1.3 Data and Methodology 1.3.1 Home Bias Measure
The Coordinated Portfolio Investment Survey (CPIS) conducted by the IMF provides bilateral equity investment data for more than 70 countries. The CPIS breaks down offshore investment into 255 foreign countries for an individual country during the period 2001 to 2009.1 More than 70 countries report their international equity portfolio investments in foreign countries, but CPIS data do not identify domestic securities holdings. Therefore, the aggregate portfolio investment in a selected country, as reported by the remaining countries, serves as an estimate of that country’s liabilities. This allows us to calculate the domestic portfolio holdings by subtracting the foreign liabilities from the local market capitalization. Moreover, we calculate the equity investment across major countries, which is intensively used in home bias related research. Following Chan et al. (2005), we calculate the country home bias that describes the deviation from the foreign market, while we extend the scope to the bilateral home bias. Since source country i may not invest in target country j for i ≠ j, we exclude all missing values and extreme observations when estimating our model.
Figure 1.1 Home bias for year 2009
1
Participation in the Coordinated Portfolio Investment Survey (CPIS) is voluntary and 75 economies
currently participate in the survey. The foreign holding data for each country provided by CPIS are
available annually for the period 2001-2009 and some data are also available for 1997
.In this study the subscript i and j denote the home country and the host country, respectively. The share of i’s equity investment in country j (wij) is the ratio of domestic country i’s holdings of country j equities to country i’s total equity portfolio.
The total equity portfolio for country i is calculated as country i’s market capitalization less equities held by foreign investors plus foreign equities held by domestic investors.
'
ij
'
country i s holdings of country j equities
w country i s total equity portfolio
(1.1)Here, the optimal portfolio allocation
w is the ratio of target country j’s equity
*j capitalization relative to the world market and is used as the benchmark of optimal portfolio holdings.Following Chan et al. (2005) and Fidora et al. (2007), Equation (1.3) defines the home bias measure of country i toward country j. The under/overweighting of the target countries is calculated as the actual allocation by each target country deviating from the market portfolio as suggested by the Capital Asset Pricing Model (CAPM).
This measures how far the actual portfolio allocation deviates from the market portfolio
w as suggested by CAPM.
*jThis paper addresses the issue of how cross-cultural differences affect foreign portfolio holdings. According to the well-known survey conducted by Hofstede (2001), the culture attributes can be identified into the following primary dimensions, including the differences in thinking, values, and social behaviors among people from more than 50 countries. This allows us to relate culture dimensions to international asset allocation. These culture dimensions are power distance index (pdi), uncertainty avoidance index (uai), individualism (idv), masculinity (mas), and long-term orientation (lto).
According to Hofstede’s framework, the cultural dimension of power distance is associated with the content of hierarchy. In a high power distant society, we expect the power imbalance to cause unequal resource distribution, a limited
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decision-making process, and a lack of social mobility. These will allow a powerful authority to pursue private interest and privilege, which will lead to a corrupt and bureaucratic government that lowers the level of trust and increases opportunistic behaviors. The extent to uncertainty avoidance is related to a society’s tolerance for uncertainty and ambiguity, indicating that people will feel either nervous or anxious in unpredicted situations. A country with a higher degree of uncertainty avoidance will expect its investment to be protected by strict laws and rules, in particular for investors preferring to allocate their assets in a safe and secure market.
Individualism is the degree to which individuals are integrated into groups. A country with a greater degree of individualism focuses on individual motivation, self-interest, and ambitions and one is expected to look after his immediate family. By contrast, a collectivism society refers to the extent that people are strongly connected and prefer group decision-making. Masculinity refers to a society that emphasizes assertiveness, competitiveness, and success instead of femininity, such as nurturance, support, and attentiveness. The last culture dimension of Hofsted (2001) is the long-term orientation, which refers to values associated with thrift and perseverance.
Despite the above-mentioned primary dimensions of national culture, we also utilize a composite measure of cultural distance through Kogut and Singh (1988) as follows:
where CDI is the cultural distance of domestic country I from target country J. Here,
C
n,I is the index for the nth cultural dimension of country I, Vnis the variance of the nth index, and C
n,J is the index for the nth cultural dimension of country J. A higher culture distance indicates a greater difference between the source and target countries.The data analyzed in this study are collected from various sources. The specific country characteristics such as GDP, total population, the ratio of private sector finance to GDP, telephone lines, the number of mobile phone subscribers, and Internet users per 100 people are from World Development Indicators (WDI), while country governance is from governance matters conducted by Kaufmann (1999). Our addressed cultural dimension measures, including power distance, uncertainty avoidance, individualism, masculinity, and long-term orientation versus short-term orientation, are from Hofsted’s website (www.geert-hofsted.com/). The gravity variables such as geographic distance between two countries and dummy variables indicating whether the two countries share a common language are drawn from CEPII (http://www.cepii.fr/anglaisgraph/news/accueilengl.htm).
1.3.2 Model Specification
We first examine whether national culture characteristics and culture distance between the home and host countries influence foreign investment. We are also interested in the interaction effect of culture distance and information gap on cross-border investment. We argue that information distance significantly increases the culture distance and discourages foreign investment, thus increasing the home bias measure for the originating country. The gravity model is specified as follows:
0 1 2 3 4 5
home bias gdp pop gdp pop dist
comlang credit credit
ln(gdp)
it andln(gdp)
jtare the GDP levels for source country i and target country j
in year t. ln(pop)
it and ln(pop)jtare the populations for source country i and target country j
in year t. ln(dist)
ij is the geographic distance between the capital cities of countries i and j. comlan is a dummy variable for whether two countries share a common
language. ln(credit)
it and ln(credit) jt are the ratios of private sector debt to GDP for country i and country j in year t. ln(culture)
it are the scores of Hofsted’s culture characteristics. ln(dist
cul)
ijt denotes the cultural distance for Hofsted’s culture characteristics between the source and target countries. ln(dist
cul dist
int)
ijt denotes the cross product term of culture distance and information distance between the source and target countries.
εijt is the normal error term with mean zero and variance σ2.
The dependent variable home biasijt denotes the home bias measure in cross-border equity investment, subscriber i denotes the cross-section country, and the symbol t represents each time period. The term α0 is a constant term, while the estimated coefficients of β1 to β4 capture the economic scale and specific country characteristics that are basic variables in the gravity model. The estimated coefficients for β5 and β6 measure the marginal effect of the gravity variables, geographic distance and whether two countries share common language, on international portfolio
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holdings. The coefficients for β7 and β8 capture the impact of financial development on bilateral home bias. The estimated coefficients for β9 measure the marginal effects for different national culture characteristics in home bias, while coefficient β10
captures the effects of various distances in the level of culture dimensions on home bias.
Shenkar (2001) suggests that national culture can be modified by corporate culture and addresses the interaction effect between culture distance and other interesting variables. Cho and Padmanabhan (2005)investigate the moderating effects of a firm’s experience levels in the relationship between cultural distance and foreign ownership mode choice. Slangen (2006) hypothesizes that national culture reduces foreign acquisition performance, depending on the level of post-acquisition integration. This study also interacts the cultural distance with information distance to examine whether the information gap increases this culture distance and result in an increasing home bias. Therefore, we expect the coefficient for β11 to be positive for the interaction term. Table 1.1 presents the summary statistics of the related variables used in this paper.
Table 1.1 Summary statistics
Table 1 presents descriptive statistics for the variables used in this study. We constrain our sample by censoring the values of home bias exceeding 0.99 and less than 0, since observations exceeding 0.99 or having a negative value can be seen as extreme values or foreign bias. The control variables include gross domestic product (GDP), total population (pop) for originating and destination countries, geographic distance (dist); a dummy variable indicates whether two countries share a common language (comlan); and the credit to the private sector as a share of GDP is used to proxy financial development (fin) for the originating and destination countries. The culture identifiers are Hofstede’s power distance (pdi), uncertainty avoidance (uai), individualism (idv), masculinity (mas), and long-term orientation (lto). The culture distance dimensions include power distance (distpdi), uncertainty avoidance (distuai), individualism (distidv), masculinity (distmas), and long-term orientation (distlto). All these variables are presented in log form. The superscripts OC and DC denote originating country and destination country, respectively.
Variable Obs Mean Std. Dev. Min Max
In order to provide insights for the relationship between rooted-cultural difference and equity home bias, we construct a gravity model from CPIS cross-border equity investment data that consist of 45 countries during 2001 to 2009. The following empirical results are estimated by the panel data approach, while the pooled OLS regression is conducted in Appendix.
Our analyses begin by identifying the national culture impacts on home bias by entering the specific culture characteristics into our model separately. Table 1.2 presents panel data estimation for the effects of different cultural dimensions, including power distance, uncertainty avoidance, masculinity, individualism, long-term orientation, and overall cultural distance measure, on international equity holdings. The positive sign of uncertainty avoidance suggests that a home country with a higher score in this cultural dimension exhibits more home bias. In general, a country with higher uncertainty avoidance has a greater risk adverse attitude and is more conservative in investing its wealth in foreign markets. The negative coefficient of individualism (ind) reflects that a country with a higher score in this dimension is confident in the ability to understand and interpret information quickly from the target market. Thus, investors are more willing to allocate their wealth in foreign markets