Fima 12107

National Culture and Profit
Reinvestment: Evidence from Small

and Medium-Sized Enterprises
Sadok El Ghoul, Omrane Guedhami, Chuck Kwok, and Liang Shao
We examine the role of national culturean important informal institutionin the profit reinvestment decisions of small firms in emerging markets. Prior economic development literature
focuses on formal institutions as determinants of growth. However, in emerging markets where
formal institutions are less developed, informal institutions should have more of a direct versus
indirect impact through formal institutions. We find that Schwartzs cultural dimensions of Embeddedness and Hierarchy negatively affect profit reinvestment, and that access to external financing
(strength of property rights) is more important for reinvestment decisions in countries with low
(high) Embeddedness and Hierarchy.
What factors contribute to economic development? Prior research points to two formal institutions: strength of property rights (e.g., Mauro, 1995; Svensson, 1998; Claessens and Laeven,
2003) and access to external financing (e.g., Levine, 1997; Rajan and Zingales, 1998; Levine,
Loayza, and Beck, 2000). Country-level data cannot shed light on which of these institutions
is more important for economic growth because they are highly correlated. Recent research
therefore relies on micro data to disentangle the effects of property rights and external finance,
examining their relative importance in explaining firms profit reinvestment decisions. Johnson,
McMillan, and Woodruff (2002), for instance, demonstrate that weak property rights are the
central impediment to profit reinvestment in five postcommunist countries (Poland, Slovakia,
Romania, Russia, and Ukraine). In contrast, Cull and Xu (2005) find for a sample of firms from
China that access to external financing is an equally important predictor of profit reinvestment,
suggesting that the importance of market-supporting (financial) institutions depends on the level
of development of a countrys economy (McMillan and Woodruff, 2002).1 Extending the above
line of research, in this paper, we examine the relation between an important informal institution
national cultureand profit reinvestment by small firms in emerging markets and we investigate
whether culture affects the relative importance of formal institutions for profit reinvestment
decisions.
We thank an anonymous reviewer, Najah Attig, Narjess Boubakri, Raghavendra Rau (Editor), and Xiaolan Zheng
for constructive comments. We appreciate generous financial support from Canadas Social Sciences and Humanities
Research Council.
Sadok El Ghoul is an Associate Professor at the University of Alberta in Edmonton, Canada. Omrane Guedhami is an
Associate Professor at the Darla Moore School of Business at the University of South Carolina in Columbia, SC. Chuck
Kwok is the Distinguished Business Partnership Foundation Fellow and Professor of International Business at the Darla
Moore School of Business at the University of South Carolina in Columbia, SC. Liang Shao is an Assistant Professor of
Finance at the Hong Kong Baptist University, Hong Kong.
1
These findings on the role of property rights and external finance in profit reinvestment are echoed in Chakravarty and
Xiang (2011) and Ayyagari, Demirguc-Kunt, and Maksimovic (2010, 2011).
Financial Management Spring 2016 pages 37 65
38
Financial Management r Spring 2016
We are interested in the role of national culture for economic growth in emerging economies for
two reasons. First, in such economies where formal institutions are weaker, informal institutions
such as national culture should matter more. Hence, we should be more likely to observe a
direct effect of informal institutions, as opposed to an indirect effect through formal institutions.
Hofstede (2001) shows that national culture and economic development are correlated. However,
the literature has yet to identify a clear channel through which informal institutions affect the
economy. A direct association between culture and profit reinvestment may provide one answer.
Second, because culture is located at the most basic level in a stratified system of institutions
(Williamson, 2000), and formal institutions must be compatible with culture in order to be
effective (Licht, Goldschmidt, and Schwartz, 2005), the effectiveness of efforts to increase the
level of economic development (e.g., by facilitating profit reinvestment) is likely to depend on a
countrys cultural profile.
To proxy for culture, we focus on two cultural dimensions from Schwartzs (1994) widely
accepted framework: Embeddedness, which captures cultural emphasis on conformity and the
status quo, and Hierarchy, which captures cultural acceptance of an unequal distribution of power.
These dimensions may affect reinvestment indirectly, through their correlations with formal institutions such as economic development, political rights, and economic freedom (Schwartz, 2006),
or directly, through their effect on the motivation to invest. To the extent that our sample focuses
on emerging markets with similarly weak formal institutions and a large number of small firms
for which investment policies are largely determined by managers individual investment motivations, culture is more likely to exert a direct effect than an indirect effect on reinvestment. We
obtain profit reinvestment and other firm-level information from the 2002 to 2005 standardized
Enterprise Surveys conducted by the World Bank. Using this information, we construct a sample
of 5,752 small firms from 22 emerging economies.
To control for indirect channels of the effect of culture and distinguish firmversus countrylevel effects, we employ a hierarchical linear model (HLM) following Li et al. (2013). We
find that Embeddedness and Hierarchy are negatively correlated with profit reinvestment,
after controlling for firm characteristics, other informal institutions such as trust and religion, and formal institutions such as economic development, economic freedom, political
rights, transition economy, legal protection, and financial market development. Furthermore,
for the most part, the formal institutions considered do not affect profit reinvestment significantly, which suggests that the documented effect of culture is mainly due to the direct link
and that culture matters for firms in emerging markets characterized by a weak institutional
environment.
To mitigate the endogeneity concern that our results may be driven by a failure to control for
institutions that determine both culture and profit reinvestment, we instrument Embeddedness
and Hierarchy with a countrys latitude as well as its religious composition and fractionalization.
The effect of culture on profit reinvestment persists in the two-stage instrumental variables
regression. We also test whether alternative explanations could be behind a lower motivation
to invest. In particular, firms in high-Embeddedness and -Hierarchy countries may reinvest less
profit because they 1) rely more on external financing such as debt, 2) are subject to greater
constraints on investment, 3) have more internal funds, 4) face less competition, or 5) have
different corporate governance structures. Our analyses do not lend support to these alternative
explanations.
In additional analyses, we investigate whether the two formal institutions previously identified
as determinants of profit reinvestmentnamely, access to external financing and strength of
property rightsaffect profit reinvestment differently across different cultures. We find that access to external financing (strength of property rights) is more important for profit reinvestment
El Ghoul et al. r National Culture and Profit Reinvestment
39
in low (high)-Embeddedness and -Hierarchy countries, consistent with the view that Embeddedness and Hierarchy are associated with a lower motivation to invest. In low-Embeddedness
and -Hierarchy countries where firm owners/managers tend to engage in large-scale investment,
availability of external financing is more important to profit reinvestment decisions. In contrast, in high-Embeddedness and -Hierarchy countries where people tend to invest less, firm
owners/managers may care more about the strength of property rights when reinvesting profit.
These results suggest that regulatory incentives to motivate investment should be based on a
countrys cultural profile.
This study contributes to the literature on economic growth by showing that an informal
institutionnational cultureis a determinant of economic development. The effect of culture
on profit reinvestment suggests a possible explanation for why countries with strong versus weak
formal institutions develop differently. Furthermore, although the literature generally agrees
that formal institutions such as strength of property rights and access to external financing are
conducive to economic growth, the role of culture has yet to receive attention. We show that the
effectiveness of formal institutions depends on the cultural environment.
This study also contributes to the literature on culture and finance. Empirical work in this
area focuses on public corporations from developed and popular developing countries, and is
subject to the concern that the effect of culture is spurious due to a failure to control for important
country-level institutions and firm-level characteristics in the analysis. This study generates
cleaner results on the direct effects of culture by examining small firms from emerging markets.
First, formal institutions in emerging markets tend to be weak, and hence it is less likely that
important institutions are omitted. Furthermore, our HLM distinguishes between country- and
firm-level effects, and hence is more likely to provide evidence on the direct effects of culture.
Second, 75% of our sample of small firms are controlled by families or individuals, whose
investment decisions are more likely to be influenced by cultural values than those of larger firms
with more complex governance structures. Third, globalization may compromise the impact of
domestic culture on corporate decisions, but our sample of small firms is to a lesser extent subject
to this concern (7% of the sample firms have a large foreign shareholder, 8% have holdings or
operations in foreign countries, and 22% have exports).2
The remainder of the paper is organized as follows. In Section I, we discuss the indirect and
direct links between national culture and profit reinvestment decisions. Section II describes the
data, our methodology, and the main results. Sections III and IV address endogeneity and examine
alternative explanations for our results, respectively. Section V examines variation in different
stimuli for profit reinvestment across cultures. Section VI concludes.
I. Possible Links between Culture and Profit Reinvestment

A. Relevance of National Culture
National culture has gained increasing attention in the finance literature.3 Central to a countrys
culture is a set of prevailing values with respect to what is considered good and desirable
2
3
In robustness tests, we show that controlling for foreign ownership and exports does not affect the role of culture.
For example, recent studies document that for public firms from both developed and developing countries, national
culture is associated with leverage (Chui, Lloyd, and Kwok, 2002), dividend payments (Shao, Kwok, and Guedhami,
2010), earnings management (Han et al., 2010), international mergers volume and synergy gains (Ahern, Daminelli, and
Fracassi, 2015), cross-border investment flows (Siegel, Licht, and Schwartz, 2011), debt maturity (Zheng et al., 2012),
corporate investment (Shao, Kwok, and Zhang, 2013), and corporate risk-taking (Li et al., 2013).
40
(Schwartz, 2006) that shape every aspect of a society, from individual behaviors to institutional
arrangements, and distinguish people of one country from those of another (Hofstede, 2001). In
line with the fundamental role of culture, Williamson (2000) proposes a four-level framework
of economic and social analysis in which informal institutions such as culture (Level 1) impose
constraints on formal institutions (Level 2) and in turn governance structures (Level 3) and
resource allocation decisions (Level 4).4
In our context, there are two possible channels through which culture (Level 1) can affect
profit reinvestment decisions (Level 4). First, culture can indirectly affect reinvestment through
its effect on formal institutions (Level 2) that impact firm-level investment decisions. Governance
structures (Level 3) are likely to be less important in this indirect channel because our sample
comprises small firms with similar governance structures.5 Second, because it is impossible to
completely contract upon all contingencies (bounded rationality; see Aggarwal and Goodell,
2009), formal institutions alone cannot govern economic outcomes. Among emerging markets,
where formal institutions are less developed, culture is also likely to have a direct effect on
reinvestment.
To test the effects of national culture, in this paper we proxy for culture using Schwartzs
(1994) framework, as it has country coverage for 22 of the emerging markets in our sample.6
Drawing on social science theories, Schwartz (1994) identifies three basic issues that confront
societies. He captures the extent to which a country emphasizes a particular basic issue using
three corresponding sets of bipolar cultural dimensions: Embeddedness-Autonomy, HierarchyEgalitarianism, and Harmony-Mastery.7
According to Schwartz (1994, 2006), the Embeddedness-Autonomy dimension captures the
relationship between the individual and the group. High-Embeddedness cultures emphasize
the status quo and in-group solidarity, while high-Autonomy cultures encourage individuals
to express their ideas and preferences. The Hierarchy-Egalitarianism dimensions reflect how
a society organizes to preserve the social fabric. High-Hierarchy cultures rely on hierarchical
structures to ensure responsible and productive behavior, and consider the unequal distribution
of power as legitimate, while high-Egalitarianism cultures recognize people as moral equals
and are concerned about the welfare of all. Finally, Harmony-Mastery captures the relationship
between society and the natural and social worlds. High-Harmony cultures emphasize fitting
into the world as it is rather than changing, directing, or exploiting it, while high-Mastery
cultures encourage active self-assertion in order to master and change the natural and social
environment.
Small firms in emerging markets are subject to investment risk due to state expropriation
and weak infrastructure and institutional support. Besides, the small firms in our sample seem
to engage in risky investments, for example, innovations and new products: with the limited
information in the data set, we find that in the last three years, 40% of the firms developed
a major new product line, 60% upgraded the existing product line, and 33% introduced new
technologies that significantly changed the way that main products were produced.8 Thus, in
4
Because cultural values are reinforced by the institutions that themselves are products of the dominant cultural system
(Hofstede, 2001), national culture is stable over time and hence can be used to predict observable behaviors.
5
Of the small firms in our sample, 95% are private firms, 83% have a chief executive officer (CEO) who is the firms largest
shareholder, 73% have a dominant shareholder with more than 50% ownership, and 75% are controlled by individuals or
families. However, we show later that our results are robust to controlling for these governance characteristics.
6
In contrast, Hofstedes (2001) widely used index covers only 13 of the emerging markets in our sample.
Schwartz (1994) distinguishes between two types of autonomy: Intellectual Autonomy and Affective Autonomy.
We also find that these patterns in the data are not significantly correlated with the cultural dimensions.
41
the following subsections, we propose possible links between reinvestment and the first two sets
of aforementioned dimensions, which are associated with the willingness to innovate and take
risk.9 We do not propose a hypothesis for (but do empirically test) the effect of the HarmonyMastery dimensions because it is hard to clearly link the values emphasized by these dimensions
to risk-taking. These dimensions are more likely to exert effects on how a firm interacts with
society, and the scale of investment is not likely a question of fitting into versus mastering the
external world. We do conjecture, however, that the Harmony-Mastery dimensions affect the type
of investment (e.g., environmentally friendly vs. unfriendly, or collaborative vs. competitive), if
not necessarily the scale.
B. Indirect Channels
The development of national institutions that affect firm investment varies across countries.
These formal institutions can reinforce cultural values but at the same time must be compatible
with the local culture to be effective and thus are reciprocally influenced by culture (Schwartz,
2006). Previous literature on culture and corporate finance argues that culture has an indirect
effect on firm behavior through legal and financial institutions (e.g., Li et al., 2013; Boubakri
et al., 2014) such as the level of stock market development (Kwok and Tadesse, 2006) and the
strength of investor protection (Licht et al., 2005).
Table I reports correlations between the cultural dimensions of interest, reinvestment, and
various proxies for formal institutions. For the most part, we do not observe significant correlations
between the cultural dimensions of interest and the level of stock market development, the strength
of legal protection, and the two formal institutions important to profit reinvestment in emerging
markets according to prior research (i.e., access to external financing and strength of property
rights). These insignificant results are not surprising, as in our sample of emerging markets, most
countries have an immature stock market and weak investor protection. For example, annual stock
market trading volume as a percentage of gross domestic product (GDP) is between 10% and
40% for six countries in our sample and less than 10% for the remaining 16 sample countries,
and all of the sample countries except the Philippines are of civil law origin.
However, the results in Table I also show that the cultural dimensions are associated with
other institutions relevant to small firms investment decisions. In particular, Embeddedness
and Hierarchy are significantly negatively correlated with economic development, political
rights, and economic freedom, which in turn are significantly positively related to reinvestment.10
C. Direct Channels
The cultural dimensions of interest can also directly affect the investment motivation of firm
managers. In high-Embeddedness countries, firm owners/managers are likely to have lower
9
We do not focus on uncertainty avoidance from Hofstede (2001) because uncertainty is not the same as risk. As Hofstede
(2001, p. 145) points out, uncertainty avoidance should not be confused with risk avoidance. Risk is often expressed
by probabilities that different events may happen, whereas uncertainty refers to a situation in which one does not know
what may happen. Uncertainty avoidance often leads to formal structures and rules to reduce anxiety about ambiguity
(not risk) and these formal structures do not necessarily reduce risk-taking. In unreported tests, we find that uncertainty
avoidance has an insignificant and negative coefficient for reinvestment and, interestingly, is negatively correlated with
Embeddedness.
10
Table I also shows that Embeddedness and Hierarchy are negatively associated with a countrys banking credit, which
is positively associated with REINVEST. However, we lack a strong theoretical explanation from the literature for why
these two cultural dimensions affect banking credit.
42
Table I. Culture, Profit Reinvestment, and Formal Institutions

This table presents country-level correlations between the cultural dimensions of interest, profit reinvestment,
and formal institutions. REINVEST is a continuous variable based on the reported percentage of profit
reinvestment. EMBEDDED and HIERARCHY are national culture scores from Schwartz (1994). LN_GDP
is the natural logarithm of a countrys GDP per capita in 2000 US$ from World Development Indicators.
POLITICAL_RIGHTS is the political rights index from Freedom House, with larger values indicating higher
political liberty. ECONOMIC_FREEDOM captures the extent to which private firms operate freely in a
country in 2002. CREDIT_MARKET is the total value of banking credit scaled by GDP. STOCK_MARKET
is total value traded in the stock market scaled by GDP. ANTI_DIRECTOR and CREDITOR RIGHTS are
shareholder creditor protection indexes from Djankov et al. (2008) and (2007), respectively. PRIVATE
is a dummy variable equal to one if the firm has shares held by private interests and zero otherwise.
BANK_LOAN is a dummy variable equal to one if the firm has one or more bank loan(s) and zero
otherwise. INFORMAL_PAYMENT is total gifts or informal payments to public officials as a percentage
of total sales. JUDICIAL_ENFORCEMENT is the managers response to On a scale of 16 (fully disagree
to fully agree), I am confident that the judicial system will enforce my contractual and property rights in
business disputes. LN_AGE is the natural logarithm of the number of years the firm has operated in the
country. LN_SIZE is the natural logarithm of the number of permanent and temporary employees of the
firm during the previous survey year. EXPORTER is the percentage of sales exported directly or indirectly.
REINVEST
REINVEST
LN_GDP
POLITICAL_RIGHTS
ECONOMIC_FREEDOM
CREDIT_MARKET
STOCK_MARKET
ANTI_DIRECTOR
CREDITOR_RIGHTS
PRIVATE
BANK_LOAN
INFORMAL_PAYMENT
JUDICIAL_ENFORCEMENT
LN_AGE
LN_SIZE
EXPORTER
0.58
0.53
0.43
0.47
0.05
0.11
0.10
0.29
0.20
0.21
0.00
0.16
0.36
0.02
EMBEDDED
HIERARCHY
0.70
0.84
0.47
0.42
0.50
0.32
0.14
0.30
0.11
0.20
0.17
0.04
0.31
0.40
0.17
0.47
0.58
0.50
0.38
0.52
0.14
0.17
0.32
0.14
0.34
0.20
0.15
0.18
0.34
0.02
Significant at the 0.01 level.

motivation to invest for four possible reasons. First, more (less) Embeddedness is associated
with respect of tradition (creativity). Firm owners/managers in high-Embeddedness countries
are more likely to follow existing norms and practices, and hence invest less in innovations.
Second, in low-Embeddedness countries, corporate policies tend to be autonomous decisions
by firm owners/managers, but in high-Embeddedness countries are to a larger extent subject to
other stakeholders opinions. Embeddedness emphasizes group solidarity among stakeholders,
including shareholders, creditors, and employees, which constrains firm owners/managers
from making risky investment. Consistent with this argument about the association between
Embeddedness and risk-taking, Chui et al. (2002) find that high Embeddedness is correlated
with less firm debt among public corporations, as the financial distress risk of overborrowing
conflicts with a cultural emphasis on group security, and Li et al. (2013) find a negative
43
association between collectivism (a cultural dimension from Hofstede, 2001, that is similar to
Embeddedness) and corporate risk-taking.11,12 Third, low Embeddedness encourages pursuing
individual accomplishments such as through performance-based compensations. This may
also enhance managers motivation for investment and innovation in low-Embeddedness
countries. Fourth, managers must have confidence in their forecasts of future payoffs and their
execution capabilities before making an investment. People tend to be less (more) confident in
high-Embeddedness (Autonomy) countries (e.g., Markus and Kitayama, 1991), implying lower
(higher) motivation to invest in high-Embeddedness (Autonomy) countries.13
Turning to our second cultural dimension, in high-Hierarchy countries, centralized power and
top-down control within a firm stifles innovation because the power and roles of managers and
subordinates are strictly defined in a hierarchical structure. In line with this view, the literature
shows that power distancea cultural dimension in Hofstedes (2001) framework that is similar to
Hierarchyis associated with low innovation (Shane, 1992; Varsakelis, 2001). A second reason
for a negative association between Hierarchy and reinvestment lies in the fact that the stability of
a hierarchical structure (firm) is important to both managers and subordinates. Managers in highHierarchy countries enjoy higher compensation (Tosi and Greckhamer, 2004) and are entitled to
authoritative power. In turn, subordinates expect superiors to provide job security in exchange
for obedience. Therefore, in high-Hierarchy countries, managers at the top of the hierarchy are
likely to be reluctant to commit to risky investment.14 Last, there is less mobility between social
classes in high-Hierarchy societies because people tend to accept unequal distribution of power.
This cultural emphasis may make managers of small and medium-sized enterprises (SMEs) less
motivated to increase investment to challenge large/mature firms.
In summary, due to the association between Embeddedness/Hierarchy and a lower investment
motivation, we predict negative direct effects of these cultural dimensions on profit reinvestment.
We argue that this direct effect should be more pronounced for small firms in emerging markets for
three reasons. First, culture should matter more for firms operating in emerging markets where
formal institutions are weak. Second, because small firms have similar corporate governance
structures, cultural values of firm decision makers are more likely to explain the variation of
11
Firm owners/managers are also embedded in a social network comprising their family members and friends. Hsee
and Weber (1999) argue that in high-Embeddedness countries, this network is stronger and works as a cushion against
possible losses because people tend to help one another within the network, leading to more risky investment. This
argument is echoed by Chui and Kwok (2008) who find that Embeddedness is associated with lower life insurance
consumption. However, this cushion hypothesis should not have first-order importance in emerging markets, because
people cannot always expect to receive considerable support from family members and friends who are very likely to
be also financially constrained. On the contrary, we can argue that knowing that they have obligations to assist, network
members in high-Embeddedness countries may have expectations for less risk-taking.
12
The negative association between Embeddedness and debt suggests that there is greater profit reinvestment in highEmbeddedness countries, in which case the net effect of Embeddedness on profit reinvestment depends on the relative
importance of lower investment motivation and less reliance on external financing. However, the results in Table VI
show that culture does not affect debt usage in new investment among small firms in our sample, hence preference
for leverage is not a major factor driving profit reinvestment. Even if small firms in high-Embeddedness countries use
less debt, a negative association between Embeddedness and reinvestment still suggests lower investment motivations in
high-Embeddedness countries.
13
Chui, Titman, and Wei (2010) find that individualism is positively associated with momentum-trading profits, which
they attribute to individualism capturing overconfidence and self-attribution.
14
A possible counterargument is that managers in high-Hierarchy countries have more authority and thus are more likely to
invest in empire-building. We do not think this is a major concern in our context because small firms in emerging markets
are subject to higher uncertainty and greater risk of state expropriation when expanding their scale of investment, so the
question of whether to build a bigger kingdom still depends on the decision makers risk preference. In high-Hierarchy
countries, a superiors authority is accepted by subordinates who expect the hierarchy to be stable, and hence Hierarchy
should still be associated with lower risk-taking.
44
investment policies. Third, small firms are less affected by globalization and foreign ownership,
suggesting a stronger effect of culture.
II. Data, Methodology, and Main Results

A. Data
We collect firm-level data, including information on profit reinvestment, from the 2002 to
2005 standardized Enterprise Surveys conducted by the World Bank.15 Following a uniform and
stratified random sampling method and covering a wide range of registered small businesses
in numerous sectors across countries, these surveys collect information on the investment environment of economies around the world. Specifically, they provide firm-level data on profit
reinvestment, ownership structure, strength of property rights, and access to external financing,
among other indicators. After removing observations with missing information required for our
study and removing developed countries and countries not covered by Schwartzs cultural index,
we obtain a sample of 5,752 firms across 22 emerging and transitional economies.
B. Methodology
To test our predictions, we run various specifications of the following HLM:16
REINVEST = 0 + 1 Cultural Dimension + 2 Country Level Controls
+ 3 Country Means of Firm Level Controls
+ 4 Demeaned Firm Level Controls + .
(1)
HLM allows us to decompose the explanation of firm-level profit reinvestment into firmversus country-level determinants, and thus increase the fit to our two-level (firm and country)
data. A central feature of HLM is centering firm-level independent variables on their respective
country means while adding in their country means. This has several advantages in our context.
First, the country mean-centered firm-level variables capture within-country variance in firm
characteristics, which helps explain why reinvestment varies within a country, while the country
means of firm-level predictors (together with other country-level controls) capture differences in
institutional environment across countries, which help explain why reinvestment differs across
countries. Second, the addition of firm-level predictors country means captures cultures indirect
effects on profit reinvestment and thus separates out the direct effects on reinvestment. Third,
because firm-level deviations better explain within-country variance of the dependent variable,
their coefficients are more informative about whether the role of firm-level factors (e.g., access
to bank loans and strength of property rights) for reinvestment differs across cultures.
In Equation (1), the dependent variable is REINVEST, a continuous variable that gives the
reported percentage of profit reinvestment. Table II, which provides summary statistics, shows
that REINVEST varies considerably across emerging economies, ranging from 23.41 (Georgia)
15
16
Details on these surveys are available at https://www.enterprisesurveys.org.
We thank an anonymous reviewer for suggesting the use of the HLM framework. In unreported tests, we find that our
results continue to go through using Tobit or ordered logit models.
45
Table II. Profit Reinvestment and National Culture across Countries

This table presents the distribution and averages of key variables used in this paper. REINVEST is a continuous variable based on the reported percentage of profit reinvestment. EMBEDDED and HIERARCHY
are national culture scores from Schwartz (1994).
Country
Bosnia and Herze.
Bulgaria
Chile
Costa Rica
Croatia
Czech Republic
Estonia
Georgia
Hungary
Indonesia
Latvia
Macedonia
Philippines
Poland
Romania
Russian Federation
Senegal
Slovak Republic
Slovenia
Turkey
Uganda
Ukraine
Total/Average
REINVEST
EMBEDDED
HIERARCHY
137
177
535
212
198
258
132
102
372
557
109
122
168
885
422
438
128
104
175
58
113
350
53.26
52.98
58.95
77.21
57.63
47.98
65.08
23.41
74.36
28.54
68.85
60.58
45.60
43.10
64.75
35.76
38.82
53.42
53.59
56.83
36.35
55.29
4.01
3.87
3.64
3.49
3.57
3.59
3.81
4.12
3.60
4.27
3.83
3.91
4.03
3.86
3.78
3.81
4.45
3.82
3.71
3.77
4.23
3.93
1.73
2.68
2.25
2.29
2.44
2.22
2.04
2.46
1.94
2.56
1.80
2.72
2.68
2.51
2.00
2.72
2.63
2.00
1.62
2.97
2.99
2.56
5,752
50.98
3.85
2.36
to 77.21 (Costa Rica). The primary independent variables of interest are EMBEDDED and
HIERARCHY, which are the scores of the two cultural dimensions of interest.
At the country level, we control for the logarithm of GDP per capita (in 2000 US$) from
the World Development Indicators, because the level of economic development explains much
of the difference in investment environment across countries. We also include country means
of firm-level controls (see next paragraph) to capture cross-country differences in institutional
environment that manifest in firm characteristics.
At the firm level, we control for four groups of variables previously shown to explain profit
reinvestment (Johnson et al., 2002; Cull and Xu, 2005; Chakravarty and Xiang, 2011). First, we
control for PRIVATE, a dummy variable equal to one if the firms shares are held by private
interests, and zero otherwise. Private firms may be subject to less government intervention and
have a higher motivation to invest. We thus expect to see a positive correlation between private
ownership and profit reinvestment. Second, we control for BANK_LOAN, a dummy variable
equal to one if the firm has one or more bank loan(s), and zero otherwise. Access to external
financing can be important because few firms in our sample (< 5%) raise equity to fund new
investment. We find that in our sample, firms do not necessarily exhaust all the internal capital
before using debt: the average profit-reinvestment rate is 57% among firms with one or more
loans. Although the pecking order theory does not work well in our sample, access to external
46
financing can be positively correlated with profit reinvestment to the extent that access to bank
loans represents a large investment scale (Cull and Xu, 2005).17 Third, we control for strength
of property rights using two variables. INFORMAL_PAYMENT is the percentage of total sales
spent on informal payments or gifts to public officials. This measure captures the risk of government expropriation and corruption, an important dimension of strength of property rights. We
expect INFORMAL_PAYMENT to be negatively correlated with profit reinvestment, if current
informal payments to public officials represent the perception of future government corruption
and expropriation. Under high government corruption and expropriation, more investment implies more informal payments when investment is successful but zero refund when investment
fails. Thus, more government corruption and expropriation reduces expected investment returns.
Theoretically, this correlation may instead be positive if informal payments bring more investment
opportunities to the firm. However, only 3% of our sample firms indicate that private payments
to government officials have a major or decisive impact on their business, and thus in our study
INFORMAL_PAYMENT is more likely to proxy for the degree of government expropriation. We
also use JUDICIAL_ENFORCEMENT, which is the managers response to On a scale of 16
(fully disagree to fully agree), I am confident that the judicial system will enforce my contractual
and property rights in business disputes. Judicial enforcement should facilitate investment, but
it may benefit small businesses less because small firms cannot afford the expenses associated
with going to court. Finally, we control for three general firm characteristics, namely, LN_AGE,
the natural logarithm of the number of years the firm has operated in the country; LN_SIZE,
the natural logarithm of the number of permanent and temporary employees during the previous
survey year; and EXPORTER, the percentage of sales exported directly or indirectly.18 Recall
that in the regressions we center the above firm-level controls on their respective country means
(i.e., obtain firm-level deviations).
C. Main Results
In Table III, we report the HLM results on the effects of Schwartzs (1994) cultural dimensions on the profit reinvestment decisions of small firms in emerging markets. In model 1,
we regress REINVEST on the country- and firm-level controls, abstracting from national culture. At the country level, we find that the level of economic development (LN_GDP) has a
positive effect on profit reinvestment (a significant coefficient of 10.296). PRIVATE, INFORMAL_PAYMENT, and LN_AGE also have significant coefficients. It is interesting to observe
that INFORMAL_PAYMENT on the country level has a significant and positive coefficient. This
could be explained by the negative correlation between INFORMAL_PAYMENT and Embeddedness (Table I and notice that when Embeddedness enters the regression in model 2, INFORMAL_PAYMENT loses its significance). It is also possible that INFORMAL_PAYMENT on the
country level captures cross-country differences in investment opportunities (e.g., if a countrys
17
We find this to be the case using information on the portion of new investment financed by internal fund (INTERNAL_FINANCE). Assuming that reinvested profit is a measure of internal fund used for new investment, we can generate
a measure of investment size relative to a firms current net income by REINVEST/INTERNAL_FINANCE. We find that
with all the control variables in Table III, this measure of investment size relative to current net income is significantly
associated with access to bank loans, suggesting that access to external financing is related to investment size.
18
In unreported tests, we control for additional variables related to property rights and access to external financing:
TRADE_CREDIT takes a value of one if some share of the firms financing is via trade credit and zero otherwise;
POLITICAL_CONNECTION takes a value of one if the firm owners/managers lobby the government with respect to
laws and regulations and zero otherwise; and DISPUTE_RESOLVED is the percentage of firm disputes over payments
resolved by court action over the past two years. Controlling for these additional variables reduces the sample by
approximately half but does not change our results. None of these additional variables has a significant coefficient.
47
Table III. Cultural Dimensions and Profit Reinvestment by Small Businesses in

Emerging Economies
This table presents results from hierarchical linear models (HLM) assuming a random intercept across
countries. The dependent variable is REINVEST, a continuous variable based on the reported percentage
of profit reinvestment. EMBEDDED and HIERARCHY are national culture dimensions of interest from
Schwartz (1994). LN_GDP is the natural logarithm of a countrys GDP per capita in 2000 US$ from World
Development Indicators. PRIVATE is a dummy variable equal to one if the firm has shares held by private
interests and zero otherwise. BANK_LOAN is a dummy variable equal to one if the firm has one or more
bank loan(s) and zero otherwise. INFORMAL_PAYMENT is total gifts or informal payments to public
officials as a percentage of total sales. JUDICIAL_ENFORCEMENT is the managers response to On a
scale of 16 (fully disagree to fully agree), I am confident that the judicial system will enforce my contractual
and property rights in business disputes. LN_AGE is the natural logarithm of the number of years the firm
has operated in the country. LN_SIZE is the natural logarithm of the number of permanent and temporary
employees of the firm during the previous survey year. EXPORTER is the percentage of sales exported
directly or indirectly. Industry dummies and intercepts are included in the regressions but not reported
for brevity. Robust standard errors adjusted for country-level clustering are reported in parentheses. The
variables in bold face are the ones of interest.
(1)
Country
Level
(2)
Firm-Level
Deviations
Country
Level
Firm-Level
Deviations
6.04
(2.53)
6.39
(1.81)
0.04
(0.16)
0.80
(0.53)
1.89
(1.31)
2.10
(0.66)
2.60
(1.50)
52.89
(19.95)
13.19
(3.81)
4.91
(6.54)
38.40
(34.68)
21.08
(31.89)
3.61
(3.14)
0.20
(6.79)
28.73
(19.93)
3.33
(4.44)
65.58
(34.92)
6.03
(2.54)
6.40
(1.80)
0.04
(0.16)
0.80
(0.53)
1.87
(1.30)
2.09
(0.65)
2.64
(1.50)
EMBEDDED
HIERARCHY
LN_GDP
PRIVATE
BANK_LOAN
INFORMAL_PAYMENT
LN_AGE
LN_SIZE
EXPORTER
Industry dummies/intercept
N of countries
N of observations

10.29
(3.17)
91.99
(37.82)
50.00
(32.91)
7.00
(2.79)
5.59
(8.10)
41.98
(25.37)
2.77
(4.79)
13.76
(30.39)
Yes
22
5,752
Yes
22
5,752
48
public officials on average receive more gifts from SMEs, it may imply that SMEs in that country
are profitable enough to afford them). At the firm level, private ownership (PRIVATE), access
to external financing (BANK_LOAN), firm size (LN_SIZE), and EXPORTER are positively
associated with profit reinvestment, consistent with previous literature.
In model 2, we include the cultural dimensions EMBEDDED and HIERARCHY, both of which
are significantly and negatively associated with profit reinvestment.19,20 The results continue to
hold if we include these two cultural dimensions in the regression separately. This suggests that the
values emphasized by EMBEDDED and HIERARCHY are relevant to reinvestment decisions.21
The economic significance of the coefficients on EMBEDDED and HIERARCHY is also
meaningful. In model 2, a one-standard deviation increase in Embeddedness and Hierarchy
corresponds to a respective 12% and 5% reduction in reinvestment as a percentage of profit. Furthermore, all the country-level controls (including the country means of firm-level controls) that
have significant coefficients in model 1 lose their effects, suggesting that culture (Embeddedness
and Hierarchy) affects reinvestment mostly through the direct channel (in a statistical sense) and
that informal institutions are likely to matter more in emerging markets where formal institutions
are weakly developed.22
III. Endogeneity
Mutual causality between national culture and profit reinvestment is not likely in this study.
First, the national culture scores (which capture cultural values established in ones early life)
were collected in the early 1990s, about 10 years before the profit reinvestment decisions that we
analyze were made. Thus, if there is any causal relationship between national culture and profit
reinvestment, it is likely to run from culture to reinvestment decisions. Second, it is unlikely
that a firm-level decision (profit reinvestment) significantly influences a country-level variable
(culture). However, the effect of national culture on profit reinvestment may be influenced by
omitted variables that determine both culture and profit reinvestment. We address this endogeneity
concern using two approaches, as discussed below.
A. Additional Controls
Although variation in formal institutions across emerging markets is not likely to be considerable, as we explain above it is possible that our main analysis omits important institutions related
to both culture and profit reinvestment. In Table IV, we address this concern by considering the
following additional controls.
First, we examine whether the effect of culture in Table III is due to a failure to control for two
other important cultural variables. In model 1, we additionally include HARMONY (including
19
Although our sample is relatively balanced across countries as no country accounts for more than 20% of the sample,
we reestimate model 2 Table III after dropping the three (five) countries with more than 500 (400) observations. The
results (untabulated) are qualitatively similar.
20
In untabulated results, we find that Autonomy and Egalitarian are not significantly associated with profit reinvestment.
21
In unreported tests, we also replace EMBEDDED and HIERARCHY with Hofstedes (2001) respective dimensions,
namely, Individualism and Power Distance. Individualism does not show a significant effect, but Power Distance has a
significantly negative coefficient.
22
If EMBEDDED and HIERARCHY have largely indirect effects on reinvestment through their correlations with economic development and formal institutions as captured by the country means of firm-level controls, then the coefficients
on the country-level controls in model 2 should be similar to their counterparts in model 1, in which case the two cultural
dimensions will not have significant coefficients.
49
Table IV. Additional Controls

This table presents results from rerunning model 2 in Table III with additional controls. The dependent
variable is REINVEST, a continuous variable based on the reported percentage of profit reinvestment.
EMBEDDED, HIERARCHY, and HARMONY are national culture scores from Schwartz (1994). TRUST is
the percentage of respondents from a country that believes people are generally trustworthy from World Value
Surveys. MUSLIM, CATHOLIC, and ORTHODOX are dummy variables indicating a countrys dominant
religion in 2000. ANTI_DIRECTOR and CREDITOR RIGHTS are shareholder creditor protection indexes
from Djankov et al. (2008) and (2007), respectively. CREDIT_MARKET is the total value of banking credit
scaled by GDP. POLITICAL_RIGHTS is the political rights index from Freedom House, with larger values
indicating higher political liberty. ECONOMIC_FREEDOM is a measure of the extent to which private
firms operate freely in a country in 2002. TRANSITION is a dummy variable indicating whether a countrys
economy is transitioning to a market economy. Other firm and country controls, industry dummies, and
intercepts are also included in the regressions but not reported for brevity. Robust standard errors adjusted
for country-level clustering are reported in parentheses. The variables in bold face are the ones of interest.
(1)
EMBEDDED
HIERARCHY
HARMONY
TRUST
MUSLIM
CATHOLIC
ORTHODOX
ANTI_DIRECTOR
CREDITOR_RIGHTS
CREDIT_MARKET
(2)
(3)
(4)
(5)
(6)
52.88
49.65
82.45
25.65 58.62
(19.14)
(18.98)
(20.69)
(15.23) (18.61)
11.53 11.97 11.58 15.86 10.75
(3.19)
(4.08)
(3.85)
(7.71)
(5.80)
15.14
(8.67)
32.94
(16.59)
30.32
(4.59)
25.67
(5.89)
22.75
(7.68)
2.07
(2.57)
5.57
(3.24)
0.27
(0.18)
POLITICAL_RIGHTS
(7)
55.64
54.88
(19.19)
(22.07)
9.71 13.88
(4.35)
(4.11)
2.77
(4.01)
17.63
(10.74)
ECONOMIC_FREEDOM
TRANSITION
Firm/country controls
N of countries
N of observations

Yes
Yes
22
5,752
Yes
Yes
19
5,310
Yes
Yes
22
5,752
Yes
Yes
15
4,744
Yes
Yes
22
5,752
Yes
Yes
20
5,154
3.16
(7.87)
Yes
Yes
20
5,154
50
MASTERY generates similar results). Li et al. (2013) show that Schwartzs (1994) Harmony
dimension is negatively associated with corporate risk-taking. In model 2, we include TRUST,
which captures the extent to which people in a country regard one another as trustworthy and
comes from the World Values Survey. Recent literature shows that trust is associated with stock
market participation and economic exchange (Guiso, Sapienza, and Zingales, 2008, 2009).23
Second, we examine whether our findings on the effect of culture on profit reinvestment is
due to a failure to control for religion, another important informal institution. In early work,
Weber (1905) shows that religion plays a significant role in social change. More recently, Stulz
and Williamson (2003) attribute the low level of creditor protection in Catholic countries to the
antiusury culture pervasive in the Catholic tradition, and Guiso, Sapienza, and Zingales (2003)
show that the main religion of a country is correlated with attitudes toward cooperation, market
economy fairness, and thrift, among others. Accordingly, in model 3 we include MUSLIM,
CATHOLIC, and ORTHODOX, which are dummy variables indicating a countrys dominant
religion in 2000.24
Third, we examine variables related to the legal environment and the level of financial development. In particular, in model 4 we include ANTI_DIRECTOR, the revised antidirector index
of Djankov et al. (2008), and CREDITOR_RIGHTS, the creditor protection index of Djankov,
McLiesh, and Shleifer (2007), to capture the legal environment. To capture the level of financial
development, in model 5 we control for CREDIT_MARKET, the total value of banking credit
scaled by GDP. Because our sample mainly comprises private firms, stock market development
should not be relevant in our analysis (unreported results also show that stock market development
does not affect reinvestment in our sample).
Finally, we examine three variables that capture a countrys fundamental political and economic
freedoms. Controlling for political rights and economic freedom is important in this study because
Table I shows that they are correlated with both Embeddedness and Hierarchy and thus may be
an indirect channel for the effect of culture. In model 6, we include POLITICAL_RIGHTS, the
political rights score from Freedom House multiplied by 1 so that higher scores indicate stronger
political rights. Countries with weak political rights are characterized by government corruption,
state expropriation, weak property rights, and weak rule of law. Recent international finance
literature finds that weak political rights and political instability are associated with a high cost of
capital (Qi, Roth, and Wald, 2010; Ben-Nasr, Boubakri, and Cosset, 2012; Boubakri, El Ghoul,
and Saffar, 2014) and deter corporate investment (Julio and Yook, 2012). Model 6 also includes
ECONOMIC_FREEDOM, a composite index from the Heritage Foundation multiplied by 1 so
that higher scores indicate more economic freedom, which considers government intervention,
fiscal and monetary policies, the ease of international investment and trade, how wages and prices
are determined, property rights protection, and the extent of informal markets. Model 7 controls
for TRANSITION, a dummy variable that indicates whether a country is transitioning from a
planned economy to a market economy.
The results in Table IV show that while controlling for the above institutional variables reduces
the number of countries in the sample, the effects of Embeddedness and Hierarchy on profit
reinvestment continue to persist. In particular, we find that profit reinvestment is positively
associated with Harmony (model 1) and negatively associated with trust (model 2), the three
23
In unreported tests, we also control for a variable measuring the extent to which people in a country trust the government,
which also comes from the World Values Survey. Our main results continue to hold, and the coefficient on government
trustworthiness is not significant.
24
The dominant religions in our sample include Catholic, Orthodox, Muslim, and Atheist. We omit the Atheist dummy
to avoid the dummy variable trap.
51
religion dummies (model 3), and creditor rights (model 4). In unreported tests, we find that
Harmony does not significantly affect reinvestment if Embeddedness and Hierarchy are not in
the regression, and thus its effect is possibly due to collinearity. It is not obvious why TRUST has
a negative coefficient. However, its significant effect disappears in the sample of 26 countries
for which we have scores of TRUST.25 Firms reinvest less in countries with a dominant religion,
which is consistent with religious beliefs being negatively associated with risk-taking (e.g., Hilary
and Hui, 2009). Unreported tests show that the coefficients of the three religion dummies are not
significantly different. The effect of credit rights is not surprising, as stronger creditor protection
puts more constraints on managers ability to take risk, reducing investment. More important, most
of the formal institutions introduced in Table IV do not show significant effects on reinvestment,
suggesting that while culture is correlated with some of these formal institutions, the effect of
culture comes mostly from the direct channel rather than the indirect channel.
B. Instrumental Variables
An alternative approach to addressing missing factors is to use instrumental variables. In our
context, a valid instrument should be strongly correlated with culture (the relevance condition)
and at the same time affect profit reinvestment only through culture (the exclusion restriction).
As instruments we first consider measures of a countrys religious composition in 1900 (the
respective proportions of a countrys population that claim to be Catholic, Orthodox, Muslim,
and Atheist), as a countrys religious composition is viewed as an antecedent of cultural values
(La Porta et al., 1999; Stulz and Williamson, 2003; Siegel, Licht, and Schwartz, 2011) and hence
is viewed as exogenous. In addition, we instrument for Embeddedness and Hierarchy using a
countrys geographical latitude and religious fractionalization. Hofstede (2001) suggests that
in colder climates, individuals need to take more initiative to survive and thus tend to be less
collectivistic (similar to Embeddedness). Siegel et al. (2011) find that among ethnic, language, and
religious fractionalizations, religious fractionalization best explains the Egalitarianism dimension
(the opposite of Hierarchy). To capture geographical latitude and religious fractionalization, we
employ TROPIC, a dummy variable equal to one if a countrys capital city lies in the tropics, and
FRACTIONALIZATION, the Herfindahl index of religious groups in a country in 1900.
We present the first-stage regression results in models 1 and 2 of Table V. The results show that
most of the instruments have significant coefficients with reasonable signs. The null hypothesis
of underidentification is also rejected at the 10% level. In model 3 we present the second-stage
regression results with two-step efficient generalized methods of moments (GMM) estimators.
The results show that the effects of Embeddedness and Hierarchy remain significant.
IV. Alternative Explanations

The findings that Embeddedness and Hierarchy are negatively correlated with profit reinvestment imply that firm owners/managers in high-Embeddedness and -Hierarchy countries
have lower motivation to invest. However, it may be the case that firms in high-Embeddedness
and -Hierarchy societies reinvest less profit because culture is associated with other structural
factors. For example, firms in high-Embeddedness and -Hierarchy societies may rely more on
external finance, face greater investment constraints, have more internal funds, operate in a less
25
The seven countries that have data available for TRUST but not for culture are Albania, Belarus, Salvador, Lithuania,
Moldova, Tanzania, and Vietnam.
52
Table V. Instrumental Variables

This table presents results from a two-stage Generalized Methods of Moments (GMM) model based on
model 2 in Table III. Models 1 and 2 show the first-stage regression results, and model 3 provides the
second-stage GMM estimators. EMBEDDED and HIERARCHY are national culture scores from Schwartz
(1994). REINVEST is a continuous variable based on the reported percentage of profit reinvestment.
The excluded instruments are the proportions of Catholics (CATHOLIC%), Orthodox (ORTHODOX%),
Muslims (MUSLIM%), and Atheists (NO_RELIGION%) in a country in 1900, FRACTIONALIZATION
(the Herfindahl index of the religious groups in a country in 1900), and TROPIC (a dummy variable equal
to one if a countrys capital city lies in the tropics). Other firm and country controls are also included in
the regressions but not reported for brevity. The underidentification test reports the Kleibergen-Paap rk LM
statistic and the overidentification test reports the Hansen J statistic. Robust standard errors adjusted for
country-level clustering are reported in parentheses. The variables in bold face are the ones of interest.
First-Stage Regression
Dependent Variable
(1)
EMBEDDED
(2)
HIERARCHY
Excluded instruments
EMBEDDED
HIERARCHY
CATHOLIC%
ORTHODOX%
MUSLIM%
NO_RELIGION%
FRACTIONALIZATION
TROPIC
Included instruments
F-test of excluded instruments
Underidentification test
Overidentification test
0.01
(0.08)
0.06
(0.08)
0.27
(0.10)
6.65
(0.73)
0.25
(0.08)
0.41
(0.11)
Yes
27.08
9.31
0.65
(0.31)
1.18
(0.34)
0.32
(0.51)
17.72
(1.86)
1.02
(0.47)
1.22
(0.46)
Yes
20.10
9.31
Second-Stage Regression
(3)
REINVEST
59.06
(15.16)
21.52
(7.01)
Yes
4.99

competitive environment, or face different governance structures. In this section, we examine

whether our results are driven by these alternative explanations.
A. Do Firms in High-Embeddedness/Hierarchy Countries Rely More on External
Finance?
We first consider the possibility that firm owners/managers in high-Embeddedness and Hierarchy countries may reinvest less profit simply because they prefer external financing over
internal funds. Chui et al. (2002), for instance, find that firms in high-Embeddedness countries
53
use less debt in a sample of developed countries, but prior evidence does not indicate whether this
result extends to developing countries. Fortunately, the Enterprise Surveys provide information
on how firms finance new investment. We find that only 3% of the sample firms finance new
investment with equity, so we focus on other forms of financing: internal funds, bank loans, trade
credit, and informal funds.
In models 1 to 4 of Table VI, we use HLM to examine the relations between both Embeddedness and Hierarchy and INTERNAL_FINANCE, BANK_FINANCE, CREDIT_FINANCE, and
INFORMAL_FINANCE, respectively, where INTERNAL_ FINANCE is the percentage of new
investment financed by internal funds, BANK_FINANCE is the percentage of new investment
financed by local and foreign banks, CREDIT_FINANCE is the percentage of new investment financed by trade credit, and INFORMAL_FINANCE is the percentage of new investment financed
by informal sources such as family members, friends, or informal money lenders. The results
show that neither of the two cultural dimensions significantly correlates with the four financing
choices, with one exception, namely, HIERARCHY is correlated with less trade credit usage. The
results therefore suggest that small firms in high-Embeddedness and -Hierarchy countries do not
have substantially different financing structures than those in low-Embeddedness and -Hierarchy
countries, and that the lower profit reinvestment in high-Embeddedness and -Hierarchy countries
represents a relatively smaller investment scale.
B. Do Firms in High-Embeddedness/Hierarchy Countries Face More
Constraints?
Consistent with evidence in Hofstede (2001), Table I shows that Embeddedness and Hierarchy
are significantly correlated with lower economic development. Accordingly, we next consider
the possibility that firm owners/managers in high-Embeddedness and -Hierarchy countries may
reinvest less profit because they face more constraints on investment rather than a lower motivation
to invest. To do so, we run subsample analyses in models 1 to 7 of Table VII.
In particular, in models 1 and 2 we repeat our main regression separately for the 11 countries
with higher economic development and the 11 countries with lower economic development in
terms of GDP per capita. In model 3, we control for 18 variables indicating the extent to which a respondent declares the following issues as obstacles to investment: telecommunications, electricity,
transportation, access to land, tax rates, tax administration, customs and trade regulations, labor
regulations, skills and education of available workers, business licensing and operating permits,
access to collateral, interest rates, economic and regulatory policy uncertainty, macroeconomic
instability, corruption, crime, anticompetitive practices, and conflict resolution.26 Controlling for
these 18 issues eases concerns that firms in different cultures are subject to different political,
infrastructure, macroeconomic, legal, financial, or social constraints. To further control for investment constraints, in model 4 we rerun the regression focusing on those firms that do not claim
major or very severe obstacles for any of the 18 issues above (1,262 firms from 20 countries).27
Next, in models 5 and 6 we divide the sample according to whether a firm has access to bank
loans. Firms with access to bank loans should have better investment opportunities. Finally, in
model 7 we run the regression using firms with exports, which should be less affected by local
investment constraints.
26
A firms responses to these 18 issues are given on a five-point scale, where 0, 1, 2, 3, and 4 correspond to no obstacle,
minor obstacle, moderate obstacle, major obstacle, and very severe obstacle, respectively.
27
In unreported analyses, we also run a regression focusing on those firms that claim no or minor obstacles for all 18
issues (372 firms from 20 countries) and obtain similar results.

N of countries
N of observations
EXPORTER
LN_SIZE
LN_AGE
INFORMAL_PAYMENT
BANK_LOAN
PRIVATE
LN_GDP
HIERARCHY
EMBEDDED
49.22
(35.54)
1.48
(7.25)
7.47
(10.47)
121.19
(63.14)
18.78
(31.33)
1.11
(3.60)
5.64
(5.81)
8.43
(20.56)
1.40
(5.37)
83.92
(56.47)
Country
Level
6.97
(1.83)
38.88
(2.02)
0.08
(0.14)
0.42
(0.71)
2.30
(0.88)
0.35
(0.59)
2.04
(2.46)
Yes
22
4,182
Firm-Level
Deviations
(1)
INTERNAL_FINANCE
2.68
(6.03)
4.34
(4.25)
1.33
(1.98)
1.67
(24.62)
64.83
(9.03)
1.40
(0.84)
4.06
(3.18)
0.42
(9.41)
3.26
(1.15)
3.37
(13.99)
Country
Level
0.18
(1.35)
43.15
(1.94)
0.03
(0.07)
0.05
(0.28)
1.03
(0.54)
0.77
(0.23)
0.71
(1.26)
Yes
22
4,182
Firm-Level
Deviations
(2)
BANK_FINANCE
2.36
(2.83)
1.37
(0.83)
0.02
(0.91)
10.72
(9.06)
9.47
(4.01)
0.30
(0.35)
0.82
(1.41)
0.50
(3.37)
1.76
(0.58)
4.90
(5.05)
Country
Level
1.29
(0.80)
0.11
(0.29)
0.00
(0.04)
0.13
(0.13)
0.47
(0.28)
0.18
(0.18)
0.25
(0.73)
Yes
22
4,182
Firm-Level
Deviations
(3)
CREDIT_FINANCE
0.45
(1.51)
0.25
(0.65)
0.53
(0.48)
19.49
(8.44)
4.70
(3.56)
0.12
(0.26)
1.24
(0.87)
3.76
(2.38)
0.73
(0.43)
4.93
(3.25)
Country
Level
0.04
(0.60)
0.03
(0.26)
0.01
(0.01)
0.03
(0.08)
0.04
(0.13)
0.21
(0.18)
0.40
(0.35)
Yes
22
4,182
Firm-Level
Deviations
(4)
INFORMAL_FINANCE
This table presents results from hierarchical linear models (HLM) assuming a random intercept across countries. The dependent variable is INTERNAL_FINANCE, BANK_FINANCE,
CREDIT_FINANCE, and INFORMAL_FINANCE in models 1 to 4, identifying the percentages of new investment financed by internal funds, bank loans, trade credit, and informal sources,
respectively. EMBEDDED and HIERARCHY are national culture scores from Schwartz (1994). LN_GDP is the natural logarithm of a countrys GDP per capita in 2000 US$ from World
Development Indicators. PRIVATE is a dummy variable equal to one if the firm has shares held by private interests and zero otherwise. BANK_LOAN is a dummy variable equal to one if the firm
has one or more bank loan(s) and zero otherwise. INFORMAL_PAYMENT is total gifts or informal payments to public officials as a percentage of total sales. JUDICIAL_ENFORCEMENT
is the managers response to On a scale of 16 (fully disagree to fully agree), I am confident that the judicial system will enforce my contractual and property rights in business disputes.
LN_AGE is the natural logarithm of the number of years the firm has operated in the country. LN_SIZE is the natural logarithm of the number of permanent and temporary employees of the
firm during the previous survey year. EXPORTER is the percentage of sales exported directly or indirectly. Industry dummies and intercepts are also included in the regressions but not reported
for brevity. Robust standard errors adjusted for country-level clustering are reported in parentheses. The variables in bold face are the ones of interest.
Table VI. National Culture and Financing Choices

54
55
Table VII. Subsample Analyses of the Effects of EMBEDDED and HIERARCHY on

Profit Reinvestment
This table presents results from subsample analysis of the effects of EMBEDDED and HIERARCHY on
profit reinvestment based on model (2) in Table III. We report only the coefficients on EMBEDDED and
HIERARCHY from Schwartz (1994). Other country/firm controls, industry dummies, and intercepts are
included in the regressions but not reported for brevity. Robust standard errors adjusted for country-level
clustering are reported in parentheses.
EMBEDDED
(1)
Coefficient
(2)
Standard Error
HIERARCHY
(3)
Coefficient
(4)
Standard Error
Panel A. Subsamples Based on Investment Constraints

1) High-GDP-per-capita
countries
2) Low-GDP-per-capita
countries
3) Controlling investment
constraints
4) Firms with fewer
investment constraints
5) Firms with access to bank
loans
6) Firms without access to
bank loans
7) Firms with exports
30.37
(3.60)
22.90
(2.41)
143.92
(10.79)
12.05
(2.25)
38.86
(21.36)
16.66
(4.69)
47.22
(25.25)
17.58
(9.19)
56.25
(10.67)
17.07
(3.92)
55.40
(25.93)
8.95
(5.43)
40.11
(17.17)
13.70
(5.37)
Panel B. Subsamples Based on Internal Funds

8) Firms with moderate profit
reinvestment
9) Firms with sufficient
internal fund
37.87
(18.06)
13.78
(3.19)
65.42
(20.48)
11.08
(5.33)
Panel C. Subsamples Based on Degree of Competition

10) Firms facing higher
competition
11) Firms facing lower
competition
63.01
(19.14)
14.94
(3.85)
50.29
(26.51)
7.48
(5.55)
Panel D. Subsamples Based on Corporate Governance Structures

12) Family firms
13) Firms without foreign
ownership
14) Largest owner is also
CEO
15) The largest shareholder
owns > 75%
16) The largest shareholder
owns < 75%

54.69
48.81
(21.42)
(19.91)
8.36
13.34
(3.65)
(3.39)
52.82
(19.96)
9.36
(3.29)
47.74
(24.40)
11.93
(3.96)
58.61
(16.92)
18.21
(5.19)
56
In each of the above models, we expect cultures effect to disappear if it is caused by cultures
correlation with investment constraints. We find that the effects of Embeddedness and Hierarchy
continue to be negative and significant across all models, suggesting that cultures correlation
with investment constraints is not driving our results.
C. Do Firms in High-Embeddedness/Hierarchy Countries Have More Internal
Funds?
We next look more closely at the role of internal funds, as firms in high-Embeddedness and
-Hierarchy countries have greater internal funds and hence do not need to rely on current net
income. For example, Truong et al. (2012) find that public firms in individualistic countries hold
less cash. In models 8 and 9 of Table VII, we rerun the regression for two subsamples of firms
with abundant internal funds. The first includes all firms reporting a profit reinvestment ratio
strictly between 0 and 100 (model 8). These firms should have neither extremely good nor zero
investment opportunities and thus should have enough internal funds to finance new investment.
The second subsample includes all firms that finance 100% of new investment using internal
funds (model 9). In both models, we find that the effect of culture on profit reinvestment continues
to go through.
D. Do Firms in High-Embeddedness/Hierarchy Countries Face Less
Competition?
It is also possible that firms in high-Embeddedness and -Hierarchy countries enjoy a dominant
position in their product markets and hence do not need to reinvest as much. This argument is
not likely to hold for our sample, which largely comprises small firms. However, to ensure such
an effect is not driving our results, we construct subsamples of firms facing a similar degree of
competition using firms responses to the question What will happen if you raise your prices
of your main product line or main line of services 10% above their current level in the domestic
market assuming that your competitors maintain their current prices? We classify a firm as facing
higher competition if it replies Our customers would continue to buy from us but at much lower
quantities or stop buying, while we classify a firm as facing lower competition if it replies Our
customers would continue to buy from us at the same quantities or slightly lower quantities.
The results in models 10 and 11 of Table VII show that the effect of culture persists in the
high-competition subsample but becomes weaker in the low-competition subsample (Hierarchys
coefficient is significant only at the one-tailed 10% level). This finding suggests that cultures
effect is impacted by how competitive the market is.
E. Do Firms in High-Embeddedness/Hierarchy Countries Have Different Agency
Concerns?
The last alternative explanation we consider is the possibility that firms in high-Embeddedness
and -Hierarchy countries have different corporate governance structuresthat is, have different
agency concernsthan those in low-Embeddedness and -Hierarchy countries. To control for
agency concerns, in models 12 and 13 of Table VII we rerun the regressions for family firms
and firms without foreign ownership, respectively; in model 14 we focus on firms in which the
largest shareholder is also the CEO; and in models 15 and 16 we run the regressions for firms in
which the largest shareholder holds more than 75% or less than 75%. We find that the effect of
culture remains unchanged for each of these subsamples of firms.
57
V. Do the Effects of Access to Credit and Strength of Property

Rights Differ across Cultures?
Based on the evidence above that Embeddedness and Hierarchy are associated with a lower
motivation to invest, one may ask whether the effects of the two formal institutions previously
shown to influence profit reinvestmentnamely, strength of property rights and access to external
financing (Johnson et al., 2002; Cull and Xu, 2005)vary across different cultures. We conjecture
that the effects of these institutions should vary across cultures because formal institutions must
be compatible with informal institutions to be effective (Licht et al., 2005; Licht, Goldschmidt,
and Schwartz, 2007). In high-Embeddedness and -Hierarchy countries, firm owners/managers
have less motivation to take risk and may care more about the likelihood of expropriation by the
government (expropriation itself is a source of risk). At the same time, because leverage increases
bankruptcy risk, access to bank loans may not encourage firm owners/managers to invest their own
money in high-Embeddedness/Hierarchy countries as much as in low-Embeddedness/Hierarchy
countries. These firms reinvestment decisions should therefore be affected to a larger extent
by the strength of property rights. In contrast, in low-Embeddedness (Hierarchy) countries, firm
owners/managers are more willing to take risk (e.g., keep a high leverage ratio) and invest on a
larger scale, and hence their reinvestment decisions should depend to a larger extent on access to
external finance. We test these conjectures in Tables VIII and IX.
In Table VIII, we observe different effects of BANK_LOAN, which proxies for access to
external finance, and INFORMAL_PAYMENT, which proxies for the strength of property rights,
on profit reinvestment across cultures. In models 1 and 3, where the observations correspond to
high-Embeddedness and high-Hierarchy countries, respectively, INFORMAL_PAYMENT has a
significantly negative coefficient but BANK_LOAN has an insignificant coefficient. In contrast,
in models 2 and 4, where the observations correspond to low-Embeddedness and low-Hierarchy
countries, respectively, the coefficient on BANK_LOAN is significantly positive but that on
INFORMAL_PAYMENT is not significant. These results suggest that in high-Embeddedness
and -Hierarchy countries where people tend to avoid risk and pursue small-scale investment, firm
owners/managers may prefer that strong property rights be in place before they reinvest profit.
On the other hand, in low-Embeddedness and -Hierarchy countries where people tend to take risk
and engage in large-scale investment, availability of external financing is more important.
The results in Table VIII also show that private ownership and a larger firm size can motivate firm owners/managers in high-Embeddedness and -Hierarchy countries to reinvest profits:
PRIVATE (LN_SIZE) has more significant (larger) coefficients in high-Embeddedness and Hierarchy countries. These results are consistent with the view that people in high-Embeddedness
and -Hierarchy countries have a lower motivation to invest. Private ownership is associated with
higher investment efficiency (Netter and Megginson, 2001) and large firms are less subject to
risk. Therefore, private ownership and firm size should make more of a difference among firms
in high-Embeddedness/Hierarchy countries characterizing by a lower motivation to invest.
Small firms in emerging markets are subject to severe financing needs and thus a good measure
of the motivation to invest is whether a firm reinvests all its profit. In Table IX, we repeat the
analyses in Table VIII using a logit model. The dependent variable is REINVEST_ALL, a
dummy variable that equals one if a firm reinvests all of its profit and zero otherwise. The
results have the same pattern as in Table VIII: INFORMAL_PAYMENT (BANK_LOAN) is
negatively (positively) associated with a firm reinvesting 100% of its profit only in high (low)Embeddedness/Hierarchy countries.
The above findings shed light on the recent debate over which formal institutionproperty
rights or external financingis more important. Our results suggest that the relative importance
58
Table VIII. Effects of the Access to External Finance and the Strength of Property
Rights across Cultures
This table presents results from repeating model (2) in Table III for high/low-EMBEDDED and HIERARCHY countries. The dependent variable is REINVEST, a continuous variable based on the reported percentage of profit reinvestment. EMBEDDED and HIERARCHY are national culture scores from
Schwartz (1994). PRIVATE is a dummy variable equal to one if the firm has shares held by private interests
and zero otherwise. BANK_LOAN is a dummy variable equal to one if the firm has one or more bank
loan(s) and zero otherwise. INFORMAL_PAYMENT is total gifts or informal payments to public officials
as a percentage of total sales. JUDICIAL_ENFORCEMENT is the managers response to On a scale of
16 (fully disagree to fully agree), I am confident that the judicial system will enforce my contractual and
property rights in business disputes. LN_AGE is the natural logarithm of the number of years the firm
has operated in the country. LN_SIZE is the natural logarithm of the number of permanent and temporary
employees of the firm during the previous survey year. EXPORTER is the percentage of sales exported
directly or indirectly. Country/industry dummies and intercepts are also included in the regressions but not
reported for brevity. Robust standard errors adjusted for country-level clustering are reported in parentheses.
The variables in bold face are the ones of interest.
PRIVATE
BANK_LOAN
INFORMAL_PAYMENT
LN_AGE
LN_SIZE
EXPORTER
Industry, country dummies/intercept
N of countries
N of observations
(1)
High
EMBEDDED
(2)
Low
EMBEDDED
(3)
High
HIERARCHY
(4)
Low
HIERARCHY
Firm-Level
Deviations
Firm-Level
Deviations
Firm-Level
Deviations
Firm-Level
Deviations
4.87
(2.20)
3.98
(2.56)
0.40
(0.13)
0.68
(0.70)
2.26
(2.23)
3.07
(0.97)
3.21
(2.00)
Yes
11
7.85
(4.96)
9.02
(1.36)
0.10
(0.09)
0.88
(0.81)
1.60
(1.16)
1.15
(0.43)
1.72
(2.39)
Yes
11
7.05
(2.67)
4.20
(2.69)
0.37
(0.14)
0.49
(0.69)
2.15
(2.07)
2.99
(0.95)
2.02
(1.86)
Yes
11
5.20
(5.94)
9.01
(1.20)
0.09
(0.09)
1.10
(0.81)
1.50
(1.24)
1.10
(0.43)
2.91
(2.46)
Yes
11
2,847
2,905
3,097
2,655

depends not only on the level of development of the market economy (McMillan and Woodruff,
2002), but also on the internal motivation to invest, which is shaped by national culture. The
differential importance of property rights and external financing across cultures also has policy
implications. Policymakers should focus on strengthening property rights if the countrys values
lead to a low motivation to invest or firms are subject to high investment uncertainty. In addition,
encouraging private stakes and exports can enhance investment. On the other hand, for countries
59
Table IX. Effects of the Access to External Finance and the Strength of Property
Rights across Cultures: Alternative Dependent Variable
This table presents results from logit models for high/low-EMBEDDED and -HIERARCHY countries.
The dependent variable is REINVEST_ALL, a dummy variable that equals one if a firm reinvests all of
its profit and zero otherwise. EMBEDDED and HIERARCHY are national culture scores from Schwartz
(1994). PRIVATE is a dummy variable equal to one if the firm has shares held by private interests and zero
otherwise. BANK_LOAN is a dummy variable equal to one if the firm has one or more bank loan(s) and zero
otherwise. INFORMAL_PAYMENT is total gifts or informal payments to public officials as a percentage
of total sales. JUDICIAL_ENFORCEMENT is the managers response to On a scale of 16 (fully disagree
to fully agree), I am confident that the judicial system will enforce my contractual and property rights in
business disputes. LN_AGE is the natural logarithm of the number of years the firm has operated in the
country. LN_SIZE is the natural logarithm of the number of permanent and temporary employees of the
firm during the previous survey year. EXPORTER is the percentage of sales exported directly or indirectly.
Country/industry dummies and intercepts are also included in the regressions but not reported for brevity.
Robust standard errors adjusted for country-level clustering are reported in parentheses. The variables in
bold face are the ones of interest.
PRIVATE
BANK_LOAN
INFORMAL_PAYMENT
LN_AGE
LN_SIZE
EXPORTER
Industry, country dummies/intercept
N of countries
N of observations
(1)
High
EMBEDDED
(2)
Low
EMBEDDED
(3)
High
HIERARCHY
(4)
Low
HIERARCHY
Firm-Level
Deviations
Firm-Level
Deviations
Firm-Level
Deviations
Firm-Level
Deviations
0.06
(0.29)
0.02
(0.17)
0.05
(0.02)
0.08
(0.04)
0.08
(0.11)
0.17
(0.06)
0.32
(0.13)
Yes
11
0.01
(0.40)
0.37
(0.11)
0.01
(0.01)
0.05
(0.04)
0.04
(0.07)
0.04
(0.03)
0.05
(0.13)
Yes
11
0.19
(0.30)
0.03
(0.17)
0.05
(0.02)
0.07
(0.03)
0.06
(0.11)
0.16
(0.06)
0.24
(0.15)
Yes
11
0.10
(0.39)
0.38
(0.11)
0.01
(0.01)
0.06
(0.04)
0.04
(0.07)
0.05
(0.03)
0.10
(0.13)
Yes
11
2,847
2,905
3,097
2,655

with cultural values associated with a high motivation to take risk, policies that focus on increasing
the availability of external financing are more important.
VI. Conclusion
In this paper, we examine the relationship between national culturean important informal
institutionand profit reinvestment by small firms in emerging markets, where formal institutions
60
are largely underdeveloped. We find that Schwartzs (1994) cultural dimensions Embeddedness
and Hierarchy are associated with lower profit reinvestment, suggesting that these two cultural
dimensions are associated with a lower motivation to invest. At the same time, most of the formal
institutions that we consider do not have a significant effect on reinvestment in our analyses,
suggesting that the effect of culture comes mostly from a direct channel and culture matters more
for emerging markets with weak institutional development.
Furthermore, we show that the strength of property rights, private ownership, and firm size
are more important in high-Embeddedness and -Hierarchy countries, whereas access to external
financing is more important in low-Embeddedness and -Hierarchy countries. These results suggest
that policymakers in emerging markets interested in increasing economic growth by incentivizing
small businesses to reinvest profit should design such incentives according to their countrys
cultural profile.
In comparison to previous literature on culture and finance, our results show that culture continues to have a strong effect on the investment motivation of small firms. This helps explain
why different countries economies grew at different speeds in the early stages of their development: cultural values played an important role in firm-level investment when formal institutions
were weak. Researchers had long ago conjectured, and more recently observed, a correlation
between informal institutions and economic development (Weber, 1905; Hofstede, 2001); this
study provides empirical evidence of such a link.
Appendix: Variables
Variables
Definition
Source
Panel A. Dependent Variables

REINVEST
INTERNAL FINANCE
BANK FINANCE
CREDIT FINANCE
INFORMAL FINANCE
REINVEST ALL
Reported percentage of profit

reinvestment.
Percentage of new investment financed
by internal funds.
by local and foreign banks.
by trade credit.
by informal sources, such as family
members, friends, or informal money
lenders.
Dummy variable equal to one if a firm
reinvests all of its profit and zero
otherwise.
Enterprise Surveys
As above
As above
As above
As above
As above
Panel B. Culture Variables

EMBEDDED
Cultural dimension characterizing the

relationship between the individual
and the group.
Schwartz (1994)
(Continued)
Variables
HIERARCHY
HARMONY
Definition
Cultural dimension characterizing a
societys view about the distribution
of power and resources.
Cultural dimension characterizing the
relation between humankind and the
natural and social world.
61
Source
As above
As above
Panel C. Control Variables

LN GDP
PRIVATE
BANK LOAN
INFORMAL PAYMENT
JUDICIAL ENFORCEMENT
LN AGE
LN SIZE
EXPORTER
The natural logarithm of a countrys

GDP per capita in 2000 US$.
Dummy variable equal to one if the
firm has shares held by private
interests and zero otherwise.
Dummy variable equal to one if the
firm has one or more bank loan(s)
and zero otherwise.
Total gifts or informal payments to
public officials as a percentage of
total sales.
The managers response to On a scale
of 16 (fully disagree to fully agree),
I am confident that the judicial
system will enforce my contractual
and property rights in business
disputes.
The natural logarithm of the number of
years the firm has operated in the
country.
The natural logarithm of the number of
permanent and temporary employees
of the firm during the previous
survey year.
The percentage of sales exported
directly or indirectly.
World Development
Indicators
Enterprise Surveys
As above
As above
As above
As above
As above
As above
Panel D. Additional Control Variables

POLITICAL RIGHTS
ECONOMIC FREEDOM
A political rights score. We multiply

scores by 1 so that higher scores
indicate stronger political rights.
A composite index that considers
government intervention, fiscal and
monetary policies, the ease of
international investment and trade,
how wages and prices are
determined, property rights
protection, and informal markets. We
multiply original scores by 1 so that
higher scores indicate more
economic freedom.
Freedom House
Heritage Foundation
(Continued)
62
Variables
TRANSITION
MUSLIM
CATHOLIC
ORTHODOX
TRUST
ANTI DIRECTOR
CREDITOR RIGHTS
CREDIT MARKET
STOCK MARKET
Definition
A dummy variable that indicates
whether a country is transitioning
from a planned economy to a market
economy.
A dummy variable equal to one if the
countrys dominant religion in 2000
is Islam and zero otherwise.
is Catholic and zero otherwise.
is Orthodox Christianity and zero
otherwise.
The percentage of a countrys
respondents that believe people in the
country are generally trustworthy.
Revised antidirector index.
Creditor protection index.
Total value of private credit scaled by
GDP.
Total value traded in the stock market
scaled by GDP.
Source
McCleary and Barro

(2006)
As above
As above
World Values Surveys
Djankov et al. (2008)

Djankov, McLiesh, and
Shleifer (2007)
World Development
Indicators
As above
Panel E. Instrumental Variables

Religious Composition
FRACTIONALIZATION
TROPIC
Respective proportions of a countrys

population that claim to be Catholic
(CATHOLIC%), Orthodox
(ORTHODOX%), Muslim
(MUSLIM%), and Atheist
(NO RELIGION%) in 1900.
Herfindahl index of a countrys
religious groups in 1900.
A dummy variable equal to one if a
countrys capital city lies in the
tropics and zero otherwise.
McCleary and Barro

(2006)
As above
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National Culture and Profit

Reinvestment: Evidence from Small

Financial Management Spring 2016 pages 37 65

Financial Management r Spring 2016

El Ghoul et al. r National Culture and Profit Reinvestment

I. Possible Links between Culture and Profit Reinvestment

Financial Management r Spring 2016

El Ghoul et al. r National Culture and Profit Reinvestment

Financial Management r Spring 2016

Table I. Culture, Profit Reinvestment, and Formal Institutions

Significant at the 0.01 level.

Significant at the 0.10 level.

El Ghoul et al. r National Culture and Profit Reinvestment

Financial Management r Spring 2016

II. Data, Methodology, and Main Results

Details on these surveys are available at https://www.enterprisesurveys.org.

El Ghoul et al. r National Culture and Profit Reinvestment

Table II. Profit Reinvestment and National Culture across Countries

Financial Management r Spring 2016

El Ghoul et al. r National Culture and Profit Reinvestment

Table III. Cultural Dimensions and Profit Reinvestment by Small Businesses in

Significant at the 0.01 level.

Significant at the 0.10 level.

Financial Management r Spring 2016

El Ghoul et al. r National Culture and Profit Reinvestment

Table IV. Additional Controls

Significant at the 0.01 level.

Significant at the 0.10 level.

Financial Management r Spring 2016

El Ghoul et al. r National Culture and Profit Reinvestment

IV. Alternative Explanations

Financial Management r Spring 2016

Table V. Instrumental Variables

Significant at the 0.01 level.

Significant at the 0.10 level.

competitive environment, or face different governance structures. In this section, we examine

El Ghoul et al. r National Culture and Profit Reinvestment

Significant at the 0.01 level.

Significant at the 0.10 level.

Table VI. National Culture and Financing Choices

El Ghoul et al. r National Culture and Profit Reinvestment

Table VII. Subsample Analyses of the Effects of EMBEDDED and HIERARCHY on

Panel A. Subsamples Based on Investment Constraints

Panel B. Subsamples Based on Internal Funds

Panel C. Subsamples Based on Degree of Competition

Panel D. Subsamples Based on Corporate Governance Structures

Significant at the 0.01 level.

Significant at the 0.10 level.

Financial Management r Spring 2016

El Ghoul et al. r National Culture and Profit Reinvestment

V. Do the Effects of Access to Credit and Strength of Property

Financial Management r Spring 2016

Significant at the 0.01 level.

Significant at the 0.10 level.

El Ghoul et al. r National Culture and Profit Reinvestment

Significant at the 0.01 level.

Significant at the 0.10 level.

Financial Management r Spring 2016

Panel A. Dependent Variables

Reported percentage of profit

Panel B. Culture Variables

Cultural dimension characterizing the

El Ghoul et al. r National Culture and Profit Reinvestment

Panel C. Control Variables