Journal

Article
Journal 34

Cultural, Political, and Economic

Antecedents of Country Risk
in Sixty-Two Countries

Journal
Moshe Banai

The Capco Institute Journal of Financial Transformation

Recipient of the Apex Awards for Publication Excellence 2002-2011

Cass-Capco Institute Paper Series on Risk

#34
03.2012
PART 1

Cultural, Political,
and Economic
Antecedents of
Country Risk in
Sixty-Two Countries
Moshe Banai, Professor of Management, Zicklin School of Business, Baruch College, City University
of New York

Abstract
This study presents and empirically tests a model of the re-
lationships between cultural, political, and economic mea-
sures and business practices in sixty-two countries. GLOBE
study’s nine dimensions of culture’s scores are regressed
along scores on democracy, religiousness, GDP, corruption,
and country risk. The results indicate that in-group collec-
tivism and humane orientation are good predictors of de-
mocracy, religion, and corruption; performance orientation
and uncertainty avoidance are good predictors of societal
institutions; and corruption and societal institutions are good
predictors of country risk. Implications for scholars and
practitioners are offered. 89
 Forty years ago numerous researchers had suggested that it would be
worthwhile to correlate socio-cultural, political, and economic variables
with various dimensions of business practices across nations [Ajifer-
uke and Boddewyn (1970a); Farmer and Richman (1965); Haire et al.
(1966); Harbison and Myers (1959)]. Culture [Hofstede (1980), House
et al. (2004), Dyck and Zingales (2004)] and political institutions [Child
(1981); Geertz (1973); Glaser and Strauss (1967) have been claimed to
influence nations’ economic performance. Yet, a model that would be
able to establish relationships between culture, political institutions, eco-
nomic performance, and management in organizations could not be fully
and empirically tested at that time because of lack of data. Efforts were
made to correlate a few variables at a time, however, there was no con-
centrated effort to offer and test a comprehensive theory that would be
able to explain and predict the impact of cultural, political, and economic
extraneous variables on business practices cross-culturally.
In 2004, the GLOBE research group [House et al. (2004)] came up with
nine dimensions of culture measured across sixty-two countries, an
achievement that has made the research about the relationships be-
tween culture and management statistically possible. This study adopts
the GLOBE measures and offers and tests a model of the relationships
between cultural, political, and economic measures, and business prac-
tices of corruption and risk in sixty-two countries. Corruption and risk
are measured at the national level rather than at an organizational level.
They are used here as proxies for risk taking involved in the day to day
operations of organizations. Hence, in this study the GLOBE study’s nine
dimensions of culture’s scores are regressed along scores for democ-
racy, religiousness, GDP, corruption, and country risk. These variables
are discussed in the next section, first culture as the independent vari-
able, and then democracy, religiousness, GDP, as well as corruption and
country risk as dependent variables.
Several of the relationships analyzed here have been described, ex-
plained, and tested in the past. However, no one study has gone so far
as to empirically measure culture, political institutions, and economic in-
dicators in one model, certainly not in a sample consisting of sixty-two
countries. This is the uniqueness and the contribution of this study. The
sample size and richness of the variables have the potential to establish
a theory of the relationships between societies’ cultural values and their
institutional and economic performance. When the market is global the
ability to predict a nation’s performance by measuring its peoples’ social
values could prove to be a powerful tool for scientists, practitioners, and
politicians. Moreover, efforts to change some of these values may be
used by educators to improve a nation’s performance.
Cultural dimensions
House et al.’s (2004) measures were selected as the independent vari-
90 ables in this study. The measures include “institutional collectivism,”
“in-group collectivism,” “humane orientation,” “uncertainty avoidance,”
“power distance,” “assertiveness,” “performance orientation,” “future
orientation,” and “gender egalitarianism.” The measures and their rela-
tionships with the dependent variables are presented here.
Institutional collectivism – is defined as the degree to which individuals
are integrated into groups within society. Individuals who are in societies
high on institutional collectivism are proud of being in groups, and lead-
ers of those societies encourage group loyalty even if individual goals
suffer. The term relates to a cultural value that endorses the prioritization
of the group’s needs over the individual’s needs. The GLOBE study has
found a significant and positive relation between the level of institutional
collectivism in a country and that country’s economic performance.
In-group collectivism – defines the degree to which individuals have
strong ties to their small immediate groups [Triandis (1994); Triandis et
al. (1986)]. In this society children live with their parents until they get
married and in many instances continue staying in the same house or the
same neighborhood even after their marriage. This type of culture holds
different norms and standards for justice for two different groups (the
in-group and the out-group) and facilitates the negotiation of justice for
familial duty or loyalty based on in-group membership. Pressure for con-
formity among the in-group members can significantly influence overall
levels of corruption in a society through its impact on obedience and
loyalty to the group. The GLOBE study has found a strong and significant
correlation between in-group collectivism and economic performance.
Humane orientation – is defined as the degree to which a society en-
courages and rewards a fair, generous, and kind behavior. This cultural
value urges people to generally be very tolerant of mistakes, kind, gen-
erous, and always look towards others with a helping hand. This set of
behaviors is advocated by all religions and therefore we would assume
some relationships between humane orientation and religiousness. Hu-
mane orientation is positively correlated with assertiveness, institutional
collectivism, in-group collectivism, and performance orientation in the
GLOBE study (576). Some of those correlates (performance orientation)
may indicate that humane orientation should lead to more democracy
and yet some other correlates (in-group collectivism) indicate the op-
posite. The GLOBE study has found a significant and negative relation
between the level of humane orientation in a country and that country’s
level of economic performance.
Uncertainty avoidance – has been defined as “the extent to which
uncertainty is tolerated in a society.” Uncertainty avoidance can be ob-
served by the amount individuals show tolerance for ambiguity, seek
feedback, and prefer constant communication of events and things. In
organizations it can be observed in the extent of planning that companies
do before they take business decisions, and the amount of innovation
The Capco Institute Journal of Financial Transformation
Cultural, Political, and Economic Antecedents of Country Risk in Sixty-Two Countries
that these organizations support. People in high uncertainty avoidance
cultures will take actions to reduce uncertainty in life, including engag-
ing in illegal activities, which aid in their survival. The GLOBE study has
found significant and positive relation between uncertainty avoidance
and a country’s economic performance.
Power distance – focuses on the degree of equality or inequality be-
tween people in a society or a country. The term power distance was
coined by Mulder (1971) to mean “the degree of inequality in power be-
tween a less powerful individual and a more powerful other, where both
individuals belong to the same (loosely or tightly knit) social system.”
Victor and Cullen (1988) indicate that in high power distance cultures, not
only would the superior be less tolerant to whistle-blowing behavior but
also try to retaliate using all of his power. People in high power distance
cultures assume that superior orders override any moral considerations
that might apply in other situations, freeing them of responsibility for their
actions. This can create a more deleterious environment for corruption.
Power distance was found to be significantly and negatively correlated
with economic prosperity of countries [House et al. (2004)]. Park (2003)
has found power distance to significantly predict corruption.
Assertiveness – is the extent to which individuals in a society exert their
will and opinion in their daily activities and their relationships with others.
This is a characteristic that is also often related to masculine properties
[Hofstede (1980)] and is treated in the same light in various societies.
Consequently, societies that encourage gender egalitarianism are also
often observed to encourage assertiveness in daily actions. Speed and
scale are venerated values in assertive cultures. Being fast is seen as be-
ing efficient and being big is considered to be great [Hofstede (1983a)].
However, in many cases, “fast” and “big” achievements are only pos-
sible through cutting corners or illegal behavior. In order to achieve a
goal faster than others, people feel pressed to provide “grease money”
[Brademas and Heimann (1998)]. Park (2003) who has used Hofstede’s
(1980) four dimensions of culture found masculinity, of which assertive-
ness is one vector, to be related to corruption. The GLOBE study has
found no relationship between the level of assertiveness in a country and
the level of economic performance of that country.
Performance orientation – is the degree to which a society encour-
ages and rewards group members for performance improvement and
excellence. This cultural value reflects the extent to which a community
encourages and rewards innovation, high standards, and performance
improvements. The GLOBE (2004) study has identified a significant nega-
tive correlation between the level of performance orientation of a coun-
try and the disdain for democracy in that country. Hofstede and Bond
(1988) showed that Confucian dynamism was strongly correlated with
economic growth in 22 countries between 1965 and 1985. Trompennars
and Hampden-Turner (1998) have suggested that there is no relationship
between performance orientation and religious belief. However, they are
only related to Catholicism and Protestant cultures. The GLOBE study
has found a significant and positive relationship between performance
orientation in a country and its economic performance.
Future orientation – the cultural characteristic of future orientation can
also be viewed in terms of time and the pattern in which societies view
time. It relates to the amount of importance a society assigns to long-
term thinking and planning for the future. Societies having a future ori-
entation focus on being thrift in the short run and work towards hav-
ing an ample amount of savings. The GLOBE (2004) study has found a
significant negative correlation between future orientation and dislike for
democracy. The GLOBE study has found no significant relationship be-
tween future orientation and religiousness. The GLOBE study has found a
significant, strong positive relation between the level of future orientation
in a country and that country’ per capita GDP.
Gender egalitarianism – deals with the degree of equality placed on
the sexes. It focuses on the degree of traditional gender role on achieve-
ment, control, and power. Gender egalitarianism focuses on the extent
to which society seeks to minimize gender role differences as compared
with societies that tend to maximize the differences by defining cliché
roles for men and women. In the latter, tasks or behaviors are catego-
rized as either feminine or masculine. Masculine behaviors primarily fo-
cus on traits of assertiveness, aggression, and the ability to earn money.
Feminine roles are more nurturing, forgiving and subdued. There is no
indication in the literature that there is a relationship between the level
of gender egalitarianism in a country and the level of democracy in the
country or the level of religiousness of its citizens. However, some of the
measures of democracy are freedom and equality. Hence, we assume
that the more egalitarian a society is the more democratic it becomes.
The GLOBE study has found a significant positive relation between the
level of gender egalitarianism and the country’s economic performance.
Seleim and Bontis (2009), using the Globe’s nine dimension of culture,
found that perceived gender egalitarianism practices were associated
with a country’s corruption.
Democracy
Democracy comes from the Greek word ‘demos’ meaning people. The
U.S. Department of States considers democracies to be countries where
the people hold sovereign power over the government, the judiciary, and
the legislative. Democracy as a form of government often is assumed to go
hand in hand with freedom. Commonly, freedom and democracy are often
used interchangeably, and it is generally assumed that a free society is also
a democratic one. For this reason, it is possible to identify the time tested
fundamentals of constitutional government, human rights, and equality
before the law that any society must possess to be properly called demo-
cratic. Democracy seeks to assure that the government is based upon the 91
 consent of the governed and is accountable to its people.
Democracy and corruption – Staw and Szwajkowski (1975) found that
private firms dealing with less munificent environments engaged in a
higher number of illegal activities. Tax policies [Novitzky et al. (1995)],
price controls [Mauro (1997)], multiple exchange rate systems, and for-
eign exchange controls [Levine and Renelt (1992)], and rules on govern-
ment subsidies [Clements et al. (1995)] are typical examples of govern-
ment regulations that can lead to illegal rent seeking behaviors. Alam
(1995) argues that corruption occurs because the government has a
monopoly power over certain resources. Government officials who hold
this monopoly power may refuse or delay the authorization of certain
economic activities in order to extract bribes from those who need au-
thorizations or permits [Tanzi (1998)]. Bribery is also often used as “speed
money” to skip cumbersome regulatory procedures and as grease for
the wheels in over-regulated societies, such as found in many develop-
ing countries [Brademas and Heimann (1998)]. When too many regula-
tions and rules frequently impede free economic activities, this creates a
breeding ground for illegal rent-seeking behavior by public officials and
increases the level of corruption.
Religiousness
The Merriam Webster Dictionary defines religiousness as “relating to or
manifesting faithful devotion to an acknowledged ultimate reality or deity.”
Religion and economic performance – Weber (1904/1978) argued that
religious practices and beliefs had important consequences for econom-
ic growth. He suggested that the difference between Catholicism and
Protestant doctrines is that while Catholicism focused on “good works”
as the exclusive path to salvation, the Protestant ethic introduced the
idea of work as a calling. Martin Luther (1483-1546) emphasized the no-
tion that doing worldly work is not a distraction from godly life. McClel-
land (1961) proposed a more detailed process in which the Protestant
values lead to greater emphasis among parents teaching their children
to have high standards and to value independence, traits that resulted in
higher need for achievement and better national performance. Religion
is an important component of the national culture of a country. Some
recent studies find that religion is an important determinant of economic
behavior [Barro and McCleary (2003); Dyck and Zingales (2004); Guiso
et al. (2003); Stulz and Williamson (2003); Treisman (2000)]. Recently, re-
ligious belief has been tested to influence a nation’s economic growth
in the wider context of religions in general rather than focusing on the
two Christian mainstreams alone [Barro and McCleary (2003)]. They have
concluded that economic growth responds positively to religious beliefs.
Religiousness and corruption – LaPorta et al. (1997) have found that
“holding per capita income constant, countries with more dominant
92 hierarchical religions have less efficient judiciaries, greater corruption,
lower quality bureaucracies, higher rates of tax evasion, lower rates of
participation in civic activities and professional association, a lower level
for importance of large firms in the economy, inferior infrastructure, and
higher inflation.”
Per capita gross domestic product (GDP)
GDP is the market value of a country’s output attributable to factors of
production located in the country’s territory. GDP per capita is the coun-
try’s gross domestic product divided by the population’s size. GDP per
capita figures can be misleading because they do not consider differ-
ences in the cost of living in different countries. To account for those
differences one can adjust the GDP per capita by purchasing power. Pur-
chasing Power Parity (PPP) adjustment allows for a more direct compari-
son of living standards in different countries. The base for the adjustment
is the cost of living in the U.S. [Hill (2004)]. In this study we have used
GDP (ppp) as our measurement to compare economic performance in
sixty-two countries.
GDP and corruption – Lesnik and Blanc (1990) describe scarcity as the
father of rent seeking. The level of income could be one of the major eco-
nomic variables that affect the level of rent seeking through its impact on
scarcity. In many poor developing countries, people do not have enough
financial resources to support their families in a normal way. As Staw and
Szwajkowsky (1975) argue, people will understandably take any action,
including engaging in illegal activities, when they experience difficulty ac-
quiring the resources necessary for survival. The situation puts pressure
on public servants as well to find alternative sources of income. Along the
line of efficiency-wage mechanisms, Kraay and Van Rijckeghem (1995)
found that when civil servants are not paid enough, they are forced to use
their position and power to seek rent. As Leiken (1996) points out, when
government does not pay civil servants decent salaries, they cannot buy
a layer of insulation against patronage and bribery. In some cases, once
a government subscribes to the view that civil servants earn sufficient
income from corruption, they may reduce civil servants’ pay as a con-
sequence [Lambsdorff (1998)]. This can cause a vicious cycle in some
countries and encourages illegal activity by civil servants. GDP (ppp) per
capita was not found to be related to a country’s level of corruption [Park
(2003)]. When GDP was used as a control variable it did not change the
positive relationships between in group collectivism and humane orienta-
tion and corruption [Seleim and Bontis (2009)].
GDP and religiousness – with exception of the U.S., richer nations tend
to place less importance on religion [The Pew Research Center (2002)].
One explanation for that finding has been offered by Larry Witham of the
Washington Times: “... high rates of professed belief often have been at-
tributed to religious freedom and separation of church and state, whereas
in most other countries a state-established religion or a secular state
policy has been enforced” [Withan (2002)].
The Capco Institute Journal of Financial Transformation
Cultural, Political, and Economic Antecedents of Country Risk in Sixty-Two Countries

Corruption
Corruption has been defined in many different ways. Even though many
articles devote their entirety to this subject alone [Gardiner (1993);
Heidenheimer et al. (1989); Dolan et al. (1988)], there is little consensus
about its definition.
Bureaucracy and corruption – theories of corruption range from cor-
ruption being induced as a product of bureaucratization in countries such
as Britain, the U.S., and other capitalist industrialized countries, to cor-
ruption as a part of a permanent bureaucratic inertia, and “mal-admin-
istration,” in developing countries. However, both these viewpoints rec-
ognize that corruption is fundamentally a problem of governance [Park
(2003)]. Corruption thrives where states are too weak to control their own
bureaucrats, to protect property and contract rights, and to provide the
institutions that underpin an effective rule of law. Park (2003) has found
economic freedom to predict a country’s level of corruption.
Corruption and economic performance – Glynn et al. (1997) argue that
corruption impedes economic development and distorts international
Methods
Measurements
Cultural values – The GLOBE’s [House et al. (2004)] scores on the nine
dimensions of culture described earlier have been used in this study. The
GLOBE study produces two set of scores, one for society practice on
each dimension and the second for society value on each dimension.
While the two dimensions measure people perceptions, there are dif-
ferences between the two which are demonstrated in the following two
questions:
Practice – in this society students are encouraged to strive for continu-
ously improved performance;
Value – I believe that teen aged students should be encouraged to strive
for continuously improved performance. In our study we have adopted
the societal practices (perceived norms) rather that the societal values
(desirable norms) for the 62 countries.
H Independent variable Relationship Dependent variable

trade and investment flow. It also undermines the very foundation of mul- H1: Power distance Positive Religiousness

tilateralism, which is the backbone of free world trade. The World Bank H2: Power distance Positive Corruption

and OECD denounce corruption as one of the major problems faced by H3: Power distance Negative GDP

a globalized world economy, and recently started to take the initiative in H4: Group collectivism Positive Corruption

combating corruption. Most recently, Zhao et al. (2003) found a negative H5: Group collectivism Negative GDP

relationship between the level of corruption and inward foreign direct in- H6: Assertiveness Positive Corruption

vestment. H7: Assertiveness No relation GDP

H8: Uncertainty avoidance Positive Corruption

Country risk H9: Uncertainty avoidance Positive GDP

Country risk is a measure that predicts the likelihood that political, eco- H10: Institutional collectivism Positive Religiousness

H11: Institutional collectivism Negative Democracy

nomic, and financial forces will cause drastic changes in a country’s
H12: Institutional collectivism Positive GDP
business environment that will adversely affect the profit and other goals
H13: Humane orientation Positive Religiousness
of a particular business enterprise [Hill (2004)]. There are five common
H14: Humane orientation No relation Democracy
measures of country risk: political risk, financial risk, economic risk, com-
H15: Humane orientation Negative GDP
posite risk indices, and country credit ratings. Country risk measures are
H16: Performance orientation Positive Democracy
related to future equity returns so that the higher the risk the lower the
H17: Performance orientation Negative Religiousness
return on investment [Erb et al. (1996)]. Borio and Packer (2004) have
H18: Performance orientation Positive GDP
found country risk to be negatively related to good macroeconomic and
H19: Future orientation Positive Democracy
structural policies.
H20: Future orientation Positive Religiousness

H21: Future orientation Positive GDP

Hypotheses
H22: Gender egalitarianism Positive Democracy
The relationships suggested between dimensions of culture and democ-
H23: Gender egalitarianism Negative Religiousness
racy, religiousness, GDP, corruption, and country risk call for the testing
H24: Gender egalitarianism Positive GDP
of many hypotheses. Because of the unusually large number of hypoth-
H25: Democracy Negative Corruption
eses generated by the model the hypotheses are presented in Table 1.
H26: GDP Negative Corruption

H27: Religiousness Positive Corruption

Not all possible combinations of relationships between variables are offered
H28: Corruption Positive Risk
as hypotheses. Rather, only those relationships that were corroborated in
the past in partial models are presented here for empirical investigation. Table 1- Summary of the hypotheses 93
 Corruption – several different data sources are available for the degree
of corruption in a country. One of them is the CPI (Corruption Perception
Index) developed by Transparency International, which ranks 85 coun-
tries and has been published annually since 1995. The validity and reli-
ability of the CPI index has been endorsed by Lancaster and Montinola
(1997), and the index has been widely used in recent studies [Husted
(1999); Swamy et al. (1999)]. However, the “reversed” scale of TF’s CPI
index (Corruption free = 10 and total corruption = 0) can cause a problem
when interpreting statistical results. Extra caution is needed to interpret
the coefficient signs in statistical results because a negative coefficient
sign means that the factor is positively related to the degree of corruption
in a country.
GDP per capita – for national income, GDP (ppp) per capita data are
used to eliminate the size effect. The data for these variables are drawn
from the World Development Indicators published by the World Bank
(1999).
Country risk – the measure used here to estimate countries’ combined
political, financial, and societal risks has been offered by OECD (2005).
OECD uses the Kneepan Package as a system for assessing country cred-
it risk and classifying countries into eight country risk categories (0 - 7). The
Country Risk Classification Method measures the country credit risk, i.e.,
the likelihood that a country will service its external debt. The classifica-
tion of countries is achieved through the application of a methodology
comprised of two basic components: (1) the Country Risk Assessment
Model (CRAM), which produces a quantitative assessment of country
credit risk, based on three groups of risk indicators (the payment ex-
perience of the participants, the financial situation, and the economic
situation); and (2) the qualitative assessment of the model’s results, con-
sidered country-by-country to integrate political risk and/or other risk
factors not taken (fully) into account by the model. The details of the
CRAM are confidential and are not published. The final classification,
based only on valid country risk elements, is a consensus decision of the
sub-group of country risk experts of the participating export credit agen-
cies. The sub-group of country risk experts meets several times a year.
These meetings are organized so as to guarantee that every country is
reviewed whenever a fundamental change is observed and at least once
a year. Whilst the meetings are confidential and no official reports of the
deliberations are made, the list of country risk classifications is published
after each meeting.
Democracy – the Freedom in the World (www.freedomhouse.com) sur-
vey provides an annual evaluation of the state of global freedom. The
survey, which includes both analytical reports and numerical ratings of
countries and select territories, measures freedom by assessing two
broad categories: political rights and civil liberties. Political rights enable
94 people to participate freely in the political process. This includes the right
to vote and compete for public office and to elect representatives who
have a decisive vote on public policies. Civil liberties include the freedom
to develop opinions, institutions, and personal autonomy without interfer-
ence from the state.
Freedom House assigns each country and territory a political rights and
civil liberties rating, along with a corresponding status designation of
“free,” “partly free,” or “not free.” The survey does not rate governments
or government performance per se, but rather the real-world rights and
freedoms enjoyed by individuals as a result of actions taken by both state
and nongovernmental actors. The survey team does not base its judg-
ment solely on the political conditions in a country or territory (i.e., war,
terrorism), but on the effect that these conditions have on freedom.
Freedom House does not maintain a culture-bound view of freedom.
The methodology of the survey established basic standards drawn from
the Universal Declaration of Human Rights. These standards apply to all
countries and territories, irrespective of geographical location, ethnic or
religious composition, and level of economic development.
Religion – The Pew Research Center conducted a poll whose results
were released on the 19th of December 2002 that questioned whether
people around the world consider religion to be personally important [The
Pew Research Center (2002)]. Results (percentage of adults for whom
religion is important) showing the balance of interest in secularism and
religion were reported from 41 countries. Among the five countries in
which religion is considered most important, four have been involved in
recent religiously based conflicts in which persons of one religion en-
gage in mass murder of those of another religion. Countries in which less
than 60% of the public considers religion to be important have been free
of inter-religious conflict, with the exception of the Protestant-Catholic
“troubles” in Northern Ireland.
Statistics
Pearson Moment Correlations were run for all variables included in the
model. This procedure allows us to investigate the direct relationships
between all the variables. Five step-wise regression analysis processes
were run. In the first stage all variables, namely, nine cultural dimen-
sions, religion, democracy, corruption and GDP, were regressed along
the dependent variable of country risk. In the second stage, eight cultural
dimensions (institutional collectivism was omitted), religion, democracy,
and GDP were regressed along the independent variable of corruption. In
the third stage, the same variables were regressed along the dependent
variable of institutional collectivism. In the fourth stage, the eight cultural
dimensions were regressed along the independent variable of religion.
In the fifth stage the same eight variables were regressed along the de-
pendent variable of democracy. These procedures, while losing some
information, have focused the analysis on the main relationships between
the variables, thereby increasing the chances for causal relationships.
The Capco Institute Journal of Financial Transformation
Cultural, Political, and Economic Antecedents of Country Risk in Sixty-Two Countries

Results Cultural values Social institutions Business practices Performance

Correlations between the variables are presented in Table 2. Humane orientation Religiousness
(+.57) (+.26)

Group collectivism Democracy

(-.66) (-.58)
As indicated in Table 2, country risk is positively correlated with religion
+.26 Corruption
Performance orientation
(.61), group collectivism (.61), and negatively correlated with uncertainty (+.83) (+.89)

Institutional collectivism
avoidance (-.53), future orientation (-.38), and per capita GDP (-.37). Cor- Uncertainty avoidance
(-.54) (-.23)
Country risk

ruption is positively correlated with country risk (.86), group collectivism

(.71), religion (.65) and humane orientation (.41), and negatively correlated
with uncertainty avoidance (-.54), future orientation (-.45), and per capita
GDP (-.37). Institutional collectivism (institution building) is positively cor-
related with future orientation (.46), performance orientation (.43), and
humane orientation (.43), and negatively correlated with power distance
(-.43), and assertiveness (-.43). Religion is positively correlated with hu-
mane orientation (.57), and group collectivism (.49). Democracy is posi-
tively correlated with uncertainty avoidance (.42), future orientation (.36),
and per capita GDP (.36), and negatively correlated with corruption (-.82),
country risk (-.73), group collectivism (-.66), religion (-.45), and power dis-
tance (-.39). Following these correlations, variables have been included
in a set of stepwise regression analyses. The results for the regression
analyses are presented in Table 3.
Five models of Stepwise Regression have yielded the following results: in
the first model country risk has been significantly explained by corruption
(B = .89; p < .001) and by institutional collectivism (B = -.23; p<.03). In the
second model corruption has been significantly explained by democracy
(B = .58; p < .001), by religion (B = .26; p < .026) and by group collectiv-
ism (B = .26; p < .04). In the third model religion has been significantly
Figure 1 – An empirical model of the relationships between cultural
dimensions, religiousness, democracy, corruption and institutions, and
country risk (all standardized coefficients are significant).
explained by humane orientation (B = .57; p < .005). In the fourth model
democracy has been significantly explained by in-group collectivism (B
= .66; p < .001). In the fifth model institutional collectivism has been sig-
nificantly explained by performance orientation (B = .83: p < .001) and by
uncertainty avoidance (B = .54; p < .027).
The results indicate that per capita GDP (ppp) does not influence a coun-
try’s risk; humane orientation influences religiousness which, in turn, in-
creases corruption; group collectivism directly and negatively decreases
democracy and increases corruption; performance orientation increases
and uncertainty avoidance decreases institutional collectivism; corrup-
tion increases a country’s risk and institutional individualism decreases
a country’s risk. All together 10 out of the 28 hypotheses have been cor-
roborated. These findings are statistically significant.

DEM COR RSK RLG GDP ICL GCL HMN UCA PDS ASS PRF FUT

DEM

COR -82

RSK -73 86

RLG -45 65 61

GDP 36 -37 -37 -29

ICL 00 -14 -19 -13 08

GCL -66 71 61 49 -41 -12

HMN -33 41 31 57 -20 43 27

UCA 42 -54 -53 -05 27 40 -61 00

PDS -39 37 34 -05 -14 -43 55 -15 -50

ASS 03 05 15 13 00 -42 08 -42 -07 16

RF 16 -23 -19 17 06 43 -14 25 58 -36 49

FUT 36 -45 -38 24 26 46 -47 07 76 -52 64 63

GDR 22 -21 -10 -21 14 -01 -20 -15 -06 -30 -07 -13 -06

DEM – Democracy; COR – Corruption; RSK – Country risk; RLG – Religiousness; GDP – Per capita gross domestic product; ICL – Institutional collectivism; GCL – Group collectivism; HMN –
Humane orientation; UNA – Uncertainty avoidance; PDS – Power distance; ASS – Assertiveness; PRF – Performance orientation; FUT – Future orientation; GDR – Gender equality. N (all variables but
Religiousness) = 58-62; N (Religion) =22; All values > .36 are significant at .005; All values >.45 are significant at .001

Table 2 – Correlations among variables 95

 Standard Adjusted-
coefficient beta t Significance R R-squared R-squared SE (estimate)

Model 1 RSK

Step 1 Constant 0.67 0.50 0.89 0.79 0.79 1.16

COR 0.89 8.43 0.00

Step 2 Constant 2.46 0.02 0.92 0.84 0.82 1.04

COR 0.88 9.28 0.00

ICL -0.22 -2.37 0.03

Model 2 COR

Step 1 Constant 2.13 0.05 0.85 0.72 0.71 19.57

DEM 0.85 7.18 0.00

Step 2 Constant 0.08 0.94 0.91 0.81 0.79 16.51

DEM 0.69 6.22 0.00

REL 0.34 3.01 0.00

Step 3 Constant -2.11 0.05 0.92 0.85 0.83 15.05

DEM 0.58 5.06 0.00

REL 0.26 2.43 0.03

GCL 0.26 2.21 0.04

Model 3 RLG

Step 1 Constant -2.01 0.05 0.57 0.33 0.29 24.48

HMN 0.57 3.11 0.00

Model 4 DEM

Step 1 Constant -4.89 0.00 0.66 0.44 0.43 33.21

GCL 0.66 6.77 0.00

Model 5 ICL

Step 1 Constant 2.24 0.36 0.49 0.24 0.21 0.38

PRF 0.49 2.55 0.19

Step 2 Constant 2.69 0.01 0.65 0.42 0.36 0.34

PRF 0.83 3.71 0.00

UCA -0.54 -2.39 0.03

DEM – Democracy; COR – Corruption; RSK – Country risk; RLG – Religiousness; ICL – Institutional collectivism; GCL – Group collectivism; HMN – Humane orientation; UNA – Uncertainty
avoidance; PRF – Performance orientation

Table 3 – Stepwise regression analysis

Discussion and conclusions
This study empirically demonstrates that culture and institutions have the
potential to influence a country’s business environment. More specifical-
ly, cultural dimensions such as in-group collectivism, humane orientation,
performance orientation, and uncertainty avoidance impact a country’s
democracy, religion, and institutions that, in turn, influence a country’s
degree of corruption and credit risk. The standard of living in a certain
country, as measured by per capita GDP, does not influence its level of
corruption nor does it impact its credit risk. This finding provides empiri-
cal support to early students of culture argument that culture influences
management in organizations [Ajiferuke and Boddewyn (1970a); Farmer
96 and Richman (1965); Haire et al. (1966); Harbison and Myers (1959)].
Humane orientation is a cultural value that urges people to generally be
very tolerant of mistakes, kind, generous, and always look towards oth-
ers with a helping hand. It is not surprising that it correlated highly with
religion since in each religion there are ingredients of preaching for tol-
erance and love. What is unclear about the relationship between those
two variables is which one is the cause and which is the result. Further
analysis is needed to answer this question.
Of the nine different cultural dimensions tested, in-group collectivism has
proven to be a very significant determinant of democracy. In-group col-
lectivism urges people to stick to their small group at the expense of
the greater public. It encourages people to positively discriminate the
The Capco Institute Journal of Financial Transformation
Cultural, Political, and Economic Antecedents of Country Risk in Sixty-Two Countries
in-group, which practically means discriminating against the out-group.
When a country’s social system is comprised of families, tribes, or groups
of different ethnic background and denomination, and each sticks to its
own, it is hardly surprising that those groups find difficulties in cooperat-
ing with each other in building an equal and free democratic society.
Both performance orientation and uncertainty avoidance were found to
be related to institutional collectivism, which in turn, was found to be
related to country risk. The establishment of the variable of institutional
collectivism as a moderator between other cultural dimensions and a
country’s risk calls for the redefinition of the concept of institutional col-
lectivism. House et al. (2004) have defined it as a cultural value that en-
dorses the prioritization of the group’s needs over the individual’s needs.
The operational variables used to measure the concept include issues
such as: “the economic system in this society is designed to maximize
individual interest” (reversed); “the pay and bonus system in this orga-
nization is designed to maximize individual interest” (reversed); and “in
this organization group members take pride in the individual accomplish-
ment of their group.” It is possible that institutional collectivism does not
actually measure a value but it is rather a structural measurement that
measures the existence of group’s institutions. It has been interpreted
as such in this study but more inquiry into the nature of institutional col-
lectivism is called upon.
GDP per capita was found to be unrelated to a country’s corruption level
in Park’s (2003) and in Seleim and Bontis (2009) studies. This finding has
been replicated here. Moreover, GDP per capita has been significantly
correlated with some of the independent variables – cultural dimensions
such as in-group collectivism, uncertainty avoidance, and future orienta-
tion – as hypothesized. However, further investigation that used regres-
sion analysis procedure has not corroborated the relationship between
per capita GDP and the dependent variable of a country’s risk.
In this study, the measure for corruption has correlated so highly with the
measure for a country’s risk that it seems that most people who evaluate
the risk are mostly influenced, even if unconsciously, by the level of cor-
ruption in the country. Since a country’s risk is probably established by
perceptions this study has corroborated the relationship between these
two variables one more time.
The study has some limitations. First, it is based on data that have been
complied over a certain number of years and therefore the time line of the
model is not crystallized. Some of the data were collected by the GLOBE
study between the years 1990 and 2000 and the data for the countries
level of per capita GDP, religiousness, and corruption have been aggre-
gated between 2002 and 2006. Yet, there is no reason to believe that
most, if not all, of these measures are stable over time. Second, despite
the use of regression analyses procedures to analyze the relationships
between variables the ability to explain causality of those relationships is
limited. The model is exploratory by nature and the lack of theory about
some aspects of the model makes it difficult to prove that the relation-
ships between variables depicted here are unidirectional. Third, for par-
simony reasons the model includes only a selected number of variables
and ignores others that might add to its explanatory power.
Despite those limitations, the model is a first of its kind in its comprehen-
siveness and the number of countries analyzed. It involves variables that
are at the essence of our social debate such as culture and democracy,
and it provides partial answers to questions such as “how ready is a
country to become democratic?” and “how could we reduce a country’s
credit risk?” Moreover, while common answers to these frequently asked
questions involved economic, political, and even military measures, the
answers provided by this study are societal and cultural.
Future research may use the model of the influence of cultural values
on democracy, corruption, and institution to calculate a country’s risk
by measuring people’s attitudes. This type of work has a great potential
for financial institutions that are constantly searching for new and better
methods for country credit risk assessment. Moreover, political scien-
tists and government research groups may use the model to estimate
the likelihood of a non-democratic country becoming democratic by
measuring the strength of societal values such as in-group collectivism
that have the potential to hamper efforts for dissemination of democratic
principles. Business researchers may replace the dependent variables of
corruption and risk by other valuable business measures such as level of
entrepreneurship or innovation. Lastly, educators may use the model to
assess those country’s values that need to be reformed in order to en-
hance democracy, minimize corruption, improve institution building, and
consequently enhance a country’s access to international credit.
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 Individual Selected Article from Journal 34

Editor
Shahin Shojai, Global Head of Strategic Research, Capco

Advisory Editors
Cornel Bender, Partner, Capco
Christopher Hamilton, Partner, Capco
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Franklin Allen, Nippon Life Professor of Finance, The Wharton School,
University of Pennsylvania
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advisor to the FSA
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Banking, Morgan Stanley
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Graduate School of Business, University of Chicago
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Business, New York University
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