This paper deals with the direct and indirect influence of cultural variables on the differences in the level of business ownership across more than twenty Western nations and Japan. First, simple correlation analysis yields evidence that dissatisfaction with society and with life in general are positively correlated with the prevalence of entrepreneurship. Countries where people are less satisfied have more business owners. These are often societies with stronger uncertainty avoidance. Second, in regressions including both cultural and economic variables, dissatisfaction comes out again as a major determinant of business ownership across nations. Also a negative relationship between prosperity and business ownership is found. Third, we repeat the regressions for two distinct cultural country clusters. In the group of high-uncertainty avoidance countries a strong negative relationship between GDP per capita and the level of entrepreneurship is found, suggesting that push factors prevail in this cultural environment. In a group of low-uncertainty avoidance countries no significant influence of per capita income is found, but the profits associated with being self-employed turn out to be a significant pull factor.

Definitions

There is no generally accepted definition of entrepreneurship. An entrepreneur or business owner¹ can fulfil several different functions, ranging from coordination and allocation of economic resources to perception or creation of new economic opportunities. See Wennekers and Thurik (1999) for an overview. In the present paper we adopt a pragmatic approach and we will equate the concepts entrepreneurship, business ownership or self-employment, and an entrepreneur will simply be understood to be the owner/manager of either an unincorporated or an incorporated business.

Business Ownership Rates Across Countries and Over Time

The prevalence of entrepreneurship, expressed as the percentage of business owners within the labour force, differs strongly between countries. Even within the relatively homogeneous subset of modern industrialised countries (the OECD) the diversity is considerable. In Greece almost one in five out of the labour force is a business owner whereas in Finland fewer than one in fifteen operate a business of their own (average rates 1974–1994). A well-known approach is that this disparity may be explained by differences in prosperity (Kuznets, 1971). The richer the country is, the fewer business owners there are. The first cracks in this negative relationship appeared in the late seventies (Blau, 1987) and, in fact, the (negative) relationship now seems to be breaking down where several of the most prosperous countries show a resurgence of entrepreneurship rates in the past decades. See Carree et al. (2001) for a literature based justification and an econometric analysis of the relationship between economic development and entrepreneurship.

Research Questions

At the individual level the decision to become a business owner can be viewed as the outcome of a process of occupational choice. Personal characteristics as well as cultural, institutional and economic variables will influence these individual choices. An aggregation of these occupational choices at the level of countries shows the cumulative and interactive influence of the different determinants (Verheul et al., 2001). In the present paper we will focus on one potential determinant of entrepreneurship, i.e. the role of culture, which to date has received only scant attention.

Our first question pertains to direct cross-sectional relationships between cultural characteristics and the prevalence of business ownership at the country level. Our second question considers the explanatory power of cultural and economic variables in regressions of business ownership rates for the period since 1974. Our third question deals with a possible indirect role of cultural characteristics through their influence on the relationships between economic variables and entrepreneurship.

Framework

Taking a broad view on the prevalence of business ownership a distinction can be made between the supply side (labour market perspective) and the demand side (product market perspective) of business ownership. On the supply side demographic, cultural and economic factors influence the occupational choices of individuals while on the demand side technological and economic trends determine the carrying capacity² of the market with respect to the viable number of enterprises. Additionally, institutions such as incentive structures, regulation of entry, and support of new and/or small enterprises play a role in determining the prevalence of business ownership.³ We elaborate only the supply side of business ownership, because we assume that cultural characteristics will have a greater influence on occupational choices than on the carrying capacity of the market. The supply side of business ownership is rooted in micro-economic decision making with respect to occupational choice. Our considerations will start at the individual level, but we will aggregate to the macro-economic level.

Demographic and Personal Characteristics

As propensities towards business ownership differ between demographic groups, several characteristics of the population such as (changes in) the age distribution and the female labour participation rate are relevant. People in the middle age cohorts have the highest prevalence of incumbent business owners. However, prevalence rates of nascent entrepreneurship are highest in the age group between 25 and 34. However, future cultural and institutional changes may affect the propensities to start a business for each age category. Next, personal characteristics, such as skills and attitudes, may influence the decision to prefer business ownership to wage employment. A prominent example of such a characteristic is the degree of risk aversion (Kihlstrom and Laffont, 1979, and Van Praag, 1996, chapter 5). Also the availability of role models and perceptions of desirability may play a role in this respect.

Push Factors

A major factor pushing people towards self-employment is job dissatisfaction (Brockhaus, 1982). More generally the state of being out of place or between things (Shapero and Sokol, 1982, p. 81) often precedes the formation of a company. A major example of such a “negative displacement” stimulating self-employment is (threat of) unemployment. However, when structural unemployment is very high this may also cause a feeling of malaise and discourage business ownership (Hamilton, 1989 and Meager, 1992). Recent indications of a positive effect of unemployment on the prevalence of self-employed (net entry) are reported in Audretsch and Thurik (1998), Audretsch et al. (2000 and 2001) and Carree et al. (2001). Finally, the so-called replacement ratio between unemployment benefits and (average or minimum) wages may also influence the propensity of unemployed persons to become self-employed.

Pull Factors

A major economic pull factor is the expected entrepreneurial income versus expected wage income. Obviously, the better the prospects of entrepreneurial income as compared to the wage income of an employee, the lower the opportunity costs of business ownership and the more people will be attracted to becoming self-employed. However occupational choices are also influenced by the risks of business ownership (failure) versus those of wage employment (dismissal). In this respect the deregulation of labour markets taking place in many industrial countries may lower the opportunity costs of business ownership. Acemoglu (1995) argues that reward structures can be both pecuniary and non-pecuniary (respect and status).

Other Factors

Van Praag (1996) distinguishes between willingness (depending on both individual preferences and alternative options) and opportunity (including both entrepreneurial abilities and the availability of financial resources). Growth in average wealth (including equity, inheritances, development of house prices etc) may contribute to the supply of business ownership as more people have financial opportunities to start a business. Finally, regulations may function as a barrier to business ownership. Research in the Netherlands indicates that business licensing influences the number of new start-ups (Bosma et al., 1999).

The data used in this study come from two databases: a database with business ownership rates and other economic variables, collected by EIM, and a database with mainly cultural variables, collected by the Institute for Research on Intercultural Cooperation (IRIC).

There are several measures of entrepreneurship for a country at a certain time. In the present paper we will consider the number of business owners per labour force. The EIM database used in our paper (COMPENDIA)⁴ contains the number of business owners for 23 countries and for the even years of the period 1972–1998. The 23 countries are 18 European countries (EU countries including Iceland, Norway and Switserland) and USA, Japan, Canada, Australia, and New Zealand.

IRIC’s database DECOR⁵ contains many cultural and some economic and demographic variables. The most important sources of cultural variables are Hofstede (1980) and the European Values Studies project. Furthermore, IRIC provides two variables (in time series) corresponding with the dissatisfaction issue discussed before, viz. dissatisfaction with life (the percentage “not at all satisfied with life”) and dissatisfaction with democracy (the percentage “not at all satisfied with the way democracy works”). These variables are collected from the Eurobarometer Trends (1994), and are available for twelve European countries. For a more detailed account again see Wildeman et al. (1999).

Role of Dissatisfaction

Most of the studies in the entrepreneurship literature focus on factors that cause individuals to opt for self-employment. Relationships found at the individual level may also be valid at the societal level, but this is not necessarily always the case. In this paper we are particularly interested in two variables: dissatisfaction and uncertainty avoidance. We will first consider their influence at the individual level and subsequently investigate these influences at the aggregate (societal) level.

Dissatisfaction, as used in the present paper, refers to the self-expressed degree of dissatisfaction of an individual with his or her life. In studies of entrepreneurship one encounters various specific types of dissatisfaction. Brockhaus (1982) asserts that dissatisfaction with previous work experience is closely related to the “entrepreneurial decision.” He finds self-employed to be relatively strongly dissatisfied with the (previous) work itself, with supervision and with opportunities for promotion (but more satisfied with actual pay). Shapero and Sokol (1982, p. 79) assert: “Research data show that individuals are much more likely to take action upon negative information rather than positive, and the data on company formations support that conclusion.” In their final model both pull and push factors contribute to the start-up of a business, but negative “displacements” such as forceful emigration, being fired and being bored or angered predominate. This all fits with what psychology tells us about motivation. In particular individuals with a high sense of self-efficacy are motivated by dissatisfaction. So at the level of the individual, it is probable that a strong dissatisfaction with life in general is associated with a stronger propensity to become self-employed.

What exists at a micro level may also exist at a macro level: do countries where people are in general less satisfied with their life have a higher self-employment rate than other countries? We use aggregated dissatisfaction data to test for the relationship between the average dissatisfaction level within a society and the rate of self-employment in that society. Earlier (Wildeman et al. 1999) we already reported a negative correlation with satisfaction, and a positive one with dissatisfaction. In one of the next sections we will also consider the influence of dissatisfaction within the context of a multiple regression model.

Hofstede’s Cultural Indices

Many publications discussing the relationship between culture and the economy refer to the four cultural indices of Hofstede (1980), viz. power distance (PDI), uncertainty avoidance (UAI), masculinity (MAS), and individualism (IDV). However, the existing hypotheses with respect to the influence of the indices on entrepreneurship, or the hypotheses that can be inferred from indirectly related phenomena, are often contradicting. In the remainder of the present paper PDI-, UAI-, MAS- and IDV- denote a low level of PDI, etc and PDI+, etc a high level of PDI, etc.

For example, Shane (1993) examines the influence of culture on rates of innovation (per capita number of trademarks), and finds that UAI- has a strong influence on innovation, even stronger than per capita income. PDI- and IDV+ are related to innovation as well, though to a lesser extent. Although the relationships with culture are indirect, these results suggest that countries with PDI-, UAI-, and IDV+ are more entrepreneurial and hence may have more entrepreneurs than others. McGrath, MacMillan, and Scheinberg (1992) compare entrepreneurs and non-entrepreneurs across countries and identify certain entrepreneurial values, independent of culture. These values are subsequently associated with PDI+ (this is contradicting with Shane, 1993), UAI-, MAS+ and IDV+. If entrepreneurs indeed hold values corresponding with larger power distance, uncertainty acceptance, masculinity, and individualism, the hypothesis then is that countries with this cultural pattern have more entrepreneurs.

Baum et al. (1993) hypothesise a reverse role of individualism (at the level of countries). The authors argue that not high but low individualism may stimulate business ownership. An individualistic society is more adapted to deal with people who want to do it their own way; both entrepreneurs and non-entrepreneurs might be able to satisfy their motivational needs in a common organisational environment. In a less individualistic society, organisations and institutions do not yield these opportunities and, as a result, people with entrepreneurial needs are more inclined to start a business as they cannot satisfy their needs within the existing structures.

Taken together, there are contradicting hypotheses with respect to the influence of culture on entrepreneurship and/or business ownership. One hypothesis is that PDI-, UAI-, MAS+, and IDV+ stimulate business ownership. This is based on the assumption that countries with this cultural profile have relatively more individuals with entrepreneurial values. However, regarding the rate of self-employment the opposite could also be true. Applying the reasoning of Baum et al. (1993) to all four indices, one could argue that “entrepreneurial” individuals in countries with PDI+, UAI+, MAS-, and IDV- have more difficulties in “doing things their own way,” since organisations and existing structures are less suited for them. Dissatisfied as they are in their situation, they may choose for self-employment to be as independent as possible. This would be concurrent with the dissatisfaction hypothesis as elaborated above.

As regards empirical evidence, we first considered a simple measure of the relationship between culture and entrepreneurial activity: the correlation between cultural variables and the percentage of business owners per labour force. Besides Hofstede’s indices we have also included the indices of Hoppe (1990), which are comparable (though they were collected for a different period, for a smaller set of countries, and for another group of respondents). Although the cultural variables are measured at one point in time only, we correlated them with the number of business owners for each year (the even years between 1974–1994). Table 1 tabulates the results for the years 1974, 1984 and 1994.

Hofstede’s indices power distance and uncertainty avoidance turn out to be significantly and positively correlated with self-employment. This is in line with the dissatisfaction hypothesis: countries with large power distance and strong uncertainty avoidance generate more self-employed. The same holds for individualism, which is indeed negatively correlated, but not significantly, to self-employment. The correlations with masculinity are positive (contrary to the dissatisfaction hypothesis), but not significantly. The correlations between self-employment and Hoppe’s indices have the same sign as the correlations with Hofstede’s indices, but the significance differs. Power distance is the only significant variable. However, the results are not entirely comparable since the Hoppe indices are available for fewer countries (17, whereas the Hofstede indices are given for 21 of the 23 countries). For more details, see Wildeman et al. (1999).

In a different paper (Noorderhaven et al., 1999) we have developed a single-equation macro-economic regression model of business ownership rates, using dissatisfaction, unemployment, the share of labour income, GDP per capita, the female labour share and population density as explanatory variables. In this model dissatisfaction acts as the major so-called push variable. The share of labour income acts as a (negative) proxy for the pull of business profitability, whereas per capita income reflects the opportunity costs of self-employment, or equivalently the countervailing pull of good jobs. Unemployment can act either as a push variable or as an (negative) indicator of business opportunities. Finally, the female labour share and population density are control variables.

In a regression for the European countries in our dataset (for which we dispose of metrics of dissatisfaction), we have found a strong and significant positive effect of dissatisfaction with life or democracy on the level of business-ownership. Table 2 lists our results. These include a significant negative influence of the level of prosperity, and a negative influence of unemployment. This latter result supports the discouragement hypothesis rather than the push hypothesis. Another remarkable result is the positive coefficient for the labour income share. This may indicate reversed causality: high prevalence rates of self-employment depressing business profitability. The regression results regarding dissatisfaction thus confirm the correlations we reported in the previous section of this paper. Furthermore, it can be concluded that inclusion of the dissatisfaction variables affects the influence of the economic variables and that of the controls, not in terms of sign but in terms of size of the coefficient and level of significance. This indirect influence of culture is the subject of the next section.

The above correlations and regressions refer to the direct influence of culture on business ownership. However, culture may also have an indirect role. Subsequently, we have used our model for exploring the possible indirect influence of culture on business ownership, while using an extended dataset of 22 OECD-countries but excluding the dissatisfaction data. In this dataset the following thirteen countries form the cluster⁶ of weak uncertainty avoidance: Denmark, Finland, Germany, Ireland, the Netherlands, Sweden, Great Britain, Norway, Switzerland, USA, Canada, Australia and New Zealand. Another nine countries, i.e. Austria, Belgium, Luxemburg, France, Italy, Greece, Portugal, Spain and Japan, make up the cluster with strong uncertainty avoidance.⁷

One might hypothesise that in cultures characterised by high uncertainty avoidance (UAI+) the pull of good (that is safe and well-paid) jobs will be relatively strong, making an (assumed) negative relationship between average wage level and self-employment stronger than in countries with low uncertainty avoidance (UAI-). Conversely, one may also expect that the effect of business profitability pulling people into business ownership will be stronger in UAI- countries. Of course, hypotheses like these are rather speculative.⁸ Therefore, we have adopted an explorative approach concerning these relationships.

The Pull of Good Jobs in Societies with High Uncertainty Avoidance

First, we consider the relationship between business ownership rates and the level of prosperity. It has been observed in various studies that the business ownership rate tends to decrease as economies become more developed. A low level of prosperity usually coincides with a low wage level, implying little pressure to increase efficiency or the average scale of enterprise. Small firms in crafts and retail trade are therefore dominant in such an economy. A major route for ambitious wage earners to increase their income, then, is to set up shop and become an entrepreneur. Economic development subsequently leads to a rise in wages, which stimulates enterprises to work more efficiently and to reap economies of scale and scope (Chandler, 1990). Clearly, an additional effect of rising wage levels is an increased attraction of wage-employment, increasing the opportunity cost of self-employment (Lucas, 1978). Iyigun and Owen (1998) also argue that fewer individuals are willing to risk becoming an entrepreneur as the “safe” professional earnings rise with economic development.

This trend towards lower rates of self-employment may weaken, or even be reversed at a later stage of economic development, when services become more important and a new rise in self-employment may occur. The advent of information technology and the differentiation of markets into niches lead to the occurrence of diseconomies of scale. An increased emphasis on subcontracting may strengthen this process (Blau 1987; Carree et al., 2001). This may partly explain the present resurgence of entrepreneurship in some of the most highly developed economies (Audretsch and Thurik, 2000 and 2001).

Van Praag (1996, p. 110) has shown that “more risk-averse individuals are significantly less inclined to start as an entrepreneur than others.” For the risk averse the pull of good jobs may be particularly attractive, or stated otherwise, for them the opportunity costs of becoming a business owner will weigh relatively heavily in their occupational choices. At the level of a society strong uncertainty avoidance may thus lead to a larger shift to wage employment when job opportunities improve, than weak uncertainty avoidance. Consequently, we expect a differential impact of the level of prosperity in weak and in strong uncertainty avoidance countries: in countries characterized by strong uncertainty avoidance the negative relationship between the level of prosperity and the self-employment rate will be stronger than in countries characterized by weak uncertainty avoidance.

As is shown in Table 3 GDP per capita was found to have a strong negative effect on the rate of business ownership in the UAI+ countries, whereas it seems to have no effect in the thirteen UAI- countries, thus supporting our hypothesis. By way of preliminary conclusion we interpret our finding as supporting the idea that uncertainty avoidance has a negative impact on business ownership, be it an indirect one.

The Pull of Rising Profits in Societies with Low Uncertainty Avoidance

The factor we consider next is the positive earning differential between self-employment and wage-employment. Potential profits are one obvious reason to choose for self-employment. Individuals may be assumed to compare expected profits and wages when weighing the attractiveness of self-employment versus wage-employment. Some recent theoretical attention for a relationship between earning differentials and the allocation of talent across business ownership and wage-employment can be found in Murphy et al. (1991). Furthermore Acemoglu (1995) provides a theoretical model of the impact of both pecuniary and non-pecuniary reward structures on occupational choices. The potential of high profits as a pull factor for entering self-employment finds some empirical support in Evans and Leighton (1990).

On the other hand self-employment is inherently risky and “there is a positive probability that entrepreneurial activity will result in failure” (Iyigun and Owen, 1998, p. 455). An individual must weigh the prospect of potential high profits with the risk and uncertainty associated with self-employment, and this may be a cause for international differences in the impact of earning differentials on the rate of self-employment. Whereas we expect a positive relationship between earning differentials and self-employment to exist in any society, it may thus be expected to be stronger in societies characterized by weak uncertainty avoidance, since here the relative weight of the risk and uncertainty associated with self-employment will be smaller.

Our empirical results do support this hypothesis regarding the differential effect of profitability, as is indicated in Table 3. In weak uncertainty avoidance countries the labour income share was indeed found to have a negative effect on business ownership. In strong uncertainty avoidance countries a positive effect was found, possibly indicating reversed causality (as discussed in the previous section) to be more likely in these countries.

The prevalence of entrepreneurship, expressed as the percentage of business owners within the labour force, differs strongly between countries. The causes of this disparity are not only economic, but can also stem from cultural differences between countries. Using a unique dataset regarding a large number of OECD countries, we have found a positive correlation between entrepreneurship rates and cultural variables as dissatisfaction and uncertainty avoidance, as well as a negative relationship with per capita income. However, the indirect influence of cultural variables was found to be more complex. In a group of nine high-uncertainty avoidance countries the expected strong negative relationship between GDP per capita and the level of entrepreneurship was indeed found, suggesting that push factors prevail in this cultural environment. On the other hand, in a group of 13 low-uncertainty avoidance countries the negative relationship between business ownership and per capita income seems to have broken down. Instead, the profits associated with being self-employed turn out to be a significant pull factor. We conclude that uncertainty avoidance, which has a direct positive correlation with the prevalence of business ownership, may well have a negative indirect impact.

1. Another term often used to distinguish a business owner from a wage earner is self-employed.

2. See Carree and Thurik (1999).

3. See Verheul et al. (2001) for an extensive survey of determinants of entrepreneurship.

4. COMParative ENtrepreneurship Data for International Analysis. Contact André van Stel at EIM for further information (ast@eim.nl).

5. Database for European Culture Comparison Research

6. The clustering was carried out with the K-means algorithm. See Noorderhaven et al. (1999).

7. No data on Hofstede’s indices are available for Iceland.

8. We are aware that risk and uncertainty are not synonymous, but for practical reasons we use uncertainty avoidance as a proxy for risk aversion.

CONTACT: Sander Wennekers, EIM Business and Policy Research, P.O. Box 7001, 2701 AA Zoetermeer, The Netherlands; (T) (+31) 79 341 3634; (F) (+31) 79 341 5024; awe@eim.nl

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