Cultural and Linguistic Explanations of Global Differences in Ease of Doing Business

1. Cultural and Linguistic Explanations of Global Differences inEase of Doing Business Jerry Platt MarjoMitsutomi University of Redlands AAG 2009

2. “Ease of Doing Business” http://www.doingbusiness.org/economyrankings/

4. Preliminary Observations • Ease of Doing Business varies across ENTITIES • Not always in favor of High Income OCED Countries • Greece is #96 Overall, although High Income OCED • Ease of Doing Business varies across COMPONENTS • Switzerland #21 Overall, but #146 Investing • US #3 Overall, #1 Hiring, #26 Permits, #46 Taxes • Congo is #178 Overall (of 181), but #68 Permits • Ease of Doing Business varies across SPACE • USA #3, Canada #8, but Mexico #56 • Singapore #1 and Japan #12, but Philippines #140

5. Mapping EDB across ENTITIES

6. Ease of Doing Business COMPONENTS:Less Correlation Structure Than Expected .53 .46 .42 .50 .55 .55 .40 .47 .50 .55 Maximum Correlation Among Specific EDB Measures Each Measure “Highly Correlated” With EDBall

7. Moran I – Correlations over SPACE

8. Hypothesis Ease of Doing Business = f (Linguistic Diversity | {Control Variables}) LingDiv = 1 – Prob( Same Language | Random Pair ) http://www.ethnologue.com/ethno_docs/distribution.asp?by=country

9. Model Region Linguistic Diversity Population EDB: P.C. I Ease of Doing Business Income EDB: P.C. II Religion Legal System Hofstede’s Cultural Dimensions

10. Hofstede’s Cultural Dimensions • PDI Power Distance Index (USA=40; China=80) • Acceptance of inequality by those on the bottom • IDV Individualism (USA=91; China=20) • Extent to which individuals are integrated into groups • MAS Masculinity (USA=62; China=66) • Extent to which men are more assertive and competitive • UAI Uncertainty Avoidance (USA=46; China=40) • Comfort level in uncertain and ambiguous situations • LTO Long-Term Orientation

11. Methodological Steps I. Use all 181 countries to: • Estimate Linear Model to explain EDB • Examine structural relationships • Extract Principal Components of EDB measures II. Apply Recursive Partitioning to explain EDB: • Three models to explain variation in Princ. Comps. • Apply to the 66 countries with Hofstede measures • Examine conditional inference: EDB ~ LingDiv

12. Results EDBall ~ LingDiv  10% EDBall ~ LingDiv + Controls  45% Majority (54%) of Total Variability Contained in the TEN measures of Ease of Doing Business for the 181 Countries are captured by the first TWO Principle Components

13. Results PC2A = f(Huai) PC1 = f(Hpdi) Hpdi PC2B = f(Hidv)

14. Conclusions • PC1 Ease of Doing Business DECREASES with LingDiv among countries with Hpdi< 48, but has NO significant relation with LingDiv for Hpdi > 48 Power Distance • PC2A EDB{Starts, Permits, Hiring, Taxes, Trade} DECREASES with LingDiv among countries with Huai < 58, but INCREASES with LingDiv for Huai > 58 Uncertainty Avoidance • PC2B EDB{Prop, Credit, Invest, Contract, Closing} DECREASES with LingDiv REGARDLESS of Hidv Individualism

15. Interpreting Conclusions • PC1 In cultures with HIGH Power Distance, those who speak minority languages are relatively LESS inclined to start or maintain a business • PC2A In cultures with HIGH Uncertainty Avoidance, this tolerance for ambiguity leads relatively MORE to start business even in a society with multiple languages • PC2B On the more formal aspects of EDB (Property Rights, Legal Contracts,…), Linguistic Diversity creates impediments to business REGARDLESS of the relative degree of Individualism common to that culture