Cultural and Linguistic Explanations

of Global Differences in

Ease of Doing Business

Jerry PlattMarjo Mitsutomi

University of Redlands

AAG 20091

“Ease of Doing Business”

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http://www.doingbusiness.org/economyrankings/

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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

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Mapping EDB across ENTITIES

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Ease of Doing Business COMPONENTS:Less Correlation Structure Than Expected

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.53 .46 .42 .50 .55 .55 .40 .47 .50 .55

Maximum CorrelationAmong SpecificEDB Measures

Each Measure“Highly Correlated”

With EDBall

Moran I – Correlations over SPACE

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HypothesisEase of Doing Business = f (Linguistic Diversity

| {Control Variables})

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LingDiv = 1 – Prob( Same Language | Random Pair )

http://www.ethnologue.com/ethno_docs/distribution.asp?by=country

Model

Ease ofDoing

Business

Region

Religion

Income

Population

Legal System

LinguisticDiversity

EDB:P.C. I

EDB:P.C. II

Hofstede’sCultural

Dimensions9

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

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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

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Results

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EDBall ~ LingDiv 10%

EDBall ~ LingDiv + Controls 45%

Majority (54%) of Total Variability Contained in the TEN measures ofEase of Doing Business for the 181Countries are captured by the first TWO Principle Components

Results

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PC1 = f(Hpdi)

PC2A = f(Huai)

PC2B = f(Hidv)

Hpdi

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 HidvIndividualism

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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

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