What is the relationship between government and business under individualism?

The individualist–collectivist (I–C) dimension has been identified by social psychologists as the most fruitful way of explaining cultural differences across societies (Oyserman et al., 2002, Kashima and Kashima, 2003). An individualist society is one where ties between individuals are loose and everyone is expected to look after themselves and their immediate family while in a collectivist one people are born into tightly knit in-groups that protect them in exchange for unquestioning loyalty (Hofstede and Hofstede, 2010). Individualist societies put rights above duties and emphasize personal control, autonomy and accomplishments while collectivist ones impose mutual obligations and expectations in the context of in-groups that are perceived to have common fates and goals (Hofstede, 1980, Schwartz, 1990, Triandis, 1995).

Because of the potential salience of the I–C dimension, scholars have pondered the extent to which this cleavage can directly explain cross-country differences in the level of economic development. By imposing social obligations on individuals to share their resources with other group members, collectivism may dull individual incentives to maximize income to the detriment of economic growth (Bauer and Yamey, 1957, Lewis, 1965). Moreover, because individualist cultures attach social status to self-reliance and personal achievements while collectivist ones tend to be conformist, then the former are likely to foster, entrepreneurship, innovations and discoveries that are instrumental in promoting long run growth (Gorodnichenko and Roland, 2011, Gorodnichenko and Roland, 2015, Bauernschuster et al., 2012).

In this article I explore the possibility that the I–C cleavage may also impact on economic development indirectly through its effect on government quality that broadly refers to the extent that the state secures private property and the rule of law, is free of corruption and is endowed with an efficient public administration (La Porta et al., 1999). A large literature in economics has identified the crucial role of good government for economic development (for example, North, 1990, Hall and Jones, 1999, Acemoglu et al., 2001, Rodrik et al., 2004). Secure property rights and equality before the law encourage investments in physical and human capital and technology thus setting the foundation for long-run growth (Acemoglu et al., 2005, Voigt et al., 2015). Corruption is inimical to development since it implies the misallocation of public resources both directly, because of the appropriation of public resources for private gain, and indirectly, insofar as it distorts collective decision-making (Shleifer and Vishny, 1993, Bardhan, 1997). And an efficient public administration opens the way for the cost-effective provision of public goods beneficial for sustained economic growth (Mauro, 1995, Evans and Rauch, 1999).1

The connection between the I–C dimension and governance has been made by several authors. For example, Tanzi (1994) describes how individualistic societies tend to apply the “arms length principle” such that public decisions are guided by universalistic and objective criteria rather than personal relationships and cronyism. He suggests that in collectivist societies such behavior would seem alien and even immoral and would conflict with social norms that put family and friends first. In his monumental work on the emergence of rule of law and political order more generally, Fukuyama, 2011, Fukuyama, 2014 describes patrimonial states staffed with family and friends with little or no effort to treat citizens impersonally on the basis of universally applied rules. These states suffer from nepotism, clientelism and corruption. While not strictly framing his discussion in the context of the I–C cleavage, this author identifies the weakening of kinship ties and the emergence of individualism as important milestones on the road towards the attainment of rule of law that refers to both the application of laws equally to all citizens and government's respect of the body of laws in place.

Given the potential link between the I–C dimension and governance, in this article I consider the causal impact of this cultural cleavage on economic development in the presence of government quality. As such, this contribution can be placed in the context of a growing literature examining the effect of different cultural dimensions on governance and economic development (for a review, see Alesina and Giuliano, forthcoming). My empirical results indicate that the I–C dimension impacts on development entirely through its effect on governance. Specifically, the empirical analysis suggests that more individualistic countries tend to be wealthier because this particular cultural trait endows them with better quality governments. My findings are robust to the introduction of a range of potentially confounding variables as well as the application of estimation methods that deal directly with the presence of reverse causality or, in other words, the possibility that economic development may be an important factor driving both individualism and good governance.

The paper is structured as follows. In the next section I review previous work that has discussed the impact of the I–C cleavage on development either directly or indirectly through government quality. Having done so, I present my choice of data and empirical method. After that I report and discuss the main result and explore their robustness. I then conclude the article.

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  What is the relationship between government and business under collectivism?

  It is the idea that a society should act, economically, in the interest of all people for the common good. For instance, collectivist societies would support the idea that the government should fund and operate social programs that are in the best interest of most, if not all people.

  How does individualism affect the government?

  At its heart, individualism is a set of principles centered on the belief in the moral worth of the individual. This means, that economic or political systems based on the principles of individualism favor policies that limit the control of the government and instead allow more freedoms for the individual person.

  Why is individualism important in government?

  Individualism is tied to the notion of minimal government intervention. So that people are free to pursue what they want, with rare exceptions where it may be necessary for the government to intervene so that they don't inflict harm on others.

  How does individualism affect business?

  Individualist leadership believes that an organization's success depends on its ability to foster the unique, creative contributions of the individuals in the workplace. Collectivist leadership stresses on the interests of the company as a whole rather than individual interests.