any given time as potential guides for the behavior of men” (Kluckhohn and Kelly, 1945, p. 45). Echoing this definition while also focusing largely on behavior, Linton (1945, p. 32) defines culture as “a configuration of learned behaviors and results of behavior whose component elements are shared and transmitted by the members of a particular society.” Similarly, Parson (1949, p. 8) emphasizes behavior, but also mentions the transmission of culture across time by stating that culture is “those patterns relative to behavior and the products of human action which may be inherited, that is, passed on from generation to generation independently of the biological genes.” Reflecting what appears to have been a commonly-held view that culture is narrowly related to behavior, Useem and Useem (1963, p. 169) state that “[c]ulture has been defined in a number of ways, but most simply, as the learned and shared behavior of a community of interacting human beings.” Here, the transmission of culture may be implied by the mention of interactions. Even so, the emphasis in these early definitions of culture is clearly on the topic of behavior.

More recent attempts to define culture indicate that the narrow, behavior-focused definition persists. One example is Damen (1987, p. 367), who describes culture as the “learned and shared human patterns or models for living.” Damen further asserts that these “patterns and models pervade all aspects of human social interaction. Culture is mankind’s primary adaptive mechanism.” A second, more succinct, example is provided by Hofstede (2012, p. 51) who defines culture as simply “the collective programming of the mind which distinguishes the members of one category of people from another.”

Following the social sciences’ cognitive revolution of the 1950s and 1960s, many anthropologists have incorporated artifacts, mentifacts, and sociofacts when crafting definitions of culture. Huxley (1955), for example, posited that cultural traits effectively take on lives of their own and move from one generation to the next. One example comes from a very generic, yet contemporary, definition of culture. The Merriam-Webster Dictionary (2015a) defines culture as “[t]he beliefs, customs, arts, etc., of a particular society, group, place, or time.” In this dictionary definition of culture, which may appear simplistic and/or vague, we see the mention of i) artifacts (i.e., arts), ii) mentifacts (i.e., beliefs) and iii) sociofacts (i.e., customs). Although this definition may appear to be plain, and lacking in detail, we do see the three components of the definition appear in other, more complete/complex definitions.

Lederach (1995, p. 9) extends beyond behavior as the primary component of culture, defining it as “the shared knowledge and schemes created by a set of people for perceiving, interpreting, expressing, and responding to the social realities around them.” Somewhat similarly, Kroeber and Kluckhohn (1952, p. 181) contend that culture is the “patterns, explicit and implicit, of and for behavior acquired and transmitted by symbols, constituting the distinctive achievements of human groups, including their embodiments in artifacts.” Other succinct definitions have been offered. For example, Banks and Banks (1989, p. 367) define culture as “the values, symbols, interpretations, and perspectives that distinguish one people from another in modernized societies.” A much more expansive definition is provided by Choudary (2015), who defines culture as the systems of knowledge shared by a relatively large group of people; a cultivated behavior that represents the entirety of pas...

Table of contents

• Cover Page
• Half Title page
• Half Title page
• Title Page
• Copyright Page
• Contents
• Figures
• Tables
• Preface
• Acknowledgments
• Globalization, economic integration, and cultural differences
• Introducing culture and globalization
• Waves of globalization Past and present
• The unevenness of economic globalization
• Dimensions of cross-societal cultural differences
• Do cultural differences hinder economic globalization?
• Expected relationships between cultural distance and facets of economic globalization
• The influences of cultural distance on international trade
• The link between cultural distance and foreign direct investment
• Origin-destination cultural distance and international migration
• Interpreting a cultural distance-economic globalization nexus
• Economic globalization and the potential for cultural homogenization
• The implications of being culturally distant
• References
• Index