CULTURE AS A PREDICTOR OF ENTREPRENEURIAL ACTIVITY 

Stephen Hunt, London Business School
Jonathan Levie, University of Strathclyde 

CHAPTER MENU 

ABSTRACT
INTRODUCTION
METHOD
RESULTS
DISCUSSION
CONCLUSIONS AND FUTURE RESEARCH
CONTACT
REFERENCES
TABLE 1
TABLE 2
TABLE 3
TABLE 4
TABLE 5 

ABSTRACT 

This research examines the extent to which culture can explain differences in entrepreneurial activity, and determines the importance of various cultural constructs derived from Hofstede and the World Values Survey. These constructs are applied to data from the 2002 Global Entrepreneurship measuring individuals’ entrepreneurial activity from 37 countries. The results indicate that culture explains only a small proportion of the variance in entrepreneurial activity and attitudes. Different entrepreneurial activities are weakly influenced by different, but not mutually exclusive, sets of cultural constructs. Population growth, however, has a significant and strong effect on all major measures of business start-up activity. 

INTRODUCTION 

The aim of this research is two fold: firstly, to determine the extent to which national differences in culture can explain differences in entrepreneurial activity; secondly, to determine the relative importance of various cultural constructs. 

The data concerning entrepreneurial activity featured here is from the 2002 Global Entrepreneurial Monitor. The first annual Global Entrepreneurship Monitor (GEM) asked representative samples of adults from 10 countries whether they thought starting new business was a respected occupation in their community, and identified a positive correlation between high levels of reported respect and new firm start-ups (Reynolds, Hay & Camp, 1999). Successive GEM reports emphasise the importance that national experts place on social and cultural norms in determining the level of national entrepreneurial activity, particularly in terms of independence versus dependency (Reynolds, Hay, Bygrave, Camp & Autio, 2000, Reynolds, Camp, Bygrave, Autio & Hay, 2001, Reynolds, Bygrave, Autio, Cox & Hay, 2002). 

However, to date there have been no attempts, due to an absence of standard measures, to link national levels of entrepreneurial activity to more fundamental national-level cultural constructs (other than self-employment, see below). Indeed, Uhlaner and Thurik (2003) have called specifically for the use of GEM data to investigate the effect of culture on entrepreneurship rates. 

Cultural Constructs 

Human culture can be described, however loosely, as a set of commonly held beliefs, attitudes, dispositions and modes of behaviour. George and Zahra (2002, p.5) define it as “the enduring set of values of a nation, a region, or an organisation.” In this study, we are concerned with culture at the national level. 

The national-level cultural constructs or dimensions featured in this research are from two sources: Hofstede’s research (Hofstede 2001; 1991; Hofstede and Bond, 1988) and the World Values Survey (Inglehart, 1997; 1982). Four constructs are taken from the former: individualism, power distance, masculinity, and uncertainty avoidance. Two constructs are taken from the latter: ‘authority’ and ‘well-being.’ 

Hofstede’s cultural constructs have the following definitions: 

Power distance (PDI): the extent to which the less powerful members of society accept that power is distributed unequally. 

Individualism (IND): the extent to which people are concerned with their own well being and that of their immediate family as opposed to relying on more general groups in exchange for their loyalty. 

Masculinity (MAS): the extent to which the dominant social values are achievement and success as opposed to caring for others and quality of life. 

Uncertainty avoidance (UAI): the extent to which people feel threatened by uncertainty, i.e. unquantifiable hazards, and try to avoid such situations. 

Hofstede’s dimensions derive from surveys conducted in 1968 and 1972 on IBM employees in 50 different countries. The surveys concerned employees’ attitudes to their employment conditions. As these respondents can be matched in terms of age, gender, education and employment status, aggregate differences by country are attributed to respondents’ “cultural” background. 

Hofstede (1980) conceives of culture as “the collective programming of the mind which distinguishes the member of one human group from another.” This mental programming then does not just colour a national environment but has concrete consequences, influencing, for example, the evolution of legal, political and economic systems within nations. 

Some researchers have identified associations between Hofstede’s national cultural constructs and national economic performance/ activity. For example, Dieckmann (1996) examined several putative cultural determinates of economic growth, including Hofstede’s. The findings indicated a robust negative correlation between “uncertainty avoidance” and the growth rate of per capita income, implying the greater the degree of risk taking the greater the growth. However, there was evidence that the relation between the cultural dimensions and economic performance is not stable over time. 

More specifically, with respect to entrepreneurship Shane (1992; 1993) used Hofstede’s dimensions to examine the influence of culture on rates of innovation by country for the years 1961, 1971, 1976, and 1980. Early research on “individualism” and “power distance” indicated positive correlations with innovation (using patent filings as a proxy) in both cases. Later analysis included the “masculinity” and “uncertainty avoidance” dimensions and identified a positive correlation of innovation with “individualism” only, and negative correlations with “power distance” and “uncertainty avoidance.” 

Wennekers, Noorderhaven, Hofstede and Thurik (2002) examined business ownership and Hofstede’s dimensions for 20 western nations and Japan. They found that business ownership rates correlated positively and significantly with high power distance and high uncertainty avoidance, but not with individualism or masculinity. 

Despite the argument of Wennekers et al. that the concepts of entrepreneurship, business ownership and self-employment can be equated, it may be that the way that entrepreneurship is measured affects the relationship with Hofstede’s cultural variables. Hayton, George, & Zahra, (2002) summarise previous research on Hofstede’s constructs and entrepreneurial activity. They identify the likely optimal conditions for encouraging entrepreneurship as high individualism, high masculinity, low power distance, and low uncertainty avoidance. 

Hofstede’s constructs have been variously criticised. Yeh and Lawrence (1995) argue Hofstede’s (Hofstede and Bond, 1988) dimensions of long term orientation, (excluded from the current study due to lack of observations) and individualism are not, as claimed, statistically independent, but highly interrelated to the extent that they may simply be inverse expressions of the same underlying value. Hofstede (2001, p.370) rejects this by stating that Yeh and Lawrence “arbitrarily exclud[ed] the data from” three countries, and remarked that the practice of “eliminating cases that don’t suit the argument… can, of course, prove almost anything.” 

Gray (1998) argues the validity of the masculinity dimension is open to question. The masculine / feminine distinction is apparent only in those cultures identifiable as “masculine” and even in these cases it is somewhat attenuated. Gray cites Beck (ibid) who argues there is a global shift from masculine towards feminine concerns, hence rendering the masculine/ feminine distinction increasingly obsolete. It is certainly true that Hofstede’s sample dates from the late 1960’s and early 1970’s, and any such shift is likely to have occurred after this point. 

Further, the sample has a distinct uniformity that belies claims of national representativeness. The sample is composed of corporate executives and employees from a single international corporation rather than being a sample randomly drawn from the whole population. This effectively limits the generality of findings derived from the data. 

Despite such limitations Hofstede’s database captures cultural attitudes relevant to individuals’ economic activity at the national level and contains a relatively large number of observations. We use Hayton et al.’s conclusions as hypotheses, recognising that culture may influence different types of entrepreneurial activity (for example new enterprise creation as opposed to owner/ management) differently. 

H1: The higher a nation’s individualism score, the higher the rate of entrepreneurship.
H2: The higher a nation’s masculinity score, the higher the rate of entrepreneurship.
H3: The higher a nation’s power distance score, the lower the rate of entrepreneurship.
H4: The higher a nation’s uncertainty avoidance score, the lower the rate of entrepreneurship. 

A further source of national cultural measures is the World Values Survey. The World Values Survey has been conducted in three waves since 1990, most recently in 2001, in a total of 64 countries. It is designed to measure individuals’ attitudes to a wide variety of socio-cultural and political issues (Inglehart, 1997). Inglehart (ibid) presents results of data reduction techniques applied to variables relating to 43 societies gathered in 1990: this produced the two dimensions of “authority” and “well-being”, that between them accounted for 51% of the variance among 43 variables. These dimensions are defined as follows: 

Authority: the extent to which people feel authority is legitimated by rational, legal norms along with an emphasis on economic accumulation and individual achievement (secular authority), as opposed to attitudes of obedience to more traditional, typically religious, authority (traditional authority) and family and communal obligations and norms of sharing. 

Well-being: the extent to which people prioritise the quality of life—emphasising self-expression, and the rights of minority groups as opposed to subsistence / survival values—such as hard work and self denial. 

Inglehart (1997) argues attitudes of approval towards secular authority and high levels of expressed well-being are characteristic of the rise of post-modern/post-materialistic values in general. This in turn is attributed to increasingly high levels of wealth and emergence of welfare states, particularly in certain countries and regions of the world, such as northern European protestant nations. 

Uhlaner and Thurik (2003) have explored the extent to which post-materialism is related to self-employment, which is seen as a “not ideal measure of entrepreneurship” (p.3), but a measure that is at least comparable across a large number of countries. They describe post-materialism as “an obvious candidate when using cultural characteristics for the explanation of self-employment across countries” (p.2). Following Uhlaner and Thurik’s findings on post-materialism and self-employment in 14 OECD countries, we hypothesise: 

H5: The higher the degree of perceived well-being in a country, the lower the level of entrepreneurship. 

Inglehart’s other cultural measure is authority: the degree to which people feel bound by secular rather than religious or family authority. The “rule of law” provides individual economic freedom to engage in what Baumol (2002, p.5) calls “productive entrepreneurship,” and therefore one would expect Inglehart’s authority measure to be associated with entrepreneurial activity. 

H6: The greater the degree of perceived secular authority in a country, the higher the level of entrepreneurship. 

Entrepreneurial Activity Measures 

This research utilises the GEM 2002 Survey data (37 countries and 113,000 randomly sampled respondents). The GEM database provides standardised measures of individuals’ participation in entrepreneurial activities and their attitudes. Specifically, GEM measures the following at the individual (human, not business) level: Business start-up rates, both independent and sponsored, or corporate, and opportunity-driven or necessity-driven; Owner-manager rates for established businesses; Business angel/informal investor rates; and Discontinued business rates. The percentages for these variables by country are presented in Table 1. 

Following Wennekers et al. (2002), we hypothesise that all these indicators of entrepreneurial activity are affected by culture in the same way. Following the literature review, it is hypothesised that the optimal conditions for encouraging entrepreneurship are: high individualism, high masculinity, low power distance, low uncertainty avoidance, low well-being and high (secular) authority.  

METHOD 

Design 

The survey element of this research was conducted in a total of 37 countries—see Table 1 for a complete list. The survey was composed of a series of questions to which there were discrete response options. The questions’ order of presentation, indicated below, was identical in every case. Following completion of the questionnaire respondents provided information on their age, gender, educational attainment, labour force status, and monthly household income. 

Participants 

In each country a representative sample of the adult population numbering at least 2,000 respondents was obtained, with the exception of Thailand and Mexico where the sample was of only 1,000. The total global sample was 113,000. However, this study included only those deemed of working age, i.e. between 18–64 years, reducing the total to 94,260. 

Materials 

Questionnaire: The distinct types of entrepreneurial activity were measured by recording responses to the questions given immediately below. All respondents were asked in turn whether each of the statements applied to them, with the response options of “yes,” “no,” “don’t know,” and “refused.” 

Procedure 

The survey research was conducted in May 2002. The questionnaire, where appropriate, was translated, and the translation(s) approved by native speakers independent of the translator. Completion of the ten questions reported here took approximately 1.5 minutes. Following completion of the questionnaire respondents provided the socio-demographic information. 

The data provides level of analysis and observation challenges. National cultural measures were available for both the Hofstede and World Values Survey for only 23 of the 37 nations, and 2 of those nations were city-states and arguably qualitatively different from nation states. Therefore OLS Regression analysis would present a degrees of freedom problem. The number of observations could be increased by employing individual not national level data and employing Probit analysis. However, this presents a level of analysis problem: the dependent variable would be measured at the individual level, while independent variables would be measured at the national level, leading to possible aggregation bias, and apparently stronger relationships between variables than are actually the case, and probable violation of the assumption of independence of observations. A solution is Hierarchical Linear Modelling, which enables nesting of individuals within groups and which is widely used in studies of educational performance within and between schools. In this case, HLM allows us to examine the individual level data in terms of variables that are true of their country but not directly applicable to them, while minimising aggregation bias through a two-step analysis. Rather than being limited to one level of analysis, we can model the multilevel structure of the data. Two standard economic and demographic control variables were employed in the analysis: GDP per capita 2002, and population growth rate (average of 1996–2002). Latitude was initially employed but later dropped since it lacked explanatory value. 

RESULTS 

Overall, population growth was the only consistent predictor of entrepreneurial activity, being significant and positive for all measures of entrepreneurial activity except corporate start-ups and informal investment. Different entrepreneurial activity measures appeared to be affected a) marginally if at all, and b) by different combinations, of individual cultural measures.  

Model 1: Total Entrepreneurial activity. The model indicated significant effects for population growth (positive) and powerdistance (negative). Both effects were is the predicted direction, but the coefficient for power distance was very low, indicating a minor effect. each variable, with the exception of uncertainty avoidance. These results offer only partial support for the hypothesised cultural determinants of entrepreneurship. (See Table 3.) 

Model 2: Opportunity-driven Entrepreneurial activity. The model indicated that only population change was a significant predictor of this measure.  (See Table 4.) 

Model 3: Necessity-driven Entrepreneurial activity. The model indicated significant effects for population change (positive), GDP per capita (negative), power distance (negative) and individualism (negative). The negative effect for individualism is in conflict with the consensus in the literature. (See Table 5.) 

Summarising over the other effects Model 4 dealt with Independent Business Start-up activity. The model indicated significant effects only for population growth. No cultural variable had any significant effect on what might be seen as a “classic” definition of entrepreneurial activity. Model 5 dealt with Corporate Start-up activity. This indicated a significant but weak effect only for uncertainty avoidance (negative). Model 6 dealt with Business Owner/manager activity. This indicated a significant positive effect for population change and also a weak but significant negative effect for individualism, contrary to the hypothesised direction. Model 7 dealt with Informal Investment activity. This indicated a relatively strong negative effect for the authority variable (suggesting the more a country was bound by the rule of law the less informal investment activity) and weak negative effects for both individualism and uncertainty avoidance. With the exception of uncertainty avoidance, these effects are not in the hypothesised direction. Model 8 dealt with Business Closure activity, but none of the variables had significant effects. 

DISCUSSION 

The results indicate that in no measure of entrepreneurial activity was the hypothesised model of cultural determinants supported. The results therefore offered only partial support for the overall hypothesis that entrepreneurial activity is affected by culture. The cultural effects seem marginal in general, and pale in comparison with the strong, consistent effect of population growth. The precise pattern of these weak effects differs for each type of entrepreneurial activity; there is no consistent pattern or combination of cultural variables that effect entrepreneurial activity in combination. This would contradict the hypothesis of Wennekers et al. (2002), who argue that culture has similar effects on different measures of entrepreneurial activity. 

Early work on this data set, which employed probit analysis and did not control for population growth, indicated that individualism appeared to have a weak positive effect, in line with the literature. Yet the present results indicate a negative, albeit weak, effect of individualism on 3 out of the 8 measures of entrepreneurial activity. Distinguishing between motivation for start-up activity—necessity and opportunity—it is possible to explain this relationship. The greater proportion of necessity based entrepreneurship occurs in the developing world and such countries tend to record lower individualism ratings than countries in the developed world, to the extent that there exists a significant negative correlation between the two measures. There is, however, no correlation between individualism and total entrepreneurial activity or opportunity based activity (see Table 2). These results suggest the pressures of local social and economic conditions engender entrepreneurial activity despite any cultural constraints. 

It is possible that previous studies have ignored or been unaware of the magnitude of the population growth effect on entrepreneurial activity, and therefore obtained misleading results for cultural constructs. It is interesting that 4 of the 6 cultural variables correlate highly significantly with either GDP per capita or population growth. Wellbeing, not surprisingly, correlates highly and positively with GDP per capita, while Authority correlates negatively with population growth. Only masculinity and uncertainty avoidance are uncorrelated with the control variables. However, these cultural variables do not appear to have any significant association with core entrepreneurial activity measures. 

Greater rates of corporate start-ups were weakly associated with low uncertainty avoidance. It is in corporate start-ups, rather than in terms of independent start-ups or proportion of owner-managers, that a culture with an aversion to uncertain or unknown situations is likely to lose entrepreneurial activity. The effect of greater uncertainty avoidance is also likely to be more acutely felt in the case of informal investment as discussed below. 

The principal explanatory variable in the case of greater likelihood of being a business angel/informal investor) (Model 3) was Authority. Against the hypothesised direction, the more the respect for traditional authority, the higher the rate of informal investment. Family and/ or clan loyalties may provide reliable if informal investment guarantees or the opportunity to request investment with greater force so enhancing the prevalence of informal investment compared with counties where such loyalties have been attenuated, or superseded by the rule of law. This is also consistent with the finding that more collectivist societies appeared to engage in more informal investment, but does contradict our hypothesis. 

Clearly in countries where uncertainty avoidance is greater, people are less inclined to engage in informal investment. Entrepreneurs are frequently cited as individuals more inclined to risk taking than some comparable group (Stevenson and Gumpert, 1985; Ray 1994), yet in terms of human risk perception, investing in another’s business is likely to be perceived as riskier than starting one’s own business. This is because perceived risks can be attenuated where the individual is able feel they have some control over a given situation, even if this sense of control is entirely illusory (Plous, 1993). People report feeling safer in a vehicle, for example, if they are driving as opposed to being the passenger. Business angels and, to a greater extent, small investors, are in the position of the passenger - deprived of any sense of control over their investment. Their fate is in the hands of the entrepreneur, and hence likely to perceive the same business venture as more hazardous than the active entrepreneur. 

Hofstede (1991) makes clear that uncertainty avoidance is not to be identified with risk aversion, since in the Knightian sense risks are open to quantification while uncertainties are not. This distinction can apply to the relative positions of the entrepreneur and the investor. 

The entrepreneur is, at least theoretically, in a position to make quantified risk assessments about their circumstances, for the informal investor the situation is more nebulous. They may lack information about the current state of the business, and the background knowledge to assess such information even if it is available. Consequently, whatever the extent of the influence of uncertainty avoidance on active entrepreneurs, it is likely to be more pronounced in the case of informal investors. 

In sum, the analysis indicates different entrepreneurial activities, even those with basic similarities, are weakly influenced by different patterns of cultural constructs. Any cultural effects are dwarfed by the role of population growth. Even necessity entrepreneurship, which one would expect to be driven by lack of wealth, is driven primarily by population growth, although poverty has a small additional effect on necessity entrepreneurship. 

CONCLUSIONS AND FUTURE RESEARCH 

The analysis as a whole failed to identify “masculinity” as an explanatory variable in entrepreneurship. This seems consistent with the concerns raised by Gray (1998), and is consistent with the claim that this dimension may be becoming anachronistic. 

The analysis also indicated that culture as measured by Hofstede and Inglehart explained only a small proportion of the variance directly, and this indicates that culture in terms of these constructs is not a key driver of entrepreneurship. This is consistent with recent academic literature on the subject. For example, Hayton, George & Zahra (2002) argue that culture may be a moderator of the relationship between contextual factors and entrepreneurial outcomes. Other researchers also suggest that national institutions are more powerful than national cultures in determining entrepreneurial activity (e.g. Tan, 2002). 

The only form of entrepreneurship that appears to be decoupled from population growth—or average individual wealth—is corporate startup activity. Perhaps this is because corporate startups are less influenced by the local economy and demography. This hypothesis is testable using GEM data and we will be pursuing it. 

Our results appear to contradict the views of national entrepreneurship experts interviewed as part of the GEM research programme. Cultural and social norms are consistently among the top three “entrepreneurial framework conditions” mentioned by these experts as factors affecting entrepreneurship rates—either positively as in the United States or negatively as in most European countries—in their country. These experts may have vastly over-estimated the direct effect of culture on entrepreneurial activity. Alternatively, they may be aware that culture acts primarily indirectly, and may have guessed at the origins of the institutional framework within which entrepreneurship takes place. 

The connection between wealth, population growth, culture and entrepreneurship is not obvious. Population growth and wealth are not correlated. Population growth drives most forms of entrepreneurial activity, both because of the opportunities it provides from new economic activity and because of the need of a growing population to engage in new economic activity in order to survive. Cultural differences between nations have little or no consistent effect on this population-driven activity, and indeed do not correlate with population growth itself, with the exception of Authority, where traditional forms of authority are associated with faster population growth. Entrepreneurial activity then could be a result of population growth, rather than a direct consequence of particular cultural norms. Given that there seems to be little statistical association between wealth and entrepreneurial activity, after controlling for population growth, the counterargument, that highly entrepreneurial nations generate population growth, seems unconvincing. The United States, seen by many as a prime example of this counterargument, has in fact only average levels of entrepreneurial activity. 

Future research could focus on any indirect link between culture and entrepreneurship by incorporating social institutions and regulatory and legal systems following the model proposed by Hayton et al., and, most importantly, increase the number of countries in the sample to at least 30. With only 19 degrees of freedom, the significance tests need to be interpreted with caution (Sullivan, Dukes and Losina, 1999). 

CONTACT: Stephen Hunt, Foundation for Entrepreneurial Management, London Business School, Regent’s Park, London, NW1 4SA; (T) +44 (0)20 7262 5050; (F) +44 (0)20 7723 8534; sahunt@london.edu 

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©  2004 Babson College. All rights reserved. Last updated May 2004.