Gravity and Culture in Foreign Portfolio Investment

Abstract

Using panel regression estimates from the IMF's CPIS survey of foreign debt and equity portfolios across 174 originating and 50 destination countries from 2001 to 2007, we clarify the role of culture and extend the set of cultural variables that have been investigated in gravity models of foreign portfolio investment (FPI). Incorporating Hofstede's cultural dimensions of individualism, masculinity, power distance and uncertainty avoidance, we show how cultural traits in both originating and destination countries, as well as the cultural distances that separate them, interact with geographic distance and other gravity variables to determine global FPI patterns. We find hitherto unreported effects and show that while gravity always deters FPI, aspects of culture and cultural distance can offset this by supporting FPI.JEL classification: F21; F23 ; F37 ; G15

The past is prologue: Moving on from Culture’s Consequences

“…The work here is dominantly in accounting, finance and entrepreneurship and is orientated around the impact of culture on investment and performance. It is best represented by articles such as Aggarwal, Kearney and Lucey (2012) and Ahern, Daminelli and Fracassi (2015). The journals in which these papers appear are very diverse, with two papers appearing in JIBS and four in the Journal of Banking & Finance.…”

Determinants of time varying co-movements among international stock markets during crisis and non-crisis periods

“…The coefficient estimate for the culture variable is negative and significant and indicates that the smaller the cultural difference between the country pairs, the higher the time-varying correlations. Aggarwal et al (2012) and Lucey and Zhang (2010) use a cultural variable to explain the international portfolio flows and argue that cultural distance acts as a proxy for transaction costs, information asymmetries, and lower levels of A c c e p t e d M a n u s c r i p t familiarity, as well as the existence of agency problems that tend to make foreign investors shy away. We observe that during the GFC, the cultural distance variable becomes highly significant with larger coefficients that indicate the GFC transmits through behavioral factors.…”

Developing Linguistic Diversity Management in Teaching IB: Introduction to this Issue

“…In this context, language is viewed as a skill and a productivity tool, so that learning one or more languages is seen as an investment in human capital that can bring economic benefits. For example, studies of international trade show, cross-linguistic communication imposes higher costs than communications in a common language so that trade between countries with different languages is much less than trade between countries with a common language (Aggarwal et al, 2012;Egger and Lassmann, 2012). As a study of the effectiveness of Japanese financial reports translated into English shows linguistic differences also make cross-border communications less efficient and less effective (Aggarwal et al, 1991).…”