Abstract
Countries differ in the way their financial activities are organized. In Anglo-Saxon countries such as the US and the UK financial systems are dominated by stock markets, whereas in continental Europe and Japan banks play a predominant role. Why do countries differ in the configuration of their financial systems? We argue that national culture plays a significant role. We find that countries characterized by higher uncertainty avoidance are more likely to have a bank-based system.
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Notes
By financial markets, we mean organized markets for securities such as stocks, bonds, futures and options (Allen and Gale, 2001).
Allen and Gale (1997, p 526) analyze how the risk arising from the dividend stream of long-lived assets is not eliminated by financial markets but can be eliminated by an intermediary. To substantiate their argument, they introduce a standard overlapping generations (OLG) model with two assets: a risky asset in fixed supply and a safe asset that can be accumulated over time. They demonstrate that the market equilibrium allocation is ex ante Pareto-inefficient, and that there exists an attainable allocation with intertemporal smoothing, which provides every generation with higher ex ante expected utility and achieves the long-run average expected utility (Proposition 4, p 536). After such theoretical discussion, Allen and Gale make some observations about the US and German financial systems. It is often suggested that German banks hold high levels of hidden reserves, which they rely on when asset returns are low. In their opinion, the German financial system, with its reliance on financial intermediaries, may have some advantages over the United States in reducing intertemporal risks (p 542).
As explained in Hofstede (1983, p 78), the culture referred to in this paper is national culture, excluding cultural differences between groups within nations (e.g., based on regions, social classes, occupations, age, sex and so forth). Differences in national cultures are statistical in nature. Characterizing a national culture does not mean that every individual within that culture is mentally programmed in the same way. The national culture found is a kind of average pattern of beliefs and values, around which individuals in the country differ. For instance, on average, Germans have a higher level of uncertainty avoidance than Americans.
From 1967 to 1971, Hofstede worked as a psychologist on the international staff of IBM. He collected data on employees’ values and attitudes through questionnaires. Virtually, all employees of IBM were surveyed, from research scientists to unskilled workers working for the company in many countries around the world. There were 116,000 questionnaires collected from over 40 countries.
However, several concerns have been raised regarding the Hofstede dimensions: (1) the dimensions are culturally bound; (2) there is no mention of the need to ensure equivalence of meaning in the cross-cultural data collection process (Schwartz, 1994); and (3) the dimensions are too broad, and some other important value dimensions have not been included. Another study of the measurement of cultural dimensions is by Schwartz (1994), who classifies national cultures into six value types and summarizes these values into two culture-level dimensions. In this study we decided to use Hofstede's measures rather than Schwartz's for two main reasons. First, Hofstede's scores have been used in numerous studies and are, therefore, more established. Findings of this study can be correlated with earlier studies. Second, because we are dealing with the country level, the number of countries with adequate data is limited. We asked Professor Schwartz about the availability of his cultural scores. He said he has published the scores of only some of the countries surveyed; the complete dataset is not yet available to the public. We use Hofstede's scores as they cover a significantly larger number of countries, providing more observations for our analysis.
Please refer to Rescher (1969, p 75), who suggested a cost–benefit approach to the analysis of value changes.
For instance, Hofstede (2001, p 36) reports some empirical findings that show the stability of the uncertainty avoidance index. For developed countries, there is a strong negative correlation between their populations’ total life satisfaction and their scores on the UAI. For life satisfaction data from ten European countries collected in each of the years 1982–98, the correlations with the 1970 UAI fluctuated between −0.70*** and −0.87*** without any trend effect whatsoever.
Our research hypothesis proposes an association between UAI and the configuration of financial systems. It is not a historical, causal relationship. A causal relationship is difficult to establish with certainty, for both theoretical and empirical reasons. First, at the theoretical level, we introduce the model of Hofstede as seen in Figure 2 to argue how cultural differences might play a role in the configuration of financial systems. Nevertheless, as pointed out by a reviewer, it is possible that the configuration of financial systems came first, and the national culture gradually evolved to fit the system. Even in this latter case, however, one may still argue that national culture could still play a role. It provided the inertia to the system. As national culture socializes its participants who have become more comfortable with status quo, it becomes more difficult to change the financial system. Second, at the empirical level, it is difficult to test with certainty, which appeared first: national culture or configuration of financial systems. In our empirical test section, we perform an instrumental variables methodology in which we first isolate the more enduring, exogenous component of uncertainty avoidance (the component of uncertainty avoidance that is predetermined by exogenous forces such as geography, religion and ethnic mix of countries), and use this portion of uncertainty avoidance to explain differences in financial systems. Consistent with our hypothesis, the exogenous component of UAI has a statistically significant impact on the choice of financial systems, thus providing evidence that the relation is less likely to be evidence of reverse causality from financial systems to national culture. Nevertheless, it is not a thorough test of causality. Therefore, our main research hypothesis claims only an association between UAI and the configuration of financial systems.
We also use a probit model for robustness. No discernible differences are shown between the two sets of estimates. On theoretical grounds, there is no basis to prefer logit over probit or vice versa; they both are widely used in empirical economic research.
We do not include all the control variables at the same time for two reasons: (1) some of the control variables are significantly correlated, which may lead to the multicollinearity problem; and (2) including many controls simultaneously will reduce the degree of freedom, and we have only 41 country observations.
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Acknowledgements
This paper was named the First Runner-Up in the Academy of International Business Best Paper Award, Stockholm 2004. We thank the two anonymous referees for their helpful comments, and also Raj Aggarwal, the JIBS departmental editor. We gratefully acknowledge the support of the Center for International Business Education and Research (CIBER) at the University of South Carolina for this research project.
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Accepted by Raj Aggarwal, Departmental Editor, 16 June 2005. This paper has been with the author for two revisions.
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Kwok, C., Tadesse, S. National culture and financial systems. J Int Bus Stud 37, 227–247 (2006). https://doi.org/10.1057/palgrave.jibs.8400188
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DOI: https://doi.org/10.1057/palgrave.jibs.8400188