Abstract
This paper investigates the effect of culture on trade using measures of cultural distance based on various dimensions of national culture from Hofstede (Culture’s Consequences: International Differences in Work-Related Values, 1980; Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations across nations, 2001). Previous papers using such measures find a positive effect of cultural distance on bilateral trade, suggesting that cultural differences lead to more trade between countries. This paper indicates that the relationship between international trade and cultural differences is in fact non-linear: international trade decreases with cultural distance, but only once cultural differences between two countries surpass a certain threshold. Benefits due to differences in comparative advantages and substitution of FDI by trade may explain the positive effect of cultural distance on trade for lower levels of cultural distance.
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Notes
The index is defined as: \(D_{i,j} =\frac{1}{K}\sum \nolimits _{k=1}^K {\left( {I_{i,k} -I_{j,k} } \right) ^{2}} /V_k\), where \(D_{i,j}\) is the measure of distance between country \(i\) and country \(j,\,K\) is the number of indicators of culture distinguished (indexed by \(k\)). Here, \(K = 4.\,I_{i,k}\) is country \(i\)’s score with respect to indicator \(k\), and \(V_{k}\) the variance of indicator \(k\) over all countries in the sample.
See the appendix for the data sources.
Institutional distance and GDP per capita are positively correlated. The coefficient of institutional distance is negative and statistically significant when GDP per capita is left out. This is illustrated in specification (6). It is also the case for specifications (1) and (2). These additional results are available upon request.
A value of 4.9 corresponds to the cultural distance between Singapore and Italy. Country pairs for which the value of cultural distance exceeds 4.9, and the relationship between cultural distance and trade is thus negative, include among others: Denmark-Albania, China-Sweden, Russia-USA, and Switzerland-Sri Lanka.
For reference, institutional distance is calculated using governance indicators for over 150 countries. Institutional distance is calculated as a Kogut-Singh index using six governance indicators.
In fact, there is quite some variance in trade levels for similar levels of cultural distance in the data set. Hence, the estimates for cultural distance tend to be somewhat less accurate in general. This becomes particularly manifest in smaller samples.
See http://www.oecd.org/dataoecd/39/37/1923431.pdf for a listing of the members in each of the RIAs.
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Appendix: Data sources
Appendix: Data sources
We use the United Nations trade data compiled by Feenstra et al. (2005). The data report bilateral trade flows for the year 2000. To measure cultural and institutional distance, we apply the index of distance that was developed for these purposes and first applied by Kogut and Singh (1988). The data for culture are from Hofstede (1980, 2001). Hofstede has developed a set of variables that reflect national cultures in terms of work-related norms and values. These variables are: masculinity (versus femininity); uncertainty avoidance; individualism (versus collectivism); and power distance. The data for institutional quality are from Kaufmann et al. (2005). They have constructed six indicators of perceived institutional quality. These indicators are: voice and accountability; political stability; government effectiveness; regulatory quality; rule of law; control of corruption. Distance in miles between capital cities is used as a measure of geographical distance. Data on geographical distance, adjacency, common language and colonial ties are from CEPII. We use information on regional integration agreements (RIAs) from the OECD to define trade blocs.Footnote 7
Countries in the sample: Albania, Argentina, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Belgium-Luxembourg, Brazil, Bulgaria, Burkina Faso, Canada, Chile, China, Hong Kong, Colombia, Costa Rica, Croatia, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Estonia, Ethiopia, Fiji, Finland, France, Georgia, Germany, Ghana, Greece, Guatemala, Hungary, India, Indonesia, Iran, Iraq, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Kenya, South Korea, Kuwait, Latvia, Lebanon, Libya, Lithuania, Malawi, Malaysia, Malta, Mexico, Morocco, Nepal, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Panama, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Sierra Leone, Singapore, Slovakia, Slovenia, South Africa, Spain, Sri Lanka, Suriname, Sweden, Switzerland, Syria, Tanzania, Thailand, Turkey, UK, USA, Ukraine, United Arab Emirates, Uruguay, Venezuela, Vietnam, Yemen, Zambia.
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Lankhuizen, M.B.M., de Groot, H.L.F. Cultural distance and international trade: a non-linear relationship. Lett Spat Resour Sci 9, 19–25 (2016). https://doi.org/10.1007/s12076-014-0129-8
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DOI: https://doi.org/10.1007/s12076-014-0129-8