Does culture matter for entrepreneurship?

Economists have been increasingly looking at culture to explain the divergent economic fortunes of nations. Does culture matter for development? If it does, what kind of culture?  In a recent paper we argue that differences in economic development across countries can be explained by a culture of entrepreneurship, that there is a role for government policy to shift culture towards risk-taking and innovation but that, ultimately, culture is subordinate to institutions.

The social psychologist, Geert Hofstede views culture as “the collective programming of the mind which distinguishes the members of one group or category of people from those of another” (Cultures and Organization, 1991). The first step in implementing such a definition is identifying a specific trait that the researcher believes is important for development. The empirical literature has employed various measures depending on the context: trust, tribal affiliation, individualism, religious denomination to name a few.

Theory needs to take a more general approach. We use “entrepreneurial attitude” as the cultural trait since development economists have long believed entrepreneurship to be fundamental to economic prosperity. In our model an entrepreneur is someone who has developed certain skills or attitudes that enable him to identify arbitrage opportunities and bear the associated risks. This definition aligns with Joseph Schumpeter’s belief that identifying arbitrage opportunities was the key entrepreneurial skill as well as Frank Knight for whom the willingness to bear risk was critical.

In our model people choose between two occupational classes, risky entrepreneurship or low risk employment. This choice is shaped by cultural factors. We embed two aspects of culture into the model: some cultural traits are hard-wired, others are dynamic, susceptible to change. The first is formalized as a general anti-capitalist attitude among workers and traditional sectors, an attitude that we think has been a natural byproduct of exploitative colonialism in the developing world. This aspect of culture never changes in our story but a second, dynamic, process modulates its effect on the economy.

This dynamic aspect of culture arises from socialization and occupational choice. Perception of entrepreneurial risk is partly influenced by family background, as children from entrepreneurial backgrounds are more likely to be better informed about such activities. Similarly, wage-working parents having developed skills in their line of work and some aversion to risk may endow their children with human capital that predisposes them toward low risk activities. This within-family cultural transmission is not perfect but it does create inertia: children tend to follow in the footsteps of their parents, and a society with less entrepreneurship today is likely to remain so in the future. What allows the inertia to be overturned are social influence that occasionally matters more than family upbringing, and occupational choice through which people may decide to go into a different line of work than what they have been socialized into.

Our dynamic theory of culture and development has two implications. Culture always matters for the state of the economy, specifically how rich or poor a country is. Country-specific factors such as anti-entrepreneurial bias, importance of the family in shaping attitudes, government policies that raise the return to non-entrepreneurship (e.g. guaranteed and generous employment through a large public sector) all accentuate this difference as one would expect.

This does not mean culture is destiny. Institutional changes – economic openness most obviously – can raise returns to entrepreneurship in a population that has acquired considerable proficiency in worn-out methods of production. If those returns occur in newer, less familiar, sectors or technologies, a new entrepreneurial spirit is unleashed. People, who otherwise would have opted for the relative safety of paid employment, turn entrepreneurial, eager to bear large risks because established entrepreneurs no longer have an absolute advantage in the new opportunities.

Neither is history destiny. For example, in Asian countries that have successfully transitioned, industrial policy has long considered the nature of the country’s entrepreneurs and their relation to the state. In Singapore and South Korea, the entrepreneurial base was judged to be lacking initially. Consequently industrial policy was first oriented towards complementing or creating the domestic entrepreneurial base, through facilitating the entry of foreign entrepreneurship and providing financial support to allow entrepreneurs to take on more risk in imitating and adopting foreign technology or by forcing firms to enter new industries. And, of course, the role of the Meiji Restoration in Japan’s cultural transformation and subsequent economic success is by now well accepted among historians.

We take this to mean that policy and future discussions should place a greater emphasis on facilitating an entrepreneurial culture.  By increasing the opportunities associated with taking big risks, or pushing existing businesses to engage in new activities, incredible growth opportunities are created. And when incentives change, culture responds.

This article was originally published on The World Bank’s Let’s Talk Development Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Shankha Chakraborty is Professor of Economics at the University of Oregon. Etienne B. Yehoue (PhD, Harvard University) is a senior economist in the European Department at the International Monetary Fund. Jon C. Thompson will be soon graduating from the University of Oregon with a PhD in Economics and join Willamette University from Fall 2015.

Image: A traditional light bulb with carbon filament is displayed at a do-it-yourself store. REUTERS/Ina Fassbender.