Social Values Transformation, Entrepreneurship and Economic Growth: Cross-Country Analysis
by
DopiraMykhailo
A thesis submitted in partial fulfillment of the requirements for the degree of
MA in Economics
KyivSchool of Economics
2010
Thesis Supervisor: ProfessorVakhitovaHanna
Approved by ______
Head of the KSE Defense Committee, Professor Gardner Roy
______
______
______
Date ______
KyivSchool of Economics
Abstract
Social Values Transformation, Entrepreneurship and Economic Growth: Cross-Country Analysis
by Dopira Mykahailo
Thesis Supervisor:Professor Vakhitova, Hanna
The paper investigates interconnection of economic performance and social values of the country. It is hypothesized that evolution towards greater spread of values inherent to entrepreneurship in the society is connected to higher rates of economic growth ceteris paribus. Based on previous research internal locus of control, achievement motivation and calculated risk taking represent the specific values inherent to entrepreneurs, and they are believed to be connected with higher rates of growth. Spread of these values was measured in 51 countries across the globe during the period of 1981-2008 employing dataset of the World Values Survey, and it was determined that prevalence of entrepreneurship values cannot predict subsequent economic growth. Still, evolution towards domination of internal locus of control in the society is found to be a significant predictor of higher economic growth on country level. So, the paper suggests that a social program targeted on bringing up internal locus of control is likely to lead to better economic performance of the country.
Table of Contents
Chapter 1 Introduction......
Chapter 2 Literature Review
Stability of Values
Economic Development and Social Values
Entrepreneurship and Economic Development
Entrepreneurship and Social Values
Chapter 3 Methodology
Choice of Values
Quantification of Values
Factor Analysis
Changes of Values as Growth Determinants
Chapter 4 Results
Chapter 5 Conlcusions
Works Cited
Appendix AMissing Values for Countries in Analysis......
AppendixBCountries in the Analysis and Years of Survey Conduction
Appendix CSpapiro-Wilk W Test for Normal Data......
Appendix DLoadings for Principal Components and Principal Axis Methods
Appendix EVariability of Values......
Appendix FComparison of Fixed and Random Effect Models......
Appendix GStata do-file & SPSS syntax file......
List offigures
NumberPage
Figure 1: U-Shaped form of entrepreneurship depending on economic development 8
Figure 2:Opportunity vs. Necessity entrepreneurship across the world....9
Figure 3: Scree plot with parallel analysis...... 18
Figure 4:Achievement motivation variability...... 46
Figure 5: Perseverance variability...... 47
Figure 6:Locus of control variability...... 47
List of tables
NumberPage
Table 1: Questions selected as indicators of entrepreneurship values...... 13
Table 2: Descriptive Statistics...... 15
Table 3: Correlations between principal components and factors of principal axis factoring. 17
Table 4: Variance explained by each factor...... 19
Table 5: Pattern Matrix...... 20
Table 6: Structure Matrix...... 21
Table 7: Factor Correlation Matrix...... 21
Table 8: Estimation Results...... 27
Table 9: Missing Values for Countries in Analysis...... 36
Table 10: Countries in the Analysis and Years of Survey Conduction...... 41
Table 11: Spapiro-Wilk W Test for Normal Data...... 43
Table 12:Loadings for Principal Components...... 44
Table 13: Pattern Matrix for Principal Axes Factoring method...... 45
Table 14:Hausman Test...... 48
Table 15: Breusch and Pagan Lagrangian multiplier test...... 49
Glossary
Social values. Ideals that guide or qualify personal conduct, interaction with others, and other situations of social interaction (Braithwaite and Blamey, 1998).
1
Chapter 1
Introduction
Connections between social values and economic growth have been noted in the beginning of the twentieth century. Max Weber (1905) has claimed that specific “ethos” (which stands in author’s notation for a particular value system) brought by Protestantism has contributed to nascent entrepreneurship, more active trade and accumulation of wealth for investment. Such cultural change relevant for large number of people turned out to be the factor that was able to explain difference in economic performance of European states where different religions dominated. The author also claims that modern Capitalism emerged due to spread of the specific values of Protestantism.
Later, relations of economic developed and values have been studied in context of modernization theories of mid-twentieth century. It has been claimed that change of economic conditions leads to shift in values (Lipset, 1959). Still, interconnection between social values and economic growth is largely underexplored. The most probable reason for this is lack of reliable cross-country data that allows measuring and comparing values for different societies. Another possible reason why linkage between social values and economic development is not thoroughly studied yet is the fact that cultural dimension has not been included in classical economic growth models, such as exogenous growth models (Solow (1956) for instance) or endogenous growth models (Romer, 1990; Lucas, 1988, for example).
Still, the issue of interconnection of symbolic values and economic development has been studied. The researchers, however, have not come to definite conclusion concerning presence of such connection, since there is number of works that find no relations between values and economic development (such as Pryor, 2005), while some others claim presence of such connection (like Minkov and Blagoev, 2009). Nonetheless, studies that show existence of relations between social values and economic development are criticized (Hanson, 2009), so there is no definite answer whether the relation exists. It is notable that there are very few studies devoted to dynamical aspect of interaction between economical and cultural subsystems. Values tend to be viewed statically by most researchers (see Pryor, 2005; Minkov and Blagoev, 2009; Granato, Inglehart and Leblang, 1996), and this is one of the statements challenged by the current study.
Current research is aimed to investigate whether shifts in the specific set of values that is inherent to entrepreneurs can explain future economic growth. Basing on data of the World Values Survey, the global research with largely invariant set of questions across waves and countries that represents opinions of 90% of world population and covers the period of 1981-2006, it is possible to view dynamics of values and link it to economic growth of countries. So, viewing changes of values instead of levels is the major novelty of the research. Moreover, examination of entrepreneurship values as predictors of economic growth has not been done yet.
Selection of entrepreneurial values as predictors of economic growth is not ad hoc. Such choice is based on the fact that entrepreneurship stimulates economic development (Acs, 2005), and entrepreneurs are bearers of specific culture and set of values (Carland et al, 1984). So, the major hypothesis tested by this study is that spread of values inherent to entrepreneurs in a society stimulates its future economic growth.
The rest of the paper is structured the following way.Firstly, attention is paid to the literature review that covers issues of values stability, interrelations between social values and economic growth, entrepreneurship, its connections to economic development and values inherent to entrepreneurs. Methodology section discussing choice of values, their quantification and usage as predictors in endogenous growth model follows in chapter 3. Results of the research are in the chapter 4, and conclusions can be found in chapter 5.
Chapter 2
LITERATURE REVIEW
Stability of Values
The concept of values widely used in current research is defined as ideals that guide or qualify personal conduct, interaction with others, and other situations of social interaction (Braithwaite and Blamey, 1998). Social values are principles that indicate how you relate meaningfully to others in social situations, including those involving family, friends, and co-workers.
Several studies concerning both developed and developing countries (Braithwaite and Blamey, 1998; Yoshino, 2006) have reached a conclusion that social values are fairly stable in the period of two decades. Thus, inference about value stability is widely supported by the academic research community, and assumption of non-changeable nature of values is sometimes taken for granted (for instance Minkov and Blagoev, 2009). While this conclusion may be correct for value orientations (which are basic perceptions of right and wrong) and value types (which are basic structures of personal value system), it is not the case for variety of social values that are subject to substantial shifts. It can be seen from graph in Appendix E that values do change significantly in the period of 20 years, and there is no apparent pattern in value evolution. So, there is sufficient variability in data that allows testing of the major hypothesis of the paper.
Evolution of values is not a completely unstudied research area. There are several studies looking at the dynamics of social values. Psychologists Melton and Hoke (2003) tracked changes in personal values. They measured values of freedom and equality in American society in period of 1968-1981 and found that community value orientation has increased substantially over the studied period. Hassan, Antunes and Pavon (2009) studied evolution of moral values of Spanish society over last 20 years. Operating with individual data, researchers constructed a model that predicted changes in values based on changes in other measureable social characteristics. Thus, for instance, it has been shown that change in marital status or having children is likely to affect values of a person. A study of cultural changes conducted by Abdollahian et al. (2008) views transformation of values in the framework of New Modernization Theory, and considers cultural, political and economic systems of the society. The researched values include two dimensions of rational-secular and self-expression values. Authors assume that change in economic conditions leads to higher existential security, which leads to shift in values towards rational-secular and self-expression values. This shift enforces liberal political institutions that in their turn influence economic development. Using non-linear estimation procedures, the authors come to conclusion that economic development affects values of people and the model has a stable equilibrium meaning that as economic conditions evolve, values tend to converge to highly rational and secular in the long run (approximately 25 years). The authors, however, have not considered influence of value change on economic development, which might be the case. Moreover, estimations of a continuous dynamic model having only 4 discrete time periods for every state might produce misleading results.
Current research tests the hypothesis that value change influence economic growth but not vice versa. It is assumed that changes in values stimulate individual actions, which, in their turn, influence real economic variables.
Economic Development and Social Values
Although interconnection between social values and economic development is not completely uninvestigated, there is no clear understanding how social and economic spheres are connected. It has been already noted that the question of causality in interrelations of social values and economic growth is ambiguous. Proponents of modernization theory view economic development as determinant of economic growth (Abdollahian et al., 2008), while other scholars believe the causality to be reversed. Thus, Granato, Inglehart, and Leblang (1996) used data from the World Values Survey of the wave of 1990 and came to conclusion that “achievement motivation” variable (which is a characteristic that measures value of being successful and outperforming others) is statistically significant in endogenous growth regression. Although this article has been severely criticized for the presence of endogeneity and omitted variable bias (Hanson, 2009), it is one of the earliest papers that formalize relations between social values and economic development. With two waves of the World Values Survey Inglehart and Baker (2000) have concluded that values prevailing in the society have an impact on GDP per capita level. There are other studies that support the idea that social values influence economic variables. Corneo and Jeanne (2007) have stated that economic changes and substantial development are related to changes in value system of people at individual level. Having constructed a variation of endogenous growth model the authors investigate an interaction between value system and economic development through occupational choice of individuals. They have concluded that symbolic values have great impact on economic development, and cultural peculiarities can influence the pattern of economic system evolution. Minkov and Blagoev (2009) find that economic growth correlates with the value system. They have built a factor model, which includes a principal component that has strong correlation with economic growth in subsequent periods.
Still, there is a strand of literature that rejects the existence of correlations between value system and economic development. A number of researches that investigate social values and economic growth come to conclusion that there is no statistically significant relationship between the variables of interest. Hanson (2009) has replicated the classical study by Granato, Inglehart, and Leblang (1996) and argued that their finding has been driven by the omitted variable bias. When controlling for institutional influences, Hanson finds out that impact of the “achievement motivation” is insignificant factor in the model. Another research conducted by Pryor (2005) also has led to the conclusion that connection of social value system and economic growth is insignificant. Using the data from the 1990 wave of the World Values Survey in a factor model, he finds all principal components being uncorrelated with economic development.
Entrepreneurship and Economic Development
Numerous empirical studies have tested relations between entrepreneurship and economic development. Comparatively recent work of Klapper et al. (2008) investigates the question of relations between entrepreneurship and economic development based on the World Bank Group Entrepreneurship Survey and concludes that “a higher level of entrepreneurship significantly relates to greater economic development, formal sector participation, and better governance” (Klapper et al. 2008, p. 32). Wennekers et al. (2005) finds an empirical support for the hypothesis that the relationship between entrepreneurship activity and level of economic development has a U-shaped form, as Figure 1 reveals. So, the most developed countries enjoy the greatest returns on active entrepreneurship, while in developing countries the impact is significantly lower in magnitude.
Figure 1: U-Shaped form of entrepreneurship depending on economic development
Different nature of entrepreneurship in developing and developed countries is a quite logical explanation of the observed distribution form. Acs (2006) has suggested that entrepreneurship in developing and developed countries are different from each other. In developing countries people are forced to establish own businesses, since they have virtually no alternatives. The researcher argues that this kind of entrepreneurship can be called “necessity entrepreneurship”, and such kind of start-ups is not contributing to economic growth much. In case of developed countries people have more opportunities of self realization, so their choice of becoming entrepreneurs is determined by internal factors and personal motivation. Such people seek opportunities and free niches, and their enterprises are usually based on innovative ideas. Acs (2006) calls such type of entrepreneurship “opportunity entrepreneurship”. The author manages to determine difference in motivation for starting an enterprise in different countries using Global Entrepreneurship Monitor 2007 survey, and his results are quite convincing.
Figure 2:Opportunity vs. Necessity entrepreneurship across the world. Source: Acs, 2006.
It can be seen at Figure 2 that a higher proportion of opportunity entrepreneurship is observed in more developed states. This result can suggest that opportunity entrepreneurs are the bearers of a specific value set which stimulates them to seek for opportunities and to start businesses, while necessity entrepreneurs do not differ much from the general public.
Entrepreneurship and Social Values
Classical papers by Weber (1905) and Schumpeter (1934) suggest that there is a close relationship between entrepreneurship and values. Weber claims that specific “ethos” of Protestantism has contributed to development of entrepreneurship and modern capitalism in general, while Schumpeter has been more interested in specific values that entrepreneurs had and how these values were related to commercial successes. McClelland (1975) suggests that entrepreneurship is connected with such a construct, as “need for achievement” (p. 25). Rotter (1966) has found that “internal locus of control” (the trait that makes people take personal responsibility for everything that happens to them) is substantially higher among entrepreneurs. Finally, Carland et al. (1984) believe that “calculated risk taking” is the most significant factor for predicting entrepreneurship. Chell et al. (1991) determined that a successful entrepreneur should have such traits as “proactivity”, “commitment to others” and “achievement orientation”.
More recent studies in the area support the hypothesis that entrepreneurs have specific set of values and personal traits that distinguish them from the rest of the population (Mitchell et al, 2002). Viewing effective entrepreneurship as a function of inherent values exhibits numerous drawbacks and lacks sufficient predicting power. Nevertheless, it provides evidence that entrepreneurs have different set of values compared with general audience. Current research will be based on the set of values found to be connected with entrepreneurship in various studies in case WVS contains appropriate questions.
So, existing literature tends to view values as stable phenomena that are not subject to transformation in short time periods. Still, the data gives enough evidence that transformation of values can be rather substantial. Most researchers who have investigated linkage of social values and economic development tended to link “time-invariant” social values to economic growth, which is a dynamic variable. Most papers that consider changes in values (such as Corneo and Jeanne, 2007 or Hassan, Antunes and Pavon, 2009) analyze those changes at individual level. While such papers are useful in studying the value transformation mechanism, they do not allow us to link social values to economic development. This paper proposes to pay attention to changes in values at an aggregated levelof the society. Moreover, we offer a look at changes in values, rather than in their magnitude in order to investigate links between social values and economic development. The logic of such choice is the following: economic growth is a change of GDP level, so it is more reasonable to predict change variable using another change variable instead of level variable. It is also supposed that shift of values that are connected with entrepreneurship (and data supports the idea that entrepreneurs are bearers of specific values) would be the best predictors among value of subsequent economic growth.