Writer: Aidan Morgan Chan, Editor: Emily Vu
In the 1960s, Clark Kerr, an Economics professor at the University of California, Berkeley, popularized his theory of Convergence. Kerr proposed that as nations undergo industrialization, they become more alike socio-economically, “converging” to a greater global identity. However, Convergence doesn’t capture the depth of microeconomic paradigms throughout the many regions of the world. While the theory can illustrate macroeconomic commonalities, it fails to capture the microcosms of “Business Culture,” or more precisely, how cultures affect microeconomic transactions, and thereby economic development.
Recently, Gerard Roland and Yuri Gorodnichenko, fellow Berkeley Economics professors, proposed a way to observe the impact of cultural differences on economic transactions by studying the interactions of global economies. However, despite this being an implicitly accepted truth, systematic evidence of this relationship is still not definite. This led Roland and Gorodnichenko to pioneer an investigation into the effects of cultural distance on market integration and business transactions. They define cultural distance as “the extent to which shared values and norms differ across economic agents – on the organization of firms across borders,”—the precursor to globalization and international sourcing. Though this topic has some intrinsic ambiguity, by observing the behavior of multinational firms, it appears that Kerr’s Convergence theory is not universally applicable; specifically, certain unique international cultures are able to avoid this global-melting-pot phenomenon.
That said, let’s address the remaining question; to what extent do international cultures affect the microeconomy?
It is a difficult question to answer, as economists are unable to pinpoint the explicit effects of internationalism on the microeconomy. Realistically, we cannot derive many causal statistics. Much of what we know is founded upon correlation. As such, geographic diversity in business has been widely debated. Some speculate that cultural diversity fosters creativity and mitigates the likelihood of the groupthink trap; a more optimistic outlook would be that internationalism encourages the expansion of perspective, which optimizes decision-making. Research indicates this argument doesn’t quite embody the bigger picture. Before we can understand why, let’s look at a case study that encourages economists to define what ‘diversity’ entails and why it is crucial in understanding the question at hand.
In 2021, the Harvard Business Review published a study in which researchers examined the behaviors and interactions of 5,728 individuals in 804 international teams. Each team’s performance and climate was analyzed for six months as they worked on business consultation projects. Factors such as cohesion, project participants’ satisfaction, collaboration, and interest to continue working with the team were surveyed weekly. When it came time for the researchers to report their findings, they divided diversity into two categories: contextual diversity and personal diversity. Contextual diversity is defined as differences in people’s past or present environments—in a contextually diverse environment, each individual contributes a different context for living that offers cross-cultural understanding. Personal diversity, by contrast, is what we might consider classic concepts of diversity—differences in age, gender, race, political views, etc. Interestingly, as per the survey results, the latter exhibited greater feelings of dissatisfaction. Contextual diversity–geographic diversity and international cultures–was once again implied to encourage innovation and decision-making. However, it is difficult to substantiate these claims beyond observational data. Moreover, contextual diversity is difficult to implement without first overcoming the problems associated with personal diversity. Thus, from the perspective of the laborer, it is unlikely that culture has explicit effects. This is a convoluted topic, because societal norms often dictate personal diversity as well.
Research from the National Library of Medicine posits that cultural syndromes such as collectivism and individualism develop due to exposure to different social ecologies. Each has its own myriad of strengths and weaknesses. For example, collectivist cultures can be known to undermine independent thinking, whereas individualism may harbor a self-seeking nature that hinders collaboration. In many Asian cultures, cultural differences in communication and self-expression, whether through semantics, pragmatics, or simple language barriers, result in passive workers. Scholars attribute this dynamic to Confucianism and its philosophy that prioritizing the community is a virtue. This philosophy also has strictly-defined hierarchical boundaries, which discourages people from doing anything remotely self-interested—even something as simple as expressing oneself in the workplace.
This cultural-psyche makes it difficult for companies to globalize and grow their operations abroad. There also exist culturally systematic barriers in many global economies. In 2024, we see this explicitly in South Korea’s “Korean Discount”–the tendency of South Korean companies to devalue their shares to artificially low-prices, ultimately decreasing foreign incentives to invest in Korean companies. A unique aspect about Korean society is that economic power is concentrated in the hands of a few conglomerates known as “Chaebols”, with the top five companies contributing over half of the entire nation’s GDP. The issue is that South Korea’s culture has a tacitly-understood system of nepotism, in which Chaebols don’t transfer their influence and power to parties outside of the Korean elite. This has led to issues such as the Korean Discount and essentially prevents foreign access to Korean markets–eroding corporate value and inhibiting economic growth as Korea can not optimally raise capital at home.
Japan has also exhibited economic hurdles fostered by cultural dynamics. The International Monetary Fund (IMF) concluded that blatant gender discrimination–while not unique to Japan–has resulted in the country’s female population having a 7% rate of enrollment in STEM degrees in university, the lowest amongst G7 countries. Economists from the IMF conclude that Japan’s biases have hindered Japan’s total factor productivity (TFP) by about 20%, and this could be said for other countries that have similar macroeconomic barriers embedded into their economies. As TFP is directly associated with the neoclassical economic growth models, Japan is hindering its own GDP growth by excluding a capable demographic from its dying labor force. Furthermore, the IMF posits that gender equality in financial institutions has led to greater financial resilience in policy making, which results in more effective leadership and the potential for globalization. This supports the World’s Bank hypothesis that long-run GDP per capita would increase by about 20% if gender gaps were closed. From here, it is apparent that cultural differences highly impact economic outcomes, and that sometimes businesses don’t prioritize what is economically efficient. Though most of the cultural influence on peoples starts out as psychological and behavioral adjustments, it burgeons into systematic issues within both the macro and microeconomy.
However, sometimes these issues don’t need to exist as systematic barriers. Going back to Roland and Gorodnichenko’s research, they assess international business relationships between a firm’s management to substantiate how these cultural differences impact business transactions. By analyzing the prospects of ownership (equity), they find that a French-led HQ firm would be 17% less likely to hold majority ownership in an affiliate if they are managed by a Chinese manager compared to a Belgian manager. In their original model, they account for foreign-policy restrictions, perpetuating that even being culturally distant results in business apprehension—sometimes even unwillingness to choose the economically efficient choice. Now, you might be thinking that personal biases have something to do with this–and you’re right. However, as mentioned in the beginning, the issue is complex and such a metric is difficult to assess. Roland and Gorodnichenko tested whether or not the nationality of managers affected the outcome of their experiment. Generally speaking, it did not. The same results were yielded, and they were able to mitigate prejudice to a viable extent.
So what does this mean? Well, research currently models what is happening or what is likely to occur. Globalizing the economy and international business culture considers factors beyond the mere exposure effect. It’s not just a matter of two-dimensional diversity—there are a number of unseen variables that require thought and nuance. However, what we can derive from this is that economics is not linear. Understanding the sociological and psychological effects of global integration can steer us in completely new directions. Kerr’s theory has validity—with economic growth comes greater globalization efforts. But convergence shouldn’t come at the loss of cultural individuality. And perhaps, by studying societal nuances, we’ll be able to better understand the complex relationships that exist in the global economy.
Featured image by LSST Marketing/Adobe Firefly
