Can a Nation’s Culture drive Competitiveness?

Over the past few decades, a substantial body of research has been undertaken to examine the relationships between cultural diversity, value systems and economic performance. This research has produced mixed and contradictory analyses, some of which are controversial: for example, does cultural diversity enhance or hinder economic development? Less has been written about the contribution of culture and value systems to national competitiveness and the degree to which a country’s national heritage drives sustainable economic development.

Drumming up statistics to support the relationship between culture and competitiveness is a difficult task but the IMD World Competitiveness Yearbook (note 1) shows some interesting results: When business executives are asked to what extent their national culture is open or closed to foreign ideas, the Irish are ranked as having the most open culture. Ireland is followed by Israel, an interesting parallel in its own right given that Ireland is an island surrounded by water and Israel is an “island” partly surrounded by desert and not-so-friendly neighbors. Neither has much in terms of natural resources either, but their open and competitive cultures appear to contribute significantly to attracting foreign direct investment (FDI). When inward investment is measured as a percentage of a country’s GDP, Ireland is the 4th-biggest destination worldwide, with FDI stocks valued at 142% of Irish GDP. And in 2013, Israel attracted almost as much investment as South Korea or Malaysia (note 2).

Ireland and Israel can both boast a highly skilled and educated workforce that is English-speaking, all of which are important factors in a global economy that give them a cutting-edge over other countries in attracting investment. The same holds true in Asia, with Hong Kong and Singapore perceived as the shining stars of openness, ranking 6th and 7th respectively for the openness of their national culture (note 3). These “Asian Tigers” are the mirror image of the Celtic Tiger when it comes to attractiveness, for talents as well as for investments. Hong Kong was the world’s 4th-destination for FDI flows last year, attracting $77bn, just behind Russia ($79bn). Singapore came in 6th place with FDI inflows of $64bn, the same amount as Brazil attracted. When one considers the huge differences in size between these small city-states and the vastness of Russia and Brazil, it begs the question of what role their cultures play in their capacity to attract such investment.

But what does one mean when talking about national culture? It is often described as a commonly accepted body of beliefs and values that define a nation’s identity, norms of behavior and codes of conduct. Culture can also explain a nation’s “social capital”, defined as “…the internal social and cultural coherence of society, the norms and values that govern interactions among people, and the institutions in which they are embedded” (note 4). Ideologies, religion or professional associations can also shape country-based cultures and value systems. In many countries, economic development and material wellbeing often appear inconceivable without the strong underpinnings of a spiritual dimension to accompany them, such as Islam in the Middle East, Confucianism in China, Buddhism in India or Christianity in Occidental countries.

The suggestion that value systems could influence a nation’s prosperity was proposed in the early 1900s by the German sociologist, Max Weber, when he discussed the relationship between values, religious beliefs and the economic performance of nations in his book, The Protestant Ethic and the Spirit of Capitalism (1930). Weber described how the Protestant Reformation period in the early sixteenth century had promoted a strong work ethic and value system, which emphasized the values of austerity, hard work, discipline, thrift, honesty and trust.

Weber saw these characteristics as the basis of social contracts that had propelled Western capitalism throughout Europe and the United States during the 18th and 19th centuries. Virtues, such as punctuality, industry and frugality, were seen as utilitarian; honesty was useful because it assured credit and underpinned transactions. These virtues were perceived as contributing to increased efficiency in the workplace and enhanced productivity, thus spurring economic growth and development towards a more modern economy.

Even as early as the writings of Adam Smith (1776), capitalist societies, despite being “laissez-faire”, needed the foundations of trust and confidence in order to thrive. The ability to conduct commercial transactions in an environment where honesty, integrity and morality were taken as given, reduced uncertainty and the inherent risks associated with such activities, thereby encouraging exchange and commerce and boosting efficiency and economic performance. Throughout history, an environment of transparency, trust and legal recourse has been positively associated with investment, both domestic and foreign, as well as sustainable economic development.

The Nobel-Prize economist (2003) Douglass North made the link between culture, ideology and institutions. His research on the role of institutions in economic development argues that perceptions about the fairness and justice of the rules of the game in society affect economic performance. These comprise routines, customs, traditions and culture that make up the informal rules or constraints in our societies. They also include conventions, norms of behavior and self-imposed codes of conduct to resolve exchange problems (be they social, political or economic). These institutional frameworks are significant drivers of competitiveness as supported in Acemolgu and Robinson’s Why Nations Fail: The Origins of Power, Prosperity and Poverty (2012). Strong institutions that are “inclusive” and not “extractive” create an environment that underpins economic and social development.

According to these experts, institutions and culture help explain the problems that third-world nations have in trying to “catch up” by borrowing the rules and institutions of developed nations. Governments of developing countries can implement the “formal” rules of the game but it is much harder to put into practice the informal norms and rules of conduct that help explain the performance of developed nations. Major problems arise in bridging the knowledge gap that underpins institutions and governance.

This is a vital point that helps explain why so many companies that expand internationally into cultural settings very different from their home culture often end up pulling out. They are doomed to fail unless sufficient time and energy is consecrated to learn about the foreign culture, develop the right talents that can “fit in” alongside their domestic counterparts, and adopt management techniques that leverage the competitive advantages of each culture: home and host.

For example, ideologies, culture and traditional habits in East Asian societies are often used as supporting arguments for their economic success. The concept of “shared” or “collective” culture versus more diversity in society, or an individualistic value system, is a common refrain in explaining the impact of culture on countries’ economic growth potential.

Michael Porter, in the Competitiveness of Nations (1990), examined national ideologies from a different perspective. He observed that the composition of local demand shapes how firms perceive, interpret and respond to buyer needs and saw these as being influenced by social and historical factors. He noted that, for a given income level, Germans generally consume fewer personal services and are considered to be more frugal than Americans, who buy more on credit. And the Swiss are perceived as being more risk-averse than other nationalities. Porter also examined the internationalization of a nation’s values and culture, using the example of American cinema and brand names that have permeated almost all societies around the world.

But, according to Porter, consumers’ preferences can also be affected by factor conditions (geography, climate) that influence demand; for example, whether a country has natural resources or not, is landlocked or is an energy importer. Domestic buyer needs are also transmitted abroad through exports that disseminate culture (movies, TV programs), but also emigration and tourism, which expose foreigners to national tastes and norms. Porter’s reasoning suggests that societies that are open to foreign ideas and attempt to integrate them will have greater potential for competitiveness.

This argument is supported by a possible correlation between a nation’s cultural heritage and its overall competitiveness. In the IMD WCY 2014, nine of the ten best-ranked countries that are perceived by executives as having value systems supporting competitiveness are also ranked in the top twenty places for overall competitiveness (see table, note 5). In addition, a nation’s value system also appears to be conducive to its innovative capacity, in itself a strong driver of competitiveness (see the IMD rankings below):

National Value Systems and Innovative Capacity (IMD WCY 2014)

There thus appears to be general consensus in the research literature that a nation’s culture and value system have an impact on its development, economic growth and competitiveness. The data reflecting location attractiveness, in terms of investments and skills, also supports two important arguments:

1. An open and positive national culture encourages sustainable economic growth and enhances competitiveness; and
2. A nation’s value system that promotes entrepreneurship, adaptability and innovation is an important driver of competitiveness.

Notes
(1)IMD World Competitiveness Yearbook 2014, IMD, Lausanne, Switzerland (WCY 2014).
(2) UNCTAD World Investment Report 2014.
(3)IMD WCY 2014.
(4) Collier, P. “Social Capital and Poverty.” Social Capital Initiative Working Paper No.4 (1998, p. iv).
(5)The exception is Israel, ranked 24th out of 60 economies in the WCY 2014, but which was ranked 12th in 2013.