Critical Issues of Economic Development of Emerging Markets

**3**

**1. Introduction**

**Chapter 1**

*Pascal Salin*

**Abstract**

Humanism

Liberalism, the Only True

Liberalism is often criticized because it is said that it is concerned only by economic problems (and not more general human problems) and because it is in favor of selfishness. This is wrong and, in fact, liberalism is, on the contrary, the necessary consequence of a universal and valid conception of ethics. The foundation of liberalism consists in the fact that everyone must be respectful of the legitimate rights of any person (as regards, for instance, his body, his mind, and his legitimate property rights). Therefore, it implies that one ought to be respectful of another person either if this person is generous or if he is selfish (one is not obliged to be selfish, but one has the right to be selfish). Thus, liberalism is founded on the fundamental universal ethics and it is respectful of the individual conceptions of personal ethics. It is not in favor of selfishness, but in favor of individualism. This is why it must be said that liberalism is the only humanistic approach of social problems. However, many people consider that it is ethically justified to impose a redistribution policy to decrease so-called "social inequalities." But, so doing, a state is not respectful of the legitimate property rights of those who are obliged by legal constraint to pay taxes. A voluntary distribution of resources from individuals who give part of their legitimate resources to other individuals is ethically justified. But it is not the case whenever this transfer of resources is made by using coercion. And it must be added that it has negative consequences. Those who benefit from the redistribution policy are less induced to make productive efforts. And those who have to pay the taxes are also less induced to develop their productive activities. Therefore, the production of resources is diminished by the redistribution policy and all the members of a society (for instance a country) suffer from this non-ethical policy.

**Keywords:** liberalism, ethics, individual rights, redistribution policy

The discredit from which liberalism suffers in our time, in many countries, is an astonishing and appalling phenomenon. In reality, this discredit is based on caricatures of liberalism, complacently spread by those who have an interest in fighting it or who are unaware – sometimes voluntarily – of what is the true liberalism. Thus, it is claimed that liberalism is supporting rich people against poor people, that it gives human beings the sole objective of seeking material benefits, that it advocates selfishness, etc. Nothing could be further from the truth, and that is why all those who love the truth should be concerned about learning more about liberalism [1]. Unfortunately, all people have very rarely the opportunity to make this intellectual re-examination, and I am struck, for example, by the fact that all young people who

#### **Chapter 1**

## Liberalism, the Only True Humanism

*Pascal Salin*

#### **Abstract**

Liberalism is often criticized because it is said that it is concerned only by economic problems (and not more general human problems) and because it is in favor of selfishness. This is wrong and, in fact, liberalism is, on the contrary, the necessary consequence of a universal and valid conception of ethics. The foundation of liberalism consists in the fact that everyone must be respectful of the legitimate rights of any person (as regards, for instance, his body, his mind, and his legitimate property rights). Therefore, it implies that one ought to be respectful of another person either if this person is generous or if he is selfish (one is not obliged to be selfish, but one has the right to be selfish). Thus, liberalism is founded on the fundamental universal ethics and it is respectful of the individual conceptions of personal ethics. It is not in favor of selfishness, but in favor of individualism. This is why it must be said that liberalism is the only humanistic approach of social problems. However, many people consider that it is ethically justified to impose a redistribution policy to decrease so-called "social inequalities." But, so doing, a state is not respectful of the legitimate property rights of those who are obliged by legal constraint to pay taxes. A voluntary distribution of resources from individuals who give part of their legitimate resources to other individuals is ethically justified. But it is not the case whenever this transfer of resources is made by using coercion. And it must be added that it has negative consequences. Those who benefit from the redistribution policy are less induced to make productive efforts. And those who have to pay the taxes are also less induced to develop their productive activities. Therefore, the production of resources is diminished by the redistribution policy and all the members of a society (for instance a country) suffer from this non-ethical policy.

**Keywords:** liberalism, ethics, individual rights, redistribution policy

#### **1. Introduction**

The discredit from which liberalism suffers in our time, in many countries, is an astonishing and appalling phenomenon. In reality, this discredit is based on caricatures of liberalism, complacently spread by those who have an interest in fighting it or who are unaware – sometimes voluntarily – of what is the true liberalism. Thus, it is claimed that liberalism is supporting rich people against poor people, that it gives human beings the sole objective of seeking material benefits, that it advocates selfishness, etc. Nothing could be further from the truth, and that is why all those who love the truth should be concerned about learning more about liberalism [1]. Unfortunately, all people have very rarely the opportunity to make this intellectual re-examination, and I am struck, for example, by the fact that all young people who discover by chance a correct explanation of what liberalism is are amazed by its intellectual coherence and the solidity of its ethical foundation.

#### **2. Liberalism, ethics, individual rights and redistribution policy**

Liberalism consists into developing ideas based on individual behavior and individual aims to analyze or to promote the working of a society. And this is why liberalism must be considered as a true humanism, since humanism means a way of thinking or acting coherently with what human beings are. And humanism can be considered as the foundation of ethics since ethical actions and thoughts imply to be respectful of the very nature of human beings.

Indeed, liberalism is both a method of analysis and an ethic. It is a method of analysis because it consists in thinking – and this should be obvious – that we can only understand the functioning of a society by having a realistic vision of what a human being is, of his deep nature, of his behavior. A society is not a kind of great machine, but a collection of men and women who have – each of them – their own individuality, but who interact one with the other and are therefore, from this point of view, necessarily in solidarity with each other. Just to give an illustration of the problem, economists quite often develop analyses of what is called "macroeconomics." But they possibly define discretionary concepts – such as "national income" – which may not have any link with individual behaviors. Thus they may deduct economic proposals which are not respectful of individual behaviors and aims so that they may not be efficient and, above all, they may not be coherent with ethics. To avoid such errors, many intellectuals are in favor of what is called praxeology, that is, the science of human action. Such is the case, in particular, of Ludwig von Mises in his book, *Human action*, [2] and more generally of the so-called Austrian economic theory (initially developed by Ludwig von Mises and Friedrich Hayek [3, 4]). They rightly consider that it is necessary to begin any social analysis by using realistic assumptions about the behavior of individuals.

As regards liberal ethics [5] it implies that there is a universal duty to be respectful of everyone's legitimate rights. Of course, each of us also has his or her own personal moral principles regarding how to behave with others. These personal morals are highly respectable, provided, however, that they are not incompatible with the universal ethic of respect for the legitimate rights of others.

It may be said that liberal values are Christian values or at least are fully compatible with them. It is Christianity which has enabled the emergence of individual freedom in the Western world and which has, moreover, enabled economic takeoff and enabled countless masses to escape from poverty. With Christianity, as with liberalism, a human being is not just a cog in the great social machine, but a person who deserves respect as such.

Liberalism and Christianity share a common basis in terms of universal values. But, of course, within this general framework each can develop its own moral concepts. Thus, Christianity considers altruism as a virtue. But this is not incompatible with liberalism. Indeed, a liberal must be intransigent with the universal duty to respect the rights of others, but he does not claim to suggest a particular conduct to human beings, for example, to suggest – or, even less, to impose – altruistic or selfish behavior toward this or that person or category of persons. He considers that this is a matter of personal responsibility and that it is his duty to respect such personal ethics as long as it does not contradict the universal duty to be respectful of the rights of others. That is why it is absurd to say that liberalism supports selfishness. Based on an absolute respect for individuals, liberalism refrains from making judgments about the conduct and opinions of individuals unless they infringe the legitimate rights of

**5**

been the only real enemy of totalitarianism!

and peaceful society?

Should not the trust we place in human beings and in their extraordinary capacities lead us to hope that all these confusions, lies, and the resulting disasters will be dispelled and that, as free beings, they will be able to live in a harmonious

However many people believe that there are so-called inequalities between the members of a society (for instance the members of a country) and that it is the important role of a State to decide a redistribution policy. It is understandable that

*Liberalism, the Only True Humanism*

*DOI: http://dx.doi.org/10.5772/intechopen.93235*

many people bear the burden of taxes without knowing it.

ously, as they are led to see this role as being played by the State.

others. Thus, it will consider a person's generous behavior to be perfectly respectable. But it will challenge the State's claim to redistribute resources through the use of coercion, which in itself constitutes an infringement of the freedom and rights of individuals. Solidarity is worthy of respect when it is voluntary; it is not worthy of respect when it is compulsory. In the latter case, moreover, it is all the less not a moral value since in reality, it is most often used as a means for politicians to serve their own personal interests: They obtain votes in elections by distributing the resources they have taken by force from certain taxpayers. And this is all the more questionable since

By giving to itself a virtual monopoly in the exercise of solidarity, the State destroys natural solidarity. It destroys the incentives to work, save, innovate, and undertake in order to create resources (since it takes a large part of the fruits of all efforts), which undermines the prosperity of all and harms the poorest in particular. At the same time, however, it destroys the propensity of individuals to act gener-

This shows how wrong it is to claim that liberalism is attached to material values, that it defends the rich against the poor, the powerful against the oppressed. It is, on the contrary, state interventionism which, by depriving individuals of the full exercise of their freedom, provokes a war of all against all. As the famous French economist [6] put it so well at the beginning of the nineteenth century, "The State is the great fiction through which everyone tries to live at the expense of everyone else." It should therefore come as no surprise if, in a country like France, one has the feeling that most citizens are embittered, demanding, and frustrated: their fate now depends only marginally on their own efforts and sense of responsibility, it depends on what the State will take from them and give to them in this war of all against all. What a contrast with what would be a perfectly liberal society based on the freedom of each individual and therefore on individual responsibility! Such a society, totally respectful of the rights of each person, would be peaceful and prosperous. It would allow everyone to live according to his own moral principles, his own goals, and his own decisions. Could we not then trust human beings to build, through their interactions, the peaceful society that each of us deeply desires within our society? And should we not be surprised that citizens hand over so many decisions concerning their lives to men and women who are not chosen for their sense of ethics or, for that matter, for their skills, but more often than not for the promises they make and who are financed by the catching of resources which they did not create and which therefore do not belong to them? It should not be surprising, moreover, that in this immoral world built by statesmen, we find all sorts of corruption scandals and illicit enrichment throughout the world. These are obviously the same people who go to war against liberalism because it threatens their privileges and their spoliations. They do not hesitate to disguise reality and present liberalism as something it is not. In this terribly politicized world in which we find ourselves unfortunately, the confusion of ideas reaches an incredible level. One comes to reproach so-called liberal policies (which are not liberal) for the failures due to state interventionism. As Marine Le Pen – the head of a nationalist extreme-right political party in France – has said, one even comes to claim that liberalism is totalitarianism, even though it is and always has

#### *Liberalism, the Only True Humanism DOI: http://dx.doi.org/10.5772/intechopen.93235*

*Emerging Markets*

discover by chance a correct explanation of what liberalism is are amazed by its

Liberalism consists into developing ideas based on individual behavior and individual aims to analyze or to promote the working of a society. And this is why liberalism must be considered as a true humanism, since humanism means a way of thinking or acting coherently with what human beings are. And humanism can be considered as the foundation of ethics since ethical actions and thoughts imply to be

Indeed, liberalism is both a method of analysis and an ethic. It is a method of analysis because it consists in thinking – and this should be obvious – that we can only understand the functioning of a society by having a realistic vision of what a human being is, of his deep nature, of his behavior. A society is not a kind of great machine, but a collection of men and women who have – each of them – their own individuality, but who interact one with the other and are therefore, from this point of view, necessarily in solidarity with each other. Just to give an illustration of the problem, economists quite often develop analyses of what is called "macroeconomics." But they possibly define discretionary concepts – such as "national income" – which may not have any link with individual behaviors. Thus they may deduct economic proposals which are not respectful of individual behaviors and aims so that they may not be efficient and, above all, they may not be coherent with ethics. To avoid such errors, many intellectuals are in favor of what is called praxeology, that is, the science of human action. Such is the case, in particular, of Ludwig von Mises in his book, *Human action*, [2] and more generally of the so-called Austrian economic theory (initially developed by Ludwig von Mises and Friedrich Hayek [3, 4]). They rightly consider that it is necessary to begin any social analysis by using realistic assumptions about the behavior of individuals. As regards liberal ethics [5] it implies that there is a universal duty to be respect-

ful of everyone's legitimate rights. Of course, each of us also has his or her own personal moral principles regarding how to behave with others. These personal morals are highly respectable, provided, however, that they are not incompatible

It may be said that liberal values are Christian values or at least are fully compatible with them. It is Christianity which has enabled the emergence of individual freedom in the Western world and which has, moreover, enabled economic takeoff and enabled countless masses to escape from poverty. With Christianity, as with liberalism, a human being is not just a cog in the great social machine, but a

Liberalism and Christianity share a common basis in terms of universal values. But, of course, within this general framework each can develop its own moral concepts. Thus, Christianity considers altruism as a virtue. But this is not incompatible with liberalism. Indeed, a liberal must be intransigent with the universal duty to respect the rights of others, but he does not claim to suggest a particular conduct to human beings, for example, to suggest – or, even less, to impose – altruistic or selfish behavior toward this or that person or category of persons. He considers that this is a matter of personal responsibility and that it is his duty to respect such personal ethics as long as it does not contradict the universal duty to be respectful of the rights of others. That is why it is absurd to say that liberalism supports selfishness. Based on an absolute respect for individuals, liberalism refrains from making judgments about the conduct and opinions of individuals unless they infringe the legitimate rights of

with the universal ethic of respect for the legitimate rights of others.

person who deserves respect as such.

**2. Liberalism, ethics, individual rights and redistribution policy**

intellectual coherence and the solidity of its ethical foundation.

respectful of the very nature of human beings.

**4**

others. Thus, it will consider a person's generous behavior to be perfectly respectable. But it will challenge the State's claim to redistribute resources through the use of coercion, which in itself constitutes an infringement of the freedom and rights of individuals. Solidarity is worthy of respect when it is voluntary; it is not worthy of respect when it is compulsory. In the latter case, moreover, it is all the less not a moral value since in reality, it is most often used as a means for politicians to serve their own personal interests: They obtain votes in elections by distributing the resources they have taken by force from certain taxpayers. And this is all the more questionable since many people bear the burden of taxes without knowing it.

By giving to itself a virtual monopoly in the exercise of solidarity, the State destroys natural solidarity. It destroys the incentives to work, save, innovate, and undertake in order to create resources (since it takes a large part of the fruits of all efforts), which undermines the prosperity of all and harms the poorest in particular. At the same time, however, it destroys the propensity of individuals to act generously, as they are led to see this role as being played by the State.

This shows how wrong it is to claim that liberalism is attached to material values, that it defends the rich against the poor, the powerful against the oppressed. It is, on the contrary, state interventionism which, by depriving individuals of the full exercise of their freedom, provokes a war of all against all. As the famous French economist [6] put it so well at the beginning of the nineteenth century, "The State is the great fiction through which everyone tries to live at the expense of everyone else." It should therefore come as no surprise if, in a country like France, one has the feeling that most citizens are embittered, demanding, and frustrated: their fate now depends only marginally on their own efforts and sense of responsibility, it depends on what the State will take from them and give to them in this war of all against all.

What a contrast with what would be a perfectly liberal society based on the freedom of each individual and therefore on individual responsibility! Such a society, totally respectful of the rights of each person, would be peaceful and prosperous. It would allow everyone to live according to his own moral principles, his own goals, and his own decisions. Could we not then trust human beings to build, through their interactions, the peaceful society that each of us deeply desires within our society? And should we not be surprised that citizens hand over so many decisions concerning their lives to men and women who are not chosen for their sense of ethics or, for that matter, for their skills, but more often than not for the promises they make and who are financed by the catching of resources which they did not create and which therefore do not belong to them? It should not be surprising, moreover, that in this immoral world built by statesmen, we find all sorts of corruption scandals and illicit enrichment throughout the world. These are obviously the same people who go to war against liberalism because it threatens their privileges and their spoliations. They do not hesitate to disguise reality and present liberalism as something it is not. In this terribly politicized world in which we find ourselves unfortunately, the confusion of ideas reaches an incredible level. One comes to reproach so-called liberal policies (which are not liberal) for the failures due to state interventionism. As Marine Le Pen – the head of a nationalist extreme-right political party in France – has said, one even comes to claim that liberalism is totalitarianism, even though it is and always has been the only real enemy of totalitarianism!

Should not the trust we place in human beings and in their extraordinary capacities lead us to hope that all these confusions, lies, and the resulting disasters will be dispelled and that, as free beings, they will be able to live in a harmonious and peaceful society?

However many people believe that there are so-called inequalities between the members of a society (for instance the members of a country) and that it is the important role of a State to decide a redistribution policy. It is understandable that some people find it difficult to accept large differences in incomes and living conditions, and the fight against inequality therefore seems sympathetic. But beyond feelings, what is called "inequalities" must be rigorously analyzed. In a country, there is not one big central distributor who would have created all the wealth and who could distribute it in an egalitarian way. There is a multitude of individuals who create their wealth thanks to their efforts of work, savings, entrepreneurial risktaking, etc. What characterizes a human society is not inequality, but diversity. All human beings are different and the wealth they create is unequal because they differ in age, talents, abilities to make efforts, life choices, etc. However, all members of a society are "united," for example, because we cannot have prosperous employees if we discourage their employers by overloading them with exorbitant taxes.

At some point in time the situations of all individuals are obviously diverse ("unequal"). But these relative situations change and it is important to give everyone a chance. It is interesting to note, for example, that according to many studies in the United States a significant proportion of those who have high incomes at one point in time have much lower incomes a few years later. On the contrary, there is a significant progress for those with low incomes.

The feeling of solidarity exists in the hearts of human beings and there have always been private initiatives to take care of the weakest people. This voluntary solidarity has a moral basis: those who practice it sacrifice resources they have created to help others. This has nothing to do with the so-called compulsory "solidarity" practiced by representatives of the State and public organizations, which is done with the money of individuals (even if some have a sincere desire to help others). And one can always suspect that they are pursuing personal goals: getting votes in elections. This is why, for example, in most countries, an income tax has progressive rates: politicians do not lose much electoral support by taxing a small number of high-income people heavily in the name of fighting inequality. But in fact they are hurting everyone. Indeed, in a free society, those with high incomes are the ones who create the most wealth through their talent, their productive efforts, and their ability to take risks. They create jobs, and they introduce technical progress which increases everyone's purchasing power. But if they are too much taxed, they are discouraged from making efforts or they go into exile, depriving their country of opportunities for growth, which is detrimental to everyone. And it would be better if, by reducing this policy of fighting inequality, one could finally see a strong growth, a rapid increase in wages and full employment. The important thing is that everyone should be able to become richer, especially the poorest people, whatever is the evolution of "inequalities."

Many people – and specially politicians – claim to be in favor of "social justice." But it is important to analyze what is meant by "social justice" and the remarks made above can help to develop such an analysis. There are two very different definitions of "social justice." The first one is concerned by what could be called "universal ethics," namely being respectful of individual rights. On the other hand, the specific and personal ethics of each individual is inspiring the second definition of "social justice": it consists in comparing the actual situation of individuals and to decide subjectively that some specific differences are fair or not. This second definition is the most widely accepted one and usually, when speaking of "social justice" people care mainly about the monetary incomes of individuals. According to a personal judgment – more or less shared by a great number of people – one considers that the differences between individual incomes must be more or less diminished. Now, some more characteristics of both definitions must be clarified in order to have a rigorous analysis of this problem.

Let us first consider the first definition of social justice. We just mentioned that it means that individual rights are respected by everyone. But it is not sufficient to

**7**

misleading.

*Liberalism, the Only True Humanism*

legitimate.

*DOI: http://dx.doi.org/10.5772/intechopen.93235*

which have been created by partners in exchange).

reduction of inequality as being a morally justified policy.

person and therefore universal morality.

care about respecting rights, since individual rights have to be ethically founded for a situation respectful of rights to be ethically justified. In fact, let us assume that there is a society in which most properties have been got by stealing them; it is obvious that, in such a case, there is no justification for respecting property rights! This means that it is important to determine in which cases property rights are

The basic principle of ethics consists in claiming that individuals are free, which means that they are not subject to the constraint of other people, that is, they are the owners of themselves. But one is not his own owner if ever he is not the owner of the goods and services he is creating by using his mind and his physical activities. Therefore, it must be considered that legitimate property rights are those which are obtained by acts of creation (and obviously, by exchanging goods and services

Thus, the first definition of social justice can potentially be accepted by everyone all over the world (at least if people agree about the legitimacy of property rights). But, as regards the second definition of social justice – namely a comparison of the standard of life of individuals in a society – each individual has a different definition of what he considers as socially fair. There is therefore a very important problem, namely the coherence between these different opinions. As, very likely, all individuals have different opinions about "solidarity" there cannot be an "universal" criterion of what should be considered as "social justice," that is, the fair distribution of resources. It is then assumed that social justice in the distribution of incomes can be defined by a majority of votes in a democratic system. Nowadays, when speaking of social justice one implicitly means redistributive activities (social policy), which refers to the second meaning of social justice. It is implicitly assumed that social justice implies a reduction of inequalities. In the term "equality" or "inequality," there is an implicit value judgment. This is why one considers the

Libertarians are frequently critical of egalitarian policies so that it is often claimed that they promote selfishness, and that liberalism must be challenged for ethical reasons. But human beings are characterized by their diversity and this is why one should, on the one hand, talk about diversity rather than inequality and, on the other hand, be respectful of this diversity inherent to human nature. The term of inequality would be justified if the fate of all individuals – and in particular their standard of living – was determined by a central authority owning all resources and able to "distribute" them more or less "equally." But it is not the case – fortunately – in a free society and that is why the expression "income redistribution" is totally

However, contrary to what is often claimed, liberalism is not supporting the freedom of anyone to do anything, but the freedom to act while respecting the legitimate rights of others. This freedom to act implies the freedom to implement one's own personal ethics, but only if it is legitimate and if it is respectful of universal ethics. It is the case if someone who holds legitimate property rights on certain resources uses a portion of these resources to help another person; his acts are then in accordance with his personal morality without being damaging to universal morality. This behavior is totally moral and respectable. But someone who steals goods to a person to give his loot to another person – because his personal morality induces him to help the latter – violates the property rights of the first

Now, it is exactly the same with "inequalities policies": Statesmen (politicians and bureaucrats) levy, thanks to coercion, resources from some people (known as citizens) to give them to others. In doing so, they undermine universal morality and therefore we must accept the idea that a policy aiming at the reduction of "inequalities" is

#### *Liberalism, the Only True Humanism DOI: http://dx.doi.org/10.5772/intechopen.93235*

*Emerging Markets*

some people find it difficult to accept large differences in incomes and living conditions, and the fight against inequality therefore seems sympathetic. But beyond feelings, what is called "inequalities" must be rigorously analyzed. In a country, there is not one big central distributor who would have created all the wealth and who could distribute it in an egalitarian way. There is a multitude of individuals who create their wealth thanks to their efforts of work, savings, entrepreneurial risktaking, etc. What characterizes a human society is not inequality, but diversity. All human beings are different and the wealth they create is unequal because they differ in age, talents, abilities to make efforts, life choices, etc. However, all members of a society are "united," for example, because we cannot have prosperous employees if

we discourage their employers by overloading them with exorbitant taxes.

significant progress for those with low incomes.

people, whatever is the evolution of "inequalities."

order to have a rigorous analysis of this problem.

At some point in time the situations of all individuals are obviously diverse ("unequal"). But these relative situations change and it is important to give everyone a chance. It is interesting to note, for example, that according to many studies in the United States a significant proportion of those who have high incomes at one point in time have much lower incomes a few years later. On the contrary, there is a

The feeling of solidarity exists in the hearts of human beings and there have always been private initiatives to take care of the weakest people. This voluntary solidarity has a moral basis: those who practice it sacrifice resources they have created to help others. This has nothing to do with the so-called compulsory "solidarity" practiced by representatives of the State and public organizations, which is done with the money of individuals (even if some have a sincere desire to help others). And one can always suspect that they are pursuing personal goals: getting votes in elections. This is why, for example, in most countries, an income tax has progressive rates: politicians do not lose much electoral support by taxing a small number of high-income people heavily in the name of fighting inequality. But in fact they are hurting everyone. Indeed, in a free society, those with high incomes are the ones who create the most wealth through their talent, their productive efforts, and their ability to take risks. They create jobs, and they introduce technical progress which increases everyone's purchasing power. But if they are too much taxed, they are discouraged from making efforts or they go into exile, depriving their country of opportunities for growth, which is detrimental to everyone. And it would be better if, by reducing this policy of fighting inequality, one could finally see a strong growth, a rapid increase in wages and full employment. The important thing is that everyone should be able to become richer, especially the poorest

Many people – and specially politicians – claim to be in favor of "social justice." But it is important to analyze what is meant by "social justice" and the remarks made above can help to develop such an analysis. There are two very different definitions of "social justice." The first one is concerned by what could be called "universal ethics," namely being respectful of individual rights. On the other hand, the specific and personal ethics of each individual is inspiring the second definition of "social justice": it consists in comparing the actual situation of individuals and to decide subjectively that some specific differences are fair or not. This second definition is the most widely accepted one and usually, when speaking of "social justice" people care mainly about the monetary incomes of individuals. According to a personal judgment – more or less shared by a great number of people – one considers that the differences between individual incomes must be more or less diminished. Now, some more characteristics of both definitions must be clarified in

Let us first consider the first definition of social justice. We just mentioned that it means that individual rights are respected by everyone. But it is not sufficient to

**6**

care about respecting rights, since individual rights have to be ethically founded for a situation respectful of rights to be ethically justified. In fact, let us assume that there is a society in which most properties have been got by stealing them; it is obvious that, in such a case, there is no justification for respecting property rights! This means that it is important to determine in which cases property rights are legitimate.

The basic principle of ethics consists in claiming that individuals are free, which means that they are not subject to the constraint of other people, that is, they are the owners of themselves. But one is not his own owner if ever he is not the owner of the goods and services he is creating by using his mind and his physical activities. Therefore, it must be considered that legitimate property rights are those which are obtained by acts of creation (and obviously, by exchanging goods and services which have been created by partners in exchange).

Thus, the first definition of social justice can potentially be accepted by everyone all over the world (at least if people agree about the legitimacy of property rights). But, as regards the second definition of social justice – namely a comparison of the standard of life of individuals in a society – each individual has a different definition of what he considers as socially fair. There is therefore a very important problem, namely the coherence between these different opinions. As, very likely, all individuals have different opinions about "solidarity" there cannot be an "universal" criterion of what should be considered as "social justice," that is, the fair distribution of resources. It is then assumed that social justice in the distribution of incomes can be defined by a majority of votes in a democratic system. Nowadays, when speaking of social justice one implicitly means redistributive activities (social policy), which refers to the second meaning of social justice. It is implicitly assumed that social justice implies a reduction of inequalities. In the term "equality" or "inequality," there is an implicit value judgment. This is why one considers the reduction of inequality as being a morally justified policy.

Libertarians are frequently critical of egalitarian policies so that it is often claimed that they promote selfishness, and that liberalism must be challenged for ethical reasons. But human beings are characterized by their diversity and this is why one should, on the one hand, talk about diversity rather than inequality and, on the other hand, be respectful of this diversity inherent to human nature. The term of inequality would be justified if the fate of all individuals – and in particular their standard of living – was determined by a central authority owning all resources and able to "distribute" them more or less "equally." But it is not the case – fortunately – in a free society and that is why the expression "income redistribution" is totally misleading.

However, contrary to what is often claimed, liberalism is not supporting the freedom of anyone to do anything, but the freedom to act while respecting the legitimate rights of others. This freedom to act implies the freedom to implement one's own personal ethics, but only if it is legitimate and if it is respectful of universal ethics. It is the case if someone who holds legitimate property rights on certain resources uses a portion of these resources to help another person; his acts are then in accordance with his personal morality without being damaging to universal morality. This behavior is totally moral and respectable. But someone who steals goods to a person to give his loot to another person – because his personal morality induces him to help the latter – violates the property rights of the first person and therefore universal morality.

Now, it is exactly the same with "inequalities policies": Statesmen (politicians and bureaucrats) levy, thanks to coercion, resources from some people (known as citizens) to give them to others. In doing so, they undermine universal morality and therefore we must accept the idea that a policy aiming at the reduction of "inequalities" is

immoral in principle. Although statesmen are using their monopoly of legal constraint so that this coercion is legal, it is however immoral since it is an attack on legitimate property rights (and this is why one must consider as a moral duty to cut taxes as much as possible). It may be that, in doing thus, some statesmen try to implement their own personal morality, but anyhow they infringe universal morality. On the other hand, it is well known that, so doing, they often pursue personal goals. Thus, to be elected or re-elected, they transfer resources to a large number of voters at the expense of a minority. As we already said, it is for this reason that the progressive tax – immoral and unequal by nature – does exist. And the fact that politicians are elected by a majority of voters do not give them legitimacy since one can always find a majority to violate the legitimate rights of a minority as far as the exercise of legal constraint is possible.

Furthermore, equality is defined arbitrarily from a single criterion, namely income at some point of time. However the objectives of individuals are varied (they do not concern only monetary income), their age is different and therefore their experience and their capital (which are the sources of their incomes). Let us imagine that all individuals be identical, there would, however, be an inequality in incomes according to the age of each person.

Of course, some are victims of physical or mental disabilities and human history shows that charity has always existed in such cases. This charity, decided personally by each individual, is extremely respectable, unlike so-called public charity (which, moreover, is vitiated by prospects concerning elections and which therefore leads to new inequalities between those who thus come to power – claiming to take in charge poverty – and those who must undergo public choices).

Frédéric Bastiat has been a member of the French Parliament and he sat on the benches of the left. Left members of the Parliament applauded him when he advocated economic freedom to improve the life standard of the poorest people. Is that inconceivable in the present period? Improving the life standard of everyone, especially the most vulnerable, is possible and desirable. But we must take the means to do so. Liberalism is the best mean.

#### **Author details**

Pascal Salin Mont Pèlerin Society, University Paris-Dauphine, France

\*Address all correspondence to: pascal.salin@gmail.com

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**9**

*Liberalism, the Only True Humanism*

[1] Salin P. Libéralisme. Paris: Odile

[2] Mises, L E von. Human Action: A Treatise on Economics by Ludwig Von Mises. New Haven: Yale University

[3] Hayek, F. Law, Legislation and Liberty - A New Statement of the Liberal Principles of Justice and Political Economy, 1973, 1976, 1976; (republished in 2012 by Routledge)

[4] Hayek, F. The Fatal Conceit: The Errors of Socialism. Independent Publishing Platform: The University of

[5] Rothbard, M N. The Ethics of Liberty. Odile Jacob: New York

[6] Bastiat, F. "The Law", "The State", and Other Political Writings, 1843-1850. Indianapolis: Liberty Fund Inc, 2012.

Chicago Press, 1988.

University Press, 2003.

**References**

Jacob, 2000.

Press, 1949.

*DOI: http://dx.doi.org/10.5772/intechopen.93235*

*Liberalism, the Only True Humanism DOI: http://dx.doi.org/10.5772/intechopen.93235*

#### **References**

*Emerging Markets*

immoral in principle. Although statesmen are using their monopoly of legal constraint so that this coercion is legal, it is however immoral since it is an attack on legitimate property rights (and this is why one must consider as a moral duty to cut taxes as much as possible). It may be that, in doing thus, some statesmen try to implement their own personal morality, but anyhow they infringe universal morality. On the other hand, it is well known that, so doing, they often pursue personal goals. Thus, to be elected or re-elected, they transfer resources to a large number of voters at the expense of a minority. As we already said, it is for this reason that the progressive tax – immoral and unequal by nature – does exist. And the fact that politicians are elected by a majority of voters do not give them legitimacy since one can always find a majority to violate the legitimate rights of a minority as far as the exercise of legal constraint is possible. Furthermore, equality is defined arbitrarily from a single criterion, namely income at some point of time. However the objectives of individuals are varied (they do not concern only monetary income), their age is different and therefore their experience and their capital (which are the sources of their incomes). Let us imagine that all individuals be identical, there would, however, be an inequality in

Of course, some are victims of physical or mental disabilities and human history shows that charity has always existed in such cases. This charity, decided personally by each individual, is extremely respectable, unlike so-called public charity (which, moreover, is vitiated by prospects concerning elections and which therefore leads to new inequalities between those who thus come to power – claiming to take in charge

Frédéric Bastiat has been a member of the French Parliament and he sat on the benches of the left. Left members of the Parliament applauded him when he advocated economic freedom to improve the life standard of the poorest people. Is that inconceivable in the present period? Improving the life standard of everyone, especially the most vulnerable, is possible and desirable. But we must take the

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

**8**

**Author details**

Mont Pèlerin Society, University Paris-Dauphine, France

incomes according to the age of each person.

means to do so. Liberalism is the best mean.

poverty – and those who must undergo public choices).

\*Address all correspondence to: pascal.salin@gmail.com

provided the original work is properly cited.

Pascal Salin

[1] Salin P. Libéralisme. Paris: Odile Jacob, 2000.

[2] Mises, L E von. Human Action: A Treatise on Economics by Ludwig Von Mises. New Haven: Yale University Press, 1949.

[3] Hayek, F. Law, Legislation and Liberty - A New Statement of the Liberal Principles of Justice and Political Economy, 1973, 1976, 1976; (republished in 2012 by Routledge)

[4] Hayek, F. The Fatal Conceit: The Errors of Socialism. Independent Publishing Platform: The University of Chicago Press, 1988.

[5] Rothbard, M N. The Ethics of Liberty. Odile Jacob: New York University Press, 2003.

[6] Bastiat, F. "The Law", "The State", and Other Political Writings, 1843-1850. Indianapolis: Liberty Fund Inc, 2012.

**Chapter 2**

**Abstract**

and Why?

business transactions.

transition economies

**1. Introduction**

**11**

*Sabina Silajdzic and Eldin Mehic*

Institutions, Culture and Foreign

Direct Investment in Transition

Economies: Does Culture Matter

The aim of this research is to analyse the importance of cultural and institutional determinants in attracting FDI to transition countries. We rely on gravity econometric framework and examine the impact of cultural and institutional factors on FDI using bilateral FDI flows between home (i.e. major trading partners) and eight transition economies in the period 2000–2018. We study this relationship in an integrated framework considering principal gravity forces, traditional FDI determinants, policy and institutional factors. We provide strong and robust evidence that cultural factors, depicted in Hofmann cultural indices, influence MNCs' locational decisions. Other things held constant, specific cultural features seem more important than formal institutions, which seems at odds with standard neoclassical propositions, and shed some new light on the way we understand international

**Keywords:** FDI, cultural factors, institutional factors, gravity model,

economies is the principal question investigated in this research.

Foreign Direct Investments (hereinafter: FDI) has been largely found to positively affect economic growth in transition economies. Increases in FDI have been associated with productivity and export growth of local companies via knowledge spillovers and complementary effects on domestic investment. The impact of FDI on economic growth seems, however, conditional on the level of human capital and absorptive capacity of a host economy. Determinants of FDI in transition economies have been intensely researched highlighting the importance of traditional factors, institutions and policy choices in determining locational decisions of multinational corporations (MNCs). Although informal institutions and cultural factors have increasingly been characterised as important factors that off-set for the underdeveloped institutional capacity of transition economies, the impact of cultural ties on FDI remains fairly under researched. Informal economic structures and cultural similarities emanate trust and enable strong business ties across borders. How important are these factors in explaining differences in FDI flows among transition

#### **Chapter 2**

## Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture Matter and Why?

*Sabina Silajdzic and Eldin Mehic*

### **Abstract**

The aim of this research is to analyse the importance of cultural and institutional determinants in attracting FDI to transition countries. We rely on gravity econometric framework and examine the impact of cultural and institutional factors on FDI using bilateral FDI flows between home (i.e. major trading partners) and eight transition economies in the period 2000–2018. We study this relationship in an integrated framework considering principal gravity forces, traditional FDI determinants, policy and institutional factors. We provide strong and robust evidence that cultural factors, depicted in Hofmann cultural indices, influence MNCs' locational decisions. Other things held constant, specific cultural features seem more important than formal institutions, which seems at odds with standard neoclassical propositions, and shed some new light on the way we understand international business transactions.

**Keywords:** FDI, cultural factors, institutional factors, gravity model, transition economies

#### **1. Introduction**

Foreign Direct Investments (hereinafter: FDI) has been largely found to positively affect economic growth in transition economies. Increases in FDI have been associated with productivity and export growth of local companies via knowledge spillovers and complementary effects on domestic investment. The impact of FDI on economic growth seems, however, conditional on the level of human capital and absorptive capacity of a host economy. Determinants of FDI in transition economies have been intensely researched highlighting the importance of traditional factors, institutions and policy choices in determining locational decisions of multinational corporations (MNCs). Although informal institutions and cultural factors have increasingly been characterised as important factors that off-set for the underdeveloped institutional capacity of transition economies, the impact of cultural ties on FDI remains fairly under researched. Informal economic structures and cultural similarities emanate trust and enable strong business ties across borders. How important are these factors in explaining differences in FDI flows among transition economies is the principal question investigated in this research.

Culture, in a broader sense, means a pattern of behaviour based on values and beliefs that develops over time in a particular society. While culture in a narrower sense represents the way of life of a social group, i.e. a society that includes language, tradition, knowledge, customs, laws, art and other tangible and intangible features of social life that are passed down through generations, cultural is of course subject to change. Culture includes a set of values and attitudes of a homogeneous group of people that are passed down from generation to generation, and these patterns of behaviour change rather slowly.

well as informal norms, set of beliefs, systems of values, customs considered also an important feature of the institutional environment of a given country. Different scholars perceive differently the relative importance of these various components, including the role played by formal and informal rules and conventions as well as the importance of and role played by organisations, encompassing both economic

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

They are competing theoretical perceptions and different values attached to institutions and organisations in the contemporary literature [1–3]. Generally, institutions are perceived as frames or rules of the game while organisations are defined as social agents constituting and carrying these rules [2]. Importantly, the relationship between institutions and organisations is not a straight forward one. There is a general consensus among scholars that institutions principally evolve in response to market- related imperfections, and as such, institutions are considered a mechanism to enhance efficiency associated with economic transactions. However, whether institutions evolve primarily in response to changes in values, perception and attitudes embodied in organisations (i.e. various social agents) including theirs' perceived inefficiencies in functioning of the market, or whether institutional development can be viewed as principally exogenous process where norms dominantly govern actions of social agents is still a debated issue [1–3]. Relate to this is a question whether institutional development is constrained by organisations' preferences and capacities? Arguably the answer to these questions depends on how we perceive institutions and how do we value the relative importance of institutions *vis*

The theoretical conceptualisation of institutions has mostly favoured the stream of literature which views institutions as frames or rules of the game which both guide and constrain actions of social agents i.e. organisations of various sorts including political and economic agents that make up societies. This stream of literature suggests the dichotomy between institutions and organisations. Accordingly institutions reveal formal and informal rules and conventions which set the structures within which, and upon which societal agents act [1, 2]. More precisely, the dichotomy in the words of [2] implies a clear conceptual distinction between institutions and organisations as follows; institutions define 'the rules' of the game and organisations are 'the players' by whom the game is played. Similarly, [4] suggests that institutions provide the set of rules defining frames within which organisations act. This is where the importance of cultural dimensions become crucial in understanding the institutional performance and in particular the differences in economic performance among countries amid similar institutional devel-

In this respect, 'good' institutions are only necessary but not sufficient condition to promote successful change within a society and/or to achieve desired societal goals. This view implies that although institutions evolve in response to market failures encompassing various forms of imperfections related to economics transactions and exchange they evolve in particular socio-historical context, and in accordance with prevailing preferences, norms and ethics of organisations that embody, interpret and influence the institutional conditions i.e. the specific

(endogenous) rule setting [5]. These endogenous norms and values of a society have been embedded in what we call informal institutional structures of the economy. Put differently, formal institutions are embodied in culture, and culture matters for understanding the link between formal and informal institutional setting of individual countries [2, 6, 7]. The culture of a society determines informal behavioural patterns of economic agents, and by that the quality and the efficiency of formal institutions. This is to say that institutions, e.g. the relevance of formal rules, adherence to formal principles and legal provisions rests within organisation and

and social agents of various sorts.

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

*a vis* organisations.

**13**

opment and/or quality of institutions.

The importance of cultural factors has been increasingly emphasised in the FDI literature. In particular, the impact of cultural distance between home and host countries has found to be significant in number of studies investigating the role of culture in explaining FDI flows. However, few studies concentrated on the transition economies of Central and Eastern Europe. These countries are viewed as specific in terms of both scope of economic and institutional transformation, and specific (common) legacies of socialism. We contribute to recent literature on FDI in transition economies, by analysing the significance of broad set of institutional and cultural indicators ought to influence MNC decisions on where to invest. A special reference is given to the discussion on the relationship between formal and informal institutions, assumed to be predominantly depicted in cultural dimensions of a specific country. In addition, the relevance of specific Hofstede cultural dimension to foreign firms is brought to the fore. Having said this, the hypothesis tested imply 'favourable cultural context' that is, specific cultural characteristics that are assumed to be preferred by foreign firms. We posit somewhat universal aspects of culture related to Hofstede cultural dimensions that constitute favourable cultural environment to foreign firms. Furthermore, we make use of the gravity model and the panel data framework to examine the importance of relative differences between home and host country characteristics in explaining bilateral FDI stock. The gravity-panel empirical framework allows us to draw important and detailed conclusions with respect to the relative importance of formal institutions vs. cultural aspects to foreign firms. Our dataset includes 10 source countries (i.e. major trading partners) and 8 home countries (transition economies of Central Eastern and South East Europe for which the cultural indicators were available).

This paper is structured as follows. Next we elaborate on basic theoretical propositions underpinning the mechanism of institutional and cultural influence on FDI, with special reference to empirical work on the matter. In discussion theoretical and empirical issues, we present the conceptual framework for the empirical strategy used in this analysis discussing number of important issues including interplay between culture institutions and FDI, definitions and measurement issues, and research hypothesis. The third section relates to the empirical analysis where detailed description of the model, data and variables and methodology employed is provided and followed by the interpretation of the empirical results. The conclusion follows.

#### **2. Institutions, culture and FDI: conceptual framework and literature review**

#### **2.1 Institutions: what they are and why they are important?**

Institutional environment often encompasses political systems, policy making and policy enforcing institutional structures which determine economic structures at the national and sub-national levels. It includes institutional setting that provides formal rules of the game and sets forth the incentives to economic/societal agents as

#### *Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

well as informal norms, set of beliefs, systems of values, customs considered also an important feature of the institutional environment of a given country. Different scholars perceive differently the relative importance of these various components, including the role played by formal and informal rules and conventions as well as the importance of and role played by organisations, encompassing both economic and social agents of various sorts.

They are competing theoretical perceptions and different values attached to institutions and organisations in the contemporary literature [1–3]. Generally, institutions are perceived as frames or rules of the game while organisations are defined as social agents constituting and carrying these rules [2]. Importantly, the relationship between institutions and organisations is not a straight forward one. There is a general consensus among scholars that institutions principally evolve in response to market- related imperfections, and as such, institutions are considered a mechanism to enhance efficiency associated with economic transactions. However, whether institutions evolve primarily in response to changes in values, perception and attitudes embodied in organisations (i.e. various social agents) including theirs' perceived inefficiencies in functioning of the market, or whether institutional development can be viewed as principally exogenous process where norms dominantly govern actions of social agents is still a debated issue [1–3]. Relate to this is a question whether institutional development is constrained by organisations' preferences and capacities? Arguably the answer to these questions depends on how we perceive institutions and how do we value the relative importance of institutions *vis a vis* organisations.

The theoretical conceptualisation of institutions has mostly favoured the stream of literature which views institutions as frames or rules of the game which both guide and constrain actions of social agents i.e. organisations of various sorts including political and economic agents that make up societies. This stream of literature suggests the dichotomy between institutions and organisations. Accordingly institutions reveal formal and informal rules and conventions which set the structures within which, and upon which societal agents act [1, 2]. More precisely, the dichotomy in the words of [2] implies a clear conceptual distinction between institutions and organisations as follows; institutions define 'the rules' of the game and organisations are 'the players' by whom the game is played. Similarly, [4] suggests that institutions provide the set of rules defining frames within which organisations act. This is where the importance of cultural dimensions become crucial in understanding the institutional performance and in particular the differences in economic performance among countries amid similar institutional development and/or quality of institutions.

In this respect, 'good' institutions are only necessary but not sufficient condition to promote successful change within a society and/or to achieve desired societal goals. This view implies that although institutions evolve in response to market failures encompassing various forms of imperfections related to economics transactions and exchange they evolve in particular socio-historical context, and in accordance with prevailing preferences, norms and ethics of organisations that embody, interpret and influence the institutional conditions i.e. the specific (endogenous) rule setting [5]. These endogenous norms and values of a society have been embedded in what we call informal institutional structures of the economy. Put differently, formal institutions are embodied in culture, and culture matters for understanding the link between formal and informal institutional setting of individual countries [2, 6, 7]. The culture of a society determines informal behavioural patterns of economic agents, and by that the quality and the efficiency of formal institutions. This is to say that institutions, e.g. the relevance of formal rules, adherence to formal principles and legal provisions rests within organisation and

Culture, in a broader sense, means a pattern of behaviour based on values and beliefs that develops over time in a particular society. While culture in a narrower sense represents the way of life of a social group, i.e. a society that includes language, tradition, knowledge, customs, laws, art and other tangible and intangible features of social life that are passed down through generations, cultural is of course subject to change. Culture includes a set of values and attitudes of a homogeneous group of people that are passed down from generation to generation, and these

The importance of cultural factors has been increasingly emphasised in the FDI literature. In particular, the impact of cultural distance between home and host countries has found to be significant in number of studies investigating the role of culture in explaining FDI flows. However, few studies concentrated on the transition economies of Central and Eastern Europe. These countries are viewed as specific in terms of both scope of economic and institutional transformation, and specific (common) legacies of socialism. We contribute to recent literature on FDI in transition economies, by analysing the significance of broad set of institutional and cultural indicators ought to influence MNC decisions on where to invest. A special reference is given to the discussion on the relationship between formal and informal institutions, assumed to be predominantly depicted in cultural dimensions of a specific country. In addition, the relevance of specific Hofstede cultural dimension to foreign firms is brought to the fore. Having said this, the hypothesis tested imply 'favourable cultural context' that is, specific cultural characteristics that are assumed to be preferred by foreign firms. We posit somewhat universal aspects of culture related to Hofstede cultural dimensions that constitute favourable cultural environment to foreign firms. Furthermore, we make use of the gravity model and the panel data framework to examine the importance of relative differences between home and host country characteristics in explaining bilateral FDI stock. The gravity-panel empirical framework allows us to draw important and detailed conclusions with respect to the relative importance of formal institutions vs. cultural aspects to foreign firms. Our dataset includes 10 source countries (i.e. major trading partners) and 8 home countries (transition economies of Central Eastern and South East Europe for which the cultural indicators were available). This paper is structured as follows. Next we elaborate on basic theoretical propositions underpinning the mechanism of institutional and cultural influence on FDI, with special reference to empirical work on the matter. In discussion theoretical and empirical issues, we present the conceptual framework for the empirical strategy used in this analysis discussing number of important issues including interplay between culture institutions and FDI, definitions and measurement issues, and research hypothesis. The third section relates to the empirical analysis where detailed description of the model, data and variables and methodology employed is provided and followed by the interpretation of the empirical results. The conclusion

patterns of behaviour change rather slowly.

*Emerging Markets*

follows.

**12**

**and literature review**

**2. Institutions, culture and FDI: conceptual framework**

**2.1 Institutions: what they are and why they are important?**

Institutional environment often encompasses political systems, policy making and policy enforcing institutional structures which determine economic structures at the national and sub-national levels. It includes institutional setting that provides formal rules of the game and sets forth the incentives to economic/societal agents as agencies that is with people who implement those rules. This stream of literature, which identifies culture as important aspect of formal institutions, may help us disentangle the relationship between formal and informal institutions, and, in particular, may help us comprehend how societies with similar quality of formal institutions have divergent economic outcomes.

resource allocation. The conventional economic wisdom implied that former centrally planned economies needed to develop institutions which underpin free market transactions and well functioning of the markets as quickly as possible. The importance of institutional environment conducive to rapid market development has been put high on the transition reform agenda. The initial institutional development in transition economy context reflected the establishment of institutions fundamental to free-market economies including setting proper incentives through policies of macroeconomic-stability, price liberalisation, denationalisation and privatisation, as well as through institutions underpinning effective financial sector reform and private sector growth. The prevailing conceptualisation of institutions at the time envisaged that institutions are somewhat easily transferable, exogenously created whereby institutions are built following best practices elsewhere [13]. However, over the course of transition, growing empirical evidence on the matter of institutional change in transition suggested that the important historical, political and social factors have played a role. The empirical studies pointed to the interrelatedness and interdependence between institutions and diverse political, cultural and economic contexts of a given country [8]. Among others, the initial institutional conditions and institution-related legacies, as well as cultural dimensions largely influenced the pace and character of institutional development in

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

Despite these efforts, we do have a limited understanding of the processes and lack meaningful explanation on the diverging pattern of institutional development among countries including TEs. Analysing relationship between formal and informal institutions may help disentangle differences in institutional performance among transition economies. Such analysis is fairly constrained by number of difficulties including conceptualisation of the relationship, as well as data limitations and number of measurement issues related to informal institutions of the economy. We believe that indicators of cultural dimensions may help comprehend at least some aspect of this complex relationship. In view of this, we argue, that it is important to study institutions in an integrated framework, and point to the

In this paper, an attempt is made to illuminate the importance of formal institu-

tions relative to the distinctive cultural features of a society in comprehending differences in FDI flows across transition economies. We use a narrow-definition of institutions and focus on institutions revealing principally formal rules specifically related to FDI such as the rule of law and corruption. Relying on previous empirical work, we emphasise the importance of corruption [15–18], regulatory and governance indicators [19–21], as well as legal indicators in our empirical analysis. We identify institutional variables to be included in the model based on these results, and include three institutional variables (Corruption, Good governance and Rule of Law and Efficiency). Since we investigate the impact of institutional factors on FDI in transition economies, we do not use Political stability variable amid low variation in the data, and relatively similar Political stability index across CEE transition economies. In the light of the forgoing discussion, however, we acknowledge that by the way we measure institutional dimension in this analysis we possibly do not account for complex informal social structures (including social ethics and norms, preferences and capabilities of organisations) which may well influence the outcomes of institutional environment in a given country. This is why we include cultural indicators (Hofstende Cultural Dimensions) in the analysis in order to account for important aspects of both institutional and cultural behaviour of individual (host) countries that may influence FDI flows in transition economies. While there is considerable number of studies analysing the impact of formal institutions on FDI, very little empirical research has been done on the importance

transition economies (see [11, 14]).

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

relevance of cultural factors.

**15**

As pointed by [8], it is possible that societies with identical institutional setting perform differently assuming that societal agents are not 'passive' but influence and determine the outcomes of any particular institutional structure in relation to their competences and preferences as well as in relation to what is called informal institutions. The latter include rather endogenous institutional features or their evolution such as norms, social ethics, prevalence of (old) institutional legacies, initial institutional conditions, institutional and individual's values and competences. This would imply that it does not suffice to develop 'quality' institutions in the form of extensive and desirable legislative and institutional infrastructures, or 'optimal'set of rules, but also necessary organisational capabilities that affect policy impacts and subsequent institutional change. Institutional development should be perceived as a long-term process of societal change, a one that certainly involves the development of 'better' or 'improved' conventions but importantly the process that rests on the commitment and competences of prevailing human and organisations kinds involved in those processes.<sup>1</sup>

Here it is important to emphasise that theoretic perspective of institutions matters for: (i) our understanding of the evolutionary dynamics of institutional development and change; ii) the importance of informal institutional structures and their link with formal institutions; as well as iii) the way we measure institutions in our empirical analysis. As pointed by [8]: "*Whether institutions are viewed as endogenous to the relevant domain or exogenously set in the polity may have significant implications for the role of public policy*." This is to say that if institutions are exogenous than we could relatively easily transplant the best practices of other (more advanced) countries in the forms of formal rules and conventions and anticipate increases in efficiency and welfare. If the reverse is true, and if institutions evolve principally in relation to a country specific historical, political and cultural context assuming interdependence among institutions, constrained and influenced by informal norms and social ethics, competences and capabilities of human and organisation kind, then the intended outcomes and consequences of any institutional conditions would vary considerably in relation to these important but intrinsic features of a given country. These raise important considerations for researches analysing the role of institutions in economic performance as well as international business.

The comparison of transition institutional reform, particularly the evidence revealing contrasting experiences and institutional performance across countries, however, led to doubts and seriously questioned the conventional wisdom of straightforward transplantation of practices of developed market economies [9–11]. Contrary to what has been expected, the years of transition saw institutional building and reform as exceptionally challenging and complex. The initial years of transition witnessed the remarkable differences in institutional progress among transition economies (EBRD, 2001). Empirical evidence point to the highly intrinsic and endogenous nature of institutional development including the varying institutional performance among transition economies [9–12]. Transition economies were faced with the necessity to reform their economic and institutional structures on a large scale moving from centrally planned to free market economic system and

<sup>1</sup> Commitment implies willingness whereby individuals perceive the benefits associated with 'good' institutions.

#### *Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

resource allocation. The conventional economic wisdom implied that former centrally planned economies needed to develop institutions which underpin free market transactions and well functioning of the markets as quickly as possible. The importance of institutional environment conducive to rapid market development has been put high on the transition reform agenda. The initial institutional development in transition economy context reflected the establishment of institutions fundamental to free-market economies including setting proper incentives through policies of macroeconomic-stability, price liberalisation, denationalisation and privatisation, as well as through institutions underpinning effective financial sector reform and private sector growth. The prevailing conceptualisation of institutions at the time envisaged that institutions are somewhat easily transferable, exogenously created whereby institutions are built following best practices elsewhere [13]. However, over the course of transition, growing empirical evidence on the matter of institutional change in transition suggested that the important historical, political and social factors have played a role. The empirical studies pointed to the interrelatedness and interdependence between institutions and diverse political, cultural and economic contexts of a given country [8]. Among others, the initial institutional conditions and institution-related legacies, as well as cultural dimensions largely influenced the pace and character of institutional development in transition economies (see [11, 14]).

Despite these efforts, we do have a limited understanding of the processes and lack meaningful explanation on the diverging pattern of institutional development among countries including TEs. Analysing relationship between formal and informal institutions may help disentangle differences in institutional performance among transition economies. Such analysis is fairly constrained by number of difficulties including conceptualisation of the relationship, as well as data limitations and number of measurement issues related to informal institutions of the economy. We believe that indicators of cultural dimensions may help comprehend at least some aspect of this complex relationship. In view of this, we argue, that it is important to study institutions in an integrated framework, and point to the relevance of cultural factors.

In this paper, an attempt is made to illuminate the importance of formal institutions relative to the distinctive cultural features of a society in comprehending differences in FDI flows across transition economies. We use a narrow-definition of institutions and focus on institutions revealing principally formal rules specifically related to FDI such as the rule of law and corruption. Relying on previous empirical work, we emphasise the importance of corruption [15–18], regulatory and governance indicators [19–21], as well as legal indicators in our empirical analysis. We identify institutional variables to be included in the model based on these results, and include three institutional variables (Corruption, Good governance and Rule of Law and Efficiency). Since we investigate the impact of institutional factors on FDI in transition economies, we do not use Political stability variable amid low variation in the data, and relatively similar Political stability index across CEE transition economies. In the light of the forgoing discussion, however, we acknowledge that by the way we measure institutional dimension in this analysis we possibly do not account for complex informal social structures (including social ethics and norms, preferences and capabilities of organisations) which may well influence the outcomes of institutional environment in a given country. This is why we include cultural indicators (Hofstende Cultural Dimensions) in the analysis in order to account for important aspects of both institutional and cultural behaviour of individual (host) countries that may influence FDI flows in transition economies.

While there is considerable number of studies analysing the impact of formal institutions on FDI, very little empirical research has been done on the importance

agencies that is with people who implement those rules. This stream of literature, which identifies culture as important aspect of formal institutions, may help us disentangle the relationship between formal and informal institutions, and, in particular, may help us comprehend how societies with similar quality of formal insti-

As pointed by [8], it is possible that societies with identical institutional setting perform differently assuming that societal agents are not 'passive' but influence and determine the outcomes of any particular institutional structure in relation to their competences and preferences as well as in relation to what is called informal institutions. The latter include rather endogenous institutional features or their evolution such as norms, social ethics, prevalence of (old) institutional legacies, initial institutional conditions, institutional and individual's values and competences. This would imply that it does not suffice to develop 'quality' institutions in the form of extensive and desirable legislative and institutional infrastructures, or 'optimal'set of rules, but also necessary organisational capabilities that affect policy impacts and subsequent institutional change. Institutional development should be perceived as a long-term process of societal change, a one that certainly involves the development of 'better' or 'improved' conventions but importantly the process that rests on the commitment and competences of prevailing human and organisations kinds

Here it is important to emphasise that theoretic perspective of institutions matters for: (i) our understanding of the evolutionary dynamics of institutional development and change; ii) the importance of informal institutional structures and their link with formal institutions; as well as iii) the way we measure institutions in our empirical analysis. As pointed by [8]: "*Whether institutions are viewed as endogenous to the relevant domain or exogenously set in the polity may have significant implications for the role of public policy*." This is to say that if institutions are exogenous than we could relatively easily transplant the best practices of other (more advanced) countries in the forms of formal rules and conventions and anticipate increases in efficiency and welfare. If the reverse is true, and if institutions evolve principally in relation to a country specific historical, political and cultural context assuming interdependence among institutions, constrained and influenced by informal norms and social ethics, competences and capabilities of human and organisation kind, then the intended outcomes and consequences of any institutional conditions would vary considerably in relation to these important but intrinsic features of a given country. These raise important considerations for researches analysing the role of

institutions in economic performance as well as international business.

The comparison of transition institutional reform, particularly the evidence revealing contrasting experiences and institutional performance across countries, however, led to doubts and seriously questioned the conventional wisdom of straightforward transplantation of practices of developed market economies [9–11]. Contrary to what has been expected, the years of transition saw institutional building and reform as exceptionally challenging and complex. The initial years of transition witnessed the remarkable differences in institutional progress among

transition economies (EBRD, 2001). Empirical evidence point to the highly intrinsic and endogenous nature of institutional development including the varying institutional performance among transition economies [9–12]. Transition economies were faced with the necessity to reform their economic and institutional structures on a large scale moving from centrally planned to free market economic system and

<sup>1</sup> Commitment implies willingness whereby individuals perceive the benefits associated with 'good'

tutions have divergent economic outcomes.

*Emerging Markets*

involved in those processes.<sup>1</sup>

institutions.

**14**

of culture, and cultural factors in determining FDI. Furthermore, we study the impact of institutional and cultural factors on FDI in an integrated framework, where we assess the relative importance of formal institutions vs. cultural factors.

Therefore, relying solely on formal institutions, and formal institutional indicators of one country, including various legal indicators that are of specific interest to FDI, when analysing the importance of formal institutions, may be associated with ambiguities and uncertain 'policy' implications. This is not to say that formal institutions are of less importance, but it is at least important to acknowledge that 'good' institutions are embodied in culture. These societal values, attitudes and norms evolve overtime and reinforce formal institutions [25, 26]. This means that overtime, cultural changes influence acceptance of formal institutions as values of a society in general, and society at large adheres to these formal 'rules of the game'. Along the lines of these theoretical propositions, [6] investigates both direct and indirect effect of culture on FDI, and finds that culture impact FDI indirectly through its impact on formal institutions, as well as directly. The indirect impact of culture on FDI is mediated via formal institutions, which confines the hypothesis that culture 'shape formal institutions'. Essentially, the impact of cultural factors is found to be more important than the impact of formal institutions. Similarly, a recent study by [27] finds significant and greater effect of cultural factors

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

(embeddedness vs. autonomy; hierarchy vs. egalitarianism, mastery vs. harmony) than formal institutions in cross-country regressions. Both studies render support to

Culture seems to reveal hidden behavioural patterns that underpin societal prosperity, including society relation to and the perception of responsibility, ethics and trust. The idea that these norms affect companies' efficiency and growth prospects cannot be dismissed. On the contrary, these factors should be perceived as important determinants of FDI that not only minimise transaction costs, but also enhance productivity potential of foreign affiliates, and/or simply create an environment conducive to business growth. Such an environment is perceived as friendly and or familiar market from MNC perspective. What kind of information MNC search for when deciding about new investment site is important? Do managers look at formal institutional indices, or have other sources of knowledge and information that reveal 'true' that is prevailing aspects of social relations, ethics and norms? Studying the impact of formal institutions on FDI, in an integrated framework in which we control for cultural factors, along with traditional FDI determi-

In what follows we discuss in greater detail the relevance of culture in international business and briefly review past empirical research on the role of culture in

According to the literature cultural dimension can influence foreign direct investments in two ways. First theoretical proposition suggest that more culturally diverse societies tend to be perceived as favourable cultural environment by MNC, while the second theoretical proposition implies that foreign investors prefer to invest in cultures similar to their own. These two distinct theoretical perspectives imply first that more culturally diverse societies positively impact foreign direct investments, and second that lower cultural distance between home and host countries positively affects FDI. As for the former, culturally diverse countries reflect on more open and welcoming societies that are viewed positively by foreign companies. As for the latter cultural difference between home and host countries is often associated with high transaction cost arising from uncertainty

the theoretical propositions underlying the importance of cultural factors in comprehending role played by formal institutions, as well as that distinctive

features of national cultures influence FDI flows.

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

nants, becomes of crucial importance.

**2.3 What role for culture in attracting FDI**

attracting FDI.

and lower FDI.

**17**

#### **2.2 Culture and its relevance for understanding institutions-FDI nexus**

Informal institutions are often considered important determinant of FDI since they could compensate for the deficiencies associated with underperforming or poor quality formal institutions. Despite this, they are often overlooked in the FDI literature whereby the emphasis is given to the quality of formal institutions per se. The rationale behind is that while formal institutions ensure efficiency of foreign operations in a new environment, informal institutions mostly favour local economic agents. Local agents are assumed to have better access to political and local facilities and processes. Given this, reliance on informal institutions in ensuring efficient economic transactions is least favoured by MNCs. A study by [22, 23] have shown that institutional development in transition economies has had an impact on foreign investors'strategic decisions, arguably their entry modes, whereby quality of formal institutions seems of greater importance for establishing wholly owned ventures. The study by [22] reveals evidence that quality of institutions does seem to impact type of ownership related to FDI, where poor institutional development is more likely to result in network- types of FDI (i.e. joint-ventures, contracts). This is why the FDI literature mostly emphasise the relevance of formal institutions as locational advantage as reliance on informal institutions tend to increase transaction costs of foreign investors relative to domestic agents. The cultural features seem to have been disregarded as important factors which influence the way in which markets develop and evolve.

Notwithstanding this, in this paper we argue that cultural dimension is important determinant of FDI, in the sense that culture 'shape' formal institutions (see for instance [24]). Cultural dimensions of a society depict ways in which 'nations' tend to understand the rules and norms of social behaviour. The role played by formal institution(s) within a society and their relative importance *vis a vis* informal social structures (e.g. social networks, linkages) is deeply rooted cultural phenomena. The perception of formal institutions that prevails among general public, on this particular matter, is important to be understood, when examining the relationship between formal institutions and FDI. Having said this, culture may reflect on 'tacit' aspects of general-purpose or more specific 'market-enhancing' institutions within countries. The diverse and distinct concepts of social behaviour, present important features of a society that not only influence and model the behaviour of local economic agents, but affect the quality and the efficiency of formal institutions. Reliance on informal institutions as opposed on formal institutions may well be associated with weak and malfunctioning formal institutional structures. On this ground it seems reasonable to posit that informal institutions reflected in cultural dimensions are also likely to influence MNC's decisions on where to invest.

Overall, we strongly believe that the essential question on the matter of cultureinstitutions-FDI nexus, is to what extent 'formal institutions' and the why we measure them, reflect society's adherence to formal rules, as opposed to society's 'modus operandi' e.g. collective actions, practices, behaviours that may contradict formal codes of conduct? Here it is worthwhile mentioning the theory of 'institutional stickiness' which firmly explains the relationship between culture and institutions [25]. The authors posit that formal institutions are stuck to what they call *'metis',* which may be defined as 'values' that are largely 'exogenous' to people and that shape our social relations and constitute important unwritten behavioural patterns.

#### *Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

Therefore, relying solely on formal institutions, and formal institutional indicators of one country, including various legal indicators that are of specific interest to FDI, when analysing the importance of formal institutions, may be associated with ambiguities and uncertain 'policy' implications. This is not to say that formal institutions are of less importance, but it is at least important to acknowledge that 'good' institutions are embodied in culture. These societal values, attitudes and norms evolve overtime and reinforce formal institutions [25, 26]. This means that overtime, cultural changes influence acceptance of formal institutions as values of a society in general, and society at large adheres to these formal 'rules of the game'. Along the lines of these theoretical propositions, [6] investigates both direct and indirect effect of culture on FDI, and finds that culture impact FDI indirectly through its impact on formal institutions, as well as directly. The indirect impact of culture on FDI is mediated via formal institutions, which confines the hypothesis that culture 'shape formal institutions'. Essentially, the impact of cultural factors is found to be more important than the impact of formal institutions. Similarly, a recent study by [27] finds significant and greater effect of cultural factors (embeddedness vs. autonomy; hierarchy vs. egalitarianism, mastery vs. harmony) than formal institutions in cross-country regressions. Both studies render support to the theoretical propositions underlying the importance of cultural factors in comprehending role played by formal institutions, as well as that distinctive features of national cultures influence FDI flows.

Culture seems to reveal hidden behavioural patterns that underpin societal prosperity, including society relation to and the perception of responsibility, ethics and trust. The idea that these norms affect companies' efficiency and growth prospects cannot be dismissed. On the contrary, these factors should be perceived as important determinants of FDI that not only minimise transaction costs, but also enhance productivity potential of foreign affiliates, and/or simply create an environment conducive to business growth. Such an environment is perceived as friendly and or familiar market from MNC perspective. What kind of information MNC search for when deciding about new investment site is important? Do managers look at formal institutional indices, or have other sources of knowledge and information that reveal 'true' that is prevailing aspects of social relations, ethics and norms? Studying the impact of formal institutions on FDI, in an integrated framework in which we control for cultural factors, along with traditional FDI determinants, becomes of crucial importance.

In what follows we discuss in greater detail the relevance of culture in international business and briefly review past empirical research on the role of culture in attracting FDI.

#### **2.3 What role for culture in attracting FDI**

According to the literature cultural dimension can influence foreign direct investments in two ways. First theoretical proposition suggest that more culturally diverse societies tend to be perceived as favourable cultural environment by MNC, while the second theoretical proposition implies that foreign investors prefer to invest in cultures similar to their own. These two distinct theoretical perspectives imply first that more culturally diverse societies positively impact foreign direct investments, and second that lower cultural distance between home and host countries positively affects FDI. As for the former, culturally diverse countries reflect on more open and welcoming societies that are viewed positively by foreign companies. As for the latter cultural difference between home and host countries is often associated with high transaction cost arising from uncertainty and lower FDI.

of culture, and cultural factors in determining FDI. Furthermore, we study the impact of institutional and cultural factors on FDI in an integrated framework, where we assess the relative importance of formal institutions vs. cultural factors.

**2.2 Culture and its relevance for understanding institutions-FDI nexus**

markets develop and evolve.

*Emerging Markets*

patterns.

**16**

Informal institutions are often considered important determinant of FDI since they could compensate for the deficiencies associated with underperforming or poor quality formal institutions. Despite this, they are often overlooked in the FDI literature whereby the emphasis is given to the quality of formal institutions per se. The rationale behind is that while formal institutions ensure efficiency of foreign operations in a new environment, informal institutions mostly favour local economic agents. Local agents are assumed to have better access to political and local facilities and processes. Given this, reliance on informal institutions in ensuring efficient economic transactions is least favoured by MNCs. A study by [22, 23] have shown that institutional development in transition economies has had an impact on foreign investors'strategic decisions, arguably their entry modes, whereby quality of formal institutions seems of greater importance for establishing wholly owned ventures. The study by [22] reveals evidence that quality of institutions does seem to impact type of ownership related to FDI, where poor institutional development is more likely to result in network- types of FDI (i.e. joint-ventures, contracts). This is why the FDI literature mostly emphasise the relevance of formal institutions as locational advantage as reliance on informal institutions tend to increase transaction costs of foreign investors relative to domestic agents. The cultural features seem to have been disregarded as important factors which influence the way in which

Notwithstanding this, in this paper we argue that cultural dimension is important determinant of FDI, in the sense that culture 'shape' formal institutions (see for instance [24]). Cultural dimensions of a society depict ways in which 'nations' tend to understand the rules and norms of social behaviour. The role played by formal institution(s) within a society and their relative importance *vis a vis* informal social structures (e.g. social networks, linkages) is deeply rooted cultural phenomena. The perception of formal institutions that prevails among general public, on this particular matter, is important to be understood, when examining the relationship between formal institutions and FDI. Having said this, culture may reflect on 'tacit' aspects of general-purpose or more specific 'market-enhancing' institutions within countries. The diverse and distinct concepts of social behaviour, present important features of a society that not only influence and model the behaviour of local economic agents, but affect the quality and the efficiency of formal institutions. Reliance on informal institutions as opposed on formal institutions may well be associated with weak and malfunctioning formal institutional structures. On this ground it seems reasonable to posit that informal institutions reflected in cultural dimensions are also likely to influence MNC's decisions on where to invest.

Overall, we strongly believe that the essential question on the matter of culture-

institutions-FDI nexus, is to what extent 'formal institutions' and the why we measure them, reflect society's adherence to formal rules, as opposed to society's 'modus operandi' e.g. collective actions, practices, behaviours that may contradict formal codes of conduct? Here it is worthwhile mentioning the theory of 'institutional stickiness' which firmly explains the relationship between culture and institutions [25]. The authors posit that formal institutions are stuck to what they call *'metis',* which may be defined as 'values' that are largely 'exogenous' to people and that shape our social relations and constitute important unwritten behavioural

#### *2.3.1 Cultural diversity and religion as cultural factors influencing FDI*

Alesina [28] argues that high level of ethnic, linguistic and religious diversity requires well functioning governments and as such is positively associated with FDI. Additionally, more culturally diverse society is more tolerable and less reluctant to foreigners, which is perceived positively by MNCs. A number of research investigate the impact of religious factors including religion diversity and pluralism [29, 30] religious similarity [31, 32] and religious groups [31, 33] on FDI and find that religion does influence FDI. Accordingly, religious pluralism is found to be positivelly associated with FDI and thus more important compared to religious similarity, while a study by [31] finds positive relationship between all monotheistic religious groups (Catholic, Protestant and Orthodox Christian) and FDI, but for Islam. According to the results of their study, significantly negative relationship is thus suggested between Buddhism and FDI. No doubt, the results of their study suggest that MNCs are not indifferent to culture, broadly represented by diverse religious groups, and that only certain religious groups are positively associated with FDI. However, the empirical evidence on the matter is scarce and far from uniform to draw any sensible conclusions.

fails to sensibly reflect on the important cultural dimensions that are of relevance when studying the link between culture and FDI. This is to say, that it is fairly improper (invalidate) to a priori assign that certain religious groups are indifferent to economic growth or adversely oriented toward foreigners, unless we truly conceptualise and measure links between prevailing religious beliefs and some 'relevant' economic categories or attitudes. Most studies investigating the link between religious groups and FDI fall short of addressing this issue. We first need to conceptualise on, and empirically establish the link between certain believes and attitudes including individual aspirations for growth, attitudes toward risk and competition, attitudes toward other groups/individuals and specific religious groups, as suggested by Guiso et al. study [33], before we examine the relationship

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

between supposedly distinct religious groups and FDI or economic growth. The empirical evidence on the matter is far from consistent and far from its mature phase. In light of this discussion, we argue that although religion constitute important cultural dimension of a society, it may well be inappropriate and misleading to include religious group(s) as dummy variables in regression equations to estimate the effect of culture on FDI. In contrast, considering religious diversity or similarity across nations may reflect on cultural distance that could be associated with costs of transition to new business or cultural environment. Most empirical studies have, in fact, followed this line of reasoning where, cultural similarity is considered important, *a priori* positive determinant of FDI, as we discuss below.

*2.3.2 The relevance of cultural proximity (distance) as determinant of FDI*

and Singh index on inward FDI in South Korea.

**19**

Kogut and Singh [35], posit that foreign investors prefer investing in countries culturally similar to their own. Sharing similar attitudes and values implies better knowledge of the local market, customers and business practices. Greater cultural differences between the host country and the source country lead to higher costs of doing business in another culture, such as the cost of obtaining information or the cost of searching to discover the specifics of the local bureaucracy [31]. This theoretical proposition has dominated the research on culture and FDI. Most empirical studies analyse the impact of cultural distance per se on FDI, and hypothesise that cultural similarity between home and host countries positively affects FDI flows. Accordingly, the principal question investigated by researcher refers to the effect of 'cultural distance' on FDI. Siegel and Licht [35] in their analysis using instrumental variables (social factionalization, dominant religion, 19th century war experience, previous communist rule) measure how cultural distance in terms of egalitarianism vs. hierarchy affects FDI flows. The analysis is based on a 2005 Schwartz study [36]. The results obtained explain that the egalitarian distance has a negative and statistically significant impact on FDI flows. Similarly, [35] conduct a comprehensive analysis on the impact of cultural distance on FDI. They rely on 'egalitarianism vs. hierarchy' dimension of culture developed by Schwarz [36] and argue that the greater the distance between culture of origin and destination country the greater the difficulty in interacting with stakeholders in the host country. The results of their study confirm the negative and significant impact of cultural distance on FDI. Moreover, [31] study suggest that foreign investors from developed countries are negatively affected by greater 'cultural distance' when investing in developing and transition economies. Lee, Shenkar, and Li [37] come to similar conclusions when it comes to the impact of cultural distance measured by Kogut

Number of empirical studies uses cultural proximity as determinant of FDI, relaying on common language, common history (e.g. colonial legacy, socialist past), and common border as cultural proxies. Most studies find significant and positive

In this paper we, however, argue that, while religious believes may influence attitudes toward free market, competition or foreign investors, it may be fairly misleading to associate specific attitudes and values to individual religious groups per se, based on our assumptions, generalisation and even pre-assumptions about religious constituencies of individual nations. This tendency to assign specific societal attributes to certain religious groups such as is the case of the La Porta et al. study [34], which prescribe and impose 'low institutional quality, institutional inefficiency, political and economic instability, high level of corruption and tax invasion etc.', to reside and prevail within the so called 'hierarchical religious'such as Catholicism, Orthodox Christianity and Islam is rather forged, deceptive and ambiguous.

Certainly, a genuine and reasonable approach to study religious aspects of cultural dimension and its relationship to FDI and/or economic growth need be based on attitudes toward certain economic concepts and principles, as well as on values assigned to those, including wealth and growth, competition-rivalry and struggle, market openness and foreign investors. In case, significant differences assigned to those concepts, could be associated with specific religious believes or related valuesystems, then we could sensibly argue of the prevailing religiously rooted 'cultural' differences. This is to say, that we need to investigate the link between religious beliefs and values assigned to aforementioned economic concepts. How differently are these concepts perceived and valued by different religious groups need be the principal question investigated, and not something a priori assumed and assigned to specific religious groups. In line with this reasoning, for instance, Guiso, Sapienza and Zingales [33] conclude that Catholics and Protestants are more positively associated with attitudes favouring market-efficiency and economic growth, while Muslims are found to be negatively associated with competition. Last but not lease, if we consider far-reaching cultural differencies existing within supposedly homogenous religious groups across different nations, such as is the case of Islamic countries (Malasya vs. Tukey vs. Saudi Arabia vs. Iran), or cultural differences across supposedly Catholic states such as is the case of Ireland vs. Poland vs. (South) Italy, we clearly face the measurement problem that may bias the results. This could partly explain why number of studies including [34] failed to find significant impact of religious groups per se on either economic growth or FDI. The notable exception is the aforementioned study by Lucke and Eichler [31].

Overall, in this paper we argue that analysis of cultural influence on FDI, that measure cultural diversity via dichotomous variables depicting religious group(s)

#### *Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

fails to sensibly reflect on the important cultural dimensions that are of relevance when studying the link between culture and FDI. This is to say, that it is fairly improper (invalidate) to a priori assign that certain religious groups are indifferent to economic growth or adversely oriented toward foreigners, unless we truly conceptualise and measure links between prevailing religious beliefs and some 'relevant' economic categories or attitudes. Most studies investigating the link between religious groups and FDI fall short of addressing this issue. We first need to conceptualise on, and empirically establish the link between certain believes and attitudes including individual aspirations for growth, attitudes toward risk and competition, attitudes toward other groups/individuals and specific religious groups, as suggested by Guiso et al. study [33], before we examine the relationship between supposedly distinct religious groups and FDI or economic growth.

The empirical evidence on the matter is far from consistent and far from its mature phase. In light of this discussion, we argue that although religion constitute important cultural dimension of a society, it may well be inappropriate and misleading to include religious group(s) as dummy variables in regression equations to estimate the effect of culture on FDI. In contrast, considering religious diversity or similarity across nations may reflect on cultural distance that could be associated with costs of transition to new business or cultural environment. Most empirical studies have, in fact, followed this line of reasoning where, cultural similarity is considered important, *a priori* positive determinant of FDI, as we discuss below.

#### *2.3.2 The relevance of cultural proximity (distance) as determinant of FDI*

Kogut and Singh [35], posit that foreign investors prefer investing in countries culturally similar to their own. Sharing similar attitudes and values implies better knowledge of the local market, customers and business practices. Greater cultural differences between the host country and the source country lead to higher costs of doing business in another culture, such as the cost of obtaining information or the cost of searching to discover the specifics of the local bureaucracy [31]. This theoretical proposition has dominated the research on culture and FDI. Most empirical studies analyse the impact of cultural distance per se on FDI, and hypothesise that cultural similarity between home and host countries positively affects FDI flows.

Accordingly, the principal question investigated by researcher refers to the effect of 'cultural distance' on FDI. Siegel and Licht [35] in their analysis using instrumental variables (social factionalization, dominant religion, 19th century war experience, previous communist rule) measure how cultural distance in terms of egalitarianism vs. hierarchy affects FDI flows. The analysis is based on a 2005 Schwartz study [36]. The results obtained explain that the egalitarian distance has a negative and statistically significant impact on FDI flows. Similarly, [35] conduct a comprehensive analysis on the impact of cultural distance on FDI. They rely on 'egalitarianism vs. hierarchy' dimension of culture developed by Schwarz [36] and argue that the greater the distance between culture of origin and destination country the greater the difficulty in interacting with stakeholders in the host country. The results of their study confirm the negative and significant impact of cultural distance on FDI. Moreover, [31] study suggest that foreign investors from developed countries are negatively affected by greater 'cultural distance' when investing in developing and transition economies. Lee, Shenkar, and Li [37] come to similar conclusions when it comes to the impact of cultural distance measured by Kogut and Singh index on inward FDI in South Korea.

Number of empirical studies uses cultural proximity as determinant of FDI, relaying on common language, common history (e.g. colonial legacy, socialist past), and common border as cultural proxies. Most studies find significant and positive

*2.3.1 Cultural diversity and religion as cultural factors influencing FDI*

uniform to draw any sensible conclusions.

*Emerging Markets*

Alesina [28] argues that high level of ethnic, linguistic and religious diversity requires well functioning governments and as such is positively associated with FDI. Additionally, more culturally diverse society is more tolerable and less reluctant to foreigners, which is perceived positively by MNCs. A number of research investigate the impact of religious factors including religion diversity and pluralism [29, 30] religious similarity [31, 32] and religious groups [31, 33] on FDI and find that religion does influence FDI. Accordingly, religious pluralism is found to be positivelly associated with FDI and thus more important compared to religious similarity, while a study by [31] finds positive relationship between all monotheistic religious groups (Catholic, Protestant and Orthodox Christian) and FDI, but for Islam. According to the results of their study, significantly negative relationship is thus suggested between Buddhism and FDI. No doubt, the results of their study suggest that MNCs are not indifferent to culture, broadly represented by diverse religious groups, and that only certain religious groups are positively associated with FDI. However, the empirical evidence on the matter is scarce and far from

In this paper we, however, argue that, while religious believes may influence attitudes toward free market, competition or foreign investors, it may be fairly misleading to associate specific attitudes and values to individual religious groups per se, based on our assumptions, generalisation and even pre-assumptions about religious constituencies of individual nations. This tendency to assign specific societal attributes to certain religious groups such as is the case of the La Porta et al. study [34], which prescribe and impose 'low institutional quality, institutional inefficiency, political and economic instability, high level of corruption and tax invasion etc.', to reside and prevail within the so called 'hierarchical religious'such as Catholicism, Orthodox Christianity and Islam is rather forged, deceptive and ambiguous.

Certainly, a genuine and reasonable approach to study religious aspects of cultural dimension and its relationship to FDI and/or economic growth need be based on attitudes toward certain economic concepts and principles, as well as on values assigned to those, including wealth and growth, competition-rivalry and struggle, market openness and foreign investors. In case, significant differences assigned to those concepts, could be associated with specific religious believes or related valuesystems, then we could sensibly argue of the prevailing religiously rooted 'cultural' differences. This is to say, that we need to investigate the link between religious beliefs and values assigned to aforementioned economic concepts. How differently are these concepts perceived and valued by different religious groups need be the principal question investigated, and not something a priori assumed and assigned to specific religious groups. In line with this reasoning, for instance, Guiso, Sapienza and Zingales [33] conclude that Catholics and Protestants are more positively associated with attitudes favouring market-efficiency and economic growth, while Muslims are found to be negatively associated with competition. Last but not lease, if we consider far-reaching cultural differencies existing within supposedly homogenous religious groups across different nations, such as is the case of Islamic countries (Malasya vs. Tukey vs. Saudi Arabia vs. Iran), or cultural differences across supposedly Catholic states such as is the case of Ireland vs. Poland vs. (South) Italy, we clearly face the measurement problem that may bias the results. This could partly explain why number of studies including [34] failed to find significant impact of religious groups per se on either economic growth or FDI. The notable

exception is the aforementioned study by Lucke and Eichler [31].

**18**

Overall, in this paper we argue that analysis of cultural influence on FDI, that measure cultural diversity via dichotomous variables depicting religious group(s) impact of cultural proximity along geographical distance on FDI [32, 38]. Lopez-Duarte and Vidal-Suarez [39] analyse how language distance affects the choice between greenfield investments and acquisitions when investing in other countries. 383 foreign direct investments from Spain in 44 different countries in the period 1989–2003 were analysed. The authors find strong support for the role of language distance as the main factor causing transaction costs. The results suggest that investors avoid acquisitions as a way of investing in countries characterised by high language distance. Bandelj [40] analysed the cultural connections (presence of a national minority) between investors and recipients of investments (hosts). It measures how the presence of national minorities affects the movement of FDI between pairs of countries. Bilateral flows of 11 Central and Eastern European countries (recipients of investments) and 27 investor countries were analysed. The author came to the conclusion that cultural ties that have historically been formed due to the presence of national minorities of the host country in the investor country, and vice versa, positively and statistically significantly affect FDI flows between the two countries.

attributed to individual national cultures as 'core' to comprehending the

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

ii. The importance of analysing the impact of institutional and cultural factors in an integrated empirical framework in which we take control of both institutional and cultural factors and examine their relative importance on

In view of the possible biases associated with the 'cultural distance variable' constructed by subcontracting the origin form destination country cultural scores, we refrain from using 'cultural distance' variable in our empirical analysis. On the contrary, we postulate the importance of specific and intrinsic cultural features that reflect on deep cultural traits and different cultural models, developed by Hofstede [48, 49] to be important determinant of FDI. In what follows, we discuss the relevance of Hofstede cultural factors as determinants of FDI inflows. The impact of these factors has been fairly under-researched in transition economy context.

**2.4 Which cultural factors matter for FDI and why: measurement issues**

We postulated earlier that culture is important aspect of informal institutions. As such culture is associated with way formal institutions function, their quality and efficiency. Apart from this, local culture is associated with 'social risk' of investment and transition to a new market embedded in social relations. Risks associated with cross-border business go beyond economic analysis and economic risks. The social characteristics are important determinant of FDI in that they influence operational and the external environment of business, influencing business success factors in the long run. Social characteristics depicted in cultural dimensions of a society are considered important to the internationalisation process ([50] as companies do not perform their businesses in isolation from other firms and/or networks of firms [51] nor do they construct their internal capabilities in isolation. Local work ethics, values and attitudes affect business performance of foreign companies through social relations of the workforce. All economic activities are 'submerged in social relations' [52]. Social characteristics and relations are embedded in cultural dimen-

Research on culture attempted to define important elements and dimensions of national culture relating to both conscious and unconscious set of beliefs, values and norms that reflect general attitudes and preferences of a society. Hofstede study and the model of national culture presents a systematic and pioneering work on the matter, that had a major influence on understanding cultural differences among nations [52]. Hofstede introduced four cultural dimensions of a society, namely Power Distance (PDI); Masculinity (MAS); Individualism (IDV); and Uncertainty Avoidance (UAI). The fifth cultural dimension, Long term orientation (LTO) was later developed and added as additional variable by Hofstede and Bond (1988). Further research on cultural dimension and its measurement resulted in the development of the Globe cultural dimensions (Global Leadership and Organisational Behaviour Effectivness, Kogut and Singh's Index of cultural distance [53] and Schwarz Value Survey [36]. The literature has critically assessed various aspects of these cultural indices, including the Hofstede work on culture and cultural dimensions [54–56]. Most of criticism is related to the problem of time invariant nature of cultural indices including Hofstende cultural dimensions, and lack of genuine (socio) anthropological aspect of culture. In this research we follow arguments

presented in [57] on the rationale of using Hofstede cultural indicators

cultural influences on FDI

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

FDI

**and hypothesis**

sions of a society.

**21**

Although, the results of majority of studies on cultural distance and FDI support the hypothesis that greater cultural distance negatively affects FDI, and that cultural proximity plays important role in attracting FDI, studies by Voyer and Beamish [41], Grosse and Trevino [42] find that cultural distance does not exert significant negative impact on FDI, and that cultural distance does not seem to influence FDI flows. Tang [43] reports mixed results on the impact of all cultural distance variables (four Hofstede cultural indicators) on FDI and concludes that 'cultural difference does not always imply cultural conflict'. In similar vein, Barkema, Bell, and Pennings [44] (following [45]) argue that the risks arising from cultural differences can be overcome because investors can learn over time how to deal with those differences. According to them, experienced investors, both from developed and developing countries, ultimately do not consider cultural differences a significant obstacle.

Analysing the impact of cultural distance on foreign direct investment has, however, proven to be quite complex resulting in inconclusive and even contradictory empirical evidence. Part of the reason can be attributed to the fact that authors use different measures of culture from which they construct cultural distance variable, rendering support to the need to understand the mechanism underpinning the influence of 'cultural distance' on FDI. Moreover, the problem of measurement of cultural distance variable has been investigated by van Hoorn and Maseland [46]. The authors analyse the implications of using 'cultural distance' variable, defined as a difference between home and host country scores of one or more cultural dimensions, on robustness of the empirical results obtained. They conclude that one cannot compare the impact of this 'cultural distance variable' on FDI for different countries of origin. Following the conclusions emanating from their study, Kapas and Czegledi [47] construct a 'cultural distance' variable taking into account the problem of 'the mixed impact of cultural distance and the culture in the host country' when constructing cultural distance variable. Essentially, the results of their study suggest that the impact of culture measured in levels on FDI is greater than the impact of 'cultural distance' variables. The results of their study along the van Hoorn and Maseland [46] study clearly suggest the possible bias effect of earlier studies analysing the impact of 'cultural distance' on FDI.

In light of this discussion and in view of the important insights arising from the previous empirical work, in this study we analyse the impact of culture on FDI in transition economies while highlighting the following:

i. The importance of cultural features of host economy that are independent of culture of the origin country, that is of specific values that could be

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

> attributed to individual national cultures as 'core' to comprehending the cultural influences on FDI

ii. The importance of analysing the impact of institutional and cultural factors in an integrated empirical framework in which we take control of both institutional and cultural factors and examine their relative importance on FDI

In view of the possible biases associated with the 'cultural distance variable' constructed by subcontracting the origin form destination country cultural scores, we refrain from using 'cultural distance' variable in our empirical analysis. On the contrary, we postulate the importance of specific and intrinsic cultural features that reflect on deep cultural traits and different cultural models, developed by Hofstede [48, 49] to be important determinant of FDI. In what follows, we discuss the relevance of Hofstede cultural factors as determinants of FDI inflows. The impact of these factors has been fairly under-researched in transition economy context.

#### **2.4 Which cultural factors matter for FDI and why: measurement issues and hypothesis**

We postulated earlier that culture is important aspect of informal institutions. As such culture is associated with way formal institutions function, their quality and efficiency. Apart from this, local culture is associated with 'social risk' of investment and transition to a new market embedded in social relations. Risks associated with cross-border business go beyond economic analysis and economic risks. The social characteristics are important determinant of FDI in that they influence operational and the external environment of business, influencing business success factors in the long run. Social characteristics depicted in cultural dimensions of a society are considered important to the internationalisation process ([50] as companies do not perform their businesses in isolation from other firms and/or networks of firms [51] nor do they construct their internal capabilities in isolation. Local work ethics, values and attitudes affect business performance of foreign companies through social relations of the workforce. All economic activities are 'submerged in social relations' [52]. Social characteristics and relations are embedded in cultural dimensions of a society.

Research on culture attempted to define important elements and dimensions of national culture relating to both conscious and unconscious set of beliefs, values and norms that reflect general attitudes and preferences of a society. Hofstede study and the model of national culture presents a systematic and pioneering work on the matter, that had a major influence on understanding cultural differences among nations [52]. Hofstede introduced four cultural dimensions of a society, namely Power Distance (PDI); Masculinity (MAS); Individualism (IDV); and Uncertainty Avoidance (UAI). The fifth cultural dimension, Long term orientation (LTO) was later developed and added as additional variable by Hofstede and Bond (1988). Further research on cultural dimension and its measurement resulted in the development of the Globe cultural dimensions (Global Leadership and Organisational Behaviour Effectivness, Kogut and Singh's Index of cultural distance [53] and Schwarz Value Survey [36]. The literature has critically assessed various aspects of these cultural indices, including the Hofstede work on culture and cultural dimensions [54–56]. Most of criticism is related to the problem of time invariant nature of cultural indices including Hofstende cultural dimensions, and lack of genuine (socio) anthropological aspect of culture. In this research we follow arguments presented in [57] on the rationale of using Hofstede cultural indicators

impact of cultural proximity along geographical distance on FDI [32, 38]. Lopez-Duarte and Vidal-Suarez [39] analyse how language distance affects the choice between greenfield investments and acquisitions when investing in other countries. 383 foreign direct investments from Spain in 44 different countries in the period 1989–2003 were analysed. The authors find strong support for the role of language distance as the main factor causing transaction costs. The results suggest that investors avoid acquisitions as a way of investing in countries characterised by high language distance. Bandelj [40] analysed the cultural connections (presence of a national minority) between investors and recipients of investments (hosts). It measures how the presence of national minorities affects the movement of FDI between pairs of countries. Bilateral flows of 11 Central and Eastern European countries (recipients of investments) and 27 investor countries were analysed. The author came to the conclusion that cultural ties that have historically been formed due to the presence of national minorities of the host country in the investor country, and vice versa, positively and statistically significantly affect FDI flows

Although, the results of majority of studies on cultural distance and FDI support the hypothesis that greater cultural distance negatively affects FDI, and that cultural proximity plays important role in attracting FDI, studies by Voyer and Beamish [41], Grosse and Trevino [42] find that cultural distance does not exert significant negative impact on FDI, and that cultural distance does not seem to influence FDI flows. Tang [43] reports mixed results on the impact of all cultural distance variables (four Hofstede cultural indicators) on FDI and concludes that 'cultural difference does not always imply cultural conflict'. In similar vein, Barkema, Bell, and Pennings [44] (following [45]) argue that the risks arising from cultural differences can be overcome because investors can learn over time how to deal with those differences. According to them, experienced investors, both from developed and developing countries, ultimately do not consider cultural differences a significant obstacle. Analysing the impact of cultural distance on foreign direct investment has, however, proven to be quite complex resulting in inconclusive and even contradictory empirical evidence. Part of the reason can be attributed to the fact that authors use different measures of culture from which they construct cultural distance variable, rendering support to the need to understand the mechanism underpinning the influence of 'cultural distance' on FDI. Moreover, the problem of measurement of cultural distance variable has been investigated by van Hoorn and Maseland [46]. The authors analyse the implications of using 'cultural distance' variable, defined as a difference between home and host country scores of one or more cultural dimensions, on robustness of the empirical results obtained. They conclude that one cannot compare the impact of this 'cultural distance variable' on FDI for different countries of origin. Following the conclusions emanating from their study, Kapas and Czegledi [47] construct a 'cultural distance' variable taking into account the problem of 'the mixed impact of cultural distance and the culture in the host country' when constructing cultural distance variable. Essentially, the results of their study suggest that the impact of culture measured in levels on FDI is greater than the impact of 'cultural distance' variables. The results of their study along the van Hoorn and Maseland [46] study clearly suggest the possible bias effect of earlier

studies analysing the impact of 'cultural distance' on FDI.

transition economies while highlighting the following:

**20**

In light of this discussion and in view of the important insights arising from the previous empirical work, in this study we analyse the impact of culture on FDI in

i. The importance of cultural features of host economy that are independent of culture of the origin country, that is of specific values that could be

between the two countries.

*Emerging Markets*

encompassing discussion related to the i) the benefits of using separate indices rather than aggregate cultural distance indices developed by Korgut and Singh (see [57]); ii) the stability of cultural values over time and the empirical evidence pointing to no significant variation of Hofstede indices over time; iii) the benefits of using Hofstede cultural dimensions over other indices that have been originally developed using Hofstede cultural dimensions such as is the case of the Globe indices or Kogut and Singh's Index. Thus, Hofstede [58] argues that the Globe index is deficient amid its complexity and, as such is less useful in empirical analysis, while Shenkar [59] points that we lose important information relying on aggregate cultural index i.e. Kogut and Singh's Index. In what follows we present the five Hofstede cultural dimensions, brifly review the empirical literature using Hofstede indicators and present the hypothesis.

As for the latter, we argue clearly that internationalisation of production activities through FDI seeking natural resource and/or cost-efficiency is concerned with, or values, work ethics that has a respect for 'social hierarchical distance'. On this ground it seems plausible to argue that MNC seeking to access resources or to reduce production costs prefer societies with higher Power Distance. Given the specific context of our research the positive relationship between PDI and FDI could be assumed. However, from theoretical perspective, we do acknowledge that

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

H1: *Power Distance positively affects foreign direct investments in transition economies*.

Societies in which the degree of individualism is higher compared to collectivism value the efforts of the individual more than the collective and team results. Collectivism, on the other side represents a firmer social framework in which individuals can expect their extended family or some other group to care for them in exchange for unquestioning loyalty. Individualism, on the other hand, uncover preference that everyone is responsible only for themselves, the emphasis is on individualism and the ideal is leadership, belonging to an organisation is optional, the identity of the individual is based on his personal characteristics. Collectivism emphasises the organisation, the ideal is group membership, belonging to an organisation is a matter of morality, the identity of an individual is based on his belonging to the collective [52]. In view of this, in this research, we posit that more individualistic societies have positive attitudes toward competition and rivalry, with individuals being more determined and oriented toward self-interests, self-promotion and struggle for achievement. The individualistic society is thus characterised with proactive individuals, who strive to achieve their goals based on their individual efforts, and are less relying on social-framework. In view of this, we argue that individualist societies embody values and attitudes conducive to economic growth and efficiency, and are more likely to and/or that they willingly engage in 'competitive (social) struggle' that underpins productivity growth. Hence, the positive relationship between IDV and FDI is

H2: *Individualism positively affects foreign direct investments in transition economies*.

These dimensions do not describe a person's gender but character in humans. Societies ruled by masculinity indicate that society has propensities for heroism, assertiveness, authority, success, and material rewards for success. Society as a whole is more competitive, money and material goods are important, successful and independent people are respected, and people are valued according to the material goods they own. The opposite of masculinity is femininity which signifies modesty and a propensity for agreement. Also, indulgence and consensus are considered women's values, as well as caring for the weaker, and people in society are more

According to [63], apparently, more masculine societies uncover cultural models that value material goods and material rewards for success, as opposed to quality of life and merits associated with common good that present attitudes of more feminine societies. Having said this, it could be reasonably expected that more Masculine societies are characterised by individuals and leaders who are competitiveness driven and who manage business operations by objectives. Such leaders are less sensitive to social or employee issues, they are decisive and act in isolation. On the other hand, leaders and managers of organisations of more feminine societies prefer consensus over

the sign of the relationship could go both ways.

*2.4.2 Individualism versus collectivism (IDV)*

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

*2.4.3 Masculinity versus femininity (MAS)*

focused on quality of life [52].

anticipated.

**23**

#### *2.4.1 Power distance index (PDI)*

The first cultural dimension is Power Distance. This cultural dimension uncovers general perception of social inequality predominantly related to power concentration and social status [60].

This dimension represents the degree to which less powerful members of society within their institutions (family, school, etc.) expect and accept that power is unequally distributed. People are not equal by nature and inequality is present in every profession, but this fact is experienced in different ways. The distance of power actually shows how society faces inequalities. And the main issue that this index deals with is how society solves inequalities among people. People in societies that have a greater degree of power distance accept a hierarchical order in which everyone has their place and do not require further explanations. In these societies, independence is a feature of a small group of people, and others depend on them. On the other hand, in societies with a low degree of power distance, people try to equalise the distribution of power and look for explanations for the unequal distribution of power. There is interdependence between people, and subordinates perceive orders as ordinary people, and superiors are available to subordinates [61].

This cultural dimension uncovers general perception of social inequality predominantly related to power concentration and social status (Ferraro, 2002). Having said this, it's worth emphasising that it indicates 'the degree to which members of an organisation or society expect and agree that power should be unequally shared' [62]. Applied to a firm level, it could be fairly assumed that the lower the index the higher the demand from workers within an organisation for more equally distribution of power (wealth) and higher the demand for 'justification for' and 'rationale behind' certain decisions or actions on a company level. All of these could lead to potential conflict between the workers and their superiors. Dispute and conflict(s) may arise from supposedly higher intolerance toward specific hierarchical structure of power, injustice or inequalities. Members of such society (workers within companies) prefer more horizontal organisational structure. On the other side, workers within societies with high power distance indices may be assumed to be: i) more submissive to 'formal power structure' and associated social distances; ii) to have lower levels of self-esteem associated with conflict-avoidance, (positive) affirmation and obedience. All of these lead to higher tolerance of: improper communication, improper job appraisal, overtime and unpaid work, and high tolerance of wage gaps that may be persistent within particular organisation. In light of this discussion it is firmly difficult to hypothesise what are the preferred cultural features by multinational companies seeking investments abroad. Whether a particular MNC prefer societies with high or lower Power distance depend on host of factors including company culture, organisational structure and motive of investment.

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

As for the latter, we argue clearly that internationalisation of production activities through FDI seeking natural resource and/or cost-efficiency is concerned with, or values, work ethics that has a respect for 'social hierarchical distance'. On this ground it seems plausible to argue that MNC seeking to access resources or to reduce production costs prefer societies with higher Power Distance. Given the specific context of our research the positive relationship between PDI and FDI could be assumed. However, from theoretical perspective, we do acknowledge that the sign of the relationship could go both ways.

H1: *Power Distance positively affects foreign direct investments in transition economies*.

#### *2.4.2 Individualism versus collectivism (IDV)*

encompassing discussion related to the i) the benefits of using separate indices rather than aggregate cultural distance indices developed by Korgut and Singh (see [57]); ii) the stability of cultural values over time and the empirical evidence pointing to no significant variation of Hofstede indices over time; iii) the benefits of using Hofstede cultural dimensions over other indices that have been originally developed using Hofstede cultural dimensions such as is the case of the Globe indices or Kogut and Singh's Index. Thus, Hofstede [58] argues that the Globe index is deficient amid its complexity and, as such is less useful in empirical analysis, while Shenkar [59] points that we lose important information relying on aggregate cultural index i.e. Kogut and Singh's Index. In what follows we present the five Hofstede cultural dimensions, brifly review the empirical literature using Hofstede

The first cultural dimension is Power Distance. This cultural dimension uncovers general perception of social inequality predominantly related to power concentra-

This dimension represents the degree to which less powerful members of society

within their institutions (family, school, etc.) expect and accept that power is unequally distributed. People are not equal by nature and inequality is present in every profession, but this fact is experienced in different ways. The distance of power actually shows how society faces inequalities. And the main issue that this index deals with is how society solves inequalities among people. People in societies that have a greater degree of power distance accept a hierarchical order in which everyone has their place and do not require further explanations. In these societies, independence is a feature of a small group of people, and others depend on them. On the other hand, in societies with a low degree of power distance, people try to equalise the distribution of power and look for explanations for the unequal distribution of power. There is interdependence between people, and subordinates perceive orders as ordinary people, and superiors are available to subordinates [61]. This cultural dimension uncovers general perception of social inequality predominantly related to power concentration and social status (Ferraro, 2002). Having said this, it's worth emphasising that it indicates 'the degree to which members of an organisation or society expect and agree that power should be unequally shared' [62]. Applied to a firm level, it could be fairly assumed that the lower the index the higher the demand from workers within an organisation for more equally distribution of power (wealth) and higher the demand for 'justification for' and 'rationale behind' certain decisions or actions on a company level. All of these could lead to potential conflict between the workers and their superiors. Dispute and conflict(s) may arise from supposedly higher intolerance toward specific hierarchical structure of power, injustice or inequalities. Members of such society (workers within companies) prefer more horizontal organisational structure. On the other side, workers within societies with high power distance indices may be assumed to be: i) more submissive to 'formal power structure' and associated social distances; ii) to have lower levels of self-esteem associated with conflict-avoidance, (positive) affirmation and obedience. All of these lead to higher tolerance of: improper communication, improper job appraisal, overtime and unpaid work, and high tolerance of wage gaps that may be persistent within particular organisation. In light of this discussion it is firmly difficult to hypothesise what are the preferred cultural features by multinational companies seeking investments abroad. Whether a particular MNC prefer societies with high or lower Power distance depend on host of factors including company culture, organisational structure and motive of investment.

indicators and present the hypothesis.

*2.4.1 Power distance index (PDI)*

tion and social status [60].

*Emerging Markets*

**22**

Societies in which the degree of individualism is higher compared to collectivism value the efforts of the individual more than the collective and team results. Collectivism, on the other side represents a firmer social framework in which individuals can expect their extended family or some other group to care for them in exchange for unquestioning loyalty. Individualism, on the other hand, uncover preference that everyone is responsible only for themselves, the emphasis is on individualism and the ideal is leadership, belonging to an organisation is optional, the identity of the individual is based on his personal characteristics. Collectivism emphasises the organisation, the ideal is group membership, belonging to an organisation is a matter of morality, the identity of an individual is based on his belonging to the collective [52].

In view of this, in this research, we posit that more individualistic societies have positive attitudes toward competition and rivalry, with individuals being more determined and oriented toward self-interests, self-promotion and struggle for achievement. The individualistic society is thus characterised with proactive individuals, who strive to achieve their goals based on their individual efforts, and are less relying on social-framework. In view of this, we argue that individualist societies embody values and attitudes conducive to economic growth and efficiency, and are more likely to and/or that they willingly engage in 'competitive (social) struggle' that underpins productivity growth. Hence, the positive relationship between IDV and FDI is anticipated.

H2: *Individualism positively affects foreign direct investments in transition economies*.

#### *2.4.3 Masculinity versus femininity (MAS)*

These dimensions do not describe a person's gender but character in humans. Societies ruled by masculinity indicate that society has propensities for heroism, assertiveness, authority, success, and material rewards for success. Society as a whole is more competitive, money and material goods are important, successful and independent people are respected, and people are valued according to the material goods they own. The opposite of masculinity is femininity which signifies modesty and a propensity for agreement. Also, indulgence and consensus are considered women's values, as well as caring for the weaker, and people in society are more focused on quality of life [52].

According to [63], apparently, more masculine societies uncover cultural models that value material goods and material rewards for success, as opposed to quality of life and merits associated with common good that present attitudes of more feminine societies. Having said this, it could be reasonably expected that more Masculine societies are characterised by individuals and leaders who are competitiveness driven and who manage business operations by objectives. Such leaders are less sensitive to social or employee issues, they are decisive and act in isolation. On the other hand, leaders and managers of organisations of more feminine societies prefer consensus over

aggressiveness. In view of this, it could be reasonably assumed that more masculine societies are more competitive societies, assumed to be societal attributes that foster better economic performance in general framework of a capitalist society. Notwithstanding this, it could be argued, that masculine culture traits embodied in an individual managers are not always preferred by MNCs. In case MNC's organisational culture rests on assertiveness and collective affirmation, and in case company values organisational capabilities as opposed to self-affirmation of individual employees, more feminine model of culture may be preferred. In light of this discussion, we assume that more masculine societies could be both positively and negatively related to FDI.

As far as the latter characteristic is concerned it could be argued that MNCs prefer

H:5 LTO *positively affects foreign direct investments in transition economies.*

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

**2.5 Review of empirical literature on the impact of Hofstede cultural factors**

of power and a common language have a positive effect on FDI inflows.

that have not been previously investigated. Using a bilateral econometric framweork on FDI stock gives us the opportunity to question in more detail the importance of cultural and institutional factors in explaining differencies in FDI.

In order to analyse the impact of institutional and cultural determinants on FDI, we pursue a panel data analysis. The empirical analysis covers four South East European countries (Albania, Bulgaria, Croatia and Serbia) and five Central and Eastern

**3. Empirical analysis**

**25**

**3.1 Model and data issues**

avoidance of uncertainty and trust, influence the choice of locations of foreign companies [67]. They concluded that foreign companies prefer to invest in countries that have a higher degree of uncertainty avoidance and a high level of trust. Steigner, Riedy, and Bauman examined the impact of Hofstede's cultural dimensions on DSI flows. [68]. They came to the conclusion through OLS regression that countries with civil law and countries with customary law prefer to invest in different countries and sectors. Hofstede's cultural dimensions are also analysed by Goraieb [69]. They conducted an MRQAP analysis on the example of 45 countries and came to the conclusion that firms avoid investing in countries that differ from theirs in terms of the presence of a high degree of uncertainty. Also, firms prefer to invest in countries that are similar to theirs in terms of power concentration. What these four studies have in common is that they all use Hofstede's cultural factors. We will also use Hofstede indices in this study. Most research focus on specific factors such as collectivism and future orientation or avoidance of uncertainty and trust [65, 67]. We contribute to the literature on foreign direct investment by testing the widest possible set of cultural dimensions that can influence the investment decisions of foreign companies in a particular country. Unlike previous research, we include 8 transition economies as host countries. The analysis includes also the four countries of Southeast Europe (Albania, Bulgaria, Croatia and Serbia)

Bhardwaj, Dietz, and Beamish analysed how cultural factors, more precisely the

Holmes et al. and Mac-Dermott and Mornah conducted research on how collectivism and future orientation affect the movement of inward FDI [65, 66]. Data from the Global Leadership project and the effectiveness of organisational behaviour (House et al., 2002) were used. The analysis was conducted on 50 countries (21 from Europe, 15 from Asia, 9 from North, South and Central America, 3 from Africa, 2 from Australia) for a period of nine years. They came to the conclusion that the greater presence of collectivism in society negatively affects the attraction of FDI, and that societies that are future-oriented promote capital investment of domestic entities. Bezpaliukh (2016) using Hofstede's dimensions in his paper analyzes how cultural factors, primarily concentration of power, avoidance of uncertainty, and language influence the attraction of DSI. The analysis covers post-Soviet bloc countries (Estonia, the Czech Republic, Poland, Slovakia and Hungary) and the results suggest that a higher degree of uncertainty avoidance, a lower concentration

societies with long-term, rather than short-term orientation.

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

**on FDI**

H3: *Masculinity positively (negatively) affects foreign direct investments in transition economies.*

#### *2.4.4 Uncertainty avoidance index (UAI)*

This dimension expresses the degree to which members of society feel fear or discomfort from an unfamiliar situation. This index is often misinterpreted as risk aversion. Risk avoidance is a characteristic of the individual, while uncertainty avoidance is a feature of society. The basic question this index deals with is: should we try to control the future or just let it happen? We have societies that are actively dealing with the future, i.e. they have inherent control, and societies where events are out of control (fatalism). Countries with high DACI exhibit "rigid" behaviours and are intolerant of unusual behaviours and ideas. Such nations prefer strict and precise rules of conduct in society, regulations and guidelines to minimise uncertainty. People in such societies feel more comfortable when there is a clear structure and when society is well organised. On the other hand, countries where the DACI is low reflect a more relaxed attitude in which practice is more important than rules. In such societies there is aversion to any rules and norms. But if aversion is "moderate," then it's mostly societies that are more creative and flexible. People in such societies use common sense when making decisions and rely less on prescribed rules [52].

Overall, it could be said that societies with high uncertainty avoidance are characterised with high emotional resistance to change and may feel anxious about the future [60]. It could be reasonable assumed then, that these societies are reluctant to working in unfamiliar (uncertain) environment linked to foreign companies, and may be resistant to changes in organisational structure, or any changes in business conduct. As for the former, they can present additional obstacles to foreign companies, and may thus result in "discrimination by the government, consumers, and suppliers" [64]. As for the latter feature, it is probably least preferred by international business, amid the dynamics of changes of microeconomic determinants of global industry competitiveness and the constantly changing international business environment. Bearing this in mind, we hypothesise that uncertainty avoidance exhibit a negative influence on FDI.

H4: UAI *negatively affects foreign direct investments in transition economies.*

#### *2.4.5 Long term orientation versus short term normative orientation (LTO)*

A society from a long-term oriented environment cultivates virtues that are future-oriented - perseverance, thrift, while societies from a short-term oriented environment cultivate virtues that are related to the past and present - respect for tradition and fulfilment of social obligations. Societies that have a low LTO index generally prefer to maintain traditions and norms that have been respected in the past, while social changes are viewed with suspicion. On the other hand, societies with a high LTO have a somewhat more pragmatic approach: they encourage savings and innovation in education as a way to prepare society for the future [52].

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

As far as the latter characteristic is concerned it could be argued that MNCs prefer societies with long-term, rather than short-term orientation.

H:5 LTO *positively affects foreign direct investments in transition economies.*

#### **2.5 Review of empirical literature on the impact of Hofstede cultural factors on FDI**

Holmes et al. and Mac-Dermott and Mornah conducted research on how collectivism and future orientation affect the movement of inward FDI [65, 66]. Data from the Global Leadership project and the effectiveness of organisational behaviour (House et al., 2002) were used. The analysis was conducted on 50 countries (21 from Europe, 15 from Asia, 9 from North, South and Central America, 3 from Africa, 2 from Australia) for a period of nine years. They came to the conclusion that the greater presence of collectivism in society negatively affects the attraction of FDI, and that societies that are future-oriented promote capital investment of domestic entities. Bezpaliukh (2016) using Hofstede's dimensions in his paper analyzes how cultural factors, primarily concentration of power, avoidance of uncertainty, and language influence the attraction of DSI. The analysis covers post-Soviet bloc countries (Estonia, the Czech Republic, Poland, Slovakia and Hungary) and the results suggest that a higher degree of uncertainty avoidance, a lower concentration of power and a common language have a positive effect on FDI inflows.

Bhardwaj, Dietz, and Beamish analysed how cultural factors, more precisely the avoidance of uncertainty and trust, influence the choice of locations of foreign companies [67]. They concluded that foreign companies prefer to invest in countries that have a higher degree of uncertainty avoidance and a high level of trust. Steigner, Riedy, and Bauman examined the impact of Hofstede's cultural dimensions on DSI flows. [68]. They came to the conclusion through OLS regression that countries with civil law and countries with customary law prefer to invest in different countries and sectors. Hofstede's cultural dimensions are also analysed by Goraieb [69]. They conducted an MRQAP analysis on the example of 45 countries and came to the conclusion that firms avoid investing in countries that differ from theirs in terms of the presence of a high degree of uncertainty. Also, firms prefer to invest in countries that are similar to theirs in terms of power concentration. What these four studies have in common is that they all use Hofstede's cultural factors.

We will also use Hofstede indices in this study. Most research focus on specific factors such as collectivism and future orientation or avoidance of uncertainty and trust [65, 67]. We contribute to the literature on foreign direct investment by testing the widest possible set of cultural dimensions that can influence the investment decisions of foreign companies in a particular country. Unlike previous research, we include 8 transition economies as host countries. The analysis includes also the four countries of Southeast Europe (Albania, Bulgaria, Croatia and Serbia) that have not been previously investigated. Using a bilateral econometric framweork on FDI stock gives us the opportunity to question in more detail the importance of cultural and institutional factors in explaining differencies in FDI.

#### **3. Empirical analysis**

#### **3.1 Model and data issues**

In order to analyse the impact of institutional and cultural determinants on FDI, we pursue a panel data analysis. The empirical analysis covers four South East European countries (Albania, Bulgaria, Croatia and Serbia) and five Central and Eastern

aggressiveness. In view of this, it could be reasonably assumed that more masculine societies are more competitive societies, assumed to be societal attributes that foster better economic performance in general framework of a capitalist society. Notwithstanding this, it could be argued, that masculine culture traits embodied in an individual managers are not always preferred by MNCs. In case MNC's organisational culture

organisational capabilities as opposed to self-affirmation of individual employees, more feminine model of culture may be preferred. In light of this discussion, we assume that more masculine societies could be both positively and negatively related to FDI.

H3: *Masculinity positively (negatively) affects foreign direct investments in transition*

This dimension expresses the degree to which members of society feel fear or discomfort from an unfamiliar situation. This index is often misinterpreted as risk aversion. Risk avoidance is a characteristic of the individual, while uncertainty avoidance is a feature of society. The basic question this index deals with is: should we try to control the future or just let it happen? We have societies that are actively dealing with the future, i.e. they have inherent control, and societies where events are out of control (fatalism). Countries with high DACI exhibit "rigid" behaviours and are intolerant of unusual behaviours and ideas. Such nations prefer strict and precise rules of conduct in society, regulations and guidelines to minimise uncertainty. People in such societies feel more comfortable when there is a clear structure and when society is well organised. On the other hand, countries where the DACI is low reflect a more relaxed attitude in which practice is more important than rules. In such societies there is aversion to any rules and norms. But if aversion is "moderate," then it's mostly societies that are more creative and flexible. People in such societies use common sense when making decisions and rely less on prescribed rules [52]. Overall, it could be said that societies with high uncertainty avoidance are characterised with high emotional resistance to change and may feel anxious about the future [60]. It could be reasonable assumed then, that these societies are reluctant to working in unfamiliar (uncertain) environment linked to foreign companies, and may be resistant to changes in organisational structure, or any changes in business conduct. As for the former, they can present additional obstacles to foreign companies, and may thus result in "discrimination by the government, consumers, and suppliers" [64]. As for the latter feature, it is probably least preferred by international business, amid the dynamics of changes of microeconomic determinants of global industry competitiveness and the constantly changing international business environment. Bearing this in mind, we hypothesise that uncertainty

rests on assertiveness and collective affirmation, and in case company values

*economies.*

*Emerging Markets*

**24**

*2.4.4 Uncertainty avoidance index (UAI)*

avoidance exhibit a negative influence on FDI.

H4: UAI *negatively affects foreign direct investments in transition economies.*

A society from a long-term oriented environment cultivates virtues that are future-oriented - perseverance, thrift, while societies from a short-term oriented environment cultivate virtues that are related to the past and present - respect for tradition and fulfilment of social obligations. Societies that have a low LTO index generally prefer to maintain traditions and norms that have been respected in the past, while social changes are viewed with suspicion. On the other hand, societies with a high LTO have a somewhat more pragmatic approach: they encourage savings and innovation in education as a way to prepare society for the future [52].

*2.4.5 Long term orientation versus short term normative orientation (LTO)*

European countries (Estonia, the Czech Republic, Poland, Slovakia and Hungary) in the period from 2000 to 2018, containing information on FDI and host country characteristics. Each observation point in our dataset reveals FDI flows between home country "i" (ten major trading partners) and host country "j" in the period under observation. We develop a baseline specification of the following form:

$$\begin{array}{c} \text{Ln } FDI\_{\overline{\eta}t} = \beta\_0 + \beta\_1 \ln \text{ GDP}\_{\text{it}} + \beta\_2 \ln \text{ GDP}\_{\text{jt}} + \beta\_3 \text{ DIST}\_{\text{ijt}} + \beta\_4 \text{ INFL}\_{\text{jt}} + \beta\_5 \text{ TradeO}\_{\text{jt}}\\ \quad + \beta\_6 \ln \text{ WAGE}\_{\text{jt}} + \text{Country} + \text{Time} + \varepsilon\_i \end{array}$$

$$\mathbf{(1)}$$

looking at the stock level has the advantage of stripping out the business cycle and any other 'time anomalies'. In addition, another reason for this choice is related to the functional form of the gravity equation because FDI inflows can be nil or even negative, which is something that the gravity equation cannot account for. The source of data for this variable is Database on FDI published by The Vienna Institute

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

According to North (1990), good institutions influence economic activities through various channels, such as reducing transaction and production costs. Moreover, quality institutions help reduce operating costs, which increases profitability. Foreign investors are reluctant to invest in a risky and unconvincing environment and prefer locations that offer the best economic and institutional environment. Lucas (1993) suggests that in transition economies, institutional factors play an important role in attracting foreign investment compared to purely

In order to estimate the impact of institutional determinants on FDI, we employ three indices developed by Kaufmann, Kraay, and Mastruzzi including government effectiveness, rule of law and control of corruption [70]. Each governance index ranges from 2.5 to +2.5, with higher scores corresponding to better governance outcomes. Government effectiveness (GovEff) assesses the soundness of the host country's policies and the efficiency of the administration that implements them. Rule of law (Rule) measures the confidence of agents in the rules of society, including the quality of contract enforcement, property rights and the effectiveness of the judiciary. Control of corruption (CCorr) measures corruption among public and private officials and the extent of bribery. The source of data for these variables is the World Bank. A detailed description of each institutional variable used in this

Our variable of interest is the cultural variable. Our measure of cultural variable is based on the scores developed by Geert Hofstede, which reflect country averages of individuals' attitude toward power, uncertainty, individualism etc. A detailed

> "Government effectiveness captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence

confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well

"Control of corruption captures perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests."

from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to

Rule of Law (RoL) "Rule of law captures perceptions of the extent to which agents have

as the likelihood of crime and violence."

for International Economic Studies (WIIW).

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

*3.2.2 Institutional variables*

economic factors.

analysis is given in **Table 1**.

**Variable Description**

such policies."

*3.2.3 Cultural variables*

Government Effectiveness (GovEff)

Control of Corruption

*Description of institutional variables.*

(CCorr)

Source *[71].*

**Table 1.**

**27**

Where

lnFDIijt denotes log FDI stock between home i and host countries j in period t; lnGDPit denotes log of gross domestic product of home country i in the period t; lnGDPjt denotes log of gross domestic product of home country i in the period t; DISTijt denotes log distance between capital cities of host and home countries; INFLjt denotes the inflation rate of the host country j in the period t; TradeOjt denotes exports and imports share in GDP of the country *i* in the period *t*; WAGEjt denotes relative unit labour cost of the host country j in the period t; Country denotes country dummy variables used to control for time-invariant country specific effects;

Time denotes year dummy variables used to control for time specific effect; and. εit —random error (structure eit determined by the Fixed Effect (FE) model).

We then investigate which particular features of institutional quality are important determinant of FDI flows in transition economy context while incorporating three individual institutional indicators in equations of the form:

$$\begin{array}{c} \text{Ln FDI}\_{\text{jt}} = \beta\_0 + \beta\_1 \ln \text{GDP}\_{\text{it}} + \beta\_2 \ln \text{GDP}\_{\text{jt}} + \beta\_3 \text{ DIST}\_{\text{jt}} + \beta\_4 \text{ INFL}\_{\text{jt}} + \beta\_5 \text{ TradeO}\_{\text{jt}}\\ \quad + \beta\_6 \ln \text{WAGE}\_{\text{jt}} + \beta\_8 \text{ INST}\_{\text{jt}+} \text{Country} + \text{Time} + \varepsilon\_i \end{array}$$

where INSTjt represents institutional quality indicators developed by the World Bank including Government Effectiveness (GovEffjt), Control of Corruption (Corruptjt) and Rule of Law (R\_Lawjt).

As noted earlier, the purpose of this empirical analysis is to examine whether cultural effects play an important role in explaining differences in bilateral foreign direct investment flows in the context of transition countries. With this in mind and in line with the previously reviewed empirical literature, we further expand the analysis and include cultural distance variables in our model. Using Hofstede's cultural dimensions, we decide to utilise the gravity equation to analyse the impact of individualism (IDV), power distance (PDI), uncertainty avoidance (UAI), masculinity (MAS) and long-term orientation (LTO) on FDI. More specifically, we have:

$$\begin{array}{c} \text{Ln FDI}\_{\text{jt}} = \beta\_0 + \beta\_1 \ln \text{GDP}\_{\text{it}} + \beta\_2 \ln \text{GDP}\_{\text{jt}} + \beta\_3 \text{ DIST}\_{\text{jt}} + \beta\_4 \text{ INFL}\_{\text{jt}} + \beta\_5 \text{ TradeO}\_{\text{jt}} \\ \quad + \beta\_6 \ln \text{WAGE}\_{\text{jt}} + \beta\_7 \text{ PDI}\_{\text{jt}} + \beta\_8 \text{ IDV}\_{\text{jt}} + \beta\_9 \text{ MAS}\_{\text{jt}} + \beta\_{10} \text{ UAI}\_{\text{jt}} \\ \quad + \beta\_{11} \text{ LTO}\_{\text{jt}} + \text{Country} + \text{Time} + \varepsilon\_i \end{array}$$

(3)

(2)

#### **3.2 Data and variables**

#### *3.2.1 Dependent variable*

In this research, we use FDI as our dependent variable which is the log of stock FDI between home and host countries in EUR. According to Christie (2003),

#### *Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

looking at the stock level has the advantage of stripping out the business cycle and any other 'time anomalies'. In addition, another reason for this choice is related to the functional form of the gravity equation because FDI inflows can be nil or even negative, which is something that the gravity equation cannot account for. The source of data for this variable is Database on FDI published by The Vienna Institute for International Economic Studies (WIIW).

#### *3.2.2 Institutional variables*

European countries (Estonia, the Czech Republic, Poland, Slovakia and Hungary) in the period from 2000 to 2018, containing information on FDI and host country characteristics. Each observation point in our dataset reveals FDI flows between home country "i" (ten major trading partners) and host country "j" in the period under observation. We develop a baseline specification of the following form:

*Ln FDIijt* ¼ *β<sup>0</sup>* þ *β<sup>1</sup> ln GDPit* þ *β<sup>2</sup> ln GDPjt* þ *β<sup>3</sup> DISTijt* þ *β<sup>4</sup> INFLjt* þ *β<sup>5</sup> TradeOjt*

lnFDIijt denotes log FDI stock between home i and host countries j in period t; lnGDPit denotes log of gross domestic product of home country i in the period t; lnGDPjt denotes log of gross domestic product of home country i in the period t; DISTijt denotes log distance between capital cities of host and home countries;

TradeOjt denotes exports and imports share in GDP of the country *i* in the period *t*; WAGEjt denotes relative unit labour cost of the host country j in the period t; Country denotes country dummy variables used to control for time-invariant

Time denotes year dummy variables used to control for time specific effect; and. εit —random error (structure eit determined by the Fixed Effect (FE) model). We then investigate which particular features of institutional quality are important determinant of FDI flows in transition economy context while incorporating

*Ln FDIijt* ¼ *β<sup>0</sup>* þ *β<sup>1</sup> ln GDPit* þ *β<sup>2</sup> ln GDPjt* þ *β<sup>3</sup> DISTijt* þ *β<sup>4</sup> INFLjt* þ *β<sup>5</sup> TradeOjt* þ *β<sup>6</sup> ln WAGEjt* þ *β<sup>8</sup> INSTjt*<sup>þ</sup> *Country* þ *Time* þ *ε<sup>i</sup>*

where INSTjt represents institutional quality indicators developed by the World

Bank including Government Effectiveness (GovEffjt), Control of Corruption

As noted earlier, the purpose of this empirical analysis is to examine whether cultural effects play an important role in explaining differences in bilateral foreign direct investment flows in the context of transition countries. With this in mind and in line with the previously reviewed empirical literature, we further expand the analysis and include cultural distance variables in our model. Using Hofstede's cultural dimensions, we decide to utilise the gravity equation to analyse the impact of individualism (IDV), power distance (PDI), uncertainty avoidance (UAI), masculinity (MAS) and long-term orientation (LTO) on FDI. More specifically, we have:

*Ln FDIijt* ¼ *β<sup>0</sup>* þ *β<sup>1</sup> ln GDPit* þ *β<sup>2</sup> ln GDPjt* þ *β<sup>3</sup> DISTijt* þ *β<sup>4</sup> INFLjt* þ *β<sup>5</sup> TradeOjt* þ *β<sup>6</sup> ln WAGEjt* þ *β<sup>7</sup> PDIjt* þ *β<sup>8</sup> IDVjt*<sup>þ</sup> *β<sup>9</sup> MASjt* þ *β<sup>10</sup> UAIjt*

In this research, we use FDI as our dependent variable which is the log of stock

FDI between home and host countries in EUR. According to Christie (2003),

þ *β<sup>11</sup> LTOjt* þ *Country* þ *Time* þ *ε<sup>i</sup>*

INFLjt denotes the inflation rate of the host country j in the period t;

(1)

(2)

(3)

þ *β<sup>6</sup> ln WAGEjt* þ *Country* þ *Time* þ *ε<sup>i</sup>*

three individual institutional indicators in equations of the form:

Where

*Emerging Markets*

country specific effects;

**3.2 Data and variables**

*3.2.1 Dependent variable*

**26**

(Corruptjt) and Rule of Law (R\_Lawjt).

According to North (1990), good institutions influence economic activities through various channels, such as reducing transaction and production costs. Moreover, quality institutions help reduce operating costs, which increases profitability. Foreign investors are reluctant to invest in a risky and unconvincing environment and prefer locations that offer the best economic and institutional environment. Lucas (1993) suggests that in transition economies, institutional factors play an important role in attracting foreign investment compared to purely economic factors.

In order to estimate the impact of institutional determinants on FDI, we employ three indices developed by Kaufmann, Kraay, and Mastruzzi including government effectiveness, rule of law and control of corruption [70]. Each governance index ranges from 2.5 to +2.5, with higher scores corresponding to better governance outcomes. Government effectiveness (GovEff) assesses the soundness of the host country's policies and the efficiency of the administration that implements them. Rule of law (Rule) measures the confidence of agents in the rules of society, including the quality of contract enforcement, property rights and the effectiveness of the judiciary. Control of corruption (CCorr) measures corruption among public and private officials and the extent of bribery. The source of data for these variables is the World Bank. A detailed description of each institutional variable used in this analysis is given in **Table 1**.

#### *3.2.3 Cultural variables*

Our variable of interest is the cultural variable. Our measure of cultural variable is based on the scores developed by Geert Hofstede, which reflect country averages of individuals' attitude toward power, uncertainty, individualism etc. A detailed


#### **Table 1.** *Description of institutional variables.*

description of each cultural variable according to Hofstede (2018) used in this analysis is given in **Table 2**.

In our sample, the scores for the cultural variables can take values between 0 and 100, with a higher value indicating that power distance, individualism, masculinity, uncertainty avoidance and long-term orientation are more firmly entrenched in a nation's culture. The source of data for this variable is Hofstede [71].

*3.2.4 Control variables*

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

Economic Studies (WIIW).

determinants.

CEPII database.

IMF database.

Appendix 1.

**29**

Further, we incorporate a set of control variables. In our model we include information on gross domestic product of home and host country (GDPi and GDPj), distance (DIS), labour cost (LC) and inflation rate (INF), which proved to be significant in a number of previous empirical studies on FDI

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

As stipulated by the gravity model, both home and host countries' market size are important determinants of FDI. The market size of the home country is a proxy for the economic power of the source country. The host country GDP serves as a proxy for the host country market size and thus the potential market for the investor's products. We expect the coefficients of both GDP variables to be positive.

Distance in this research pertains to geographic distance and serves as a proxy for all possible transportation and operating costs (see [72, 73]). The rationale behind including geographic distance to explain FDI is the greater cost of obtaining relevant information as well as the difficulties in managing affiliates in distant regions. The distance in this paper represents the geographical distance between the capital cities of home and host country in km. The source of data for this variable is

Furthermore, the prevailing factors for attracting FDI, besides market size and

We incorporate inflation rate as a control variable in our model. Inflation rate is often used as a proxy for macroeconomic stability in general. Political and macroeconomic stability along with transparency of legal regulations, such as land acquisition and repatriation of profits, can be important when making investment decisions [76]. The lack of macroeconomic stability creates a high degree of uncertainty for investment projects. Successful implementation of economic reforms in transition countries can be a good sign for potential investors to invest, given that stable macroeconomic performance implies lower investment risk. Thus, the lower the average inflation rate is in the host country, the more foreign investment will be attracted to the country [77]. We expect that foreign investment, ceteris paribus, will be attracted to countries with lower inflation rates. Source for this variable is

Finally, we incorporate openness as a control variable in our model. Previous empirical results show that the openness of the economy is positively and statistically related to attracting foreign direct investment. Mphigalale states in its research that the openness of the economy contributes to attracting foreign direct investment in transition countries, but this must be complemented by appropriate macroeconomic policies [78]. The openness of the economy is the sum of exports and imports of goods and services measured by gross domestic product (**Table 3**). The source of data for this variable is the World Bank. Descriptive statistics for each variable are presented in **Table 3** while the correlation matrix is in

access to host market, certainly include the costs of the input factor. Previous empirical studies show that labour costs have a significant impact on FDI and play a crucial role in labour-intensive industries, as lower labour costs attract more investment. Studies suggest a double effect of labour costs. Numerous studies show that labour costs have a negative impact on foreign direct investment inflows, which is in line with the findings of Bevan and Estrin [74]. On the other hand, certain authors found that labour costs have a negative but statistically insignificant impact on FDI [75]. In our analysis unit labour cost is measured as average gross

monthly wages. The source of data for this variable is UNECE.

The source of data for this variable is The Vienna Institute for International


**Table 2.** *Description of cultural variables.*

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

#### *3.2.4 Control variables*

description of each cultural variable according to Hofstede (2018) used in this

nation's culture. The source of data for this variable is Hofstede [71].

In our sample, the scores for the cultural variables can take values between 0 and 100, with a higher value indicating that power distance, individualism, masculinity, uncertainty avoidance and long-term orientation are more firmly entrenched in a

power and demand justification for inequalities of power."

preference for a loosely-knit social framework in which individuals are expected to take care of only themselves and their immediate families. Its opposite, Collectivism, represents a preference for a tightly-knit framework in society in which individuals can expect their relatives or members of a particular ingroup to look after them in exchange for unquestioning loyalty. A society's position on this dimension is reflected in whether people's self-image

achievement, heroism, assertiveness, and material rewards for success. Society at large is more competitive. Its opposite, Femininity, stands for a preference for cooperation, modesty, caring for the weak and quality of life. Society at large is more consensus-oriented. In the business context Masculinity versus Femininity is sometimes also related to as 'tough versus tender' cultures."

"The Uncertainty Avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. The fundamental issue here is how a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? Countries exhibiting strong Uncertainty Avoidance maintain rigid codes of belief and behaviour, and are intolerant of unorthodox behaviour and ideas. Weak Uncertainty Avoidance societies maintain a more relaxed attitude in

"Every society has to maintain some links with its own past while dealing with the challenges of the present and the future. Societies prioritise these two existential goals differently. Societies who score low on this dimension, for example, prefer to maintain time-honoured traditions and norms while viewing societal change with suspicion. Those with a culture which scores high, on the other hand, take a more pragmatic approach: they encourage thrift and efforts in modern education as a way to prepare for the future. In the business context, this dimension is referred to as "(short-term) normative versus (longterm) pragmatic" (PRA). In the academic environment, the terminology

Monumentalism versus Flexhumility is sometimes also used." Indulgence (IND) "Indulgence stands for a society that allows relatively free gratification of basic

> and natural human drives related to enjoying life and having fun. Restraint stands for a society that suppresses gratification of needs and regulates it by

Individualism (IDV) "The high side of this dimension, called Individualism, can be defined as a

Masculinity (MAS) "The Masculinity side of this dimension represents a preference in society for

which practice counts more than principles."

means of strict social norms."

is defined in terms of 'I' or 'we'."

"This dimension expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally. The fundamental issue here is how a society handles inequalities among people. People in societies exhibiting a large degree of Power Distance accept a hierarchical order in which everybody has a place, and which needs no further justification. In societies with low Power Distance, people strive to equalise the distribution of

analysis is given in **Table 2**.

*Emerging Markets*

**Variable Description**

Power Distance (PDI)

Uncertainty Avoidance (UAI)

Long Term Orientation (LTO)

Source *[52].*

*Description of cultural variables.*

**Table 2.**

**28**

Further, we incorporate a set of control variables. In our model we include information on gross domestic product of home and host country (GDPi and GDPj), distance (DIS), labour cost (LC) and inflation rate (INF), which proved to be significant in a number of previous empirical studies on FDI determinants.

As stipulated by the gravity model, both home and host countries' market size are important determinants of FDI. The market size of the home country is a proxy for the economic power of the source country. The host country GDP serves as a proxy for the host country market size and thus the potential market for the investor's products. We expect the coefficients of both GDP variables to be positive. The source of data for this variable is The Vienna Institute for International Economic Studies (WIIW).

Distance in this research pertains to geographic distance and serves as a proxy for all possible transportation and operating costs (see [72, 73]). The rationale behind including geographic distance to explain FDI is the greater cost of obtaining relevant information as well as the difficulties in managing affiliates in distant regions. The distance in this paper represents the geographical distance between the capital cities of home and host country in km. The source of data for this variable is CEPII database.

Furthermore, the prevailing factors for attracting FDI, besides market size and access to host market, certainly include the costs of the input factor. Previous empirical studies show that labour costs have a significant impact on FDI and play a crucial role in labour-intensive industries, as lower labour costs attract more investment. Studies suggest a double effect of labour costs. Numerous studies show that labour costs have a negative impact on foreign direct investment inflows, which is in line with the findings of Bevan and Estrin [74]. On the other hand, certain authors found that labour costs have a negative but statistically insignificant impact on FDI [75]. In our analysis unit labour cost is measured as average gross monthly wages. The source of data for this variable is UNECE.

We incorporate inflation rate as a control variable in our model. Inflation rate is often used as a proxy for macroeconomic stability in general. Political and macroeconomic stability along with transparency of legal regulations, such as land acquisition and repatriation of profits, can be important when making investment decisions [76]. The lack of macroeconomic stability creates a high degree of uncertainty for investment projects. Successful implementation of economic reforms in transition countries can be a good sign for potential investors to invest, given that stable macroeconomic performance implies lower investment risk. Thus, the lower the average inflation rate is in the host country, the more foreign investment will be attracted to the country [77]. We expect that foreign investment, ceteris paribus, will be attracted to countries with lower inflation rates. Source for this variable is IMF database.

Finally, we incorporate openness as a control variable in our model. Previous empirical results show that the openness of the economy is positively and statistically related to attracting foreign direct investment. Mphigalale states in its research that the openness of the economy contributes to attracting foreign direct investment in transition countries, but this must be complemented by appropriate macroeconomic policies [78]. The openness of the economy is the sum of exports and imports of goods and services measured by gross domestic product (**Table 3**). The source of data for this variable is the World Bank. Descriptive statistics for each variable are presented in **Table 3** while the correlation matrix is in Appendix 1.


**Tables 4** and **5** report the results of the econometric analysis of the model specifications presented above. Specifically, the table reports OLS fixed effect panel data estimates with panel-corrected standard errors. We first estimate Eqs. (1) using three individual subdimensions of institutional development singly due to the

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

The "traditional" gravity variables in all specifications are proved to behave as expected. Both host and host countries' economic size, proxied by GDP levels, are important determinants of FDI. The distance variable is also found to have significant implications for FDI flows which is in line with the gravity model hypothesis

We find that labour costs adversely affect FDI flows. The coefficient on labour cost is negative and significant at 1% level. The coefficient of Trade openness is positive and significant at 5%, whereas the inflation rate is not suggested to influence FDI flows. This result may be explained by the observation that we are no longer in the early years of the transition process and all transition countries from the sample are characterised with relatively stable macroeconomic environment. When it comes to institutions, the most important conclusion resulting from our analysis suggests that institutional variables do not exhibit significant influence on FDI flows in transition countries. The results obtained in this analysis are consistent with those obtained by Lucke and Eichler who study the impact of institutions and cultural factors in an integrated empirical framework [31]. Noteworthy is that institutional variables remain insignificant even when including lagged values, and the results are robust to different model specifications (i.e. manufacturing value

Regarding cultural determinants of bilateral FDI, **Table 4** reports the results

**Model 1 Model 2 Model 3**

0.103\*\*\* (0.000)

0.605\*\*\* (0.000)

0.000\*\*\* (0.000)

> 0.001 (0.140)

> 0.001\*\* (0.005)

0.601\*\*\* (0.000)

> 0.007 (0.888)

0.103\*\*\* (0.000)

0.646\*\*\* (0.000)

0.000\*\*\* (0.000)

> 0.001 (0.153)

0.001\*\* (0.000)

0.583\*\*\* (0.000)

(0.369)

based on the Hofstede cultural frameworkandsummarizestheresults for

(0.000)

(0.000)

(0.000)

(0.139)

(0.009)

(0.000)

(0.452)

Rule of Law 0.051

*Notes: All the regressions include a constant, country and time dummies (not reported in the Table 4). \**

problem of multicollinearity between the individual institutional variables.

added, productivity levels and differentials, population).

GDP home 0.103\*\*\*

GDP host 0.580\*\*\*

Distance 0.000\*\*\*

Inflation 0.001

Trade openness 0.001\*\*

Wage 0.607\*\*\*

Gov. Effectiveness 0.050

*Statistical significance at the 10 percent level. \*\*Statistical significance at the 5 percent level. \*\*\*Statistical significance at the 1 per- cent level.*

*Regression results: FDI and institutions (OLS with PCSE).*

Control of Corruption

**Table 4.**

**31**

and previous empirical findings.

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

### **Table 3.**

*Descriptive statistics.*

#### **3.3 Methodology**

In order to account for the panel structure of the data, we use bilateral fixed effects (FE) and random effects (RE) estimations. To choose between the FE and RE estimator, the Hausman (1978) test statistics are computed. The results of Hausman test showed that the model should be set as fixed effect model. This type of model is basically an Ordinary Least Squares (OLS) regression that includes a dummy variable for each country to account for country-specific effects (LSDV model). The OLS method is optimal if error processes have the same variance (homoscedasticity) and all of the error processes are independent of each other. According to Plümper et al. [79] panel data typically display contemporaneous correlation across units (i.e. large errors for country i at time t will often be associated with large errors for country j at time t), unit level heteroskedasity (i.e. variances of the error processes differ from country to country) and serial correlation (i.e. errors for each country show temporal dependence) making inference from standard errors produced by LSDV incorrect.

In order to test for possible serial correlation, we employ the Wooldridge (2002) test which indicates the presence of serial correlation in the panel data. In addition, the Breusch and Pagan test and Pasaran CD (cross-sectional dependence) test indicate a significant presence of heteroscedasticity and cross-sectional dependence/contemporaneous correlation. To avoid these problems, we follow Beck and Katz's recommended procedure, using OLS with panel-corrected standard errors (PCSE), a method widely used in empirical research that assumes by default that the disturbances are heteroskedastic and contemporaneously correlated across panels [79, 80]. This estimation approache is the suitable method to test our hypotheses with the available data and provides efficient and robust outcomes, suitable for formulating accurate conclusions. We note that we do not make use the alternative the Generalised method of moments estimator due it is not feasible for our data set (see [81]).

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

**Tables 4** and **5** report the results of the econometric analysis of the model specifications presented above. Specifically, the table reports OLS fixed effect panel data estimates with panel-corrected standard errors. We first estimate Eqs. (1) using three individual subdimensions of institutional development singly due to the problem of multicollinearity between the individual institutional variables.

The "traditional" gravity variables in all specifications are proved to behave as expected. Both host and host countries' economic size, proxied by GDP levels, are important determinants of FDI. The distance variable is also found to have significant implications for FDI flows which is in line with the gravity model hypothesis and previous empirical findings.

We find that labour costs adversely affect FDI flows. The coefficient on labour cost is negative and significant at 1% level. The coefficient of Trade openness is positive and significant at 5%, whereas the inflation rate is not suggested to influence FDI flows. This result may be explained by the observation that we are no longer in the early years of the transition process and all transition countries from the sample are characterised with relatively stable macroeconomic environment.

When it comes to institutions, the most important conclusion resulting from our analysis suggests that institutional variables do not exhibit significant influence on FDI flows in transition countries. The results obtained in this analysis are consistent with those obtained by Lucke and Eichler who study the impact of institutions and cultural factors in an integrated empirical framework [31]. Noteworthy is that institutional variables remain insignificant even when including lagged values, and the results are robust to different model specifications (i.e. manufacturing value added, productivity levels and differentials, population).


Regarding cultural determinants of bilateral FDI, **Table 4** reports the results based on the Hofstede cultural frameworkandsummarizestheresults for

*Notes: All the regressions include a constant, country and time dummies (not reported in the Table 4). \**

*Statistical significance at the 10 percent level. \*\*Statistical significance at the 5 percent level.*

*\*\*\*Statistical significance at the 1 per- cent level.*

#### **Table 4.**

*Regression results: FDI and institutions (OLS with PCSE).*

**3.3 Methodology**

*Descriptive statistics.*

*Emerging Markets*

**Table 3.**

our data set (see [81]).

**30**

In order to account for the panel structure of the data, we use bilateral fixed effects (FE) and random effects (RE) estimations. To choose between the FE and RE estimator, the Hausman (1978) test statistics are computed. The results of Hausman test showed that the model should be set as fixed effect model. This type of model is basically an Ordinary Least Squares (OLS) regression that includes a dummy variable for each country to account for country-specific effects (LSDV model). The OLS method is optimal if error processes have the same variance (homoscedasticity) and all of the error processes are independent of each other. According to Plümper et al. [79] panel data typically display contemporaneous correlation across units (i.e. large errors for country i at time t will often be associated with large errors for country j at time t), unit level heteroskedasity (i.e. variances of the error processes differ from country to country) and serial correlation (i.e. errors for each country show temporal dependence) making inference

**Variable Obs Mean Std. Dev. Min Max** lnFDI 1112 9.02 0.43 6.80 10.69 lnGDPhost 1197 24.72 1.16 21.97 27.09 lnGDPhome 1197 27.24 1.40 23.73 29.01 Distance 1197 949.92 468.34 59.61 2126.43 Inflation 1197 4.09 8.96 2 112 Trade oppeness 1197 111.92 36.34 24.17 192.34 lnWage 1064 6.55 0.63 4.24 7.33 IDV 1216 49.75 17.61 25 80 PDI 1216 68 19.49 40 104 UAI 1216 77.12 13.93 51 93 MAS 1216 59 25.72 30 110 LTO 1216 25 6.76 15 33 GovEff 1224 0.46 0.48 0.84 1.16 RoL 1224 0.32 0.60 1.27 1.37 CCorr 1224 0.17 0.51 1.17 1.30

In order to test for possible serial correlation, we employ the Wooldridge (2002) test which indicates the presence of serial correlation in the panel data. In addition, the Breusch and Pagan test and Pasaran CD (cross-sectional dependence) test indicate a significant presence of heteroscedasticity and cross-sectional dependence/contemporaneous correlation. To avoid these problems, we follow Beck and Katz's recommended procedure, using OLS with panel-corrected standard errors (PCSE), a method widely used in empirical research that assumes by default that the disturbances are heteroskedastic and contemporaneously correlated across panels [79, 80]. This estimation approache is the suitable method to test our hypotheses with the available data and provides efficient and robust outcomes, suitable for formulating accurate conclusions. We note that we do not make use the alternative the Generalised method of moments estimator due it is not feasible for

from standard errors produced by LSDV incorrect.


characterised as important factors that off-set for the underdeveloped institutional capacity of transition economies, the impact of cultural ties on FDI remains fairly under researched. Informal economic structures and cultural similarities emanate trust and enable strong business ties across borders. How important are these factors in explaining differences in FDI flows among transition economies is the

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

The cultural features seem to have been disregarded as important factors which influence the way in which markets develop and evolve. Homogenous cultures tend to understand the rules and norms of social behaviour in which firms operate and construct their capabilities. These tacit aspects of market, reflected in diverse cultural features of a society, shape and model the behaviour of local economic agents. As such, these are also likely to influence MNC's decisions on where to invest. They seem to reveal hidden behavioural patterns that underpin societal prosperity, such as responsibility, ethics and trust. The idea that these norms affect companies' efficiency and growth prospects cannot be dismissed. On the contrary, these factors should be perceived as important determinants of FDI that not only minimise transaction costs, but also enhance productivity potential of foreign affiliates, and/ or simply create an environment conducive to business growth. Such an environment is perceived as friendly and or familiar market from MNC perspective.

We rely on gravity econometric framework and examine the impact of cultural factors on FDI using bilateral FDI flows between home (i.e. major trading partners) 8 transition economies, depicted as host countries, in the period 2000–2018. We study this relationship in an integrated framework considering principal gravity

In this research we provide strong and robust evidence that cultural factors, depicted in Hofmann cultural indices, influence MNCs' locational decisions. Other things held constant, specific cultural features seem more important than formal institutions, which seems at odds with standard neoclassical propositions, and shed some new light on the way we understand international business transactions. Having said this, here we do not intend to generalise our findings, since we examine the relative importance of cultural factors measured in levels, and assigned to certain cultural values, in attracting FDI in the specific context of transition economies. However, we do pay attention to the relative importance of formal institutions in explaining differences in bilateral FDI stock between selected transition economies considered as host economies in our analysis. The fact that institutional factors have not proven to exert significant influence on FDI in our analysis does not imply that formal institutions are not important or of lesser importance. We, however, believe that more work on the matter of interplay between culture and formal institutions in comprehending differences in inward FDI flows is needed. Future research should focus on disentangling the impact of institutions possibly conditional on some important, intrinsic cultural values. The nature of our dataset inhibits further investigation of the possible interplay, suggested by the Du


———————————+———————————————————————————————————————————————————————————————————

forces, traditional FDI determinants, policy and institutional factors.

principal question investigated in this research.

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

et al. study [82].

**Appendix 1**

**33**

logFDI | 1.0000 logGDPhost | 0.5809 1.0000 logGDPhome | 0.2727 0.0411 1.0000

DISTANCE | -0.1890 -0.3242 0.3486 1.0000

*\*\*Statistical significance at the 5 percent level.*

*\*\*\*Statistical significance at the 1 per- cent level.*

#### **Table 5.**

*Regression results: FDI and culture (OLS with PCSE).*

thecoefficientson fivecultural indicatorsincludingindividualism (IDV), power distance (PDI), uncertainty avoidance (UAI), masculinity (MAS) and long-term orientation (LTO).

We find that higher levels of individualism, power distance and long-term orientation in the host countries have significant impact on the FDI. Meanwhile, thecoefficients on uncertainty avoidance andmasculinity are negative andsignificant as expected. Thus, theresults render support to the a priori postulated hypothesis.

#### **4. Conclusion**

Foreign Direct Investments has been largely found to positively affect economic growth in transition economies. Increases in FDI have been associated with productivity and export growth of local companies via knowledge spillovers and complementary effects on domestic investment. The impact of FDI on economic growth seems, however, conditional on the level of human capital and absorptive capacity of a host economy. Determinants of FDI in transition economies have been intensely researched highlighting the importance of traditional factors, institutions and policy choices in determining locational decisions of multinational corporations. Although informal institutions and cultural factors have increasingly been

#### *Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

characterised as important factors that off-set for the underdeveloped institutional capacity of transition economies, the impact of cultural ties on FDI remains fairly under researched. Informal economic structures and cultural similarities emanate trust and enable strong business ties across borders. How important are these factors in explaining differences in FDI flows among transition economies is the principal question investigated in this research.

The cultural features seem to have been disregarded as important factors which influence the way in which markets develop and evolve. Homogenous cultures tend to understand the rules and norms of social behaviour in which firms operate and construct their capabilities. These tacit aspects of market, reflected in diverse cultural features of a society, shape and model the behaviour of local economic agents. As such, these are also likely to influence MNC's decisions on where to invest. They seem to reveal hidden behavioural patterns that underpin societal prosperity, such as responsibility, ethics and trust. The idea that these norms affect companies' efficiency and growth prospects cannot be dismissed. On the contrary, these factors should be perceived as important determinants of FDI that not only minimise transaction costs, but also enhance productivity potential of foreign affiliates, and/ or simply create an environment conducive to business growth. Such an environment is perceived as friendly and or familiar market from MNC perspective.

We rely on gravity econometric framework and examine the impact of cultural factors on FDI using bilateral FDI flows between home (i.e. major trading partners) 8 transition economies, depicted as host countries, in the period 2000–2018. We study this relationship in an integrated framework considering principal gravity forces, traditional FDI determinants, policy and institutional factors.

In this research we provide strong and robust evidence that cultural factors, depicted in Hofmann cultural indices, influence MNCs' locational decisions. Other things held constant, specific cultural features seem more important than formal institutions, which seems at odds with standard neoclassical propositions, and shed some new light on the way we understand international business transactions.

Having said this, here we do not intend to generalise our findings, since we examine the relative importance of cultural factors measured in levels, and assigned to certain cultural values, in attracting FDI in the specific context of transition economies. However, we do pay attention to the relative importance of formal institutions in explaining differences in bilateral FDI stock between selected transition economies considered as host economies in our analysis. The fact that institutional factors have not proven to exert significant influence on FDI in our analysis does not imply that formal institutions are not important or of lesser importance. We, however, believe that more work on the matter of interplay between culture and formal institutions in comprehending differences in inward FDI flows is needed. Future research should focus on disentangling the impact of institutions possibly conditional on some important, intrinsic cultural values. The nature of our dataset inhibits further investigation of the possible interplay, suggested by the Du et al. study [82].

#### **Appendix 1**


———————————+—————————————————————————————————————————————————————————————————— logFDI | 1.0000 logGDPhost | 0.5809 1.0000 logGDPhome | 0.2727 0.0411 1.0000 DISTANCE | -0.1890 -0.3242 0.3486 1.0000

thecoefficientson fivecultural indicatorsincludingindividualism (IDV), power distance (PDI), uncertainty avoidance (UAI), masculinity (MAS) and long-term ori-

GDP home 0.109\*\*\*

GDP host 0.281\*\*\*

Distance 0.000\*\*\*

Inflation 0.001\*\*

Trade Openness 0.000

Wage 0.293\*\*\*

Power distance (PDI) 0.006\*\*\*

Individualism (IDV) 0.012\*\*\*

Masculinity (MAS) 0.008\*\*\*

Uncertainty avoidance (UAI) 0.005\*\*\*

Long-term orientation (LTO) 0.003\*\*\*

*Notes: All the regressions include a constant, country and time dummies (not reported in the Table 5). \**

**Model 4**

(0.000)

(0.000)

(0.000)

(0.038)

(0.537)

(0.000)

(0.000)

(0.000)

(0.000)

(0.000)

(0.016)

We find that higher levels of individualism, power distance and long-term orientation in the host countries have significant impact on the FDI. Meanwhile,

andsignificant as expected. Thus, theresults render support to the a priori postu-

Foreign Direct Investments has been largely found to positively affect economic growth in transition economies. Increases in FDI have been associated with productivity and export growth of local companies via knowledge spillovers and complementary effects on domestic investment. The impact of FDI on economic growth seems, however, conditional on the level of human capital and absorptive capacity of a host economy. Determinants of FDI in transition economies have been

intensely researched highlighting the importance of traditional factors, institutions and policy choices in determining locational decisions of multinational corporations. Although informal institutions and cultural factors have increasingly been

thecoefficients on uncertainty avoidance andmasculinity are negative

entation (LTO).

*Emerging Markets*

**Table 5.**

*Statistical significance at the 10 percent level. \*\*Statistical significance at the 5 percent level. \*\*\*Statistical significance at the 1 per- cent level.*

*Regression results: FDI and culture (OLS with PCSE).*

lated hypothesis.

**4. Conclusion**

**32**

INFL | -0.1338 -0.2630 -0.0591 -0.0050 1.0000 TradeO | 0.0560 0.0196 0.0746 0.0290 -0.2563 1.0000 logWagehost | 0.2710 0.4907 0.1298 -0.1621 -0.4883 0.4015 1.0000 GovEff | 0.1631 0.2069 0.0350 0.0064 -0.3580 0.5840 0.5953 1.0000 R\_Law | 0.2140 0.2824 0.0441 0.1055 -0.3268 0.5579 0.5404 0.9373 1.0000 Corrupt | 0.0770 0.0669 0.0362 0.2775 -0.2848 0.4105 0.4304 0.8394 0.8946 1.0000 PDI | -0.0495 0.0364 -0.0221 -0.3175 0.0878 -0.1498 -0.1013 -0.3901 -0.5724 -0.5897 1.0000 IDV | 0.2657 0.3912 0.0003 0.0082 -0.1425 0.5403 0.3158 0.6734 0.7871 0.6845 -0.5641 MAS | 0.2096 0.4224 -0.0236 -0.3800 -0.0569 0.4921 0.1989 0.2574 0.1797 0.0102 0.4222 UAI | 0.1929 0.3534 -0.0150 -0.0454 0.1184 -0.6783 -0.2291 -0.6100 -0.4481 -0.4224 -0.1482 IVR | 0.2433 0.4877 -0.0453 -0.6144 0.0221 -0.2467 0.2786 -0.0731 -0.1599 -0.2871 0.2971 **References**

York. 1985.

917–40.

**35**

of Michigan Press; 1991.

performance. New York. 1990.

[3] Williamson O. E. The Economic Institutions of Capitalism: firms, markets, relational contracting. New

[1] Buchanan JM. The economics and the ethics of constitutional order. University

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

[12] Eydam U, Gabriadze I. Institutional development in transition economies– the role of institutional experience. Post-Soviet Affairs. 2020; 1-20.

[13] Yeager TJ. Institutions, Transition Economies and Economic Development. Westview Press, Boulder; Colorado.

[14] Cornia GA, Popov V, Popov VM, editors. Transition and institutions: the

reformers. Oxford University Press on

[15] Chen CJ, Ding Y, Kim CF. Highlevel politically connected firms, corruption, and analyst forecast accuracy around the world. Journal of International Business Studies. 2010 Dec

[16] Wei SJ, Shleifer A. Local corruption and global capital flows. Brookings papers on economic activity. 2000 Dec 1

[17] Wheeler D, Mody A. International investment location decisions: The case of US firms. Journal of international economics. 1992 Aug 1;33(1–2):57–76.

[18] MudamMudambi R, Navarra P, Delios A. Government regulation, corruption, and FDI. Asia Pac J Manag 30, 487–511 (2013). https://doi.org/

[19] Buchanan BG, Le QV, Rishi M. Foreign direct investment and institutional quality: Some empirical evidence. International Review of financial analysis. 2012 Jan 1;21:81–9.

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institutions and foreign direct investment. European journal of political economy. 2007 Jun 1;23(2):

397–415.

10.1007/s10490-012-9311-y

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1991.

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

Demand; 2001.

1;41(9):1505–24.

(2):303–46.

[2] North DC, Institutions IC. Economic

[4] Vanberg, V, Kerber W. Institutional competition among jurisdictions: An evolutionary approach. Constitutional Political Economy, 1994, 5.2: 193–219.

[5] Young H. P. Individual Strategy and Social Structure: An Evolutionary Theory of Institutions (Princeton University, Princeton, NJ). 1998.

[6] Seyoum B. Informal institutions and foreign direct investment. Journal of Economic Issues. 2011 Dec 1;45(4):

[7] Peng MW, Wang DY, Jiang Y. An institution-based view of international business strategy: A focus on emerging economies. Journal of international business studies. 2008 Jul 1;39(5):920–36.

[8] Mudambi R, Navarra P. Institutions and internation business: a theoretical overview. International Business Review. 2002 Dec 1;11(6):635–46.

[9] European Bank for Reconstruction. Transition Report. The Bank; 2001.

[10] European Bank for Reconstruction and Development (EBRD). Transition Report 2010: Recovery and Reform.

[11] Stiglitz J. Incentives and institutions in the provision of health care in developing countries: Toward an efficient and equitable health care strategy. InIHEA II Meetings, Rotterdam, June 1999 Jun 7.


———————————+—————————————————————————————

IDV | 1.0000 MAS | 0.4786 1.0000 UAI | -0.2121 -0.3567 1.0000 IVR | 0.0659 0.4164 0.3032 1.0000

#### **Author details**

Sabina Silajdzic\* and Eldin Mehic School of Economics and Business, University of Sarajevo, Sarajevo, Bosnia and Herzegovina

\*Address all correspondence to: sabina.silajdzic@efsa.unsa.ba

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

#### **References**

INFL | -0.1338 -0.2630 -0.0591 -0.0050 1.0000 TradeO | 0.0560 0.0196 0.0746 0.0290 -0.2563 1.0000 logWagehost | 0.2710 0.4907 0.1298 -0.1621 -0.4883 0.4015 1.0000


> IDV | 1.0000 MAS | 0.4786 1.0000 UAI | -0.2121 -0.3567 1.0000 IVR | 0.0659 0.4164 0.3032 1.0000

*Emerging Markets*

**Author details**

**34**

Sabina Silajdzic\* and Eldin Mehic

provided the original work is properly cited.

Bosnia and Herzegovina

School of Economics and Business, University of Sarajevo, Sarajevo,

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

\*Address all correspondence to: sabina.silajdzic@efsa.unsa.ba

GovEff | 0.1631 0.2069 0.0350 0.0064 -0.3580 0.5840 0.5953 1.0000 R\_Law | 0.2140 0.2824 0.0441 0.1055 -0.3268 0.5579 0.5404 0.9373 1.0000 Corrupt | 0.0770 0.0669 0.0362 0.2775 -0.2848 0.4105 0.4304 0.8394 0.8946 1.0000

PDI | -0.0495 0.0364 -0.0221 -0.3175 0.0878 -0.1498 -0.1013 -0.3901 -0.5724 -0.5897 1.0000 IDV | 0.2657 0.3912 0.0003 0.0082 -0.1425 0.5403 0.3158 0.6734 0.7871 0.6845 -0.5641 MAS | 0.2096 0.4224 -0.0236 -0.3800 -0.0569 0.4921 0.1989 0.2574 0.1797 0.0102 0.4222 UAI | 0.1929 0.3534 -0.0150 -0.0454 0.1184 -0.6783 -0.2291 -0.6100 -0.4481 -0.4224 -0.1482 IVR | 0.2433 0.4877 -0.0453 -0.6144 0.0221 -0.2467 0.2786 -0.0731 -0.1599 -0.2871 0.2971 [1] Buchanan JM. The economics and the ethics of constitutional order. University of Michigan Press; 1991.

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[56] Waldman DA, De Luque MS, Washburn N, House RJ, Adetoun B, Barrasa A, Bobina M, Bodur M, Chen YJ, Debbarma S, Dorfman P. Cultural and leadership predictors of corporate social responsibility values of top management: A GLOBE study of 15 countries. Journal of International Business Studies. 2006 Nov 1;37(6): 823–37.

[57] Goraieb MR, Reinert M, Verdu FC. Cultural Influences on Foreign Direct Investment. Revista Eletrônica de

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[58] Hofstede G. What did GLOBE really measure? Researchers' minds versus respondents' minds. Journal of international business studies. 2006 Nov 1;37(6):882–96.

[59] Shenkar O. Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of international business studies. 2001 Sep 1;32(3):519–35.

[60] Ferraro GP. *The cultural dimension of international business*(Doctoral dissertation, Univerza v Mariboru, Ekonomsko-poslovna fakulteta).

[61] Polanyi K, MacIver RM. The great transformation. Boston: Beacon press; 2001 Jul.

[62] House R, Javidan M, Hanges P, Dorfman P. Understanding cultures and implicit leadership theories across the globe: an introduction to project GLOBE. Journal of world business. 2002 Mar 1;37(1):3–10.

[63] Arruda CA, Hickson DJ. Sensitivity to societal culture in managerial decision-making: An Anglo-Brazilian comparison. Managing across cultures: Issues and perspectives. 1996.

[64] Hymer S. The international operations of national firms: a study of FDI. Cambridge, Mass. 1976.

[65] Holmes Jr RM, Miller T, Hitt MA, Salmador MP. The interrelationships among informal institutions, formal institutions, and inward foreign direct investment. Journal of Management. 2013 Feb;39(2):531–66.

[66] Mac-Dermott R, Mornah D. The role of culture in foreign direct investment and trade: Expectations from the GLOBE dimensions of culture. Open Journal of Business and Management. 2015 3(01) 63.

[67] Bhardwaj A, Dietz J, Beamish PW. Host country cultural influences on foreign direct investment. Management International Review. 2007 Feb 1;47(1): 29–50.

Sectoral Panel Analysis. International

*DOI: http://dx.doi.org/10.5772/intechopen.95326*

*Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture…*

[76] Jun KW, Singh H. The determinants

[77] Campos NF, Kinoshita Y. Foreign direct investment as technology transferred: Some panel evidence from

Manchester School. 2002 Jun;70(3):398–

[78] Mphigalale TV. The impact of trade openness on foreign direct investment (FDI) inflows in emerging market economies(Doctoral dissertation, University of the Western Cape). 2011.

[79] Plümper T, Troeger VE, Manow P. Panel data analysis in comparative politics: Linking method to theory. European Journal of Political Research.

[80] Beck N, Katz JN. What to do (and not to do) with time-series cross-section data. American political science review.

[81] Huber ME, Huber E, Stephens JD. Development and crisis of the welfare state: Parties and policies in global markets. University of Chicago press;

[82] Du J, Lu Y, Tao Z. Institutions and FDI location choice: The role of cultural distances. Journal of Asian Economics.

2012 Jun 1;23(3):210–23.

2005 Mar;44(2):327–54.

1995 Sep 1:634–47.

2001.

**39**

Monetary Fund; 2005 Sep 1.

of foreign direct investment in developing countries. Transnational corporations. 1996 Aug;5(2):67–105.

the transition economies. The

419.

[68] Steigner T, Riedy MK, Bauman A. Legal family, cultural dimensions, and FDI. International Journal of Managerial Finance. 2019 Jun 3.

[69] Goraieb MR, Reinert M, Verdu FC. Cultural Influences on Foreign Direct Investment. Revista Eletrônica de Negócios Internacionais: Internext. 2019;14(2):128–44.

[70] Kaufmann D, Kraay A, Mastruzzi M. Response to 'What do the worldwide governance indicators measure?'. The European Journal of Development Research. 2010 Feb 1;22(1):55–8.

[71] The Worldwide Governance Indicators (WGI). Internet]. 2018. Available from: https://info.worldbank. org/governance/wgi/[Accessed: 2018-12-30]

[72] Brenton P, Di Mauro F, Lücke M. Economic integration and FDI: An empirical analysis of foreign investment in the EU and in Central and Eastern Europe. Empirica. 1999 Jun 1;26(2):95– 121.

[73] Limao NA, Hammels D. Venable, Infrastructure, Geographical disadvantage, and Transport costs. World Bank economic Review. 2001;15: 2001.

[74] AA, Estrin S. The determinants of foreign direct investment into European transition economies. Journal of comparative economics. 2004 Dec 1;32 (4):775–87.

[75] Murgasova Z. Post-Transition Investment Behavior in Poland; A *Institutions, Culture and Foreign Direct Investment in Transition Economies: Does Culture… DOI: http://dx.doi.org/10.5772/intechopen.95326*

Sectoral Panel Analysis. International Monetary Fund; 2005 Sep 1.

Negócios Internacionais: Internext.

[58] Hofstede G. What did GLOBE really measure? Researchers' minds versus respondents' minds. Journal of

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29–50.

Finance. 2019 Jun 3.

2019;14(2):128–44.

2018-12-30]

121.

2001.

(4):775–87.

[67] Bhardwaj A, Dietz J, Beamish PW. Host country cultural influences on foreign direct investment. Management International Review. 2007 Feb 1;47(1):

[68] Steigner T, Riedy MK, Bauman A. Legal family, cultural dimensions, and FDI. International Journal of Managerial

[69] Goraieb MR, Reinert M, Verdu FC. Cultural Influences on Foreign Direct Investment. Revista Eletrônica de Negócios Internacionais: Internext.

[70] Kaufmann D, Kraay A, Mastruzzi M. Response to 'What do the worldwide governance indicators measure?'. The European Journal of Development Research. 2010 Feb 1;22(1):55–8.

[71] The Worldwide Governance Indicators (WGI). Internet]. 2018. Available from: https://info.worldbank.

org/governance/wgi/[Accessed:

[72] Brenton P, Di Mauro F, Lücke M. Economic integration and FDI: An empirical analysis of foreign investment in the EU and in Central and Eastern Europe. Empirica. 1999 Jun 1;26(2):95–

[73] Limao NA, Hammels D. Venable,

[74] AA, Estrin S. The determinants of foreign direct investment into European

transition economies. Journal of comparative economics. 2004 Dec 1;32

[75] Murgasova Z. Post-Transition Investment Behavior in Poland; A

Infrastructure, Geographical disadvantage, and Transport costs. World Bank economic Review. 2001;15:

international business studies. 2006 Nov

international business studies. 2001 Sep

[60] Ferraro GP. *The cultural dimension of international business*(Doctoral dissertation, Univerza v Mariboru, Ekonomsko-poslovna fakulteta).

[61] Polanyi K, MacIver RM. The great transformation. Boston: Beacon press;

[62] House R, Javidan M, Hanges P, Dorfman P. Understanding cultures and implicit leadership theories across the globe: an introduction to project

GLOBE. Journal of world business. 2002

[63] Arruda CA, Hickson DJ. Sensitivity

to societal culture in managerial decision-making: An Anglo-Brazilian comparison. Managing across cultures:

Issues and perspectives. 1996.

[64] Hymer S. The international operations of national firms: a study of

[65] Holmes Jr RM, Miller T, Hitt MA, Salmador MP. The interrelationships among informal institutions, formal institutions, and inward foreign direct investment. Journal of Management.

[66] Mac-Dermott R, Mornah D. The role of culture in foreign direct investment and trade: Expectations from the GLOBE dimensions of culture.

FDI. Cambridge, Mass. 1976.

2013 Feb;39(2):531–66.

**38**

[59] Shenkar O. Cultural distance revisited: Towards a more rigorous conceptualization and measurement of

cultural differences. Journal of

2019;14(2):128–44.

*Emerging Markets*

1;37(6):882–96.

1;32(3):519–35.

2001 Jul.

Mar 1;37(1):3–10.

[76] Jun KW, Singh H. The determinants of foreign direct investment in developing countries. Transnational corporations. 1996 Aug;5(2):67–105.

[77] Campos NF, Kinoshita Y. Foreign direct investment as technology transferred: Some panel evidence from the transition economies. The Manchester School. 2002 Jun;70(3):398– 419.

[78] Mphigalale TV. The impact of trade openness on foreign direct investment (FDI) inflows in emerging market economies(Doctoral dissertation, University of the Western Cape). 2011.

[79] Plümper T, Troeger VE, Manow P. Panel data analysis in comparative politics: Linking method to theory. European Journal of Political Research. 2005 Mar;44(2):327–54.

[80] Beck N, Katz JN. What to do (and not to do) with time-series cross-section data. American political science review. 1995 Sep 1:634–47.

[81] Huber ME, Huber E, Stephens JD. Development and crisis of the welfare state: Parties and policies in global markets. University of Chicago press; 2001.

[82] Du J, Lu Y, Tao Z. Institutions and FDI location choice: The role of cultural distances. Journal of Asian Economics. 2012 Jun 1;23(3):210–23.

**41**

**Chapter 3**

**Abstract**

Africa's Journey to

*Chimezirim Young and Ayo Oyewale*

This chapter examines the history of other nations in achieving rapid industrialization, explains the scientific processes involved, as well as developing a model to guide Nigerians in curbing mass unemployment. This industrialized countries where selected randomly from the pool of industrialized nations, to represent the different continents. Their journey to industrialization was studied and itemized to help developing countries design a unique strategy to curb mass unemployment. The chapter adopts historical analysis to gather evidence and formulate ideas from the past and empirical analysis by direct and indirect observation. The data used in this study were both primary and secondary. The results of the study were descriptive in nature. The study revealed several models that would guide Nigerians to achieving industrialization. In conclusion, the principles and strategy applied by the industrialized nations for achieving industrialization and curbing mass unemployment is learning: theory and practical. Learning: proper education and training on how to manufacture products promotes industrialization, productivity and create job opportunities. The study emphasizes education and training as the principal learning tools for increasing employment in quantity and quality and promoting improved productivity.

**Keywords:** industrialization, productivity, learning, sustainable development,

History is important, present decisions can be concluded based on yesterday's events. Just as a man values his memory, so the human race should value their history. Deductions from history enlighten the present mind, bringing about self awareness and historical exposure. History is indeed, "a roadmap that shows where you were from where you are and navigates you to the future". It is a wonder to note that many people and society plan without taking history into cognizance. Consequently, most men have been thinking and doing things as if the world began today. The flagrant disregard of history has led to man's inability to predetermine events and procedures, which makes man to continue to repeat his mistakes and

This book presents how Nigerians can start a journey towards industrialization; solve their myriads of problems, improve on its performance and save the failing nation from further collapse. It presents the experiences of other nations in promoting rapid industrialization; explains the scientific bases of the activities they carried

policies, science and technology, technological entrepreneurship,

manpower development and innovation

**1. Introduction**

suffer avoidable pains [1].

Industrialization

#### **Chapter 3**

## Africa's Journey to Industrialization

*Chimezirim Young and Ayo Oyewale*

#### **Abstract**

This chapter examines the history of other nations in achieving rapid industrialization, explains the scientific processes involved, as well as developing a model to guide Nigerians in curbing mass unemployment. This industrialized countries where selected randomly from the pool of industrialized nations, to represent the different continents. Their journey to industrialization was studied and itemized to help developing countries design a unique strategy to curb mass unemployment. The chapter adopts historical analysis to gather evidence and formulate ideas from the past and empirical analysis by direct and indirect observation. The data used in this study were both primary and secondary. The results of the study were descriptive in nature. The study revealed several models that would guide Nigerians to achieving industrialization. In conclusion, the principles and strategy applied by the industrialized nations for achieving industrialization and curbing mass unemployment is learning: theory and practical. Learning: proper education and training on how to manufacture products promotes industrialization, productivity and create job opportunities. The study emphasizes education and training as the principal learning tools for increasing employment in quantity and quality and promoting improved productivity.

**Keywords:** industrialization, productivity, learning, sustainable development, policies, science and technology, technological entrepreneurship, manpower development and innovation

#### **1. Introduction**

History is important, present decisions can be concluded based on yesterday's events. Just as a man values his memory, so the human race should value their history. Deductions from history enlighten the present mind, bringing about self awareness and historical exposure. History is indeed, "a roadmap that shows where you were from where you are and navigates you to the future". It is a wonder to note that many people and society plan without taking history into cognizance. Consequently, most men have been thinking and doing things as if the world began today. The flagrant disregard of history has led to man's inability to predetermine events and procedures, which makes man to continue to repeat his mistakes and suffer avoidable pains [1].

This book presents how Nigerians can start a journey towards industrialization; solve their myriads of problems, improve on its performance and save the failing nation from further collapse. It presents the experiences of other nations in promoting rapid industrialization; explains the scientific bases of the activities they carried out, and describes how these other counties have used their experiences to achieve industrialization and enhance their performance. History is indeed, "a roadmap that shows where you were from where you are and navigates you to the future". It is a wonder to note that many people and society plan without taking history into cognizance. Consequently, most men have been thinking and doing things as if the world began today. The flagrant disregard of history has led to man's inability to predetermine events and procedures, which makes man to continue to repeat his mistakes and suffer avoidable pains [1].

#### **2. Lessons from history**

History shows that Britain and France spent 2000 years before achieving modern industrialization [2]. Here is an account of the positive changes which formed an intrinsic part of their evolutionary development voyage. Most preindustrial European economies also had subsistence (as it is the case in Nigeria, today) standards of living among majority of the population. For example, in medieval Europe, a large percentage of the labor force was employed in subsistence agriculture. Increase in Poverty, Increase in population and escalated crime rates; during the reign of Henry VIII, approximately 72,000 people were executed for criminal offenses [3].

In the eighteenth and nineteenth centuries, massive increase in agricultural productivity due to the mechanization of agricultural processes was experienced by the United Kingdom, this experience was known as the British Agricultural Revolution. The British Agricultural Revolution enabled and freed up a significant percentage of the workforce from farming and helping to drive the Industrial Revolution. Increase in steel works and Demand for more machinery was increasing, job opportunities also began to increase [4]. The overwhelming efficiency of mechanized farming made the increased population not to be dedicated to agriculture. The process of production was divided into simple tasks, each one of them being gradually mechanized in order to boost productivity and thus increase income. The application of new technologies enabled the industrialization process to continue to evolve. Industrialization is the replacement of hand tools by machine and powered tools by a society. Industrialization also involves vast economic and social changes, e.g., a tendency towards urbanization, a growing body of wage earners, increased technical and advanced education [5].

In 1938, a ship-building yard was established and engineering works began. In 1939 the corset iron company started a steelworks. France, Germany, Sweden and other European nations had similar experiences and Britain had a single digit unemployment rate of 4.0% (tradingeconomics.com) and the ability of their economy to absorb labor increased [6].

In Singapore's case the most feasible solution to their low economic development and high unemployment rate was to embark on a bold and comprehensive program of industrialization. Labor-intensive industries were a prime target. However, industrialization was a relatively new experience to Singapore because they had no industrial tradition. Both capital and entrepreneurship had historically been active in trading and commercial activities. The working population in Singapore focused mainly in trade, processing and service activities [7].

The Economic Development Board (EDB) of Singapore invested in manpower development, being an investment promotion agency? They work with other relevant government agencies, skills and technologies. In 1971, an Overseas Training Program for Singapore workforce was established by the EDB for training in industrialized countries and subsequently, technology and design training

**43**

*Africa's Journey to Industrialization*

growth and full employment.

of 2.20%.

production.

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

process in Singapore: manufacturing and services.

tobacco, rice, and indigo exports [10].

were able to keep the unemployment rate to 3.70%.

**2.1 Sustainable industrialization and development**

nation to absorb labor.

institutions in Singapore and other foreign countries. Additionally, to encourage the right kind of manpower training, the EDB administers the Skills Development

The need to develop a highly learned and versatile workforce is very important, and Singapore has been preparing its human capital by developing a wide pool of skilled knowledge workers. The outcome of all these developments is rapid economic

Singapore emphasized the increase on R&D and the installation of high technology based industries, this restructured industries [8]. This brings about product diversification which is crucial in enhancing sustained export performance and growth. There are two engines of economic growth identified in the restructuring

Studying the case of America, Colonies gained independence in 1783 just as industrial productions and coordination's were beginning to shift production from handmade to machine made. The Industrial Revolution (1820–1870) was significant to the economic development of the United States. The Industrial Revolution itself refers to a change from hand and home production to machine and factory

People in the Pacific Northwest practiced food preservation although substantial agriculture, built wooden houses, used nets and weirs to catch fish, and was not developed [9]. Throughout the colonies, people were self-sufficient, they lived primarily on small farms and in the few small cities and among the larger plantations, some necessities and virtually all luxuries were imported in return for

A unique confluence of geographical, social, and economic factors facilitated American industrialization. The passage of the Embargo Act of 1807 and the War of 1812 was the real impetus for America entering the Industrial Revolution. The British opened fire when they were not allowed to search the Chesapeake ship and this made Americans upset. The desertion caused from seizing four men and hanging one of them resulted in much public outrage and the passage of the Embargo Act which stopped the export of American goods and effectively ended the import of goods from other nations. Eventually, the war with Great Britain in 1812 made it apparent that America needed a better transportation system and more economic independence. The manufacturing industry began to expand and employment began to boom [11]. This gave rise to increase in productivity and ability of the

Small local industries such as sawmills and gristmills emerged as the colonies grew and standard of living generally increased [12]. However, the people involved were small in number which in turn slowed down their rate of technological change and advancement [9]. To check this, everybody including children worked in large numbers in mines, glass factories, textiles, agriculture, canneries, home industries, and as newsboys, messengers, bootblacks, and peddlers. The industrial processes

Sustainable Economic Growth, Industrialization and Development (SEGID) are achieved through learning. The value of the "learning-man" appreciates in a compound fashion with learning intensity and time [12]. So what does learning involve? Stahl [13] observed that learning begins from the novices' position and progresses to the experts' position. This in turn creates relatively permanent changes in

Fund and promotes the opportunity for the trained to apply the acquired knowledge and this paid off, because they currently have an unemployment rate

#### *Africa's Journey to Industrialization DOI: http://dx.doi.org/10.5772/intechopen.94372*

*Emerging Markets*

mistakes and suffer avoidable pains [1].

executed for criminal offenses [3].

technical and advanced education [5].

mainly in trade, processing and service activities [7].

absorb labor increased [6].

**2. Lessons from history**

out, and describes how these other counties have used their experiences to achieve industrialization and enhance their performance. History is indeed, "a roadmap that shows where you were from where you are and navigates you to the future". It is a wonder to note that many people and society plan without taking history into cognizance. Consequently, most men have been thinking and doing things as if the world began today. The flagrant disregard of history has led to man's inability to predetermine events and procedures, which makes man to continue to repeat his

History shows that Britain and France spent 2000 years before achieving modern industrialization [2]. Here is an account of the positive changes which formed an intrinsic part of their evolutionary development voyage. Most preindustrial European economies also had subsistence (as it is the case in Nigeria, today) standards of living among majority of the population. For example, in medieval Europe, a large percentage of the labor force was employed in subsistence agriculture. Increase in Poverty, Increase in population and escalated crime rates; during the reign of Henry VIII, approximately 72,000 people were

In the eighteenth and nineteenth centuries, massive increase in agricultural productivity due to the mechanization of agricultural processes was experienced by the United Kingdom, this experience was known as the British Agricultural Revolution. The British Agricultural Revolution enabled and freed up a significant percentage of the workforce from farming and helping to drive the Industrial Revolution. Increase in steel works and Demand for more machinery was increasing, job opportunities also began to increase [4]. The overwhelming efficiency of mechanized farming made the increased population not to be dedicated to agriculture. The process of production was divided into simple tasks, each one of them being gradually mechanized in order to boost productivity and thus increase income. The application of new technologies enabled the industrialization process to continue to evolve. Industrialization is the replacement of hand tools by machine and powered tools by a society. Industrialization also involves vast economic and social changes, e.g., a tendency towards urbanization, a growing body of wage earners, increased

In 1938, a ship-building yard was established and engineering works began. In 1939 the corset iron company started a steelworks. France, Germany, Sweden and other European nations had similar experiences and Britain had a single digit unemployment rate of 4.0% (tradingeconomics.com) and the ability of their economy to

In Singapore's case the most feasible solution to their low economic development and high unemployment rate was to embark on a bold and comprehensive program of industrialization. Labor-intensive industries were a prime target. However, industrialization was a relatively new experience to Singapore because they had no industrial tradition. Both capital and entrepreneurship had historically been active in trading and commercial activities. The working population in Singapore focused

The Economic Development Board (EDB) of Singapore invested in manpower

development, being an investment promotion agency? They work with other relevant government agencies, skills and technologies. In 1971, an Overseas Training Program for Singapore workforce was established by the EDB for training in industrialized countries and subsequently, technology and design training

**42**

institutions in Singapore and other foreign countries. Additionally, to encourage the right kind of manpower training, the EDB administers the Skills Development Fund and promotes the opportunity for the trained to apply the acquired knowledge and this paid off, because they currently have an unemployment rate of 2.20%.

The need to develop a highly learned and versatile workforce is very important, and Singapore has been preparing its human capital by developing a wide pool of skilled knowledge workers. The outcome of all these developments is rapid economic growth and full employment.

Singapore emphasized the increase on R&D and the installation of high technology based industries, this restructured industries [8]. This brings about product diversification which is crucial in enhancing sustained export performance and growth. There are two engines of economic growth identified in the restructuring process in Singapore: manufacturing and services.

Studying the case of America, Colonies gained independence in 1783 just as industrial productions and coordination's were beginning to shift production from handmade to machine made. The Industrial Revolution (1820–1870) was significant to the economic development of the United States. The Industrial Revolution itself refers to a change from hand and home production to machine and factory production.

People in the Pacific Northwest practiced food preservation although substantial agriculture, built wooden houses, used nets and weirs to catch fish, and was not developed [9]. Throughout the colonies, people were self-sufficient, they lived primarily on small farms and in the few small cities and among the larger plantations, some necessities and virtually all luxuries were imported in return for tobacco, rice, and indigo exports [10].

A unique confluence of geographical, social, and economic factors facilitated American industrialization. The passage of the Embargo Act of 1807 and the War of 1812 was the real impetus for America entering the Industrial Revolution. The British opened fire when they were not allowed to search the Chesapeake ship and this made Americans upset. The desertion caused from seizing four men and hanging one of them resulted in much public outrage and the passage of the Embargo Act which stopped the export of American goods and effectively ended the import of goods from other nations. Eventually, the war with Great Britain in 1812 made it apparent that America needed a better transportation system and more economic independence. The manufacturing industry began to expand and employment began to boom [11]. This gave rise to increase in productivity and ability of the nation to absorb labor.

Small local industries such as sawmills and gristmills emerged as the colonies grew and standard of living generally increased [12]. However, the people involved were small in number which in turn slowed down their rate of technological change and advancement [9]. To check this, everybody including children worked in large numbers in mines, glass factories, textiles, agriculture, canneries, home industries, and as newsboys, messengers, bootblacks, and peddlers. The industrial processes were able to keep the unemployment rate to 3.70%.

#### **2.1 Sustainable industrialization and development**

Sustainable Economic Growth, Industrialization and Development (SEGID) are achieved through learning. The value of the "learning-man" appreciates in a compound fashion with learning intensity and time [12]. So what does learning involve? Stahl [13] observed that learning begins from the novices' position and progresses to the experts' position. This in turn creates relatively permanent changes in

knowledge, skills and other behaviors [14]. Thus, when a person commences an educational or apprenticeship program, he or she usually begins from the minimum level. At the end of the first year of learning, the learning-person is promoted to the second level having learnt the things scheduled for the first level. The growth achieved this way is sustainable [15]. The learning person builds up capabilities or competence i.e. **the ability to do things**. The ability to do things increases with learning. The build-up of competence continues as long as the learning person continues to learn. Hence, performance enhancement is continuous, sustainable and effective.

If this is what learning involves, what then is the benefit of learning? Drucker [16] said that only man is capable of enlargement, because man grows, develops and acquires skills, and individuals can learn a specific type of knowledge, and the amount they learn is cumulative [17]. Learning and acquiring knowledge, skills, and capabilities and applying these in solving problems, including production, are the basis for achieving sustainable economic growth and industrialization [18].

Education and training are both essential arms of the learning process. But then, Ehiametalor [19] suggests that a clear path between education and training is very important for successful manpower planning. Formal education emphasizes on the acquisition of theoretical knowledge and the development of basic mental capabilities and general knowledge. Education, according to Coombs [20], is institutionalized instructions or course of study designed to make the learning persons, or student, experience the type of curriculum that is capable of providing essential learning needs. Education equips the individual with the ability to think and reason. Nyerere [21] considered education to be an instrument for effecting economic and technological change, change in ideas and personality. The essence of education is in developing critical thinkers and enhancing performance.

Coombs [20], however, defines training as a scheme designed to generate expertise or skills needed to perform a particular job or series of jobs. Kanawaty [22] observed that training prepares people for work and life-skills are largely developed in a working situation; competence develops through improvements of awareness, knowledge and skills. These work skills are of three types: technical, interpersonal or human and conceptual skills [23]. These skills are obtained through learning. That is, from "learning-by-doing" and "learning-by-adapting" to "learning-bydesign" and "learning-by-improved design" and then to "learning-by-setting-up a complete production system." [24].

#### **3. Science, technology policy and modeling**

Policy is a guide to thinking and action [25]; policy guides every thought process and activity undertaken in a society. Therefore, Nigeria must carefully consider its science and technology policies to guide the way we think and act.

Policies will not be successful if they do not go through the formulation stage, the implementation stage and the evaluation stage [26]. Policies once formulated, tend to become doctrines and models; they direct and justify action for some time, hence they should not be entered flimsily.

The knowledge and understanding that the scientists have about the world is often represented in the form of models. This scientific method is basically one of creating, verifying, and modifying models of the world and the goal is to simplify and explain the complexity and confusion of the world. The applied scientists and technologists then use the models of science to predict and control the world.

**45**

*Africa's Journey to Industrialization*

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

Discussing the journey to industrialization requires an emphasis on the desire to achieve industrialization, the desire to improve work performance and the desire to acquire knowledge. These models represented in this chapter would have no effect

Each model discussed in this chapter represents a policy statement for personal and economic development. The policy statements were adapted from developed countries and modeled for easy interpretation and understanding. Nations must realize that attaining industrialization transforms the economy from a dependent state to an independent one, even further more to an interdependent state. Hence, the importance of these models for personal growth, economic development, performance enhancement and industrialization cannot be over emphasized. Therefore, to grow into a dependent or interdependent state, an individual or country needs to improve their manufacturing and service performance.

Every developing nation must know why and what to do to achieve that development and also know how best to go about achieving such an endeavor. It is good to understand that real growth and development do not take place suddenly; the price must be paid over an extended period of time in order to reap the benefits for a

The following models offer insights on the concept of industrialization and performance enhancement. There are models that guide developing nations on the path to industrialization and models that transform individuals to become active

Before a nation attempts to be industrialized, there must be proper groundwork:

research. This means a nation must undergo proper planning and forecasting. However, before a nation can plan, they need to have a direction, a goal and a vision. That direction must be well stated. This model emphasizes the need for sustaining values, having a unifying language, goal, purpose or creed to form a seamless boundary to curb tribalism, individualism, terrorism, nepotism and religious segmentation. Invariably all Africans should resolve in their hearts saying, *"I promise to think and act in a way that has not been done before, but can be done now,* 

Let the vision be in a form of multiyear development plans. These multiyear development plans can make the attainment of economic development easier and faster. They can form a positive norm in the hearts of the citizenry, improve their

This creed, when said often becomes the subconscious language of the citizens. The citizens become a group of people who through their oneness of mind and

This creed is a guide and mandate that everyone must uphold, and it is a language everyone must speak. By so doing, it promotes unity and oneness. At this point, everyone would understand that although they have diverse cultures and

A productive Citizen is one who has the ability to think and act respectively. In order to make productivity a lifestyle, citizens must be constantly thinking of new

**4. Models for industrialization**

if there is an absence of genuine desire.

creators, learned and productive.

*and should be done immediately."*

*4.1.1 Productive citizens*

performance and gear them towards productivity.

language are able to achieve whatever they planned to do.

tongues, they are one through the attainment of this creed.

**4.1 The creed (model 1)**

long time.

#### **4. Models for industrialization**

*Emerging Markets*

and effective.

and industrialization [18].

complete production system." [24].

they should not be entered flimsily.

**3. Science, technology policy and modeling**

science and technology policies to guide the way we think and act.

knowledge, skills and other behaviors [14]. Thus, when a person commences an educational or apprenticeship program, he or she usually begins from the minimum level. At the end of the first year of learning, the learning-person is promoted to the second level having learnt the things scheduled for the first level. The growth achieved this way is sustainable [15]. The learning person builds up capabilities or competence i.e. **the ability to do things**. The ability to do things increases with learning. The build-up of competence continues as long as the learning person continues to learn. Hence, performance enhancement is continuous, sustainable

If this is what learning involves, what then is the benefit of learning? Drucker [16] said that only man is capable of enlargement, because man grows, develops and acquires skills, and individuals can learn a specific type of knowledge, and the amount they learn is cumulative [17]. Learning and acquiring knowledge, skills, and capabilities and applying these in solving problems, including production, are the basis for achieving sustainable economic growth

Education and training are both essential arms of the learning process. But then, Ehiametalor [19] suggests that a clear path between education and training is very important for successful manpower planning. Formal education emphasizes on the acquisition of theoretical knowledge and the development of basic mental capabilities and general knowledge. Education, according to Coombs [20], is institutionalized instructions or course of study designed to make the learning persons, or student, experience the type of curriculum that is capable of providing essential learning needs. Education equips the individual with the ability to think and reason. Nyerere [21] considered education to be an instrument for effecting economic and technological change, change in ideas and personality. The essence of

education is in developing critical thinkers and enhancing performance.

Coombs [20], however, defines training as a scheme designed to generate expertise or skills needed to perform a particular job or series of jobs. Kanawaty [22] observed that training prepares people for work and life-skills are largely developed in a working situation; competence develops through improvements of awareness, knowledge and skills. These work skills are of three types: technical, interpersonal or human and conceptual skills [23]. These skills are obtained through learning. That is, from "learning-by-doing" and "learning-by-adapting" to "learning-bydesign" and "learning-by-improved design" and then to "learning-by-setting-up a

Policy is a guide to thinking and action [25]; policy guides every thought process and activity undertaken in a society. Therefore, Nigeria must carefully consider its

Policies will not be successful if they do not go through the formulation stage, the implementation stage and the evaluation stage [26]. Policies once formulated, tend to become doctrines and models; they direct and justify action for some time, hence

The knowledge and understanding that the scientists have about the world is often represented in the form of models. This scientific method is basically one of creating, verifying, and modifying models of the world and the goal is to simplify and explain the complexity and confusion of the world. The applied scientists and technologists then use the models of science to predict and control the world.

**44**

Discussing the journey to industrialization requires an emphasis on the desire to achieve industrialization, the desire to improve work performance and the desire to acquire knowledge. These models represented in this chapter would have no effect if there is an absence of genuine desire.

Each model discussed in this chapter represents a policy statement for personal and economic development. The policy statements were adapted from developed countries and modeled for easy interpretation and understanding. Nations must realize that attaining industrialization transforms the economy from a dependent state to an independent one, even further more to an interdependent state. Hence, the importance of these models for personal growth, economic development, performance enhancement and industrialization cannot be over emphasized. Therefore, to grow into a dependent or interdependent state, an individual or country needs to improve their manufacturing and service performance.

Every developing nation must know why and what to do to achieve that development and also know how best to go about achieving such an endeavor. It is good to understand that real growth and development do not take place suddenly; the price must be paid over an extended period of time in order to reap the benefits for a long time.

The following models offer insights on the concept of industrialization and performance enhancement. There are models that guide developing nations on the path to industrialization and models that transform individuals to become active creators, learned and productive.

#### **4.1 The creed (model 1)**

Before a nation attempts to be industrialized, there must be proper groundwork: research. This means a nation must undergo proper planning and forecasting. However, before a nation can plan, they need to have a direction, a goal and a vision. That direction must be well stated. This model emphasizes the need for sustaining values, having a unifying language, goal, purpose or creed to form a seamless boundary to curb tribalism, individualism, terrorism, nepotism and religious segmentation. Invariably all Africans should resolve in their hearts saying, *"I promise to think and act in a way that has not been done before, but can be done now, and should be done immediately."*

Let the vision be in a form of multiyear development plans. These multiyear development plans can make the attainment of economic development easier and faster. They can form a positive norm in the hearts of the citizenry, improve their performance and gear them towards productivity.

This creed, when said often becomes the subconscious language of the citizens. The citizens become a group of people who through their oneness of mind and language are able to achieve whatever they planned to do.

This creed is a guide and mandate that everyone must uphold, and it is a language everyone must speak. By so doing, it promotes unity and oneness. At this point, everyone would understand that although they have diverse cultures and tongues, they are one through the attainment of this creed.

#### *4.1.1 Productive citizens*

A productive Citizen is one who has the ability to think and act respectively. In order to make productivity a lifestyle, citizens must be constantly thinking of new ways and seeking the slightest opportunity to apply those new ideas. The mind is the best creative tool. What flows into the mind is definitely what is expected to flow out. The mind helps to create a thinking atmosphere for new ideas and provides the ability for application. Each thought creates a neuron, each neuron directly and indirectly formulates a policy.

The mind power is the first tool to promoting sustainable growth, development and industrialization. The potential to think and improve the world around us is directly dependent on the level of knowledge or exposure attained – conceptually, technically and human relations. The true measures of any society or any individual is not what it knows but what it does with what it knows.

We have been made to constantly think that foreigners are better than us. We have harnessed this thought so much, creating millions of neurons and automatically is seems the foreigners are truly better than us.

#### **4.2 Sustainable industrialization initiators (model 2)**

Observing the historical experiences of Europe, America, Singapore and other developed nations, five factors are noted as key contributors that promoted their performance and industrialization process;


These factors as presented in **Figure 1** either grow or reduce the industrial core. It was observed that a nation which hopes to manufacture many products must develop the people to manufacture them. These people developed are referred to as the nation's workforce or manpower. Developing nation's especially African nations need to set up a framework for training university graduates in a curriculum-based scheme for 4 years, so as to acquire the skills to modernize and repackage their traditional activities and for studying, servicing, maintaining, duplicating, and eventually improving upon the things they import today.

Nigeria and other African nations need to encourage, support and give opportunities to science and engineering graduates to input the theories they acquire in universities into their artisan/craft activities like blacksmithing, wood-works, textiles/tailoring, construction works, and factory floor work settings and all other places where skill acquisition opportunities abound. This is how the countries can improve performance and produce youths that can develop independent thoughts to solutions about everyday problems. These youth shall evolve to become Industrialization Vanguards (IVs). Their Productivity increases as they develop manpower capability and are employed into productive activities. This in turn creates more room for employment through expansion, and as they continually involve themselves in productive activities, inventions/innovations sprout out and these inventions/innovations form the basis for new knowledge.

Industrialization is not about erecting structures, it is about developing competencies and improving performances for doing uncountable things.

**47**

**Figure 2.**

**Figure 1.**

*Sustainable industrialization initiators. Source: Author, 2012*.

*Components of the industrial core. Source: Author, 2012.*

*Africa's Journey to Industrialization*

the industrial core.

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

It is about ensuring a large percentage of resource is geared towards manpower development, employment creation, increasing productivity, promoting inventions and innovations and increasing the learning rate of the citizens. Industrialization is an all-encompassing process, it equals productivity and development. Actualization can be attained when industrialization, development and productivity are growing exponentially. **Figure 2** explains the components of

#### *Africa's Journey to Industrialization DOI: http://dx.doi.org/10.5772/intechopen.94372*

*Emerging Markets*

directly and indirectly formulates a policy.

is not what it knows but what it does with what it knows.

cally is seems the foreigners are truly better than us.

performance and industrialization process;

1.Manpower Development,

2.Employment Creation

3.Increased Productivity

4.Inventions and Innovations

5.Increased Learning Rate

**4.2 Sustainable industrialization initiators (model 2)**

eventually improving upon the things they import today.

inventions/innovations form the basis for new knowledge.

ways and seeking the slightest opportunity to apply those new ideas. The mind is the best creative tool. What flows into the mind is definitely what is expected to flow out. The mind helps to create a thinking atmosphere for new ideas and provides the ability for application. Each thought creates a neuron, each neuron

The mind power is the first tool to promoting sustainable growth, development and industrialization. The potential to think and improve the world around us is directly dependent on the level of knowledge or exposure attained – conceptually, technically and human relations. The true measures of any society or any individual

We have been made to constantly think that foreigners are better than us. We have harnessed this thought so much, creating millions of neurons and automati-

Observing the historical experiences of Europe, America, Singapore and other developed nations, five factors are noted as key contributors that promoted their

These factors as presented in **Figure 1** either grow or reduce the industrial core. It was observed that a nation which hopes to manufacture many products must develop the people to manufacture them. These people developed are referred to as the nation's workforce or manpower. Developing nation's especially African nations need to set up a framework for training university graduates in a curriculum-based scheme for 4 years, so as to acquire the skills to modernize and repackage their traditional activities and for studying, servicing, maintaining, duplicating, and

Nigeria and other African nations need to encourage, support and give opportunities to science and engineering graduates to input the theories they acquire in universities into their artisan/craft activities like blacksmithing, wood-works, textiles/tailoring, construction works, and factory floor work settings and all other places where skill acquisition opportunities abound. This is how the countries can improve performance and produce youths that can develop independent thoughts to solutions about everyday problems. These youth shall evolve to become Industrialization Vanguards (IVs). Their Productivity increases as they develop manpower capability and are employed into productive activities. This in turn creates more room for employment through expansion, and as they continually involve themselves in productive activities, inventions/innovations sprout out and these

Industrialization is not about erecting structures, it is about developing competencies and improving performances for doing uncountable things.

**46**

It is about ensuring a large percentage of resource is geared towards manpower development, employment creation, increasing productivity, promoting inventions and innovations and increasing the learning rate of the citizens. Industrialization is an all-encompassing process, it equals productivity and development. Actualization can be attained when industrialization, development and productivity are growing exponentially. **Figure 2** explains the components of the industrial core.

**Figure 1.**

*Sustainable industrialization initiators. Source: Author, 2012*.

**Figure 2.** *Components of the industrial core. Source: Author, 2012.*

#### *4.2.1 The industrial core*

The industrial core consists of simple parameters that must not be overlooked. **Figure 2** shows the components that make up the industrial core. The industrial core is made up of two layers: the INTERNAL CORE and the EXTERNAL CORE.

The internal core includes the primary, secondary and tertiary industries. The primary industry also known as the extractive industry deals with the extensive extraction of natural resources without provision for their renewal. The primary industry is key and fundamental for the effective existence of both the secondary and tertiary industries. The secondary industry is the manufacturing industry as it deals with the process of converting raw materials in components or parts with the use of machines, into finished goods that meet a customer's expectation or specifications. The tertiary industry which is also known as the service industry serves other industries. This basically refers to the intangible products that are important to the primary and secondary industries.

The external core constitutes the decisive environment such as the percentage utilization of libraries, educational centers, information technology centers, scientific research findings, cultural uniqueness of the citizens. The integration of all these into government policies go a long way to determine the kind of industries, level of industrialization, performances and growth prospects available. Below is a list of industries classified in their particular sector.


Being ready for industrialization depends on the effectiveness of the components within the industrial core. An economy or an individual must first be familiar with the components within the industrial core before the industrialization process is initiated. That economy must clearly have a reason for industrialization and know how to go about it. This is the journey the nation needs to embark on to prepare for industrialization. This process is not a waste of time and this stage holds all the fundamental elements for development. The level of preparation determines the outcome that the nation hopes to achieve. At this phase policies are set, decision are made, objectives are outlined, plans are arrayed, resources are weighed based on availability and capacity of use, forecasts are determined and a focus is outlined. A country can only be ready for development when all these are sincerely and truthfully harnessed.

#### **4.3 Three true measures of sustainable economic development (model 3)**

From history we can deduce that there are three true measures of sustainable economic development and performance enhancement. They are: 1) the level of technological knowledge, 2) the level of industrialization and 3) the level of national productivity. As shown in **Figure 3**, these three true measures are intertwined.

**49**

sectors.

**Figure 3.**

society into an industrial one.

**4.4 The manpower learning model (model 4)**

*The three true measures of economic development. Source: Author, 2012.*

*Africa's Journey to Industrialization*

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

An increase in the level of technological knowledge through learning spurs increased national productivity through employment of a workforce that possesses technical knowledge. In turn, more industries would be established to utilize the knowledge and productivity in order to meet demands and exportation. As this cycle continues, the economy experiences sustainable growth and development and industrialization sets in. Industrialization is the extensive organization of an economy for the purpose of manufacturing. It introduces a period of social and economic changes that transform or liberates a human group from an agrarian

Historically, industrialization processes involves the expansion of the secondary sector in an economy originally dominated by primary-sector activities. The lack of an industrial sector in a country can slow growth in the country's economy and power, so government often encourages or enforces industrialization. These series of activities should lead to increased productivity, increased manpower that possesses technical knowledge and a high industrial cluster in all

Manpower is that portion of the population which has actual or potential capability to contribute to the production of goods and services. They make up the workforce of a nation. The Manpower Development Learning Model has three key components that help initiate an efficient and effective workforce, as shown in *Africa's Journey to Industrialization DOI: http://dx.doi.org/10.5772/intechopen.94372*

#### **Figure 3.**

*Emerging Markets*

*4.2.1 The industrial core*

to the primary and secondary industries.

list of industries classified in their particular sector.

Grazing, quarrying, Hunting and gathering.

industry, ship building, breweries and bottles.

The industrial core consists of simple parameters that must not be overlooked. **Figure 2** shows the components that make up the industrial core. The industrial core is made up of two layers: the INTERNAL CORE and the EXTERNAL CORE. The internal core includes the primary, secondary and tertiary industries. The primary industry also known as the extractive industry deals with the extensive extraction of natural resources without provision for their renewal. The primary industry is key and fundamental for the effective existence of both the secondary and tertiary industries. The secondary industry is the manufacturing industry as it deals with the process of converting raw materials in components or parts with the use of machines, into finished goods that meet a customer's expectation or specifications. The tertiary industry which is also known as the service industry serves other industries. This basically refers to the intangible products that are important

The external core constitutes the decisive environment such as the percentage utilization of libraries, educational centers, information technology centers, scientific research findings, cultural uniqueness of the citizens. The integration of all these into government policies go a long way to determine the kind of industries, level of industrialization, performances and growth prospects available. Below is a

1.**PRIMARY INDUSTRY (EXTRACTIVE):** Agriculture, Mining, Forestry,

2.**SECONDARY INDUSTRY (MANUFACTURING):** Metal works and Smelting, Automobile production, Textile production, Chemical Industries, Engineering Industries, Aerospace Manufacturing, Energy utilities, Construction

3.**TERTIARY (SERVICES):** Retail and Wholesale, Transportation and Distribution, Entertainment (Movies, Television, Radio, Music theater, etc.), Restau-

Being ready for industrialization depends on the effectiveness of the components within the industrial core. An economy or an individual must first be familiar with the components within the industrial core before the industrialization process is initiated. That economy must clearly have a reason for industrialization and know how to go about it. This is the journey the nation needs to embark on to prepare for industrialization. This process is not a waste of time and this stage holds all the fundamental elements for development. The level of preparation determines the outcome that the nation hopes to achieve. At this phase policies are set, decision are made, objectives are outlined, plans are arrayed, resources are weighed based on availability and capacity of use, forecasts are determined and a focus is outlined. A country can only be ready for

rants, Tourism, Media, Insurance, Banking, Health care, Law.

development when all these are sincerely and truthfully harnessed.

**4.3 Three true measures of sustainable economic development (model 3)**

From history we can deduce that there are three true measures of sustainable economic development and performance enhancement. They are: 1) the level of technological knowledge, 2) the level of industrialization and 3) the level of national productivity. As shown in **Figure 3**, these three true measures are

**48**

intertwined.

*The three true measures of economic development. Source: Author, 2012.*

An increase in the level of technological knowledge through learning spurs increased national productivity through employment of a workforce that possesses technical knowledge. In turn, more industries would be established to utilize the knowledge and productivity in order to meet demands and exportation. As this cycle continues, the economy experiences sustainable growth and development and industrialization sets in. Industrialization is the extensive organization of an economy for the purpose of manufacturing. It introduces a period of social and economic changes that transform or liberates a human group from an agrarian society into an industrial one.

Historically, industrialization processes involves the expansion of the secondary sector in an economy originally dominated by primary-sector activities. The lack of an industrial sector in a country can slow growth in the country's economy and power, so government often encourages or enforces industrialization. These series of activities should lead to increased productivity, increased manpower that possesses technical knowledge and a high industrial cluster in all sectors.

#### **4.4 The manpower learning model (model 4)**

Manpower is that portion of the population which has actual or potential capability to contribute to the production of goods and services. They make up the workforce of a nation. The Manpower Development Learning Model has three key components that help initiate an efficient and effective workforce, as shown in **Figure 4**. These components are 1) education (the theoretical part of Learning), 2) Training (the Practical part of learning) and 3) Age (experience and Timing).

A workforce that possesses a high composition of theoretical, practical and experiential knowledge can catalyze and experience greater productivity, increase in technological application, high performances and generate innovations. Industrialization can only strive where such a workforce exists. For an economy to achieve sustainable development there must be an increase in the level of industrialization, an increase in the level of national productivity and an increase in the level of technical knowledge.

A nation's workforce must therefore concentrate on increasing productivity and acquiring more technical knowledge through research and development to spur innovations. The process of acquiring such intellect is known as the Manpower Development process and the manpower learning model is a guide to effective acquisition of the knowledge. The three major components of the model, education, training, and age, are discussed below.

#### *4.4.1 Education*

The higher the university education completion rate, the higher the share of knowledge that intensive service industries receive. The Knowledge Intensive Service Industry provides consumers with knowledge – based services, mainly relying on high technology, expertise, information and experience. The service process includes knowledge production, knowledge dissemination and knowledge use. The knowledge Intensive Service Industry is supported mainly by science, engineering, technology and other industries. The education and skills of the labor force have been recognized to be the underpinnings of innovation.

Innovation is possible if there are people who can perform research that generates new ways of thinking and new knowledge, who can apply their knowledge and skills, and who can adapt to change. Therefore, the workforce must aim at attaining a high theoretical knowledge, especially science and engineering graduates. Simultaneously, s/he must receive complementary training and skills based on their age and educational attainment. A workforce should be encouraged to pursue a university degree, alongside complementary training/skills. Education helps to build the technical, interpersonal or human and conceptual skills of the workforce.

#### *4.4.2 Training*

Coombs [21] defines training as a scheme designed to generate expertise or skills needed to perform a particular job or series of jobs. Kanawaty [23] observed

**51**

*Africa's Journey to Industrialization*

knowledge and skills.

*4.4.2.1 Soft skills*

achievements.

members of the workforce.

*4.4.2.2 Basic artisan skills*

a.Woodland crafts

b.Building crafts

d.Workshop crafts

c.Farmers

French polishers, and sign writers.

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

maintain a healthy working attitude.

from basic artisan skills to advanced professional skills.

that the training that prepares people for work and life skills are largely developed in a working situation; competence develops through improvements of awareness,

Training skills range from soft skills, basic artisan skills to advanced technical skills. Training must be practical and must complement educational (theoretical) knowledge. Training begins when a child is born, with soft skills and goes through

Soft skills build character; they help develop the character traits of a person and they help define their personality. Everyone needs soft skills to prepare them and

Soft skills can be learnt at any age, but the nature of these skills suggests that they are best learnt at a very young age because they are foundational. Soft skills build the competence and confidence of the labor force, giving room for more

Soft skills range from learning diverse languages, presentation skills, drawing skills, writing skills, reading skills, music skills, ethics and etiquettes, etc. These skills improve creativity. This skill will enable the workforce to create sustainable enterprises and visionary companies. Soft skills are critical for the foundational setting of the workforce. They can provide great energy and cohesion for the

An artisan is a craftsman, someone who does skilled work; making things with his hands, manually. The artisan skills range from woodland crafts, building crafts,

This includes coppices, hurdle makers, rake makers, fork makers, besom makers, handle makers, hoop markers, ladder makers, crib makers, broaches and peg makers, clog sole cutters, charcoal burners, oak basket makers, stick and staff makers, field

The builders include stone masons, plumbers, decorators, bridge builders,

This includes hedge layers, stile makers, well diggers, peat cutter, gardeners, horticulturists, tree surgeons, foresters, farmers, shepherds, shearers, bee keepers,

This includes chair makers, iron founders, black smiths, wheelwright, coopers, coppersmiths, tinsmiths, wood turners, coach builders, boat builders, boiler makers,

boiler men, soap makers, gunsmiths,, clay pipe maker, and tool maker.

field crafts, workshop crafts, textile crafts and domestic crafts.

gate makers, willow basket makers, and net makers.

millers, fishermen, orchardist, and veterinarians.

**Figure 4.**

*Manpower learning model. Source: Author, 2012.*

#### *Africa's Journey to Industrialization DOI: http://dx.doi.org/10.5772/intechopen.94372*

that the training that prepares people for work and life skills are largely developed in a working situation; competence develops through improvements of awareness, knowledge and skills.

Training skills range from soft skills, basic artisan skills to advanced technical skills. Training must be practical and must complement educational (theoretical) knowledge. Training begins when a child is born, with soft skills and goes through from basic artisan skills to advanced professional skills.

#### *4.4.2.1 Soft skills*

*Emerging Markets*

of technical knowledge.

*4.4.1 Education*

*4.4.2 Training*

training, and age, are discussed below.

**Figure 4**. These components are 1) education (the theoretical part of Learning), 2) Training (the Practical part of learning) and 3) Age (experience and Timing). A workforce that possesses a high composition of theoretical, practical and experiential knowledge can catalyze and experience greater productivity, increase

Industrialization can only strive where such a workforce exists. For an economy to achieve sustainable development there must be an increase in the level of industrialization, an increase in the level of national productivity and an increase in the level

A nation's workforce must therefore concentrate on increasing productivity and acquiring more technical knowledge through research and development to spur innovations. The process of acquiring such intellect is known as the Manpower Development process and the manpower learning model is a guide to effective acquisition of the knowledge. The three major components of the model, education,

The higher the university education completion rate, the higher the share of knowledge that intensive service industries receive. The Knowledge Intensive Service Industry provides consumers with knowledge – based services, mainly relying on high technology, expertise, information and experience. The service process includes knowledge production, knowledge dissemination and knowledge use. The knowledge Intensive Service Industry is supported mainly by science, engineering, technology and other industries. The education and skills of the labor

Innovation is possible if there are people who can perform research that generates new ways of thinking and new knowledge, who can apply their knowledge and skills, and who can adapt to change. Therefore, the workforce must aim at attaining a high theoretical knowledge, especially science and engineering graduates. Simultaneously, s/he must receive complementary training and skills based on their age and educational attainment. A workforce should be encouraged to pursue a university degree, alongside complementary training/skills. Education helps to build the technical, interpersonal or human and conceptual skills of the workforce.

Coombs [21] defines training as a scheme designed to generate expertise or skills needed to perform a particular job or series of jobs. Kanawaty [23] observed

force have been recognized to be the underpinnings of innovation.

in technological application, high performances and generate innovations.

**50**

**Figure 4.**

*Manpower learning model. Source: Author, 2012.*

Soft skills build character; they help develop the character traits of a person and they help define their personality. Everyone needs soft skills to prepare them and maintain a healthy working attitude.

Soft skills can be learnt at any age, but the nature of these skills suggests that they are best learnt at a very young age because they are foundational. Soft skills build the competence and confidence of the labor force, giving room for more achievements.

Soft skills range from learning diverse languages, presentation skills, drawing skills, writing skills, reading skills, music skills, ethics and etiquettes, etc. These skills improve creativity. This skill will enable the workforce to create sustainable enterprises and visionary companies. Soft skills are critical for the foundational setting of the workforce. They can provide great energy and cohesion for the members of the workforce.

#### *4.4.2.2 Basic artisan skills*

An artisan is a craftsman, someone who does skilled work; making things with his hands, manually. The artisan skills range from woodland crafts, building crafts, field crafts, workshop crafts, textile crafts and domestic crafts.

#### a.Woodland crafts

This includes coppices, hurdle makers, rake makers, fork makers, besom makers, handle makers, hoop markers, ladder makers, crib makers, broaches and peg makers, clog sole cutters, charcoal burners, oak basket makers, stick and staff makers, field gate makers, willow basket makers, and net makers.

#### b.Building crafts

The builders include stone masons, plumbers, decorators, bridge builders, French polishers, and sign writers.

#### c.Farmers

This includes hedge layers, stile makers, well diggers, peat cutter, gardeners, horticulturists, tree surgeons, foresters, farmers, shepherds, shearers, bee keepers, millers, fishermen, orchardist, and veterinarians.

#### d.Workshop crafts

This includes chair makers, iron founders, black smiths, wheelwright, coopers, coppersmiths, tinsmiths, wood turners, coach builders, boat builders, boiler makers, boiler men, soap makers, gunsmiths,, clay pipe maker, and tool maker.

#### e.Textile crafts

This includes spinners, weavers, dryers, silk growers, tailors, seamstresses, milliners, hatter, lace makers, button makers, mat and rug makers, crochet workers, tatting and macramé workers, knitters, quilters, smock workers, embroiderers, leather workers, and felt makers.

#### f. Domestic crafts

Fish smokers, bacon curers, dish wash maker, insecticide makers, butter makers, cheese makers, brewers, cider makers, wine makers, distillers, herbalists, ice cream makers, bakers, barrister and coffee roasters, osteopaths, naturopaths, story tellers, teacher, naturalists, historians, jesters, actors, administrators, philosophers, laborers, poets, writers, midwifes, publicans, booksellers, Liberians, movie makers, public speakers, etc.

#### *4.4.2.3 Advanced skills*

Advanced skills are necessary for the mechanization or automation of artisan skills and the production of other advanced products not possible by craftsmen alone. Advanced skills include qualitative analytical forecasting skills, military training, leadership skills, teamwork and management skills, policy formulation and advocacy skills, wafer fabrication, Integrated Circuit Design, biotech, making petrochemicals, fine chemicals, pharmaceutical, automotive machines and cybernetics, aerospace, computer aided design tools and other precision engineering components.

Advanced skills involve a lot of research and development and are important to bring about innovation. Innovation improves and increases productivity, spurring industrialization and economic development. An advanced skill is a must-have collection of activities for advanced level students. The advanced training of workers is carried out through individual and team training, both on-the-job and in a variety of short courses. Such training is offered by institutes for improving the skills of managerial personnel and specialists. Advanced training does not usually require taking time off from work.

Therefore an "expert manpower" is one who has attained proper education and had been trained to an advanced professional technological level; integrating both theory and practice to improving productivity and promoting industrialization.

#### *4.4.2.4 Human activity valuation*

Every human being requires the opportunity to listen, teach and apply what they have learnt to productivity. Most of them do not know when to perform each of these activities, hence the need for the guide as represented in **Table 1**.

Listening is associated with the acquisition of theoretical knowledge, Teaching is associated with mentorship, raising successors and transferring values to younger generations. Application is simply the acquisition and utilization of practical knowledge.

#### **4.5 Development flow chart (model 5)**

Studying developed nations resulted in designing the Development Flow Chart, as shown in **Figure 5**. Studying the models of developed countries on how they scaled through the process of industrialization, we can identify various stages that

**53**

**Figure 5.**

promoted and sustained their ability to do so. These stages include; Preparation,

This flow chart shows the importance of Preparation. Although the United Kingdom went through industrialization process without preparation, it started out of curiosity. This curiosity-driven industrialization process lasted for a long time before actualization but studying other countries like America, Singapore and the

Learning, Productivity and Networking of scientific ideas.

*Development flowchart.* Source: Author, 2012.

*Africa's Journey to Industrialization*

*Source: Author, 2014.*

*Human activity valuation model.*

**Table 1.**

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

**Age Listening Teaching Application Total** 0–5 years 85% 05% 10% 100% 6–19 years 55% 15% 30% 100% 20–60 years 30% 30% 40% 100% Above 61 years 30% 60% 10% 100%

#### *Africa's Journey to Industrialization DOI: http://dx.doi.org/10.5772/intechopen.94372*


#### **Table 1.**

*Emerging Markets*

e.Textile crafts

workers, and felt makers.

f. Domestic crafts

speakers, etc.

components.

require taking time off from work.

*4.4.2.4 Human activity valuation*

**4.5 Development flow chart (model 5)**

*4.4.2.3 Advanced skills*

This includes spinners, weavers, dryers, silk growers, tailors, seamstresses, milliners, hatter, lace makers, button makers, mat and rug makers, crochet workers, tatting and macramé workers, knitters, quilters, smock workers, embroiderers, leather

Fish smokers, bacon curers, dish wash maker, insecticide makers, butter makers, cheese makers, brewers, cider makers, wine makers, distillers, herbalists, ice cream makers, bakers, barrister and coffee roasters, osteopaths, naturopaths, story tellers, teacher, naturalists, historians, jesters, actors, administrators, philosophers, laborers, poets, writers, midwifes, publicans, booksellers, Liberians, movie makers, public

Advanced skills are necessary for the mechanization or automation of artisan skills and the production of other advanced products not possible by craftsmen alone. Advanced skills include qualitative analytical forecasting skills, military training, leadership skills, teamwork and management skills, policy formulation and advocacy skills, wafer fabrication, Integrated Circuit Design, biotech, making petrochemicals, fine chemicals, pharmaceutical, automotive machines and cybernetics, aerospace, computer aided design tools and other precision engineering

Advanced skills involve a lot of research and development and are important to bring about innovation. Innovation improves and increases productivity, spurring industrialization and economic development. An advanced skill is a must-have collection of activities for advanced level students. The advanced training of workers is carried out through individual and team training, both on-the-job and in a variety of short courses. Such training is offered by institutes for improving the skills of managerial personnel and specialists. Advanced training does not usually

Therefore an "expert manpower" is one who has attained proper education and had been trained to an advanced professional technological level; integrating both theory and practice to improving productivity and promoting industrialization.

Every human being requires the opportunity to listen, teach and apply what they

Listening is associated with the acquisition of theoretical knowledge, Teaching is associated with mentorship, raising successors and transferring values to younger generations. Application is simply the acquisition and utilization of practical

Studying developed nations resulted in designing the Development Flow Chart,

as shown in **Figure 5**. Studying the models of developed countries on how they scaled through the process of industrialization, we can identify various stages that

have learnt to productivity. Most of them do not know when to perform each of

these activities, hence the need for the guide as represented in **Table 1**.

**52**

knowledge.

*Human activity valuation model.*

#### **Figure 5.**

*Development flowchart.* Source: Author, 2012.

promoted and sustained their ability to do so. These stages include; Preparation, Learning, Productivity and Networking of scientific ideas.

This flow chart shows the importance of Preparation. Although the United Kingdom went through industrialization process without preparation, it started out of curiosity. This curiosity-driven industrialization process lasted for a long time before actualization but studying other countries like America, Singapore and the

Newly Industrialized Countries (NIC) we see the elements of planning and preparation and industrialization were achieved in less than 50 years.

The developed countries had to prepare for development; hence the precursor was a decision for industrialization. Before a child is born, the parents get ready for the arrival of the baby. In the same way, before a country becomes industrialized, the country must prepare for the industrialization process.

The nation needs to setup policies to get them ready for industrialization. The nation needs to be willing to be industrialized, the nation needs to start up a chain reaction that leads to industrialization and get to a state of readiness, especially for industrialization.

From history, it was observed that learning was taken very seriously by the industrialized nations. For example, a developing nation could be likened to a growing child. A baby sits and observes, recording everything everybody does and then begins almost immediately to do likewise. The baby who depended on others to always hold her now runs on her own. That child that could only babble now speaks clearly. It is good to know that the child has been developing. No parent would be happy if their child, after two years, has failed to speak and walk. How does a child achieve all these activities? Learning!

Learning is the second stage as shown in **Figure 5**, and it comes in different forms; Learning-by-doing and learning-by-adapting, learning-by-design and learning-by-improved design, and learning-by-setting-up a complete production system [24]. People do not learn by-letting experts do everything for them. If so, they will continually be slaves to the expert who knows and the learner will lack the opportunity to become an expert.

The third stage is Productivity. A developing nation needs to acquire knowledge and that knowledge obtained should be mandatorily applied in productive activities to increase the total performance and value of goods produced and services provided within a year. The use of this knowledge obtained improves the effectiveness of the production, i.e. being able to produce quality amounts of goods, and services, etc.

The fourth stage is Networking/Synergy. The term synergy comes from the Greek word *synergia* from *synergos* meaning "working together" and it simply refers to the interaction of multiple elements in a system to cause an effect different from or more than the sum of their individual effects. In this stage, government, the institution of learning and working practitioners network and communicate, bouncing ideas off of one another and thus, synergistically developing and/or refining innovative concepts and ideas. The Flow Chart of Development systematically integrates all these stages to present a simple and clear representation of the process which would attain sustainable development and industrialization.

Nations or individuals that intend to adopt the Development Flow Chart, also known as "YOUNG's MODEL," must first prepare themselves for development. Any man that follows this path is on the right path towards development. If not, it is dearth (starvation, Poverty and Lack).

#### **4.6 Industrialization based entrepreneurs (model 6)**

The developing nations have lately been focusing on fostering the spirit of entrepreneurship in the hearts of the citizens. This is a good move, but the right kinds of entrepreneurs need to be developed. This book concentrates on two kinds of entrepreneurs that promote industrialization and growth; the technological entrepreneur and the commercial entrepreneur.

**55**

**Figure 7.**

**Figure 6.**

*Africa's Journey to Industrialization*

ization, see **Figure 6**.

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

and processes; those who love creativity.

*4.6.1 The commercial entrepreneur*

The technological entrepreneur is a producer who is involved in a considerable amount of research and development and his activities greatly promote industrial-

Technological entrepreneurship requires innovative skills for the creation of new products, new production methods, discovery of new sources of raw materials,

Technological entrepreneurs are the right kind of entrepreneurs every developing nation requires. These are the kind of entrepreneurs you need to breed; those who enjoy innovation and production; those who enjoy mixing different procedures

Technological entrepreneurship aims at creating new products, designing new production methods, discovery of new sources of raw materials, opening new markets and developing new forms of organizations through innovative skills. The performance measurement for these entrepreneurs include; number of innovation, number of new markets and number of new market products, number of new raw materials, of new production process, number of new forms of organization.

Commercial entrepreneurs aim at creating profitable operations resulting in private gain. The performance measurements for these entrepreneurs include;

*Schematic presentation of a technological entrepreneur.* Source: Author, 2012*.*

*Schematic presentation of a commercial entrepreneur.* Source: Author, 2012*.*

opening of new markets and creation of new forms of organization [27].

#### *Africa's Journey to Industrialization DOI: http://dx.doi.org/10.5772/intechopen.94372*

*Emerging Markets*

industrialization.

services, etc.

and industrialization.

dearth (starvation, Poverty and Lack).

**4.6 Industrialization based entrepreneurs (model 6)**

entrepreneur and the commercial entrepreneur.

achieve all these activities? Learning!

opportunity to become an expert.

Newly Industrialized Countries (NIC) we see the elements of planning and prepa-

The developed countries had to prepare for development; hence the precursor was a decision for industrialization. Before a child is born, the parents get ready for the arrival of the baby. In the same way, before a country becomes industrialized,

The nation needs to setup policies to get them ready for industrialization. The nation needs to be willing to be industrialized, the nation needs to start up a chain reaction that leads to industrialization and get to a state of readiness, especially for

From history, it was observed that learning was taken very seriously by the industrialized nations. For example, a developing nation could be likened to a growing child. A baby sits and observes, recording everything everybody does and then begins almost immediately to do likewise. The baby who depended on others to always hold her now runs on her own. That child that could only babble now speaks clearly. It is good to know that the child has been developing. No parent would be happy if their child, after two years, has failed to speak and walk. How does a child

Learning is the second stage as shown in **Figure 5**, and it comes in different forms; Learning-by-doing and learning-by-adapting, learning-by-design and learning-by-improved design, and learning-by-setting-up a complete production system [24]. People do not learn by-letting experts do everything for them. If so, they will continually be slaves to the expert who knows and the learner will lack the

The third stage is Productivity. A developing nation needs to acquire knowledge and that knowledge obtained should be mandatorily applied in productive activities to increase the total performance and value of goods produced and services provided within a year. The use of this knowledge obtained improves the effectiveness of the production, i.e. being able to produce quality amounts of goods, and

The fourth stage is Networking/Synergy. The term synergy comes from the Greek word *synergia* from *synergos* meaning "working together" and it simply refers to the interaction of multiple elements in a system to cause an effect different from or more than the sum of their individual effects. In this stage, government, the institution of learning and working practitioners network and communicate, bouncing ideas off of one another and thus, synergistically developing and/or refining innovative concepts and ideas. The Flow Chart of Development systematically integrates all these stages to present a simple and clear representation of the process which would attain sustainable development

Nations or individuals that intend to adopt the Development Flow Chart, also known as "YOUNG's MODEL," must first prepare themselves for development. Any man that follows this path is on the right path towards development. If not, it is

The developing nations have lately been focusing on fostering the spirit of entrepreneurship in the hearts of the citizens. This is a good move, but the right kinds of entrepreneurs need to be developed. This book concentrates on two kinds of entrepreneurs that promote industrialization and growth; the technological

ration and industrialization were achieved in less than 50 years.

the country must prepare for the industrialization process.

**54**

The technological entrepreneur is a producer who is involved in a considerable amount of research and development and his activities greatly promote industrialization, see **Figure 6**.

Technological entrepreneurship requires innovative skills for the creation of new products, new production methods, discovery of new sources of raw materials, opening of new markets and creation of new forms of organization [27].

Technological entrepreneurs are the right kind of entrepreneurs every developing nation requires. These are the kind of entrepreneurs you need to breed; those who enjoy innovation and production; those who enjoy mixing different procedures and processes; those who love creativity.

Technological entrepreneurship aims at creating new products, designing new production methods, discovery of new sources of raw materials, opening new markets and developing new forms of organizations through innovative skills. The performance measurement for these entrepreneurs include; number of innovation, number of new markets and number of new market products, number of new raw materials, of new production process, number of new forms of organization.

#### *4.6.1 The commercial entrepreneur*

Commercial entrepreneurs aim at creating profitable operations resulting in private gain. The performance measurements for these entrepreneurs include;

**Figure 6.**

*Schematic presentation of a technological entrepreneur.* Source: Author, 2012*.*

#### **Figure 7.**

*Schematic presentation of a commercial entrepreneur.* Source: Author, 2012*.*

financial indicators, market share, customer satisfaction and quality. **Figure 7** is a diagrammatic representation of Commercial entrepreneurship. The producer determines how much the entrepreneur sells, and the time, quality and quantity of the goods to be sold. If the producer decides to pull out from that market the commercial entrepreneur is automatically knocked out of business.

The commercial entrepreneur is totally dependent on the producer. He is usually referred to as the lazy entrepreneur. He is not involved in productive activities. His research, development and innovative activities shall be limited to market and organizational innovation. All he needs to do is study a market; find out their need or the product demand of the market, link with the producer of such product and act as a middle man who suppliers the needed product to the market. The entrepreneur buys from the producer and supplies the market, simple!

However, the risk involved in being a commercial entrepreneur is far too great. We need both technological entrepreneurs and commercial entrepreneurs because when production meets distribution we attain optimum consumption and standards of living increase. It is paramount we have more technological entrepreneurs to boost economic productivity, because an increase in economic productivity increases economic strength, growth, development and industrialization.

#### **5. Conclusions**

A manufacturing revolution has emerged in the past 50 years that is as significant as the industrial revolution of the 19th century. The industrial revolution, which captured the introduction of radically new production technologies diffused across the globe and has fundamentally affected the nature of global production, birthed the manufacturing revolution.

Limited knowledge and ability of its people to create new innovations are the greatest challenges facing industrial process in developing nations. Failure to continuously strengthen and increase our knowledge base will surely result in a declining ability to provide for the needs wants and of our people. When increased productivity is viewed as a generator of wealth, the importance of innovation is clear. Employment opportunities in many industries will increase tremendously as productivity increases. Indirect employment will be created as well.

Moves towards industrialization are scarce and hesitant in developing countries. This is as a result of the copy and paste policy syndrome from industrialized nations by developing nations, without knowledge that there is no general rule or prescriptions for industrialization change. Policies should be specifically tailored to the capabilities of the particular country with more selective options requiring the highest levels of capabilities.

Simply put, these two challenges namely; (1) limited knowledge and knowledge acquisition processes, and (2) the poor policy formulation process are the main causes of Africa's problems. They are both associated with our thinking process and it's been proven that our actions are fruits of thoughts. When these challenges are tackled, a smooth journey to industrialization for developing nations like ours would be ensured.

Historically, a large majority of the citizens of developing nations were denied the benefits of the industrial revolution. Many of them were cheap slaves and contractual servants; thus robbing them of their uniqueness, self-esteem, poise and confidence.

However, despite the change in state of affairs; with developing nations gaining a greater measure of freedom and independence, many of the citizens of developing countries are still struggling with their uniqueness and their sense of self-worth.

**57**

**Author details**

Chimezirim Young\* and Ayo Oyewale

provided the original work is properly cited.

National Centre for Technology Management, Enugu, Nigeria

\*Address all correspondence to: youngchimezirim@gmail.com

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

*Africa's Journey to Industrialization*

*DOI: http://dx.doi.org/10.5772/intechopen.94372*

will the journey to industrialization begin.

**Notes/thanks/other declarations**

**Acknowledgements**

Many of the nations that progressed and developed through the industrial revolution have reinforced (by attitude, policies, and legislation) the notion that the citizens of developing nations do not possess the potential to develop the skills, intelligence and sophistication necessary to equal that of industrialized nations.

The developing nations in effect are led to still look to the industrially developed states for their measure of standard, quality and excellence. This in turn breeds a sense of disrespect and suspicion for their own products and a denial of the great potential that lies dormant in the citizens of developing nations everywhere. There is still the notion that the presence of a foreign element is necessary for the maintenance of excellence and quality. This is not true! Citizens of developing nations are great; they possess the intelligence for transformation and the sooner we realize this truth and believe in our ability to stimulate the industrialization process; only then

We acknowledge and appreciate Awojobi Anthonia, Abang Scott, Obaze Irene,

This chapter would not have been possible without the keen interest of our friends and the crew who, all through our life, has experienced our little victories,

But most of all, this chapter is for our mentors, partners and protégés too numerous to mention. And to you reading this, we say thank you for supporting

Ryan Sherry, Nnachi Joseph and Ojuloge Blessing for their support.

defeats, and believed and held fast to the simple theories we emerged.

sustainable economic growth, development and industrialization. Thank you for embracing performance enhancement principles.

#### *Africa's Journey to Industrialization DOI: http://dx.doi.org/10.5772/intechopen.94372*

*Emerging Markets*

**5. Conclusions**

birthed the manufacturing revolution.

highest levels of capabilities.

would be ensured.

confidence.

financial indicators, market share, customer satisfaction and quality. **Figure 7** is a diagrammatic representation of Commercial entrepreneurship. The producer determines how much the entrepreneur sells, and the time, quality and quantity of the goods to be sold. If the producer decides to pull out from that market the com-

The commercial entrepreneur is totally dependent on the producer. He is usually referred to as the lazy entrepreneur. He is not involved in productive activities. His research, development and innovative activities shall be limited to market and organizational innovation. All he needs to do is study a market; find out their need or the product demand of the market, link with the producer of such product and act as a middle man who suppliers the needed product to the market. The entrepreneur

However, the risk involved in being a commercial entrepreneur is far too great. We need both technological entrepreneurs and commercial entrepreneurs because when production meets distribution we attain optimum consumption and standards of living increase. It is paramount we have more technological entrepreneurs to boost economic productivity, because an increase in economic productivity increases economic strength, growth, development and industrialization.

A manufacturing revolution has emerged in the past 50 years that is as significant as the industrial revolution of the 19th century. The industrial revolution, which captured the introduction of radically new production technologies diffused across the globe and has fundamentally affected the nature of global production,

Limited knowledge and ability of its people to create new innovations are the greatest challenges facing industrial process in developing nations. Failure to continuously strengthen and increase our knowledge base will surely result in a declining ability to provide for the needs wants and of our people. When increased productivity is viewed as a generator of wealth, the importance of innovation is clear. Employment opportunities in many industries will increase tremendously as

Moves towards industrialization are scarce and hesitant in developing countries. This is as a result of the copy and paste policy syndrome from industrialized nations by developing nations, without knowledge that there is no general rule or prescriptions for industrialization change. Policies should be specifically tailored to the capabilities of the particular country with more selective options requiring the

Simply put, these two challenges namely; (1) limited knowledge and knowledge

Historically, a large majority of the citizens of developing nations were denied the benefits of the industrial revolution. Many of them were cheap slaves and contractual servants; thus robbing them of their uniqueness, self-esteem, poise and

However, despite the change in state of affairs; with developing nations gaining a greater measure of freedom and independence, many of the citizens of developing countries are still struggling with their uniqueness and their sense of self-worth.

acquisition processes, and (2) the poor policy formulation process are the main causes of Africa's problems. They are both associated with our thinking process and it's been proven that our actions are fruits of thoughts. When these challenges are tackled, a smooth journey to industrialization for developing nations like ours

productivity increases. Indirect employment will be created as well.

mercial entrepreneur is automatically knocked out of business.

buys from the producer and supplies the market, simple!

**56**

Many of the nations that progressed and developed through the industrial revolution have reinforced (by attitude, policies, and legislation) the notion that the citizens of developing nations do not possess the potential to develop the skills, intelligence and sophistication necessary to equal that of industrialized nations.

The developing nations in effect are led to still look to the industrially developed states for their measure of standard, quality and excellence. This in turn breeds a sense of disrespect and suspicion for their own products and a denial of the great potential that lies dormant in the citizens of developing nations everywhere. There is still the notion that the presence of a foreign element is necessary for the maintenance of excellence and quality. This is not true! Citizens of developing nations are great; they possess the intelligence for transformation and the sooner we realize this truth and believe in our ability to stimulate the industrialization process; only then will the journey to industrialization begin.

#### **Acknowledgements**

We acknowledge and appreciate Awojobi Anthonia, Abang Scott, Obaze Irene, Ryan Sherry, Nnachi Joseph and Ojuloge Blessing for their support.

#### **Notes/thanks/other declarations**

This chapter would not have been possible without the keen interest of our friends and the crew who, all through our life, has experienced our little victories, defeats, and believed and held fast to the simple theories we emerged.

But most of all, this chapter is for our mentors, partners and protégés too numerous to mention. And to you reading this, we say thank you for supporting sustainable economic growth, development and industrialization.

Thank you for embracing performance enhancement principles.

#### **Author details**

Chimezirim Young\* and Ayo Oyewale National Centre for Technology Management, Enugu, Nigeria

\*Address all correspondence to: youngchimezirim@gmail.com

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

### **References**

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[6] Pickard, T. (1982). Jarrow March. Allison and Busby publishers, London.

[7] Goh, K S (1963) Some Problems of Industrialization, Ministry of Culture, Singapore

[8] Yuen, B (1992) Singapore high technology cluster: origin and present situation, Journal of Property research 9:247-260

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[21] Coombs, P.H., Prosser, R.C. and Ahmed, M. (1973). New Path to Learning for Rural Children and Youths, in International Council for Education Council Research, pp.14-15.

[22] Nyerere, J. (1968). Education for Self-Reliance in Tanzana. In I.N. Resnik (Ed.) Revolution by Education. Arusa; Longman.

[23] Kanawaty, G. (1985). Training for a changing World; Some general reflection: International Labour Review, Vol.124, No.54,. July-Aug, 401-409.

[24] Davis, K. (1956). Human Behaviour at work: Organizational Behaviour, John Wiley and Sons, New York.

[25] Lall, S. (1987). Learning to industrialize: the Acquisition of Technological capability by India. London: Macmillan Press.

[26] Ogbimi, F.E. and Adjebeng-Asem, S. (1994). Improving Performance in the S& T Policy Process in Nigeria, N.S.E. technical Transactions, 29(3): 30-39.

[27] Majone, G. (1980). "The uses of Policy Analysis" in Policy Studies Review Annual, Vol.4 edited by Betram H. Raven. Sage publications Beverly Hills, p.161.

**58**

Century.

*Emerging Markets*

**References**

[1] Ogbimi, F.E. (2010). Achieving Rapid Industrialization and

2010. Inaugural series 235.

[2] Carrington, C.E and Jackson, J.H. (1954). A history of England, Cambridge University Press, England.

(ISBN 0761807136). Xvi, 266p.

[5] Williams, P.H. (1964). The

Crusade. BBC News

of Oklahoma, Norman.

London.

Singapore

9:247-260

ISBN0-19-504606.

[4] Collette, C. (2011). The Jarrow

Industrialization Of Nigeria, University

[6] Pickard, T. (1982). Jarrow March. Allison and Busby publishers,

[7] Goh, K S (1963) Some Problems of Industrialization, Ministry of Culture,

[8] Yuen, B (1992) Singapore high technology cluster: origin and present situation, Journal of Property research

[9] Cowan, R.S (1997), A Social History of American Technology, New York: Oxford University Press.

Colonial America, 2nd Edition.

[10] Edwin, J.P (1988), The Economy of

[11] Kelly, M. (2012). The United States and the Industrial Revolution in the 19th

[3] Randa, L.E. (1997), Society's Final Solution: A History and Discussion of the Death Penalty. University Press of America (Lanham, Md.), book Edited

Democratisation in AFRICA: The roles of EDUCATION and TRAINING. An Inaugural lecture delivered at Oduduwa hall, Obafemi Awolowo University, Ile-Ife Nigeria. On Tuesday 30th November,

[12] Greene, J.P and Pole, J.R. (2004). A companion to the American Revolution,

[13] Stahl, J.P (1990); A New Universal Learning Curve Proceedings of the 1990 Annual Conference of the ASEE in

[14] Ogbimi, F.E. (2005). Understanding why learning is the primary source of sustainable growth, industrialization and development. A publication of Society for Linking Education and problems publications, Obafemi Awolowo University, Ile-Ife, Nigeria.

chapter 7

Canada, pp. 1863-68

[15] Klausmerier, H.J. (1985).

Harper and Row, New York.

limited, Ile-Ife Nigeria.

Publishers, New York.

Version 0.25

Educational Psychology, Fifth Edition,

[16] Ogbimi, F.E. (2007). Solution to Mass Unemployment in Nigeria, Obafemi Awolowo University Press

[17] Drucker, P.E (1954). The Practice of Management, Harper and Row

[18] Jones, I.C (2006), Knowledge and the Theory of Economic Development

Economics, U.C Berkeley and NMBER-

[19] Ogbimi F.E (1991). Managing Education. Production Linkages: Bridging the gap between Theoretical and Practical Skills in Nigeria in proceedings of the Conference organized by Council for Registered Engineers of Nigeria (COREN) and the Committee of Deans of Engineering and Technological Institutions (CODET) in

Lagos, July 16-19, 1991. p 23-32.

[20] Ehiametalor, E.T (1988), Education and National Development, Nigerian Educational Research Association.

Department, Department of

**61**

**Chapter 4**

**Abstract**

are recommended.

market conditions

**1. Introduction**

Literature

Are African Stock Markets

*Adefemi A. Obalade and Paul-Francois Muzindutsi*

**Keywords:** African stock markets, AMH, EMH, calendar anomalies,

From the 1980s, the argument has been whether the behaviour of stock market returns is random or independent and identically distributed and whether there are significant calendar anomalies in stock markets. Three types of efficient market exist, namely the weak-form, semi-strong-form and strong-form. Weak-form hypothesis implies that the price reflects all previous information; the semi-strong hypothesis means that prices incorporate all information available to the public while the strong-form, in addition to public information, also reflects the insiders' information [1]. The most debated of the three forms is the weak-form efficiency [2, 3] note that the violation of this least restricted form of efficient market hypothesis (EMH) is tantamount to the violation of other forms of EMH. Consequently, this study focuses on the examination of weak-form efficiency. The implication of EMH is that no one can earn a return above the market average return in a consistent manner, except if one is lucky [4]. Thus, no amount of security analysis

Inefficient or Adaptive? Empirical

This chapter reviews empirical studies on weak form of efficiency with the aim of establishing whether the African market is inefficient or adaptive. The reviewed studies are categorised based on their methodological approaches to compare the power of linear and non-linear models in testing for weak-form efficiency. The studies on calendar anomalies, an indication of weak-form inefficiency, are reviewed to assess whether these anomalies are adaptive as portrayed by the relatively recent theory of adaptive market hypothesis (AMH). The scope of reviewed studies is also extended to developed and emerging markets to gain a broad comparison of the findings. This review revealed that non-linear dependence has been revealed in stock returns suggesting that non-linear models are best fit to test for the stock market efficiency. Reviewed studies produced contradictory findings with some supporting and others rejecting weak-form efficiency. Thus, most studies support the AMH, which suggests that market efficiencies and anomalies are time changing. This chapter concludes that most of the existing studies on AMH have been carried out in markets other than Africa, and hence, further empirical studies on the evolving and changing nature of efficiency in African stock markets

#### **Chapter 4**

## Are African Stock Markets Inefficient or Adaptive? Empirical Literature

*Adefemi A. Obalade and Paul-Francois Muzindutsi*

#### **Abstract**

This chapter reviews empirical studies on weak form of efficiency with the aim of establishing whether the African market is inefficient or adaptive. The reviewed studies are categorised based on their methodological approaches to compare the power of linear and non-linear models in testing for weak-form efficiency. The studies on calendar anomalies, an indication of weak-form inefficiency, are reviewed to assess whether these anomalies are adaptive as portrayed by the relatively recent theory of adaptive market hypothesis (AMH). The scope of reviewed studies is also extended to developed and emerging markets to gain a broad comparison of the findings. This review revealed that non-linear dependence has been revealed in stock returns suggesting that non-linear models are best fit to test for the stock market efficiency. Reviewed studies produced contradictory findings with some supporting and others rejecting weak-form efficiency. Thus, most studies support the AMH, which suggests that market efficiencies and anomalies are time changing. This chapter concludes that most of the existing studies on AMH have been carried out in markets other than Africa, and hence, further empirical studies on the evolving and changing nature of efficiency in African stock markets are recommended.

**Keywords:** African stock markets, AMH, EMH, calendar anomalies, market conditions

#### **1. Introduction**

From the 1980s, the argument has been whether the behaviour of stock market returns is random or independent and identically distributed and whether there are significant calendar anomalies in stock markets. Three types of efficient market exist, namely the weak-form, semi-strong-form and strong-form. Weak-form hypothesis implies that the price reflects all previous information; the semi-strong hypothesis means that prices incorporate all information available to the public while the strong-form, in addition to public information, also reflects the insiders' information [1]. The most debated of the three forms is the weak-form efficiency [2, 3] note that the violation of this least restricted form of efficient market hypothesis (EMH) is tantamount to the violation of other forms of EMH. Consequently, this study focuses on the examination of weak-form efficiency. The implication of EMH is that no one can earn a return above the market average return in a consistent manner, except if one is lucky [4]. Thus, no amount of security analysis

based on past information could result in consistent higher profit. Several deviations and various types of patterns have been discovered in asset returns, which are at variance with the EMH and, hence, are termed efficient market anomalies [5]. Lo, Blume and Durlauf [6] identified three main categories of anomalies, namely fundamental anomalies, technical anomalies and calendar anomalies. Fundamental anomalies are market anomalies (for example size and value effect), which cause security prices to depart from their intrinsic values [7], while a technical anomaly is one in which the study of past market data results in an estimate of anticipated price trends [6]. Alagidede [8] defines calendar anomalies as the likelihood that returns on financial securities would exhibit systematic patterns during a particular time of the day, week, month or year. The calendar anomalies are reviewed in this chapter because it is an indication of weak-form inefficiency. Vast numbers of empirical investigations have been conducted and they are inconclusive as to whether stock markets are efficient or inefficient. This gave rise to the Adaptive market hypothesis (AMH), which suggests that market efficiencies and anomalies are time changing due to changing market conditions [9].

The first section of this chapter presents a review of existing researches on the weak-form efficiency of financial markets from the absolute point of view. Having identified calendar anomaly as the most popular contradiction to market efficiency, the second section presents the empirical evidence on calendar anomalies, where it is viewed as all or nothing. Moreover, the third section shows the new submissions of the recent researches about efficiency and calendar anomalies from AMH point of view, in other words, taking time-variation and market conditions into consideration. Lastly, this chapter presents gaps in literature and has a summary and the concluding remarks.

#### **2. Empirical studies on weak-form EMH**

Large numbers of empirical studies have been carried out in testing the weak form of EMH or random walk in developed and developing stock markets. These studies focus on the relationship between successive price changes to determine whether they are dependent or predictable. Some studies examine linear dependence [1, 10–14] in stock returns, while others focus on non-linear dependence [15, 16]. The types of dependence and the development of the markets examined seem to impart the conclusion from these studies, hence, the empirical review is presented below taking cognisance of the two categories (linear and non-linear) of dependence.

#### **2.1 Linear empirical studies from developed and emerging markets**

The linear dependence tests constitute the earliest test of weak form of EMH and they are still in use today. There are four major linear tests employed in testing weak-form efficiency in the literature, namely the autocorrelation/partial autocorrelation tests, VR, run and unit root tests [2]. In most cases, studies of weak-form efficiency have combined various linear estimation tools. Hence, this study presents a general empirical review of linear test-based studies, since having to separate a single study where various linear tests are combined may be cumbersome.

The first set of researchers used the linear serial correlation tests, which test RM31 (i.e. the least restrictive hypothesis) to establish non-correlation of returns.

**63**

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

Additionally, some studies have employed runs2

correlation test of changes in stock prices with additional benefits of being a non-parametric test. Here, the actual and expected numbers of runs of a series are compared. Using this approach, Fama [1] provided minor support for return dependence in the US while Cooper [13], using different frequencies of stock return series from 36 countries, submitted that the UK and the US are efficient and in conformity with EMH. Apart from the autocorrelation and run test, another linear dependence test is the Variance ratio (VR) test, which has become the commonest test [25, 26] for determining whether price changes are not serially correlated. The test assumes that if changes in asset price are consistent with random walk hypothesis (RWH), the variance of the *p*-period change must be *p* multiplied by the variance of *1*-period change. Applying their own VR test, Lo and MacKinlay [27] found that the RWH does not hold for weekly stock market returns. Also, Smith and Ryoo [28] used the multiple VR test to examine the randomness of European emerging stock markets and found significant violation of the weak form of market

The fourth group of linear tests of weak-form efficiency are known as the unit root tests, which are used to examine the stationarity of stock returns, based on the argument that stock returns follow a random walk if they reject stationarity or have a unit root [25]. Unit root test and other linear tests are employed in a study of 16 developed markets, namely Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK and four emerging markets, namely Czech Republic, Hungary, Poland and Russia by Worthington and Higgs [29] in European equity markets using daily returns. Results of the emerging markets showed that only Hungary is characterised by a random walk and, hence, is weak-form efficient, while in the developed markets only Germany, Ireland, Portugal, Sweden and the UK conform to the strictest weak-

In addition, autocorrelation test and the VR test were employed by Lovatt, Boswell and Noor [30] to test firm level and market-wide randomness in the UK from 1992 to 1998. Results from the two tests depict significant dependence of daily stock returns in the UK. On the basis of run test, Borges [14] showed that RWH cannot be rejected in UK (daily and monthly data), Spain, France and Germany (monthly data). Konak and Şeker [31] supported the efficiency of the UK FTSE 100 based on the findings of unit root tests. Drawing from many of the available studies [1, 10–14] in the developed economies, the notion of weak-form efficiency has

<sup>2</sup> A run is 'a succession of identical symbols which are followed or preceded by different symbols' [24].

The presence of serial correlation in return series implies weak-form inefficiency. Studies such as Working [17]; Kendall [18]; Osborne [19]; Samuelson [10] and Fama [1, 11] and Roberts [12] provide support for the efficiency of the developed stock markets due to insignificant magnitude of autocorrelation. Kendall [20] investigated weekly indices and the idea of serial correlation was debunked in the United State (US). Although serial correlation was found in the United Kingdom (UK), it was considered insignificant. Serial correlation was also found in the US share index by Moore [21] but it was adjudged to be insignificant. In addition, low serial correlation was found by Jennergren and Korsvold [22] whose study was based on the Swedish stock market. Where significant serial correlations were reported earlier, it was dismissed on the ground of spuriousity. Hence, most of the above studies do not really reject weak-form EMH. However, Niederhoffer and Osborne [23] debunk the notion that stock price changes are independent and identically distributed and state that investors are aware of the possibility of price reversal and exploit it for

test as another popular serial

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

abnormal profits.

efficiency.

form efficiency criteria.

<sup>1</sup> RWH1 implies independently and identically distributed successive price increments; RWH2 implies independent increments; while RWH3 implies dependent but uncorrelated increments.

#### *Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

*Emerging Markets*

due to changing market conditions [9].

**2. Empirical studies on weak-form EMH**

concluding remarks.

dependence.

based on past information could result in consistent higher profit. Several deviations and various types of patterns have been discovered in asset returns, which are at variance with the EMH and, hence, are termed efficient market anomalies [5]. Lo, Blume and Durlauf [6] identified three main categories of anomalies, namely fundamental anomalies, technical anomalies and calendar anomalies. Fundamental anomalies are market anomalies (for example size and value effect), which cause security prices to depart from their intrinsic values [7], while a technical anomaly is one in which the study of past market data results in an estimate of anticipated price trends [6]. Alagidede [8] defines calendar anomalies as the likelihood that returns on financial securities would exhibit systematic patterns during a particular time of the day, week, month or year. The calendar anomalies are reviewed in this chapter because it is an indication of weak-form inefficiency. Vast numbers of empirical investigations have been conducted and they are inconclusive as to whether stock markets are efficient or inefficient. This gave rise to the Adaptive market hypothesis (AMH), which suggests that market efficiencies and anomalies are time changing

The first section of this chapter presents a review of existing researches on the weak-form efficiency of financial markets from the absolute point of view. Having identified calendar anomaly as the most popular contradiction to market efficiency, the second section presents the empirical evidence on calendar anomalies, where it is viewed as all or nothing. Moreover, the third section shows the new submissions of the recent researches about efficiency and calendar anomalies from AMH point of view, in other words, taking time-variation and market conditions into consideration. Lastly, this chapter presents gaps in literature and has a summary and the

Large numbers of empirical studies have been carried out in testing the weak form of EMH or random walk in developed and developing stock markets. These studies focus on the relationship between successive price changes to determine whether they are dependent or predictable. Some studies examine linear dependence [1, 10–14] in stock returns, while others focus on non-linear dependence [15, 16]. The types of dependence and the development of the markets examined seem to impart the conclusion from these studies, hence, the empirical review is presented below taking cognisance of the two categories (linear and non-linear) of

The linear dependence tests constitute the earliest test of weak form of EMH and they are still in use today. There are four major linear tests employed in testing weak-form efficiency in the literature, namely the autocorrelation/partial autocorrelation tests, VR, run and unit root tests [2]. In most cases, studies of weak-form efficiency have combined various linear estimation tools. Hence, this study presents a general empirical review of linear test-based studies, since having to separate a single study where various linear tests are combined may be cumbersome.

The first set of researchers used the linear serial correlation tests, which test

<sup>1</sup> RWH1 implies independently and identically distributed successive price increments; RWH2 implies

independent increments; while RWH3 implies dependent but uncorrelated increments.

(i.e. the least restrictive hypothesis) to establish non-correlation of returns.

**2.1 Linear empirical studies from developed and emerging markets**

**62**

RM31

The presence of serial correlation in return series implies weak-form inefficiency. Studies such as Working [17]; Kendall [18]; Osborne [19]; Samuelson [10] and Fama [1, 11] and Roberts [12] provide support for the efficiency of the developed stock markets due to insignificant magnitude of autocorrelation. Kendall [20] investigated weekly indices and the idea of serial correlation was debunked in the United State (US). Although serial correlation was found in the United Kingdom (UK), it was considered insignificant. Serial correlation was also found in the US share index by Moore [21] but it was adjudged to be insignificant. In addition, low serial correlation was found by Jennergren and Korsvold [22] whose study was based on the Swedish stock market. Where significant serial correlations were reported earlier, it was dismissed on the ground of spuriousity. Hence, most of the above studies do not really reject weak-form EMH. However, Niederhoffer and Osborne [23] debunk the notion that stock price changes are independent and identically distributed and state that investors are aware of the possibility of price reversal and exploit it for abnormal profits.

Additionally, some studies have employed runs2 test as another popular serial correlation test of changes in stock prices with additional benefits of being a non-parametric test. Here, the actual and expected numbers of runs of a series are compared. Using this approach, Fama [1] provided minor support for return dependence in the US while Cooper [13], using different frequencies of stock return series from 36 countries, submitted that the UK and the US are efficient and in conformity with EMH. Apart from the autocorrelation and run test, another linear dependence test is the Variance ratio (VR) test, which has become the commonest test [25, 26] for determining whether price changes are not serially correlated. The test assumes that if changes in asset price are consistent with random walk hypothesis (RWH), the variance of the *p*-period change must be *p* multiplied by the variance of *1*-period change. Applying their own VR test, Lo and MacKinlay [27] found that the RWH does not hold for weekly stock market returns. Also, Smith and Ryoo [28] used the multiple VR test to examine the randomness of European emerging stock markets and found significant violation of the weak form of market efficiency.

The fourth group of linear tests of weak-form efficiency are known as the unit root tests, which are used to examine the stationarity of stock returns, based on the argument that stock returns follow a random walk if they reject stationarity or have a unit root [25]. Unit root test and other linear tests are employed in a study of 16 developed markets, namely Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK and four emerging markets, namely Czech Republic, Hungary, Poland and Russia by Worthington and Higgs [29] in European equity markets using daily returns. Results of the emerging markets showed that only Hungary is characterised by a random walk and, hence, is weak-form efficient, while in the developed markets only Germany, Ireland, Portugal, Sweden and the UK conform to the strictest weakform efficiency criteria.

In addition, autocorrelation test and the VR test were employed by Lovatt, Boswell and Noor [30] to test firm level and market-wide randomness in the UK from 1992 to 1998. Results from the two tests depict significant dependence of daily stock returns in the UK. On the basis of run test, Borges [14] showed that RWH cannot be rejected in UK (daily and monthly data), Spain, France and Germany (monthly data). Konak and Şeker [31] supported the efficiency of the UK FTSE 100 based on the findings of unit root tests. Drawing from many of the available studies [1, 10–14] in the developed economies, the notion of weak-form efficiency has

<sup>2</sup> A run is 'a succession of identical symbols which are followed or preceded by different symbols' [24].

hardly been rejected [32]. In contrast, findings from the emerging economies are contradictory with some supporting and some rejecting weak-form efficiency. For instance, empirical evidences from Asian, Latin American and European emerging markets and the Middle-East are all contradictory [32]. Kim *et al.* [33] state that there is vast proof of predictable patterns from past price changes, particularly in the emerging financial markets.

#### **2.2 Linear empirical studies from African markets**

While the African region studies are not as much as others are, the Johannesburg Stock Exchange (JSE) seems to have received more attention than other African markets in the investigation of market efficiency. The JSE has been identified as the most developed in the league of African stock markets and it has been noted that the market behaves more like those in developed economies. A review of JSE studies by Thomson and Ward [34] indicates conflicting results with some studies supporting JSE efficiency while others do not. However, they submitted that there are more reasons to conclude that JSE is efficient in weak form. According to Vitali and Mollah [32], subsequent investigations on the JSE have maintained this submission [35–38] with the exception of Appiah-Kusi and Menyah [39] and Smith [40]. Conflicting findings, even when similar methodologies are used, may not be unconnected with differences in sample size or data frequencies but one would have expected similar results if markets were to be efficient at all times. Further, while Almudhaf and Alkulaib [41] employed unit root tests and VR and concluded that the JSE is consistent with RWH, Grater and Struweg [42], based on unit root test, discovered that JSE is not consistent with RWH. Sub-period analysis was considered by Fusthane and Kapingura [43] who employed all the popular linear tests except the run test in the pre-, post- and during global financial crisis and showed that the JSE, to a greater extent, is weak-form efficient.

In Nigeria, many investigations have been undertaken to test weak-form efficiency. A review of these studies reveals that the problems of efficiency in Nigerian stock market remain inconclusive. In Nigeria, Gimba [44] applied run, autocorrelation and VR tests; Nwosa and Oseni [45], Nwidobie [46] and Obayagbona and Igbinosa [47] employed autocorrelation, run test and unit root test. All these studies submitted that stock returns do not comply with weak-form efficiency (implying weak-form inefficiency). On the other hand, Ayadi [48], Olowe [49], Emeh and Obi [50], found that Nigerian stock market is weak-form efficient. The finding is supported by Godwin [51] and Ajao and Osayuwu [52] using autocorrelation test and runs test; Keyur [53] using run test; Arewa and Nwakanma [54] based on portmanteau autocorrelation and LM serial correlation. Apart from the full sample study, certain studies employed sub-sample analyses. For instance, Ezepue and Omar [55] employed daily and monthly indices and sub-sample analyses (2000– 2004; 2005–2010) using financial reform as the basis for breaking the sample and found that the market is inefficient, based on run and autocorrelation test results. Similarly, Ikeora, Nneka and Andabai [56] showed that three out of the four subperiods analyses are characterised with dependence and inefficiency using the runs and unit root test. Violation of EMH is also documented by Ogbulu [57] using the four linear tests and four frequencies of return index from 1999 to 2013.

There are some studies, which combine selected African stock markets. For instance, Magnusson and Wydick [35] studied efficiency in African stock markets from 1989 to 1998 using partial correlation. Botswana, Kenya, Cote d'Ivoire, Mauritius, South Africa and Nigeria markets are found to be weak-form efficient − the exceptions being Ghana and Zimbabwe. Smith et al. [36], using multiple VR test and weekly indices from 1990 to 1998, rejected weak-form efficiency of

**65**

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

Egypt, Morocco, Kenya, Zimbabwe, Nigeria, Botswana and Mauritius, with South Africa identified as the only efficient market in the sample. Appiah-Kusi and Menya [39] also employed EGARCH-M to analyse weekly indices and showed that Egypt, Morocco, Kenya, Zimbabwe, Mauritius are efficient while Ghana, Botswana, Ivory Coast, South Africa, Nigeria and Swaziland are not. In Mauritius, Fowdar, Subadar, Lampot, Sannassee and Fawsee [58] used the traditional linear tests except the VR test and found that returns from 1999 to 2004 are autocorrelated. Mlambo and Biekpe [59] analysed daily indices from 1997 to 2002 with the aid of run tests and submitted that stock returns in all African markets other than Namibia exhibit serial correlation and do not conform with RWH. They warned, however, that the rejection of the random walk, based on these tests, does not necessarily imply weak-form

Furthermore, Smith [40] used samples from 2000 to 2006 and various versions of VR tests and found that Egypt, Botswana, Ghana, Kenya, Ivory Coast, Mauritius, Nigeria, Morocco, South Africa, Zimbabwe and Tunisia are not efficient. Also, by employing (G)ARCH effects tests; GARCH family models, BDS tests and bicovariance test; Alagidede and Panagiotidis [60] showed that Zimbabwe, South Africa, Morocco, Egypt, Nigeria, Kenya and Tunisia are not efficient but the data are characterised with leverage effect, volatility clustering and leptokurtosis. Nwosu, Orji and Anagwu [61], also using various linear tests, found that the Egypt, Kenya, Nigeria and South African stock markets behave in a manner that is contradictory to weak efficiency while the US S&P500 complies with the notion of efficiency. Similarly, the combination of autocorrelation, run and unit root tests revealed that Kenya stock market is weak-form inefficient [62]. Gyamfi, Kyei and Kyei [63] employed non-linear ADF unit root test and the modified Wald and revealed that unit root is present in Nigeria, Egypt, Mauritius, Kenya, Mauritius, South Africa, Morocco and Tunisia returns except Botswana, hence, non-stationary and weakform efficient. By and large, findings from stock markets other than developed markets have been mixed with the majority showing that African stock markets are

**2.3 Non-linear empirical studies from developed and emerging markets**

autoregressive [73] and Engle Lagrange multiplier test [74].

It is noteworthy that the 'traditional' tests of efficiency, as discussed above, have been said to be of little or no use, in the recent literature. It is because such tools may fail to find evidence of linear structure in the data, but this would not necessarily imply that the same observations are independent of one another [64]. In other words, researchers have observed that markets sometimes exhibit non-linear dependence even when there is no linear dependence [65, 66]. Owing to the presence of non-linear structure in stock returns, which cannot possibly be captured by the study of linear dependence, weak-form efficiency studies have been broadened to cover the examination of non-linear dependence, since the latter portends the possibility of predictability. Thus, where non-linear dependence is observed, absence of linear dependence is not enough to adjudge the market efficient considering the non-normality of return series [65, 67]. This leads to the application of myriads of non-linear test to stock returns in recent times. Non-linear tests include portmanteau tests such as the BDS test [68], the bispectrum test [69], Tsay's test [70], the neural network test [71], the bicorrelation test [72], Ramsey's RESET test and the specific tests such as SETAR-type non-linearity [70], smooth transition

The earliest evidence of non-linearity in a stock market was shown by Hinich and Patterson [75] who applied a bispectrum test to daily returns of stocks on the NYSE. In the same vein, De Gooijer [15] further found significant non-linear

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

inefficiency but a presence of serial correlation.

not efficient in weak form.

#### *Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

*Emerging Markets*

the emerging financial markets.

**2.2 Linear empirical studies from African markets**

hardly been rejected [32]. In contrast, findings from the emerging economies are contradictory with some supporting and some rejecting weak-form efficiency. For instance, empirical evidences from Asian, Latin American and European emerging markets and the Middle-East are all contradictory [32]. Kim *et al.* [33] state that there is vast proof of predictable patterns from past price changes, particularly in

While the African region studies are not as much as others are, the Johannesburg

Stock Exchange (JSE) seems to have received more attention than other African markets in the investigation of market efficiency. The JSE has been identified as the most developed in the league of African stock markets and it has been noted that the market behaves more like those in developed economies. A review of JSE studies by Thomson and Ward [34] indicates conflicting results with some studies supporting JSE efficiency while others do not. However, they submitted that there are more reasons to conclude that JSE is efficient in weak form. According to Vitali and Mollah [32], subsequent investigations on the JSE have maintained this submission [35–38] with the exception of Appiah-Kusi and Menyah [39] and Smith [40]. Conflicting findings, even when similar methodologies are used, may not be unconnected with differences in sample size or data frequencies but one would have expected similar results if markets were to be efficient at all times. Further, while Almudhaf and Alkulaib [41] employed unit root tests and VR and concluded that the JSE is consistent with RWH, Grater and Struweg [42], based on unit root test, discovered that JSE is not consistent with RWH. Sub-period analysis was considered by Fusthane and Kapingura [43] who employed all the popular linear tests except the run test in the pre-, post- and during global financial crisis and

showed that the JSE, to a greater extent, is weak-form efficient.

four linear tests and four frequencies of return index from 1999 to 2013.

There are some studies, which combine selected African stock markets. For instance, Magnusson and Wydick [35] studied efficiency in African stock markets from 1989 to 1998 using partial correlation. Botswana, Kenya, Cote d'Ivoire, Mauritius, South Africa and Nigeria markets are found to be weak-form efficient − the exceptions being Ghana and Zimbabwe. Smith et al. [36], using multiple VR test and weekly indices from 1990 to 1998, rejected weak-form efficiency of

In Nigeria, many investigations have been undertaken to test weak-form efficiency. A review of these studies reveals that the problems of efficiency in Nigerian stock market remain inconclusive. In Nigeria, Gimba [44] applied run, autocorrelation and VR tests; Nwosa and Oseni [45], Nwidobie [46] and Obayagbona and Igbinosa [47] employed autocorrelation, run test and unit root test. All these studies submitted that stock returns do not comply with weak-form efficiency (implying weak-form inefficiency). On the other hand, Ayadi [48], Olowe [49], Emeh and Obi [50], found that Nigerian stock market is weak-form efficient. The finding is supported by Godwin [51] and Ajao and Osayuwu [52] using autocorrelation test and runs test; Keyur [53] using run test; Arewa and Nwakanma [54] based on portmanteau autocorrelation and LM serial correlation. Apart from the full sample study, certain studies employed sub-sample analyses. For instance, Ezepue and Omar [55] employed daily and monthly indices and sub-sample analyses (2000– 2004; 2005–2010) using financial reform as the basis for breaking the sample and found that the market is inefficient, based on run and autocorrelation test results. Similarly, Ikeora, Nneka and Andabai [56] showed that three out of the four subperiods analyses are characterised with dependence and inefficiency using the runs and unit root test. Violation of EMH is also documented by Ogbulu [57] using the

**64**

Egypt, Morocco, Kenya, Zimbabwe, Nigeria, Botswana and Mauritius, with South Africa identified as the only efficient market in the sample. Appiah-Kusi and Menya [39] also employed EGARCH-M to analyse weekly indices and showed that Egypt, Morocco, Kenya, Zimbabwe, Mauritius are efficient while Ghana, Botswana, Ivory Coast, South Africa, Nigeria and Swaziland are not. In Mauritius, Fowdar, Subadar, Lampot, Sannassee and Fawsee [58] used the traditional linear tests except the VR test and found that returns from 1999 to 2004 are autocorrelated. Mlambo and Biekpe [59] analysed daily indices from 1997 to 2002 with the aid of run tests and submitted that stock returns in all African markets other than Namibia exhibit serial correlation and do not conform with RWH. They warned, however, that the rejection of the random walk, based on these tests, does not necessarily imply weak-form inefficiency but a presence of serial correlation.

Furthermore, Smith [40] used samples from 2000 to 2006 and various versions of VR tests and found that Egypt, Botswana, Ghana, Kenya, Ivory Coast, Mauritius, Nigeria, Morocco, South Africa, Zimbabwe and Tunisia are not efficient. Also, by employing (G)ARCH effects tests; GARCH family models, BDS tests and bicovariance test; Alagidede and Panagiotidis [60] showed that Zimbabwe, South Africa, Morocco, Egypt, Nigeria, Kenya and Tunisia are not efficient but the data are characterised with leverage effect, volatility clustering and leptokurtosis. Nwosu, Orji and Anagwu [61], also using various linear tests, found that the Egypt, Kenya, Nigeria and South African stock markets behave in a manner that is contradictory to weak efficiency while the US S&P500 complies with the notion of efficiency. Similarly, the combination of autocorrelation, run and unit root tests revealed that Kenya stock market is weak-form inefficient [62]. Gyamfi, Kyei and Kyei [63] employed non-linear ADF unit root test and the modified Wald and revealed that unit root is present in Nigeria, Egypt, Mauritius, Kenya, Mauritius, South Africa, Morocco and Tunisia returns except Botswana, hence, non-stationary and weakform efficient. By and large, findings from stock markets other than developed markets have been mixed with the majority showing that African stock markets are not efficient in weak form.

#### **2.3 Non-linear empirical studies from developed and emerging markets**

It is noteworthy that the 'traditional' tests of efficiency, as discussed above, have been said to be of little or no use, in the recent literature. It is because such tools may fail to find evidence of linear structure in the data, but this would not necessarily imply that the same observations are independent of one another [64]. In other words, researchers have observed that markets sometimes exhibit non-linear dependence even when there is no linear dependence [65, 66]. Owing to the presence of non-linear structure in stock returns, which cannot possibly be captured by the study of linear dependence, weak-form efficiency studies have been broadened to cover the examination of non-linear dependence, since the latter portends the possibility of predictability. Thus, where non-linear dependence is observed, absence of linear dependence is not enough to adjudge the market efficient considering the non-normality of return series [65, 67]. This leads to the application of myriads of non-linear test to stock returns in recent times. Non-linear tests include portmanteau tests such as the BDS test [68], the bispectrum test [69], Tsay's test [70], the neural network test [71], the bicorrelation test [72], Ramsey's RESET test and the specific tests such as SETAR-type non-linearity [70], smooth transition autoregressive [73] and Engle Lagrange multiplier test [74].

The earliest evidence of non-linearity in a stock market was shown by Hinich and Patterson [75] who applied a bispectrum test to daily returns of stocks on the NYSE. In the same vein, De Gooijer [15] further found significant non-linear dependence in daily returns of 27 stocks and monthly returns of S&P 500 respectively. Similar findings were later documented in the UK market by Abhyankar, Copeland and Wong, [76], Newell, Peat and Stevenson [77] and Opong, Mulholland, Fox and Farahmand, [78]. The results of bispectrum and BDS tests showed that all frequencies of all share indices possess high non-linear dependence that violates RWH. Examination of non-linear dependence is not limited to developed markets alone. Sewell, Stansell, Lee and Pan [79] found support for the presence of non-linear dependence in a sample of emerging markets. Other recognised studies reporting non-linear dependence in stock return include Afonso and Teixeira [80] in Portugal, Dorina and Simina [81] in Turkey, Hungary, Romania, Czech Republic, Slovenia, Poland, Slovakia and Lithuania, among others.

#### **2.4 Non-linear empirical studies from African markets**

The developed markets, especially the US, UK, Japan and Germany, have been highly focused when it comes to the examination of non-linear dependence [16, 68, 76, 82] while non-linear tests on African markets are limited. In African stock markets, Kruger [83] and Kruger, Toerien and MacDonald [84] examined 109 shares from JSE and showed that there is significant nonlinear dependence for all shares. They also explored sub-period analyses and discovered that the nonlinear dependence is episodic in nature. Similarly, Cheteni [85] employed LM test, BDS test and VR test in the investigation of chaotic and non-linear tendencies of all bond indices return in JSE. The presence of non-linear dependence was reported; hence, they concluded that the JSE is highly chaotic. In addition, Sarpong [86] examined chaos on JSE by testing JSE all share index, top 40 and small cap returns with the BDS test. The non-linear model revealed that the three indices negate the notion of RWH with the re-scaled range analysis further showing that JSE small cap index is not as efficient and risky as the rest.

Non-linear tests have also been extended to test the weak-form EMH in other African markets. For instance, the ARCH-LM and McLeod–Li portmanteau tests are combined with linear autocorrelation to investigate efficiency of five indices on the Nigerian stock exchange from 2010 to 2013. The models revealed that all the indices except banking sector are non-linearly dependent and not in support of RWH [87]. In the same vein, Saadi, Gandhi and Dutta [88] examined the efficiency of Tunisian stock market from the non-linear viewpoint using the BDS test. It was shown through the result of the BDS test that non-linear dependence is inherent in the stock return series and that the weak-form efficiency of the market should be rejected. By examining BDS, Mcleod-Li, Engle LM tests in Egyptian and Tunisian stock markets, Chkir, Chourou and Saadi [89] found significant non-linear dependence in stock indices return series and advocate for the rejection of RWH in the two African markets. Although this review may not have covered all the available studies, an important observation from the non-linear dependence tests in absolute form is that virtually all the markets (non-African and African) reviewed are culprits of the presence of non-linearity in stock return. While there is limited application of non-linear test in African market studies, JSE seems to have received more attention than others did.

#### **3. Empirical studies on calendar anomaly**

Although, the reviewed linear and non-linear tests provide some insight into testing for EMH, it has been observed that test of independence of stock returns is incomplete without testing for the presence of anomalies. One of the anomalies that

**67**

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

**3.1 Calendar anomaly from developed and emerging markets**

while turn of the month effect is present in both periods.

equally argued that both DOW and MOY have grown weaker.

is relevant to the test of weak-form EMH is the calendar anomaly. Much attention has been paid to the examination of calendar anomalies in the literature, making it the most observed or studied of all the types of stock market anomalies. In line with the previous section on the review of empirical studies relating to EMH, empirical review on calendar anomalies is also presented in this section and attention is paid

It is not surprising that the earliest empirical studies of calendar anomalies were carried out in developed countries since the theories also emanated from developed economies. In the New York Stock Exchange (NYSE), Rozeff and Kinney [90] studied the January effect from 1904 to 1974 and found that the January average return is significantly higher than other months. Keim [91], using the same set between 1963 and 1979, established that just about 50 percent of the average magnitude of risk-adjusted premium of small firms relative to large firms was caused by the January abnormal returns. Over 50 percent of the January excess return was traceable to the first week of January. Likewise, Gultekin and Gultekin [92] provide international evidence in 17 countries from a 1959 to 1970 sample. January and April effects are identified in all the countries including the UK. Further, Choudhry [93] evaluated month-of-the-year (MOY) anomalies in three developed countries between 1870 and 1913 using the GARCH [1, 1] model. It was concluded that MOY and January effects are found in the US and UK only and not in Germany. GARCH [1, 1] was also adopted by Wing-Keung, Aman and Nee-Tat [94] in the investigation of calendar anomalies in Singapore using a full period over 1993–2005 and subperiods 1993–1997 and 1998–2005. Results showed that there is the January effect in the post-crisis period, weekend and holiday effects disappear in the post crisis,

Apart from the MOY effects, day-of-the-week (DOW) effect is another prominent calendar anomaly. The earliest academic report on DOW effect was traceable to Cross [95] who found that Friday return is significantly higher than Monday return based on observation of the US stock market index returns over 1953 to 1970. In addition, Lakonishok and Smidt [96] investigated the presence of DOW calendar effect in the US from 1897 to 1986 and found high presence of a negative Monday return in the market. Hakan and Halil [97] also examined the DOW effect on stock market volatility by using the S&P 500 market index during the period of January 1973 and October 1997. The findings showed that the DOW effect is present in both volatility and return equations. While the highest and lowest returns are observed on Wednesday and Monday, the highest and the lowest volatility are observed on Friday and Wednesday, respectively. Further investigation of sub-periods reinforces the findings that the volatility pattern across the days of the week is statistically different. In addition, Shiok, Chong and Brian [98] used non-parametric test to study stock market calendar anomalies in Malaysia. This study was able to give clear view that Mondays are the only days with negative returns and represent the lowest stock return in a week and there was positive effect in Friday but not as high as the returns on Wednesday. Conversely, some international studies [99–103] have

Furthermore, both the MOW and DOW effects are combined in some studies. For instance, Lei and Gerhard [104] investigated calendar effects in the Chinese stock market, especially monthly and daily effects. Returns of the market index in Shanghai and Shenzhen stock exchanges were used to analyse the monthly and daily effects in stock returns. Results revealed that the highest returns could be achieved after the Chinese year-end in February while Mondays are seen to be

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

to the markets where the studies are carried out.

*Emerging Markets*

dependence in daily returns of 27 stocks and monthly returns of S&P 500 respectively. Similar findings were later documented in the UK market by Abhyankar, Copeland and Wong, [76], Newell, Peat and Stevenson [77] and Opong,

Mulholland, Fox and Farahmand, [78]. The results of bispectrum and BDS tests showed that all frequencies of all share indices possess high non-linear dependence that violates RWH. Examination of non-linear dependence is not limited to developed markets alone. Sewell, Stansell, Lee and Pan [79] found support for the presence of non-linear dependence in a sample of emerging markets. Other recognised studies reporting non-linear dependence in stock return include Afonso and Teixeira [80] in Portugal, Dorina and Simina [81] in Turkey, Hungary, Romania, Czech Republic, Slovenia, Poland, Slovakia and Lithuania, among others.

The developed markets, especially the US, UK, Japan and Germany, have been highly focused when it comes to the examination of non-linear dependence [16, 68, 76, 82] while non-linear tests on African markets are limited. In African stock markets, Kruger [83] and Kruger, Toerien and MacDonald [84] examined 109 shares from JSE and showed that there is significant nonlinear dependence for all shares. They also explored sub-period analyses and discovered that the nonlinear dependence is episodic in nature. Similarly, Cheteni [85] employed LM test, BDS test and VR test in the investigation of chaotic and non-linear tendencies of all bond indices return in JSE. The presence of non-linear dependence was reported; hence, they concluded that the JSE is highly chaotic. In addition, Sarpong [86] examined chaos on JSE by testing JSE all share index, top 40 and small cap returns with the BDS test. The non-linear model revealed that the three indices negate the notion of RWH with the re-scaled range analysis further

showing that JSE small cap index is not as efficient and risky as the rest.

Non-linear tests have also been extended to test the weak-form EMH in other African markets. For instance, the ARCH-LM and McLeod–Li portmanteau tests are combined with linear autocorrelation to investigate efficiency of five indices on the Nigerian stock exchange from 2010 to 2013. The models revealed that all the indices except banking sector are non-linearly dependent and not in support of RWH [87]. In the same vein, Saadi, Gandhi and Dutta [88] examined the efficiency of Tunisian stock market from the non-linear viewpoint using the BDS test. It was shown through the result of the BDS test that non-linear dependence is inherent in the stock return series and that the weak-form efficiency of the market should be rejected. By examining BDS, Mcleod-Li, Engle LM tests in Egyptian and Tunisian stock markets, Chkir, Chourou and Saadi [89] found significant non-linear dependence in stock indices return series and advocate for the rejection of RWH in the two African markets. Although this review may not have covered all the available studies, an important observation from the non-linear dependence tests in absolute form is that virtually all the markets (non-African and African) reviewed are culprits of the presence of non-linearity in stock return. While there is limited application of non-linear test in African market studies, JSE seems to have received

Although, the reviewed linear and non-linear tests provide some insight into testing for EMH, it has been observed that test of independence of stock returns is incomplete without testing for the presence of anomalies. One of the anomalies that

**2.4 Non-linear empirical studies from African markets**

**66**

more attention than others did.

**3. Empirical studies on calendar anomaly**

is relevant to the test of weak-form EMH is the calendar anomaly. Much attention has been paid to the examination of calendar anomalies in the literature, making it the most observed or studied of all the types of stock market anomalies. In line with the previous section on the review of empirical studies relating to EMH, empirical review on calendar anomalies is also presented in this section and attention is paid to the markets where the studies are carried out.

#### **3.1 Calendar anomaly from developed and emerging markets**

It is not surprising that the earliest empirical studies of calendar anomalies were carried out in developed countries since the theories also emanated from developed economies. In the New York Stock Exchange (NYSE), Rozeff and Kinney [90] studied the January effect from 1904 to 1974 and found that the January average return is significantly higher than other months. Keim [91], using the same set between 1963 and 1979, established that just about 50 percent of the average magnitude of risk-adjusted premium of small firms relative to large firms was caused by the January abnormal returns. Over 50 percent of the January excess return was traceable to the first week of January. Likewise, Gultekin and Gultekin [92] provide international evidence in 17 countries from a 1959 to 1970 sample. January and April effects are identified in all the countries including the UK. Further, Choudhry [93] evaluated month-of-the-year (MOY) anomalies in three developed countries between 1870 and 1913 using the GARCH [1, 1] model. It was concluded that MOY and January effects are found in the US and UK only and not in Germany. GARCH [1, 1] was also adopted by Wing-Keung, Aman and Nee-Tat [94] in the investigation of calendar anomalies in Singapore using a full period over 1993–2005 and subperiods 1993–1997 and 1998–2005. Results showed that there is the January effect in the post-crisis period, weekend and holiday effects disappear in the post crisis, while turn of the month effect is present in both periods.

Apart from the MOY effects, day-of-the-week (DOW) effect is another prominent calendar anomaly. The earliest academic report on DOW effect was traceable to Cross [95] who found that Friday return is significantly higher than Monday return based on observation of the US stock market index returns over 1953 to 1970. In addition, Lakonishok and Smidt [96] investigated the presence of DOW calendar effect in the US from 1897 to 1986 and found high presence of a negative Monday return in the market. Hakan and Halil [97] also examined the DOW effect on stock market volatility by using the S&P 500 market index during the period of January 1973 and October 1997. The findings showed that the DOW effect is present in both volatility and return equations. While the highest and lowest returns are observed on Wednesday and Monday, the highest and the lowest volatility are observed on Friday and Wednesday, respectively. Further investigation of sub-periods reinforces the findings that the volatility pattern across the days of the week is statistically different. In addition, Shiok, Chong and Brian [98] used non-parametric test to study stock market calendar anomalies in Malaysia. This study was able to give clear view that Mondays are the only days with negative returns and represent the lowest stock return in a week and there was positive effect in Friday but not as high as the returns on Wednesday. Conversely, some international studies [99–103] have equally argued that both DOW and MOY have grown weaker.

Furthermore, both the MOW and DOW effects are combined in some studies. For instance, Lei and Gerhard [104] investigated calendar effects in the Chinese stock market, especially monthly and daily effects. Returns of the market index in Shanghai and Shenzhen stock exchanges were used to analyse the monthly and daily effects in stock returns. Results revealed that the highest returns could be achieved after the Chinese year-end in February while Mondays are seen to be

weak and Fridays showed significant positive average returns. Yet the daily effect has a minor magnitude and relevance for determining average returns compared to monthly effects. Similarly, Rossi [105] examined the calendar anomalies in stock returns in South America from 1997 to 2006, focusing on the existence of DOW effects and the monthly patterns in Argentina, Brazil, Chile and Mexico. In full period, it was concluded that there existed the traditional positive Friday effect in Brazil and in Chile; the returns had been lowest on Mondays. In addition, the study documented positive returns on Wednesdays and Fridays. In Mexico highest returns appeared on Wednesdays. For Argentina, there was no record of DOW anomaly. These results change when examined over two sub-periods. Overall, there is absence of monthly anomalies in full period and first sub-period, but January effect is found in Argentina in second sub-period. Additionally, Lukas [106] studied stock market seasonality with focus on DOW effect and January effect by analysing 30 stocks traded on the German Stock Exchange from 1995 to 2009. By adopting a dummy variable approach to investigate Monday effect and the September effect, it was confirmed that the DOW effect started disappearing in the second half of 1990s. Moreover, Martin [107] carried out a comprehensive review of the literature on calendar anomalies from 1915 to 2009. It was found that intraday, holiday and intra month effects still exist, the weekend effect seems to have disappeared and the January effect has halved.

With reference to part of the month anomalies, Ariel [108] discovered that average return in the first half of the month is significantly higher than the remaining half of the month. This finding is supported by Jaffe and Westerfield [109] in Australia, Arsad and Coutts [110] in the UK and Bildik, [111] in Istanbul. Similarly, Kohli and Kohers [112] found that first week in the month possesses average returns that are higher than other weeks using daily returns of the US composite index from 1962 to 1990. In addition, Lukas [113] investigated seasonality in the US stock exchange across six [6] major industrial sectors using descriptive statistics, GARCH(1,1) model and Wald-chi squared test. The study rejected the DOW and January effects in the US stock market but cannot reject the presence of the part of the month anomaly. In addition, Dragan, Martin and Igor [114] examined the DOW effect of stock returns in south eastern Europe, namely Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia and Serbia between 2006 and 2011. Results of dummy regression, analysis of variance and Wald test revealed that the mean daily return of all stock indices is negative on Monday in all markets; lesser and significant on Monday than the other days of the week in Croatia and Bulgaria but insignificant in Macedonia. Likewise, Guglielmo, Luis, Alex and Inna [115] investigated weekend anomalies in the US and Russian stock markets, FOREX market and gold market using the trading-boot approach and fractional integration technique. The study revealed that there is evidence of weekend effect characterised by lowest Monday returns. The evidence is weak in other markets but strong in foreign exchange market as the exploitable profit opportunities based on the weekend anomalies are significant in the FOREX market. Oprea and Ţilică [116] also examined the DOW anomaly in 18 post-communist East European stock markets, namely Bosnia, Bulgaria, Croatia, Czech Republic, Estonia, former Yugoslav Republic of Macedonia, Hungary, Kazakhstan, Latvia, Lithuania, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine from January 2005 to March 2014. The results showed that there is presence of DOW effect in Bosnia, Bulgaria, Croatia, Latvia, Serbia and Slovenia while DOW effect is absent in other markets. More recently, Rossi and Gunardi, [117] studied monthly effect in Spain, France, Italy and Germany from 2001 to 2010. They reported a significant presence of positive April effect in Italy, January effect in Spain and a negative September effect in Germany. In addition, Aziz and Ansari [118] report the presence of the

**69**

liberalisation era.

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

turn-of-the-month (TOM) effect in 11 out of the 12 markets examined in Asia from 2000 to 2015. It can be seen that many studies confirmed significant presence of calendar anomalies in developed and emerging markets. On the other hand, some sub-period studies revealed different behaviour in different sub-periods, while others observed weakening and disappearing of calendar anomalies in some quarters.

The hype of calendar anomaly would mean that other emerging markets and developing African stock markets are not overlooked in the investigation of calendar effects. In the JSE, a negative Monday effect was documented by Bhana [119] who studied two market-wide JSE indices and Treasury bills from 1978 to 1983, using descriptive statistics and OLS regression. Other days were positive with Wednesday having the highest returns. Similarly, Alagidede and Panagiotidis [120] analysed the calendar effect of Ghana Stock Exchange using daily closing prices of all equities, dummy regression and asymmetric GARCH models. The study found the presence of April effect as opposed to the usual January effect and the weekend effects with lower Monday and higher Friday returns. On the other hand, Chukwuogor [121] in another study using Kruskal Wallis and descriptive statistic tests concluded that DOW effect is absent in African countries. The findings could be questioned based on the tests used. Further, Brishan [122] examined calendar anomalies in nine sectors of the Johannesburg stock market using descriptive statistics, OLS regression and two-sample Kolmogorov–Smirnov test. The study concluded that anomalies are a worldwide phenomenon present in developed and emerging markets; there is presence of daily and monthly effects, reducing pre-holiday effects and absence of weekend or January anomalies. In addition, Umar [123] used EGARCH model to estimate the DOW anomaly in mean and variance equations for Nigerian and South African equity markets over pre-liberalisation and post-liberalisation periods. After liberalisation, Nigerian stock market exhibits DOW effect on Fridays and Tuesdays/ Thursdays in the mean and variance equation respectively. South African market exhibits significant DOW effect on Mondays and Fridays in the pre-liberalisation and Thursdays and Fridays respectively in mean and variance equation in the post-

In addition, Julio and Beatriz [124] evaluated six emerging markets (Colombia Indonesia, Vietmen, Egypt, Turkey and South Africa (CIVETS)) stock indices return from inception to 2012 using GARCH and IGARCH models. There is DOW effect in CIVETS; there is evidence of lags in the effect. Bundoo [125], in Mauritius, examined stock indices of 10 companies from 2004 to 2006. Dummy regression results found negative Tuesday returns but positive returns for other days of the week especially significant Friday and September effects. Similarly, dummy variables regression and GARCH models were also adopted by Alagidede [8] in an examination of calendar effect in African countries stock markets using data from inception of the markets to 2006. Holiday effect is reported in South Africa, February effect for Morocco, Kenya, Nigeria and South Africa and January effect in Egypt and Zimbabwe. However, skewness and kurtosis of daily index from 2004 to 2008 were estimated by Shakeel, Douglas and Chimwemwe [126] and it was submitted that Zambia, Botswana, Nigeria and Morocco displayed significantly different DOW effects in the pre and post financial crisis while South Africa did not exhibit such. Furthermore, Derbali and Hallara [127] showed through GARCH [1, 1] and asymmetry GARCH models that positive Thursdays effect is found in Tunisian market stock returns while negative Tuesday effects is present in both return and volatility. More recently, Du Toit, Hall and Pradhan [128] studied eight

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

**3.2 Calendar anomaly from African markets**

Overall, the evidence is mixed.

#### *Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

turn-of-the-month (TOM) effect in 11 out of the 12 markets examined in Asia from 2000 to 2015. It can be seen that many studies confirmed significant presence of calendar anomalies in developed and emerging markets. On the other hand, some sub-period studies revealed different behaviour in different sub-periods, while others observed weakening and disappearing of calendar anomalies in some quarters. Overall, the evidence is mixed.

#### **3.2 Calendar anomaly from African markets**

*Emerging Markets*

January effect has halved.

weak and Fridays showed significant positive average returns. Yet the daily effect has a minor magnitude and relevance for determining average returns compared to monthly effects. Similarly, Rossi [105] examined the calendar anomalies in stock returns in South America from 1997 to 2006, focusing on the existence of DOW effects and the monthly patterns in Argentina, Brazil, Chile and Mexico. In full period, it was concluded that there existed the traditional positive Friday effect in Brazil and in Chile; the returns had been lowest on Mondays. In addition, the study documented positive returns on Wednesdays and Fridays. In Mexico highest returns appeared on Wednesdays. For Argentina, there was no record of DOW anomaly. These results change when examined over two sub-periods. Overall, there is absence of monthly anomalies in full period and first sub-period, but January effect is found in Argentina in second sub-period. Additionally, Lukas [106] studied stock market seasonality with focus on DOW effect and January effect by analysing 30 stocks traded on the German Stock Exchange from 1995 to 2009. By adopting a dummy variable approach to investigate Monday effect and the September effect, it was confirmed that the DOW effect started disappearing in the second half of 1990s. Moreover, Martin [107] carried out a comprehensive review of the literature on calendar anomalies from 1915 to 2009. It was found that intraday, holiday and intra month effects still exist, the weekend effect seems to have disappeared and the

With reference to part of the month anomalies, Ariel [108] discovered that average return in the first half of the month is significantly higher than the remaining half of the month. This finding is supported by Jaffe and Westerfield [109] in Australia, Arsad and Coutts [110] in the UK and Bildik, [111] in Istanbul. Similarly, Kohli and Kohers [112] found that first week in the month possesses average returns that are higher than other weeks using daily returns of the US composite index from 1962 to 1990. In addition, Lukas [113] investigated seasonality in the US stock exchange across six [6] major industrial sectors using descriptive statistics, GARCH(1,1) model and Wald-chi squared test. The study rejected the DOW and January effects in the US stock market but cannot reject the presence of the part of the month anomaly. In addition, Dragan, Martin and Igor [114] examined the DOW effect of stock returns in south eastern Europe, namely Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia and Serbia between 2006 and 2011. Results of dummy regression, analysis of variance and Wald test revealed that the mean daily return of all stock indices is negative on Monday in all markets; lesser and significant on Monday than the other days of the week in Croatia and Bulgaria but insignificant in Macedonia. Likewise, Guglielmo, Luis, Alex and Inna [115] investigated weekend anomalies in the US and Russian stock markets, FOREX market and gold market using the trading-boot approach and fractional integration technique. The study revealed that there is evidence of weekend effect characterised by lowest Monday returns. The evidence is weak in other markets but strong in foreign exchange market as the exploitable profit opportunities based on the weekend anomalies are significant in the FOREX market. Oprea and Ţilică [116] also examined the DOW anomaly in 18 post-communist East European stock markets, namely Bosnia, Bulgaria, Croatia, Czech Republic, Estonia, former Yugoslav Republic of Macedonia, Hungary, Kazakhstan, Latvia, Lithuania, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia and Ukraine from January 2005 to March 2014. The results showed that there is presence of DOW effect in Bosnia, Bulgaria, Croatia, Latvia, Serbia and Slovenia while DOW effect is absent in other markets. More recently, Rossi and Gunardi, [117] studied monthly effect in Spain, France, Italy and Germany from 2001 to 2010. They reported a significant presence of positive April effect in Italy, January effect in Spain and a negative September effect in Germany. In addition, Aziz and Ansari [118] report the presence of the

**68**

The hype of calendar anomaly would mean that other emerging markets and developing African stock markets are not overlooked in the investigation of calendar effects. In the JSE, a negative Monday effect was documented by Bhana [119] who studied two market-wide JSE indices and Treasury bills from 1978 to 1983, using descriptive statistics and OLS regression. Other days were positive with Wednesday having the highest returns. Similarly, Alagidede and Panagiotidis [120] analysed the calendar effect of Ghana Stock Exchange using daily closing prices of all equities, dummy regression and asymmetric GARCH models. The study found the presence of April effect as opposed to the usual January effect and the weekend effects with lower Monday and higher Friday returns. On the other hand, Chukwuogor [121] in another study using Kruskal Wallis and descriptive statistic tests concluded that DOW effect is absent in African countries. The findings could be questioned based on the tests used. Further, Brishan [122] examined calendar anomalies in nine sectors of the Johannesburg stock market using descriptive statistics, OLS regression and two-sample Kolmogorov–Smirnov test. The study concluded that anomalies are a worldwide phenomenon present in developed and emerging markets; there is presence of daily and monthly effects, reducing pre-holiday effects and absence of weekend or January anomalies. In addition, Umar [123] used EGARCH model to estimate the DOW anomaly in mean and variance equations for Nigerian and South African equity markets over pre-liberalisation and post-liberalisation periods. After liberalisation, Nigerian stock market exhibits DOW effect on Fridays and Tuesdays/ Thursdays in the mean and variance equation respectively. South African market exhibits significant DOW effect on Mondays and Fridays in the pre-liberalisation and Thursdays and Fridays respectively in mean and variance equation in the postliberalisation era.

In addition, Julio and Beatriz [124] evaluated six emerging markets (Colombia Indonesia, Vietmen, Egypt, Turkey and South Africa (CIVETS)) stock indices return from inception to 2012 using GARCH and IGARCH models. There is DOW effect in CIVETS; there is evidence of lags in the effect. Bundoo [125], in Mauritius, examined stock indices of 10 companies from 2004 to 2006. Dummy regression results found negative Tuesday returns but positive returns for other days of the week especially significant Friday and September effects. Similarly, dummy variables regression and GARCH models were also adopted by Alagidede [8] in an examination of calendar effect in African countries stock markets using data from inception of the markets to 2006. Holiday effect is reported in South Africa, February effect for Morocco, Kenya, Nigeria and South Africa and January effect in Egypt and Zimbabwe. However, skewness and kurtosis of daily index from 2004 to 2008 were estimated by Shakeel, Douglas and Chimwemwe [126] and it was submitted that Zambia, Botswana, Nigeria and Morocco displayed significantly different DOW effects in the pre and post financial crisis while South Africa did not exhibit such. Furthermore, Derbali and Hallara [127] showed through GARCH [1, 1] and asymmetry GARCH models that positive Thursdays effect is found in Tunisian market stock returns while negative Tuesday effects is present in both return and volatility. More recently, Du Toit, Hall and Pradhan [128] studied eight

sectors of JSE for DOW effect from 1995 to 2016 using GARCH model. The study found a significant positive Monday/Tuesday and negative Friday effect respectively and argued that the DOW effect is significantly influenced by the estimation techniques.

The review of empirical studies so far revealed that calendar anomalies have been documented in the literature. Although, some studies have observed that weekend/DOW and January/monthly effects are disappearing in recent times [107], especially from developed markets and little has been said regarding this in the emerging African markets. The question is whether these anomalies are disappearing from emerging markets too. It can also be observed from a few sub-periods (pre/post crisis for instance) studies that some calendar anomalies appear in one period (say pre crisis) and disappear in the other period (say post) and vice versa. Could calendar anomalies be disappearing and reappearing? It can also be observed that conflicts at times appear in the findings of different studies; for instance, Chukwuogor [121] rejected presence of calendar anomalies in African markets while others accepted it.

#### **4. Empirical studies on AMH**

The majority of the weak-form EMH and calendar anomaly literature largely applies tests and models on the full sample period, assuming that market efficiency is a fixed feature that remains the same, irrespective of stages of market development, or happenings in the market ecology. By so doing, they ended up addressing the issue of market efficiency and anomalies in absolute form and producing conflicting findings. Considering the inconclusiveness of the absolute efficiency tests, Campbell et al. [129] suggest the notion of relative efficiency, a new methodology that permits the level of market efficiency to be tested over time. This is akin to Lo's [130] argument in AMH, that market efficiency should be treated as a feature that changes over time and that is relative to market environment conditions. Available studies on the AMH, which considered alternative approaches to fixed state models; that is the possibility of time-varying efficiency/anomaly and market condition are presented in this section. Unlike the previous sections (2 and 3), where presentation takes market setting into consideration, this section presents a general review because African market studies on this topic seem to be limited.

#### **4.1 Time varying efficiency studies**

The formulation of AMH has ignited the reinvestigation of market efficiency in recent times. The most popular implication of the AMH is that market evolves over time in cyclical version. To examine this assumption, Anatolyev and Gerko [131] investigated AMH in the US stock market and documented that inefficiencies do alternate efficiencies. Similarly, Todea, Ulici and Silaghi [132], using daily indices and portmanteau and bi-correlation tests, revealed that there are sub-periods of non-linear and linear dependency in Australia, Hong Kong, Singapore, Japan, India and Malaysia with changes in degrees of dependencies over time. In another study, Ito, Noda and Wada [133] employed time-varying auto-regressive and moving average models as the estimation tools and concluded that stock market evolves through time and that there are cyclical movements in market efficiency in the US. In Austria and 12 other emerging markets, results of rolling window automatic, wild-bootstrap and joint-sign VR tests showed that developed markets are less predictable compared to less developed markets [134]. Likewise, Urquhart and Hudson [2] employed sub-sample methods to examine the evolution of linear and non-linear

**71**

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

dependence in the long run US, UK and Japanese stock markets data. The findings from the linear runs, autocorrelation and VR tests showed that all the markets undergo eras of dependence and independence, while findings from the non-linear tests revealed high dependence in all windows. In addition, Mobarek and Fiorante [135] tested the same hypothesis in the BRIC, Japan, UK, and US using autocorrelation, run and VR tests in five-year fixed length moving windows. It was submitted that the markets are trending towards higher levels of efficiency. In the same period, Dourad and Tabak [136] examined daily stock index return in Brazil over the 1991 to 2012 period using rolling wild bootstrap VR statistic and generalised spectral to test linear and non-linear dependencies respectively. It was found that RWH is present but varies in line with the AMH. Further, rolling automatic VR and generalised spectra tests are adopted by Shi, Jiang and Zhou [137] in China using daily and weekly data from 1990 to 2015. They found that the return predictability changes through

time and high predictability were discovered around 2007 financial crisis.

exploiting changing predictability in the FTSE real estate markets.

et al. [150] suggest that US and Chinese stock markets are adaptive.

It can be seen that most of the above studies concentrate on the developed markets while there are limited empirical studies on time-varying efficiency in emerging and African markets. One the first studies in the African stock market was carried out by Jefferis and Smith [37] who examined evolving efficiency and used daily indices from 1990 to 2001 and GARCH with time-varying factor. They submitted that South Africa is efficient right through the period; Egypt, Morocco and

In the case of emerging markets, Ahmad, Shahid, Ateeq, Zubair and Nazir [145] focus on Asia and used four popular linear tests and sub-period approaches. They established that the Indian and Pakistan stock markets are adaptive, fluctuating between inefficiency and efficiency. Kayani, Ayub, and Jadoon [146] also documented a repetitive pattern of efficiency and inefficiency in Pakistan stock exchange using a rolling nonlinear autoregressive neural network. Applying varying Hurst exponents in the Indian market, Patil and Rastogi [147] assert that arbitrage chances emerge from time to time in line with the AMH and a nonlinear cross-correlation exists in the price and volume series. In a sample of 384, Indian investors, Mushinada [148] provides a proof of existence of investors rationality and biases in an adaptive manner. Comparing developed and emerging markets, Jiang and Li [149] indicated that the Japanese and US stock exchanges are efficient in the normal market condition, while Chinese market was found to be generally inefficient. Conversely, Yang

It is noteworthy that the study of AMH has been introduced to markets other than stock markets. For instance, Charfeddine, et al. [138] employed state-space GARCH-M model, which revealed time-varying efficiency in the developed US and UK and emerging South Africa and India bond markets with the US market being the most efficient. Similarly, Kumar [139] validated the AMH in the Indian FOREX market using data from 1999 to 2017. Based on the application of non-overlapping sub-period and rolling automatic VR and Belaire-Franch and Contreras [140] rankbased tests, they found that though the market is not efficient in full sample, it varies in the level of efficiency over time depending on occasion of fundamental macroeconomic events. In addition, Urquhart [141] later studied the time-varying behaviour of precious metal returns via the application of rolling window Hurst exponent, VR and BDS tests and showed that the market is not static but time-varying, with the silver market being less predictable and platinum being most predictable. Shahid et al. [142] indicated that Bitcoin market is inefficient, rather than adaptive using a series of linear and nonlinear tests. Shahid et al. [142] confirms the applicability of AMH in the commodity markets while anomalies and efficiency are said to interchange on UK stock market according to Rosini and Shenai [143]. Almudhaf, Aroul and Hansz, [144] suggest that technical trading moving average are capable of

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

#### *Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

*Emerging Markets*

techniques.

while others accepted it.

**4. Empirical studies on AMH**

**4.1 Time varying efficiency studies**

sectors of JSE for DOW effect from 1995 to 2016 using GARCH model. The study found a significant positive Monday/Tuesday and negative Friday effect respectively and argued that the DOW effect is significantly influenced by the estimation

The review of empirical studies so far revealed that calendar anomalies have been documented in the literature. Although, some studies have observed that weekend/DOW and January/monthly effects are disappearing in recent times [107], especially from developed markets and little has been said regarding this in the emerging African markets. The question is whether these anomalies are disappearing from emerging markets too. It can also be observed from a few sub-periods (pre/post crisis for instance) studies that some calendar anomalies appear in one period (say pre crisis) and disappear in the other period (say post) and vice versa. Could calendar anomalies be disappearing and reappearing? It can also be observed that conflicts at times appear in the findings of different studies; for instance, Chukwuogor [121] rejected presence of calendar anomalies in African markets

The majority of the weak-form EMH and calendar anomaly literature largely applies tests and models on the full sample period, assuming that market efficiency is a fixed feature that remains the same, irrespective of stages of market development, or happenings in the market ecology. By so doing, they ended up addressing the issue of market efficiency and anomalies in absolute form and producing conflicting findings. Considering the inconclusiveness of the absolute efficiency tests, Campbell et al. [129] suggest the notion of relative efficiency, a new methodology that permits the level of market efficiency to be tested over time. This is akin to Lo's [130] argument in AMH, that market efficiency should be treated as a feature that changes over time and that is relative to market environment conditions. Available studies on the AMH, which considered alternative approaches to fixed state models; that is the possibility of time-varying efficiency/anomaly and market condition are presented in this section. Unlike the previous sections (2 and 3), where presentation takes market setting into consideration, this section presents a general review

The formulation of AMH has ignited the reinvestigation of market efficiency in recent times. The most popular implication of the AMH is that market evolves over time in cyclical version. To examine this assumption, Anatolyev and Gerko [131] investigated AMH in the US stock market and documented that inefficiencies do alternate efficiencies. Similarly, Todea, Ulici and Silaghi [132], using daily indices and portmanteau and bi-correlation tests, revealed that there are sub-periods of non-linear and linear dependency in Australia, Hong Kong, Singapore, Japan, India and Malaysia with changes in degrees of dependencies over time. In another study, Ito, Noda and Wada [133] employed time-varying auto-regressive and moving average models as the estimation tools and concluded that stock market evolves through time and that there are cyclical movements in market efficiency in the US. In Austria and 12 other emerging markets, results of rolling window automatic, wild-bootstrap and joint-sign VR tests showed that developed markets are less predictable compared to less developed markets [134]. Likewise, Urquhart and Hudson [2] employed sub-sample methods to examine the evolution of linear and non-linear

because African market studies on this topic seem to be limited.

**70**

dependence in the long run US, UK and Japanese stock markets data. The findings from the linear runs, autocorrelation and VR tests showed that all the markets undergo eras of dependence and independence, while findings from the non-linear tests revealed high dependence in all windows. In addition, Mobarek and Fiorante [135] tested the same hypothesis in the BRIC, Japan, UK, and US using autocorrelation, run and VR tests in five-year fixed length moving windows. It was submitted that the markets are trending towards higher levels of efficiency. In the same period, Dourad and Tabak [136] examined daily stock index return in Brazil over the 1991 to 2012 period using rolling wild bootstrap VR statistic and generalised spectral to test linear and non-linear dependencies respectively. It was found that RWH is present but varies in line with the AMH. Further, rolling automatic VR and generalised spectra tests are adopted by Shi, Jiang and Zhou [137] in China using daily and weekly data from 1990 to 2015. They found that the return predictability changes through time and high predictability were discovered around 2007 financial crisis.

It is noteworthy that the study of AMH has been introduced to markets other than stock markets. For instance, Charfeddine, et al. [138] employed state-space GARCH-M model, which revealed time-varying efficiency in the developed US and UK and emerging South Africa and India bond markets with the US market being the most efficient. Similarly, Kumar [139] validated the AMH in the Indian FOREX market using data from 1999 to 2017. Based on the application of non-overlapping sub-period and rolling automatic VR and Belaire-Franch and Contreras [140] rankbased tests, they found that though the market is not efficient in full sample, it varies in the level of efficiency over time depending on occasion of fundamental macroeconomic events. In addition, Urquhart [141] later studied the time-varying behaviour of precious metal returns via the application of rolling window Hurst exponent, VR and BDS tests and showed that the market is not static but time-varying, with the silver market being less predictable and platinum being most predictable. Shahid et al. [142] indicated that Bitcoin market is inefficient, rather than adaptive using a series of linear and nonlinear tests. Shahid et al. [142] confirms the applicability of AMH in the commodity markets while anomalies and efficiency are said to interchange on UK stock market according to Rosini and Shenai [143]. Almudhaf, Aroul and Hansz, [144] suggest that technical trading moving average are capable of exploiting changing predictability in the FTSE real estate markets.

In the case of emerging markets, Ahmad, Shahid, Ateeq, Zubair and Nazir [145] focus on Asia and used four popular linear tests and sub-period approaches. They established that the Indian and Pakistan stock markets are adaptive, fluctuating between inefficiency and efficiency. Kayani, Ayub, and Jadoon [146] also documented a repetitive pattern of efficiency and inefficiency in Pakistan stock exchange using a rolling nonlinear autoregressive neural network. Applying varying Hurst exponents in the Indian market, Patil and Rastogi [147] assert that arbitrage chances emerge from time to time in line with the AMH and a nonlinear cross-correlation exists in the price and volume series. In a sample of 384, Indian investors, Mushinada [148] provides a proof of existence of investors rationality and biases in an adaptive manner. Comparing developed and emerging markets, Jiang and Li [149] indicated that the Japanese and US stock exchanges are efficient in the normal market condition, while Chinese market was found to be generally inefficient. Conversely, Yang et al. [150] suggest that US and Chinese stock markets are adaptive.

It can be seen that most of the above studies concentrate on the developed markets while there are limited empirical studies on time-varying efficiency in emerging and African markets. One the first studies in the African stock market was carried out by Jefferis and Smith [37] who examined evolving efficiency and used daily indices from 1990 to 2001 and GARCH with time-varying factor. They submitted that South Africa is efficient right through the period; Egypt, Morocco and

Nigeria are moving towards efficiency while Zimbabwe, Mauritius and Kenya are inefficient all through. Likewise, Smith and Dyakova [151] applied linear VR tests to daily index between 1998 and 2011. Fixed-length rolling sub-period window analyses disclosed successive periods of inefficiency and efficiency with Egypt, South Africa and Tunisia found to be less predictable while Kenya, Zambia and Nigeria are the most predictable. Seetharam (1509) examined daily, weekly and monthly indices of 44 shares and six local indices of JSE from 1997 to 2014 using traditional linear tests, Hurst exponent, non-linear BDS and artificial neural network and subsample analysis. The outcome described the JSE as a market with changing levels of efficiency through time. In Egypt, Botswana, Morocco, Kenya, Nigeria, Mauritius, South Africa, Tunisia; Gyamfi, Kyei, Gill [63] provide support for AMH as markets, which were found to be inefficient in absolute forms revealed periods of unpredictability in rolling window generalised spectra test results. The same finding was reported in a separate study of Ghana stock market using rolling window VR and generalised spectra tests and index return data from 2011 to 2015 [152]. In addition, Heymans and Santana [153] used rolling window of the three versions of VR test to examine AMH in JSE ALSI and other smaller and sectoral indices. They found that the broad market index is ranked more efficient than the others, while the smaller and younger indices from communication, small cap, media and automobiles and parts are found to be most inefficient. However, all the indices exhibit cyclicality in the level of efficiency over time. It can be observed that most of the existing studies on AMH were carried out in markets other than Africa, although there are few studies covering African markets. In this context, Obalade and Muzindutsi [154] asserted that three African stock markets are adaptive from linear and nonlinear point of view. At this stage, an investigation of an evolving and changing nature of efficiency in African stock markets has not received adequate attention within the framework of AMH. In addition, there is need to compare and exploit linear and non-linear tests because Lim and Hooy [155], among others, affirmed that non-linear dependence has been revealed in stock returns where linear tests showed absence of dependence. In the presence of non-linear dependence, markets cannot be said to be efficient.

#### **4.2 Return predictability and market condition studies**

Another inference of the new AMH is that the fluctuation in efficiency arises from changes in market conditions, although the hypothesis did not itemise the exact makeup of market conditions or its expected relation with return predictability. Researchers, however, have relied on the literature in determining what constitutes market conditions. For instance, where the stock market price or return behaviour or trend is considered, the market conditions may be defined as up or down or bull, bear and normal [156, 157]. Lo [158] also mentioned external environments such as political, economic, financial, cultural environments and so on. One of the foremost attempts in the direction of changing efficiency cum market condition is the study by Kim et al. [33], which applied automatic VR and portmanteau tests to generate predictability and OLS regression to examine the effect of market conditions. In consonance with the AMH, they concluded that predictability varies over time and that market conditions such as bubbles, normal, political and economic crises influence return predictability in the US stock market using index return from 1900 to 2009.

In addition, the application of VR and portmanteau test by Zhou and Lee [159] revealed declining predictability over time. The dummy OLS regression further showed that the US real estate market efficiency is influenced by market development, inflation, volatility and regulatory changes from 1980 to 2009. In a similar study, Urquhart and McGroarty [160] used the VR and BDS tests, in 2-year fixed length moving window and dummy regression to analyse daily indices in the US,

**73**

anomalies.

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

UK, Japan, and Europe. Changing return predictability is reported in different markets overtime; a behaviour, which can be explained by up, down, bull, bear, normal and volatile conditions. These findings are supported by Soteriou and Svenssion [161] in the Swedish market using joint rank and sign tests, dummy regression, BDS test, autoregressive-generalised autoregressive conditional heteroscedasticity (AR-GARCH) filter and OLS. It can be seen from the review in this section that studies on the effect of market conditions on market efficiency have largely been a developed market affair. Thus, there is a need for further study on other emerging markets such as the African stock markets. In this context, Obalade and Muzindutsi [162, 163] found that certain market conditions are responsible for

Owing to its dominance in the determination of weak-form inefficiency, calendar anomalies are now also being evaluated within the time-varying approach of AMH. Although some of the studies [60, 164] have applied the rolling window approach out of curiosity to question the persistence of the calendar anomalies without mentioning of the AMH. Coincidentally, their approach is in line with the AMH. Alagidede and Panagiotidis [60] seem to be the earliest recognised African stock market calendar anomaly study where a rolling window analysis was mentioned to examine the persistence of DOW effect in Ghana. The study employed OLS, GARCH, EGARCH and TGARCH and submitted that there is significant Friday effect in the Ghana stock exchange in absolute form, however, they concluded that April and DOW effect evaporates with rolling window estimation. Additionally, Borges [164] employed GARCH [1, 1] to investigate 17 European stock market indices and documented evidence of cross-country rather than across-the-board calendar anomalies, especially in August and September. He submitted that the identified anomalies vary with time and could be more as a result of data mining due to high instability in the behaviours of the anomalies over time. Based on Borges' finding, Ching [165] states, "the calendar effects may only be a 'chimera' delivered by intensive data mining as they are country-specific results and may not be stable over time" (p. 1). Similarly, Urquhart [166] employed sub-period analyses to evaluate calendar anomalies within the AMH framework and found that January and Monday effects all change over time while TOM effect remains at all times. Further, Urquhart and McGroarty [167] also showed in the US that the behaviour of the Monday, January, Halloween and the TOM calendar anomalies change over time using rolling window estimation for the S&P 500 index. This study confirmed that AMH provides better descriptions of the behaviour of the studied calendar

Additionally, Bampinas, Fountas and Panagiotidis [168] used daily data and GARCH [1, 1], TGARCH and EGARCH to check the DOW effect in global, European and country-specific real estate indices from 1990 to 2010. The full sample analysis indicates the presence of the effect while about 75 percent of the rolling windows reject the presence of the anomaly. Hence, they submit that the effect could be due to data mining and sample selection bias criticism. This conclusion supported Borges' [164] study in European markets. Similarly, various GARCH family models are analysed in rolling windows by Bampinas, Fountas and Panagiotidis [168] to establish that the DOW effect, found in two regional and six national indices and Monday effect found in three national indices, all experienced significant reduction in power when rolling window analyses were carried out. Also, eight Dow Jones Islamic indices were studied by Osamah and Ali [169] using sub-period mean–variance and stochastic dominance analyses and the findings

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

changing efficiency of selected African markets.

**4.3 Time-varying calendar anomalies studies**

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

*Emerging Markets*

Nigeria are moving towards efficiency while Zimbabwe, Mauritius and Kenya are inefficient all through. Likewise, Smith and Dyakova [151] applied linear VR tests to daily index between 1998 and 2011. Fixed-length rolling sub-period window analyses disclosed successive periods of inefficiency and efficiency with Egypt, South Africa and Tunisia found to be less predictable while Kenya, Zambia and Nigeria are the most predictable. Seetharam (1509) examined daily, weekly and monthly indices of 44 shares and six local indices of JSE from 1997 to 2014 using traditional linear tests, Hurst exponent, non-linear BDS and artificial neural network and subsample analysis. The outcome described the JSE as a market with changing levels of efficiency through time. In Egypt, Botswana, Morocco, Kenya, Nigeria, Mauritius, South Africa, Tunisia; Gyamfi, Kyei, Gill [63] provide support for AMH as markets, which were found to be inefficient in absolute forms revealed periods of unpredictability in rolling window generalised spectra test results. The same finding was reported in a separate study of Ghana stock market using rolling window VR and generalised spectra tests and index return data from 2011 to 2015 [152]. In addition, Heymans and Santana [153] used rolling window of the three versions of VR test to examine AMH in JSE ALSI and other smaller and sectoral indices. They found that the broad market index is ranked more efficient than the others, while the smaller and younger indices from communication, small cap, media and automobiles and parts are found to be most inefficient. However, all the indices exhibit cyclicality in the level of efficiency over time. It can be observed that most of the existing studies on AMH were carried out in markets other than Africa, although there are few studies covering African markets. In this context, Obalade and Muzindutsi [154] asserted that three African stock markets are adaptive from linear and nonlinear point of view. At this stage, an investigation of an evolving and changing nature of efficiency in African stock markets has not received adequate attention within the framework of AMH. In addition, there is need to compare and exploit linear and non-linear tests because Lim and Hooy [155], among others, affirmed that non-linear dependence has been revealed in stock returns where linear tests showed absence of dependence. In the presence of non-linear dependence, markets cannot be said to be efficient.

**4.2 Return predictability and market condition studies**

Another inference of the new AMH is that the fluctuation in efficiency arises from changes in market conditions, although the hypothesis did not itemise the exact makeup of market conditions or its expected relation with return predictability. Researchers, however, have relied on the literature in determining what constitutes market conditions. For instance, where the stock market price or return behaviour or trend is considered, the market conditions may be defined as up or down or bull, bear and normal [156, 157]. Lo [158] also mentioned external environments such as political, economic, financial, cultural environments and so on. One of the foremost attempts in the direction of changing efficiency cum market condition is the study by Kim et al. [33], which applied automatic VR and portmanteau tests to generate predictability and OLS regression to examine the effect of market conditions. In consonance with the AMH, they concluded that predictability varies over time and that market conditions such as bubbles, normal, political and economic crises influence return predictability in the US stock market using index return from 1900 to 2009. In addition, the application of VR and portmanteau test by Zhou and Lee [159] revealed declining predictability over time. The dummy OLS regression further showed that the US real estate market efficiency is influenced by market development, inflation, volatility and regulatory changes from 1980 to 2009. In a similar study, Urquhart and McGroarty [160] used the VR and BDS tests, in 2-year fixed length moving window and dummy regression to analyse daily indices in the US,

**72**

UK, Japan, and Europe. Changing return predictability is reported in different markets overtime; a behaviour, which can be explained by up, down, bull, bear, normal and volatile conditions. These findings are supported by Soteriou and Svenssion [161] in the Swedish market using joint rank and sign tests, dummy regression, BDS test, autoregressive-generalised autoregressive conditional heteroscedasticity (AR-GARCH) filter and OLS. It can be seen from the review in this section that studies on the effect of market conditions on market efficiency have largely been a developed market affair. Thus, there is a need for further study on other emerging markets such as the African stock markets. In this context, Obalade and Muzindutsi [162, 163] found that certain market conditions are responsible for changing efficiency of selected African markets.

#### **4.3 Time-varying calendar anomalies studies**

Owing to its dominance in the determination of weak-form inefficiency, calendar anomalies are now also being evaluated within the time-varying approach of AMH. Although some of the studies [60, 164] have applied the rolling window approach out of curiosity to question the persistence of the calendar anomalies without mentioning of the AMH. Coincidentally, their approach is in line with the AMH. Alagidede and Panagiotidis [60] seem to be the earliest recognised African stock market calendar anomaly study where a rolling window analysis was mentioned to examine the persistence of DOW effect in Ghana. The study employed OLS, GARCH, EGARCH and TGARCH and submitted that there is significant Friday effect in the Ghana stock exchange in absolute form, however, they concluded that April and DOW effect evaporates with rolling window estimation. Additionally, Borges [164] employed GARCH [1, 1] to investigate 17 European stock market indices and documented evidence of cross-country rather than across-the-board calendar anomalies, especially in August and September. He submitted that the identified anomalies vary with time and could be more as a result of data mining due to high instability in the behaviours of the anomalies over time. Based on Borges' finding, Ching [165] states, "the calendar effects may only be a 'chimera' delivered by intensive data mining as they are country-specific results and may not be stable over time" (p. 1). Similarly, Urquhart [166] employed sub-period analyses to evaluate calendar anomalies within the AMH framework and found that January and Monday effects all change over time while TOM effect remains at all times. Further, Urquhart and McGroarty [167] also showed in the US that the behaviour of the Monday, January, Halloween and the TOM calendar anomalies change over time using rolling window estimation for the S&P 500 index. This study confirmed that AMH provides better descriptions of the behaviour of the studied calendar anomalies.

Additionally, Bampinas, Fountas and Panagiotidis [168] used daily data and GARCH [1, 1], TGARCH and EGARCH to check the DOW effect in global, European and country-specific real estate indices from 1990 to 2010. The full sample analysis indicates the presence of the effect while about 75 percent of the rolling windows reject the presence of the anomaly. Hence, they submit that the effect could be due to data mining and sample selection bias criticism. This conclusion supported Borges' [164] study in European markets. Similarly, various GARCH family models are analysed in rolling windows by Bampinas, Fountas and Panagiotidis [168] to establish that the DOW effect, found in two regional and six national indices and Monday effect found in three national indices, all experienced significant reduction in power when rolling window analyses were carried out. Also, eight Dow Jones Islamic indices were studied by Osamah and Ali [169] using sub-period mean–variance and stochastic dominance analyses and the findings

supported varying behaviour of calendar effects in line with the AMH. In addition, Zhang, Yongzen and Jianghong [170], via the application of GARCH model, established the presence of DOW effect in 25 countries (made up of 13 developed and 15 developing markets), the anomalies, which disappear with rolling windows in all except six countries. Moreover, Evanthia [171] showed that DOW is present in all the sectors and the general S&P500 indices using non-linear models (EGARCH and TGARCH) in full sample but only one-fifth of the total number of regressions/windows are associated with the anomaly. Hence, the study concluded that the anomalies are weak and time-variant as opposed to being persistent. Similarly, Obalade and Muzindutsi [172] provided supports for time-varying calendar anomalies in African stock markets by applying GARCH family models. Overall, the studies of time-varying AMH are not only few, but many of them (apart from [166, 167, 169, 171, 172] who supported AMH), have not supported the presence of calendar anomaly because only a small proportion of the estimated windows or sub-periods confirms the identified anomaly.

#### **4.4 Calendar anomalies and market condition studies**

By inference, AMH also portends that variation in calendar anomaly would emanate from changing market conditions. In line with the reasoning, Agnani and Aray [173] applied two state Markov-switching models (MSMs) and documented time-changing January effect in the US. The effect is found to be pronounced during the period of high volatility. Similarly, Urquhart and McGroarty [167] investigated time-varying calendar anomaly in the US market using daily and monthly index from 1900 to 2013. Results of GARCH (1,1) and Kruskal–Wallis test in 19-years equal length sub-samples and 5-year fixed length rolling window disclosed that calendar anomalies vary over time. When market conditions were taken into consideration, the study further showed that calendar anomalies are influenced by conditions such as the up, down bull, bear, normal, expansionary and contractionary, republican and democrat's dispensation. These findings were supported by Shahid and Sattar [174] in Pakistan who documented that the behaviour of calendar anomalies (Monday, January, TOM, Holiday and Ramadan) change through time and under different market conditions, using similar methodology. Evanthia [171] further examined the presence of DOW effect in relation to recession, uncertainty, liquidity and bearish sentiment. The study submitted that both the positive and negative DOW effect are more likely in the boom than in recession, Monday effect is highly correlated with the uncertainty index, weak relationships exist between DOW effect and liquidity/trading volume and negative DOW effect is associated with an increase in bearish investors. Recently, Rich [175] in JSE applied MSMs and showed that there is no clear evidence of DOW effect under any market condition, but found a negative January effect in bull, negative July effect in bear and positive August effect in bull regimes. It must be noted that studies reviewed in this subsection are not linked with AMH except the Urquhart and McGroarty [167] and Shahid and Sattar [174]. In support of responsiveness of calendar anomalies to changing regimes of AMH, Obalade and Muzindutsi [176, 177] applied Markov-Switching Models in selected African markets. In essence, there is a dearth of study of calendar anomalies cum market condition and only a few studies seem to support AMH.

#### **4.5 Gap in AMH empirical studies**

The gaps in the subject under review are depicted by the fact that while the empirical investigations of market efficiency and calendar anomalies under AMH are limited, African market studies are rare, the contributions in the last two years,

**75**

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

notwithstanding. It can also be seen that recognised studies on the effect of market conditions on market efficiency or return predictability in other markets, other than US, UK, Japan and Germany and Sweden, are needed, thereby creating a need for further studies in emerging and African markets. Further, the review shows that the consideration of time-changing calendar anomaly is new and the investigation is limited to a few markets. Just as the EMH, which has taken many years of investigation, there are still a lot of markets to cover in the examination of calendar anomalies within the AMH framework. Lastly, calendar anomalies could also be investigated vis-à-vis market conditions. Obviously, there is a dearth of empirical study on the explanatory power of market conditions on the behaviour of calendar anomalies globally, especially in the small and so-called inefficient markets like African stock markets. The identified gaps suggest that further investigation of AMH in smaller markets can shed more light on the topic. At this stage, an investigation of changing nature of efficiency and anomalies in response to market conditions in African stock markets has not received adequate attention under AMH. An attempt in this direction will make meaningful contribution to the existing body of knowledge on AMH and bridge the empirical literature gaps between developed

This chapter presents the review of empirical studies on weak-form EMH and calendar anomalies, both in absolute form and under AMH. It can be seen from the review that evaluation of market efficiency is a controversial subject in the literature. While there is preponderance of linear dependency tests in the early periods (believed to be unable to capture non-linear dependency), there has also been an upsurge in the adoption of non-linear testing tools later. In the same manner, investigation of calendar anomalies has evolved from the linear OLS test to the nonlinear types of GARCH family models. The rationale for the influx of non-linear tests and models is due to the realisation of the fact that many aspects of economic behaviour may not be linear. Since the existence of non-linearity also disagrees with the EMH and gives market participants an occasion to earn surplus profits, reliance on linear testing tools alone, to determine predictability, may lead to wrong inferences. Thus, reviewed studies revealed that (i) combining both the linear and nonlinear testing tools or one that is able to pick both non-linear and linear dependence will ensure the avoidance of possible wrong inferences. Generally, the linear tests of EMH have produced conflicting findings, although developed markets have been found to be more efficient than other markets. On the other hand, non-linear tests, in most cases found non-linear dependence, whether the market is developed or developing. Hence, (ii) the issue of weak-form efficiency has remained inconclusive and its problem has been traced to the approach of evaluating EMH and calendar anomalies in absolute form. Thus, a market when investigated for dependency and predictability can be found to be either efficient or inefficient. This assumption can be described as viewing efficiency as absolute or all-or-nothing. In other words, the

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

markets and African Markets.

**5. Summary and concluding remarks**

EMH can be described as a fixed or final state model [178].

Due to the defect of the absolute efficiency and calendar anomaly studies, Campbell et al. [129] and Lo [9] have advocated evolving efficiency and timevarying efficiency respectively as the alternatives to the traditional EMH methods. Consequently, there are a gradually increasing number of investigations of timevarying efficiency and calendar anomaly in recent times. Some efficiencies/anomalies found in one sub-period sometimes change/disappear in another sub-period; seasonal effects such as weekend/DOW and January/monthly effects are said to

#### *Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

*Emerging Markets*

sub-periods confirms the identified anomaly.

**4.4 Calendar anomalies and market condition studies**

supported varying behaviour of calendar effects in line with the AMH. In addition, Zhang, Yongzen and Jianghong [170], via the application of GARCH model, established the presence of DOW effect in 25 countries (made up of 13 developed and 15 developing markets), the anomalies, which disappear with rolling windows in all except six countries. Moreover, Evanthia [171] showed that DOW is present in all the sectors and the general S&P500 indices using non-linear models (EGARCH and TGARCH) in full sample but only one-fifth of the total number of regressions/windows are associated with the anomaly. Hence, the study concluded that the anomalies are weak and time-variant as opposed to being persistent. Similarly, Obalade and Muzindutsi [172] provided supports for time-varying calendar anomalies in African stock markets by applying GARCH family models. Overall, the studies of time-varying AMH are not only few, but many of them (apart from [166, 167, 169, 171, 172] who supported AMH), have not supported the presence of calendar anomaly because only a small proportion of the estimated windows or

By inference, AMH also portends that variation in calendar anomaly would emanate from changing market conditions. In line with the reasoning, Agnani and Aray [173] applied two state Markov-switching models (MSMs) and documented time-changing January effect in the US. The effect is found to be pronounced during the period of high volatility. Similarly, Urquhart and McGroarty [167] investigated time-varying calendar anomaly in the US market using daily and monthly index from 1900 to 2013. Results of GARCH (1,1) and Kruskal–Wallis test in 19-years equal length sub-samples and 5-year fixed length rolling window disclosed that calendar anomalies vary over time. When market conditions were taken into consideration, the study further showed that calendar anomalies are influenced by conditions such as the up, down bull, bear, normal, expansionary and contractionary, republican and democrat's dispensation. These findings were supported by Shahid and Sattar [174] in Pakistan who documented that the behaviour of calendar anomalies (Monday, January, TOM, Holiday and Ramadan) change through time and under different market conditions, using similar methodology. Evanthia [171] further examined the presence of DOW effect in relation to recession, uncertainty, liquidity and bearish sentiment. The study submitted that both the positive and negative DOW effect are more likely in the boom than in recession, Monday effect is highly correlated with the uncertainty index, weak relationships exist between DOW effect and liquidity/trading volume and negative DOW effect is associated with an increase in bearish investors. Recently, Rich [175] in JSE applied MSMs and showed that there is no clear evidence of DOW effect under any market condition, but found a negative January effect in bull, negative July effect in bear and positive August effect in bull regimes. It must be noted that studies reviewed in this subsection are not linked with AMH except the Urquhart and McGroarty [167] and Shahid and Sattar [174]. In support of responsiveness of calendar anomalies to changing regimes of AMH, Obalade and Muzindutsi [176, 177] applied Markov-Switching Models in selected African markets. In essence, there is a dearth of study of calendar anomalies cum market condition and only a few studies seem to support AMH.

The gaps in the subject under review are depicted by the fact that while the empirical investigations of market efficiency and calendar anomalies under AMH are limited, African market studies are rare, the contributions in the last two years,

**74**

**4.5 Gap in AMH empirical studies**

notwithstanding. It can also be seen that recognised studies on the effect of market conditions on market efficiency or return predictability in other markets, other than US, UK, Japan and Germany and Sweden, are needed, thereby creating a need for further studies in emerging and African markets. Further, the review shows that the consideration of time-changing calendar anomaly is new and the investigation is limited to a few markets. Just as the EMH, which has taken many years of investigation, there are still a lot of markets to cover in the examination of calendar anomalies within the AMH framework. Lastly, calendar anomalies could also be investigated vis-à-vis market conditions. Obviously, there is a dearth of empirical study on the explanatory power of market conditions on the behaviour of calendar anomalies globally, especially in the small and so-called inefficient markets like African stock markets. The identified gaps suggest that further investigation of AMH in smaller markets can shed more light on the topic. At this stage, an investigation of changing nature of efficiency and anomalies in response to market conditions in African stock markets has not received adequate attention under AMH. An attempt in this direction will make meaningful contribution to the existing body of knowledge on AMH and bridge the empirical literature gaps between developed markets and African Markets.

#### **5. Summary and concluding remarks**

This chapter presents the review of empirical studies on weak-form EMH and calendar anomalies, both in absolute form and under AMH. It can be seen from the review that evaluation of market efficiency is a controversial subject in the literature. While there is preponderance of linear dependency tests in the early periods (believed to be unable to capture non-linear dependency), there has also been an upsurge in the adoption of non-linear testing tools later. In the same manner, investigation of calendar anomalies has evolved from the linear OLS test to the nonlinear types of GARCH family models. The rationale for the influx of non-linear tests and models is due to the realisation of the fact that many aspects of economic behaviour may not be linear. Since the existence of non-linearity also disagrees with the EMH and gives market participants an occasion to earn surplus profits, reliance on linear testing tools alone, to determine predictability, may lead to wrong inferences. Thus, reviewed studies revealed that (i) combining both the linear and nonlinear testing tools or one that is able to pick both non-linear and linear dependence will ensure the avoidance of possible wrong inferences. Generally, the linear tests of EMH have produced conflicting findings, although developed markets have been found to be more efficient than other markets. On the other hand, non-linear tests, in most cases found non-linear dependence, whether the market is developed or developing. Hence, (ii) the issue of weak-form efficiency has remained inconclusive and its problem has been traced to the approach of evaluating EMH and calendar anomalies in absolute form. Thus, a market when investigated for dependency and predictability can be found to be either efficient or inefficient. This assumption can be described as viewing efficiency as absolute or all-or-nothing. In other words, the EMH can be described as a fixed or final state model [178].

Due to the defect of the absolute efficiency and calendar anomaly studies, Campbell et al. [129] and Lo [9] have advocated evolving efficiency and timevarying efficiency respectively as the alternatives to the traditional EMH methods. Consequently, there are a gradually increasing number of investigations of timevarying efficiency and calendar anomaly in recent times. Some efficiencies/anomalies found in one sub-period sometimes change/disappear in another sub-period; seasonal effects such as weekend/DOW and January/monthly effects are said to

be disappearing or weaker in some markets. This observation suggests that AMH approach could be more appropriate but this will require investigation of several sub-samples. Rolling analyses has so far been pointed out as the best-developed class of alternative tests to the absolute approach, while researchers are still facing the task of identifying models best suited to capture cycles or dynamics inherent in the AMH. While the investigation started from developed markets like the US, other emerging markets are now receiving a fair share of interest from researchers. Obviously, there is now a shift from absolute framework to time-varying frameworks. Recent empirical evidences are suggesting that AMH could be a more appropriate approach to describe the stock returns patterns. Consequently, stock market efficiencies and anomalies are now being linked to market conditions. However, very few studies have tested this in the developing markets. Thus, there is a need for further studies from African stock markets that are often considered to be illiquid and inefficient.

#### **Author details**

Adefemi A. Obalade and Paul-Francois Muzindutsi\* University of KwaZulu-Natal, Durban, South Africa

\*Address all correspondence to: muzindutsip@ukzn.ac.za

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

**77**

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

[12] Roberts HV. Statistical Versus Clinical Prediction of the Stock Market.

[14] Borges MR. Efficient market hypothesis in European stock markets. The European Journal of Finance.

[15] De Gooijer JG. Testing non-

[16] Serletis A, Shintani M. No evidence of chaos but some evidence of dependence in the US stock market. Chaos, Solitons & Fractals.

[17] Working H. A Random-Difference Series for Use in the Analysis of Time Series. Journal of the American Statistical Association.

linearities in world stock market prices. Economics Letters. 1989;31(1):31-5.

[18] Kendall MG. The Advanced Theory of Statistics. London: Griffin & Co.;

[19] Osborne MFM. Periodic Structure in the Brownian Motion of Stock Prices. Operations Research. 1962;10(3):345-79.

[20] Kendall MG, Hill AB. The Analysis of Economic Time-Series-Part I: Prices. Journal of the Royal Statistical Society Series A (General). 1953;116(1):11-34.

[21] Moore BA. A Statistical Analysis of Common Stock Prices. . Chicago:

[22] Jennergren LP, Korsvold PE. Price Formation in the Norwegian and Swedish Stock Markets: Some Random Walk Tests. The Swedish Journal of Economics. 1974;76(2):171-85.

University of Chicago; 1962.

2010;16(7):711-26.

2003;17(2):449-54.

1934;29(185):11-24.

1943.

[13] Cooper JCB. World stock markets: some random walk tests. Applied Economics. 1982;14(5):515-31.

1967.

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

[1] Fama EF. The Behavior of Stock-Market Prices. The Journal of Business.

[2] Urquhart A, Hudson R. Efficient or adaptive markets? Evidence from major stock markets using very long run historic data. International Review of Financial Analysis. 2013;28:130-42.

[3] Kok S, Munir Q, Bahron A, editors. Technical Anomalies: A Theoretical

[4] Helena N. A Multifactor Approach in Understanding Asset Pricing Anomalies: An empirical study of the factor model in the Budapest Stock Market. 2009.

[5] Bodie Z, Kane, A., & Marcus, A. J. Essentials of Investments. 7th ed. New York: Mc-Graw Hill/Irwin; 2011.

[6] Lo AW, Blume, L., & Durlauf, S. The New Palgrave: A Dictionary of Economics 2nd ed. New York: Palgrave

[7] Gabrielė Č. Identification of Market Anomalies in Nasdaq Omx Baltic. : ISM University of Management and

[8] Alagidede P. Month of the year and pre-holiday effects in African Stock Markets. South African Journal of Economic and Management Sciences.

Hypothesis: Market Efficiency from an

[10] Samuelson PA. Proof that Properly Anticipated Prices Fluctuate Randomly.

[11] Fama EF. Random Walks in Stock Market Prices. Financial Analysts

[9] Lo A. The Adaptive Markets

Evolutionary Perspective. 2004.

Industrial Management Review.

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McMillan; 2007.

Economics.; 2015.

2013;16:64-74.

1965;6:41-9.

1965;38(1):34-105.

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

#### **References**

*Emerging Markets*

be disappearing or weaker in some markets. This observation suggests that AMH approach could be more appropriate but this will require investigation of several sub-samples. Rolling analyses has so far been pointed out as the best-developed class of alternative tests to the absolute approach, while researchers are still facing the task of identifying models best suited to capture cycles or dynamics inherent in the AMH. While the investigation started from developed markets like the US, other emerging markets are now receiving a fair share of interest from researchers. Obviously, there is now a shift from absolute framework to time-varying frameworks. Recent empirical evidences are suggesting that AMH could be a more appropriate approach to describe the stock returns patterns. Consequently, stock market efficiencies and anomalies are now being linked to market conditions. However, very few studies have tested this in the developing markets. Thus, there is a need for further studies from African stock

markets that are often considered to be illiquid and inefficient.

**76**

**Author details**

Adefemi A. Obalade and Paul-Francois Muzindutsi\* University of KwaZulu-Natal, Durban, South Africa

provided the original work is properly cited.

\*Address all correspondence to: muzindutsip@ukzn.ac.za

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

[1] Fama EF. The Behavior of Stock-Market Prices. The Journal of Business. 1965;38(1):34-105.

[2] Urquhart A, Hudson R. Efficient or adaptive markets? Evidence from major stock markets using very long run historic data. International Review of Financial Analysis. 2013;28:130-42.

[3] Kok S, Munir Q, Bahron A, editors. Technical Anomalies: A Theoretical Review2014.

[4] Helena N. A Multifactor Approach in Understanding Asset Pricing Anomalies: An empirical study of the factor model in the Budapest Stock Market. 2009.

[5] Bodie Z, Kane, A., & Marcus, A. J. Essentials of Investments. 7th ed. New York: Mc-Graw Hill/Irwin; 2011.

[6] Lo AW, Blume, L., & Durlauf, S. The New Palgrave: A Dictionary of Economics 2nd ed. New York: Palgrave McMillan; 2007.

[7] Gabrielė Č. Identification of Market Anomalies in Nasdaq Omx Baltic. : ISM University of Management and Economics.; 2015.

[8] Alagidede P. Month of the year and pre-holiday effects in African Stock Markets. South African Journal of Economic and Management Sciences. 2013;16:64-74.

[9] Lo A. The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective. 2004.

[10] Samuelson PA. Proof that Properly Anticipated Prices Fluctuate Randomly. Industrial Management Review. 1965;6:41-9.

[11] Fama EF. Random Walks in Stock Market Prices. Financial Analysts Journal. 1965;21(5):55-9.

[12] Roberts HV. Statistical Versus Clinical Prediction of the Stock Market. 1967.

[13] Cooper JCB. World stock markets: some random walk tests. Applied Economics. 1982;14(5):515-31.

[14] Borges MR. Efficient market hypothesis in European stock markets. The European Journal of Finance. 2010;16(7):711-26.

[15] De Gooijer JG. Testing nonlinearities in world stock market prices. Economics Letters. 1989;31(1):31-5.

[16] Serletis A, Shintani M. No evidence of chaos but some evidence of dependence in the US stock market. Chaos, Solitons & Fractals. 2003;17(2):449-54.

[17] Working H. A Random-Difference Series for Use in the Analysis of Time Series. Journal of the American Statistical Association. 1934;29(185):11-24.

[18] Kendall MG. The Advanced Theory of Statistics. London: Griffin & Co.; 1943.

[19] Osborne MFM. Periodic Structure in the Brownian Motion of Stock Prices. Operations Research. 1962;10(3):345-79.

[20] Kendall MG, Hill AB. The Analysis of Economic Time-Series-Part I: Prices. Journal of the Royal Statistical Society Series A (General). 1953;116(1):11-34.

[21] Moore BA. A Statistical Analysis of Common Stock Prices. . Chicago: University of Chicago; 1962.

[22] Jennergren LP, Korsvold PE. Price Formation in the Norwegian and Swedish Stock Markets: Some Random Walk Tests. The Swedish Journal of Economics. 1974;76(2):171-85.

[23] Niederhoffer V, Osborne MFM. Market Making and Reversal on the Stock Exchange. Journal of the American Statistical Association. 1966;61(316):897-916.

[24] Siegel J. Nonparametric Statistics for the Behavioural Sciences: McGraw-Hill; 1956.

[25] Lim K-P, Brooks R. The evolution of stock market efficiency over time: A survey of the empirical literature. Journal of Economic Surveys. 2011;25(1):69-108.

[26] Verheyden T, De Moor L, Van Den Bossche F. A Tale of Market Efficiency. Review of Business and Economic Literature. 2013;58(2):140-58.

[27] Lo AW, MacKinlay AC. Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test. The Review of Financial Studies. 2015;1(1):41-66.

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[37] Jefferies K, Smith G. The changing efficiency of African Stock Markets. South African Journal of Economics. 2005;73(1):54-67.

[38] Simons D, Laryea SA. The Efficiency of Selected African Stock Markets. Finance India. 2006;20(2):553.

[39] Appiah-Kusi J, Menyah K. Return predictability in African stock markets. Review of financial economics. 2003;12(3):247-70.

[40] Smith G. Liquidity and the informational efficiency of African stock markets. South African Journal of Economics. 2008;76(2):161-75.

[41] Almudhaf FW, AlKulaib YA. Are Civets Stock Markets Predictable? Academy of Accounting and Financial Studies Journal. 2013;17(3):1.

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*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

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2016;5(1):84-116.

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financial reforms and global financial crises. Journal of African Business.

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During and Post the 2008 Global Financial Crisis. Journal of Economics and Behavioral Studies. 2017;9(5(J)).

[44] Gimba VK. Testing the weakform efficiency market hypothesis: Evidence from Nigerian stock market. CBN Journal of Applied Statistics.

[45] Nwosa P, Oseni I. Efficient Market Hypothesis and Nigerian Stock Market. Research Journal of Finance and Accounting. 2012;2:38-46.

[47] Joel O, Igbinosa S. Test of Random Walk Hypothesis in the Nigerian Stock Market. Current Research Journal of

hypothesis and the behaviour of share prices in Nigeria. Nigerian Journal of Economic and Social Studies.

[49] Olowe RA. Stock return, volatility and the global financial crisis in an emerging market: The Nigerian case. International Review of Business Research Papers. 2009;5(4):426-47.

[50] Yadirichukwu E, Ogochukwu OJ. Evaluation of the weak-form of efficient market hypothesis: Empirical evidence from Nigeria. International Journal of Development and Sustainability.

[51] Okpara GC. Stock market prices and the random walk hypothesis: Further evidence from Nigeria. Journal of Economics and International Finance.

[52] Ajao MG, Osayuwu R. Testing the weak form of efficient market

Social Sciences. 2015;7:27-36.

[48] Ayadi F. The random walk

[46] Nwidobie BM. The Random Walk Theory: An Empirical Test in the Nigerian Capital Market. Asian Economic and Financial Review.

2012;3(1):117-36.

2014;4(12):1840-8.

1984;26(1):57-71.

2014;3(5):1199-244.

2010;2(4):049-57.

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

During and Post the 2008 Global Financial Crisis. Journal of Economics and Behavioral Studies. 2017;9(5(J)).

*Emerging Markets*

1966;61(316):897-916.

2011;25(1):69-108.

2003;9(3):290-300.

2004;1(1):59-78.

Finance. 2010:1-54.

1956.

[23] Niederhoffer V, Osborne MFM. Market Making and Reversal on the Stock Exchange. Journal of the American Statistical Association.

[33] Kim JH, Shamsuddin A, Lim K-P. Stock return predictability and the adaptive markets hypothesis: Evidence from century-long U.S. data. Journal of Empirical Finance. 2011;18(5):868-79.

[34] Thompson AR, Ward M. The Johannesburg stock exchange as an efficient market. Journal For Studies in Economic and Econometrics.

[35] Magnusson M, Wydick B. How Efficient are Africa's Emerging Stock Markets? The Journal of Development

[36] Smith G, Jefferis K, Ryoo H-J. African stock markets: multiple variance ratio tests of random walks. Applied Financial Economics.

[37] Jefferies K, Smith G. The changing efficiency of African Stock Markets. South African Journal of Economics.

[39] Appiah-Kusi J, Menyah K. Return predictability in African stock markets.

[38] Simons D, Laryea SA. The Efficiency of Selected African Stock Markets. Finance India. 2006;20(2):553.

Review of financial economics.

[40] Smith G. Liquidity and the informational efficiency of African stock markets. South African Journal of

Economics. 2008;76(2):161-75.

Studies Journal. 2013;17(3):1.

market. 2015. 2015;8(2):12.

[41] Almudhaf FW, AlKulaib YA. Are Civets Stock Markets Predictable? Academy of Accounting and Financial

[42] Grater E, Struweg J. Testing weak form efficiency in the South African

[43] Olwetu F, Kapingura FM. Weak Form Market Efficiency of the Johannesburg Stock Exchange: Pre,

Studies. 2002;38(4):141-56.

2002;12(7):475-84.

2005;73(1):54-67.

2003;12(3):247-70.

1995;19:33-63.

[24] Siegel J. Nonparametric Statistics for the Behavioural Sciences: McGraw-Hill;

[25] Lim K-P, Brooks R. The evolution of stock market efficiency over time: A survey of the empirical literature. Journal of Economic Surveys.

[26] Verheyden T, De Moor L, Van Den Bossche F. A Tale of Market Efficiency. Review of Business and Economic Literature. 2013;58(2):140-58.

[27] Lo AW, MacKinlay AC. Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test. The Review of Financial Studies. 2015;1(1):41-66.

[28] Smith G, Ryoo H-J. Variance ratio tests of the random walk hypothesis for European emerging stock markets. The European Journal of Finance.

[29] Worthington A, Higgs H. Random

[30] Lovatt D, Boswell A, Noor R. A Note on the Predictability of UK Stock Returns. The European Journal of Finance. 2007;13(2):159-64.

[31] Konak F, Şeker Y. The Efficiency of Developed Markets: Empirical Evidence from FTSE 100. Journal of Advanced Management Science. 2014;2:29-32.

[32] Vitali F, Mollah S. Stock market efficiency in Africa: Evidence from random walk hypothesis. South Western

walks and market efficiency in European equity markets. The Global Journal of Finance and Economics.

**78**

[44] Gimba VK. Testing the weakform efficiency market hypothesis: Evidence from Nigerian stock market. CBN Journal of Applied Statistics. 2012;3(1):117-36.

[45] Nwosa P, Oseni I. Efficient Market Hypothesis and Nigerian Stock Market. Research Journal of Finance and Accounting. 2012;2:38-46.

[46] Nwidobie BM. The Random Walk Theory: An Empirical Test in the Nigerian Capital Market. Asian Economic and Financial Review. 2014;4(12):1840-8.

[47] Joel O, Igbinosa S. Test of Random Walk Hypothesis in the Nigerian Stock Market. Current Research Journal of Social Sciences. 2015;7:27-36.

[48] Ayadi F. The random walk hypothesis and the behaviour of share prices in Nigeria. Nigerian Journal of Economic and Social Studies. 1984;26(1):57-71.

[49] Olowe RA. Stock return, volatility and the global financial crisis in an emerging market: The Nigerian case. International Review of Business Research Papers. 2009;5(4):426-47.

[50] Yadirichukwu E, Ogochukwu OJ. Evaluation of the weak-form of efficient market hypothesis: Empirical evidence from Nigeria. International Journal of Development and Sustainability. 2014;3(5):1199-244.

[51] Okpara GC. Stock market prices and the random walk hypothesis: Further evidence from Nigeria. Journal of Economics and International Finance. 2010;2(4):049-57.

[52] Ajao MG, Osayuwu R. Testing the weak form of efficient market

hypothesis in Nigerian capital market. Accounting and Finance Research. 2012;1(1):169-79.

[53] Nayak KM. A study of random walk hypothesis of selected scripts listed on NSE. International Journal of Management Research and Reviews. 2012;2(4):508.

[54] Arewa A, Nwakanma PC. Re-validating weak-form hypothesis in Nigerian capital market: A comparative test analyses. International Business Research. 2014;7(4):73.

[55] Ezepue PO, Omar MT. Weak-form market efficiency of the Nigerian stock market in the context of financial reforms and global financial crises. Journal of African Business. 2012;13(3):209-20.

[56] Ikeora J, Charles-Anyaogu N, Andabai P. The weak form efficient market hypothesis in the Nigerian stock market: An empirical investigation. European journal of Business, Economics and Accountancy. 2016;4(6):93-105.

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[62] Njuguna J. The market efficiency of the Tanzania stock market. Banks & bank systems. 2016;11(3):75-86.

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[68] Broock WA, Scheinkman JA, Dechert WD, LeBaron B. A test for independence based on the correlation dimension. Econometric reviews. 1996;15(3):197-235.

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[71] Lee T-H, White H, Granger CW. Testing for neglected nonlinearity in time series models: A comparison of neural network methods and alternative tests. Journal of Econometrics. 1993;56(3):269-90.

[72] Hinich MJ. Testing for dependence in the input to a linear time series model. Journal of Nonparametric Statistics. 1996;6(2-3):205-21.

[73] Luukkonen R, Saikkonen P, Teräsvirta T. Testing linearity against smooth transition autoregressive models. Biometrika. 1988;75(3):491-9.

[74] Engle RF. Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the Econometric Society. 1982:987-1007.

[75] Hinich MJ, Patterson DM. Evidence of nonlinearity in daily stock returns. Journal of Business & Economic Statistics. 1985;3(1):69-77.

[76] Abhyankar A, Copeland L, Wong W. Nonlinear Dynamics in Real Time Equity Market Indices: Evidence from the UK Market. Economic Journal. 1995:105,584-880.

[77] Newell G, Peat M, Stevenson M. Testing for evidence of non-linear structure in daily and weekly United Kingdom stock and property indices. University of Technology, Sydney; 1997.

[78] Opong KK, Mulholland G, Fox AF, Farahmand K. The behaviour of some UK equity indices: An application of Hurst and BDS tests. Journal of empirical finance. 1999;6(3):267-82.

[79] Sewell SP, Stansell SR, Lee I, Pan M. NONLINEARITIES IN EMERGING FOREIGN CAPITAL MARKETS. Journal of Business Finance & Accounting. 1993;20:237-48.

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[96] Lakonishok J, Smidt S. Are Seasonal

[97] Berument H, Kiymaz H. The day of the week effect on stock market volatility. Journal of economics and

[98] Shiok Y, Chong M, Brian D. Stock Market Calendar Anomalies: The Case of Malaysia. Working Paper series in

[99] Rubinstein M. Rational Markets: Yes or No? The Affirmative Case. Financial Analysts Journal. 2001;57(3):15-29.

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[100] Maberly ED, Waggoner DF.

[95] Cross F. The Behavior of Stock Prices on Fridays and Mondays. Financial Analysts Journal.

Anomalies Real? A Ninety-Year Perspective. The Review of Financial

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finance. 2001;25(2):181-93.

Economics. 2007;2007-5.

2000-11. 2000.

Economics. 1983;12(1):13-32.

1976;3(4):379-402.

2000;10(3):235-42.

1973;29(6):67-9.

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[82] Omran MF. Nonlinear dependence and conditional heteroscedasticity in stock returns: UK evidence. Applied Economics Letters. 1997;4(10):647-50.

[84] Kruger R, Toerien F, MacDonald I. Nonlinear serial dependence in share returns on the Johannesburg Stock Exchange. African Finance Journal.

Behaviour of the ALBI Index: A Case of Johannesburg Stock Exchange in South Africa. Mediterranean Journal of Social

[86] Sarpong PK. Trading in chaos: analysis of active management in a fractal market. South Africa: University

[87] Emenike Kalu O. Weak-form Efficiency After Global Financial Crisis: Emerging Stock Market Evidence. Journal of Emerging Market Finance.

[88] SAADI S, GANDHI D, DUTTA S. Testing for nonlinearity & modeling volatility in emerging capital markets: The case of Tunisia International Journal of Theoretical and Applied Finance. 2006;09(07):1021-50.

[89] Chkir I, Chourou L, Saadi S. Examining the Implications of Linear and Nonlinear Dependencies on Efficiency and Conditional Volatility of

MENA Markets. 2009. p. 375-97.

[90] Rozeff MS, Kinney WR. Capital market seasonality: The case of stock

[81] Dorina L, Simina U. Testing efficiency of the stock market in emerging economies. The Journal of the Faculty of Economics–Economic

Science Series. 2007;2:827-31.

[83] Kruger R. Evidence of return predictability on the Johannesburg Stock Exchange: University of Cape Town; 2011.

[85] Cheteni P. Non-Linearity

Sciences. 2014;5:183-8.

of KwaZulu-Natal; 2017.

2017;16(1):90-113.

2012;14(2):64-84.

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[81] Dorina L, Simina U. Testing efficiency of the stock market in emerging economies. The Journal of the Faculty of Economics–Economic Science Series. 2007;2:827-31.

*Emerging Markets*

[61] Nwosu EO, Orji A, Anagwu O. African emerging equity markets re-examined: Testing the weak form efficiency theory. African Development tests. Journal of Econometrics.

[73] Luukkonen R, Saikkonen P, Teräsvirta T. Testing linearity against smooth transition autoregressive models. Biometrika. 1988;75(3):491-9.

[74] Engle RF. Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica: Journal of the Econometric Society.

[75] Hinich MJ, Patterson DM. Evidence of nonlinearity in daily stock returns. Journal of Business & Economic Statistics. 1985;3(1):69-77.

[76] Abhyankar A, Copeland L, Wong W. Nonlinear Dynamics in Real Time Equity Market Indices: Evidence from the UK Market. Economic Journal.

[77] Newell G, Peat M, Stevenson M. Testing for evidence of non-linear structure in daily and weekly United Kingdom stock and property indices. University of Technology, Sydney;

[78] Opong KK, Mulholland G, Fox AF, Farahmand K. The behaviour of some UK equity indices: An application of Hurst and BDS tests. Journal of empirical finance. 1999;6(3):267-82.

[79] Sewell SP, Stansell SR, Lee I, Pan M. NONLINEARITIES IN EMERGING FOREIGN CAPITAL MARKETS. Journal of Business Finance & Accounting. 1993;20:237-48.

[80] Afonso A, Teixeira J. Non-linear tests of weakly efficient markets: Evidence from Portugal. 1998.

[72] Hinich MJ. Testing for dependence in the input to a linear time series model. Journal of Nonparametric Statistics.

1993;56(3):269-90.

1996;6(2-3):205-21.

1982:987-1007.

1995:105,584-880.

1997.

[62] Njuguna J. The market efficiency of the Tanzania stock market. Banks &

bank systems. 2016;11(3):75-86.

[63] Gyamfi EN, Kyei KA, Gill R. Stationarity of African Stock Markets

under an ESTAR framework. EuroEconomica. 2016;35(2).

[64] Brooks C. Introductory econometrics for finance. 2nd ed: Cambridge university press; 2014.

[65] Granger C, Andersen A. An Introduction to Bilinear Time Series Models. Vandenhoek & Ruprecht, Göttingen. Recent Advances in ARCH

[66] Amini S, Hudson R, Keasey K. Stock return predictability despite low autocorrelation. Economics Letters.

[67] Hsieh DA. Testing for nonlinear dependence in daily foreign exchange rates. Journal of Business. 1989:339-68.

[68] Broock WA, Scheinkman JA, Dechert WD, LeBaron B. A test for independence based on the correlation dimension. Econometric reviews.

[69] Hinich MJ. Testing for Gaussianity and linearity of a stationary time series. Journal of time series analysis.

[70] Tsay RS. Testing and modeling threshold autoregressive processes. Journal of the American statistical association. 1989;84(405):231-40.

[71] Lee T-H, White H, Granger CW. Testing for neglected nonlinearity in time series models: A comparison of neural network methods and alternative

Modelling. 1978;35:36.

2010;108(1):101-3.

1996;15(3):197-235.

1982;3(3):169-76.

Review. 2013;25(4):485-98.

**80**

[82] Omran MF. Nonlinear dependence and conditional heteroscedasticity in stock returns: UK evidence. Applied Economics Letters. 1997;4(10):647-50.

[83] Kruger R. Evidence of return predictability on the Johannesburg Stock Exchange: University of Cape Town; 2011.

[84] Kruger R, Toerien F, MacDonald I. Nonlinear serial dependence in share returns on the Johannesburg Stock Exchange. African Finance Journal. 2012;14(2):64-84.

[85] Cheteni P. Non-Linearity Behaviour of the ALBI Index: A Case of Johannesburg Stock Exchange in South Africa. Mediterranean Journal of Social Sciences. 2014;5:183-8.

[86] Sarpong PK. Trading in chaos: analysis of active management in a fractal market. South Africa: University of KwaZulu-Natal; 2017.

[87] Emenike Kalu O. Weak-form Efficiency After Global Financial Crisis: Emerging Stock Market Evidence. Journal of Emerging Market Finance. 2017;16(1):90-113.

[88] SAADI S, GANDHI D, DUTTA S. Testing for nonlinearity & modeling volatility in emerging capital markets: The case of Tunisia International Journal of Theoretical and Applied Finance. 2006;09(07):1021-50.

[89] Chkir I, Chourou L, Saadi S. Examining the Implications of Linear and Nonlinear Dependencies on Efficiency and Conditional Volatility of MENA Markets. 2009. p. 375-97.

[90] Rozeff MS, Kinney WR. Capital market seasonality: The case of stock returns. Journal of Financial Economics. 1976;3(4):379-402.

[91] Keim DB. Size-related anomalies and stock return seasonality: Further empirical evidence. Journal of Financial Economics. 1983;12(1):13-32.

[92] Gultekin MN, Gultekin NB. Stock market seasonality: International Evidence. Journal of Financial Economics. 1983;12(4):469-81.

[93] Choudhry T. Day of the week effect in emerging Asian stock markets: evidence from the GARCH model. Applied Financial Economics. 2000;10(3):235-42.

[94] Wong W-K, Agarwal A, Wong N-T. The disappearing calendar anomalies in the Singapore stock market. 2006.

[95] Cross F. The Behavior of Stock Prices on Fridays and Mondays. Financial Analysts Journal. 1973;29(6):67-9.

[96] Lakonishok J, Smidt S. Are Seasonal Anomalies Real? A Ninety-Year Perspective. The Review of Financial Studies. 2015;1(4):403-25.

[97] Berument H, Kiymaz H. The day of the week effect on stock market volatility. Journal of economics and finance. 2001;25(2):181-93.

[98] Shiok Y, Chong M, Brian D. Stock Market Calendar Anomalies: The Case of Malaysia. Working Paper series in Economics. 2007;2007-5.

[99] Rubinstein M. Rational Markets: Yes or No? The Affirmative Case. Financial Analysts Journal. 2001;57(3):15-29.

[100] Maberly ED, Waggoner DF. Closing the question on the continuation of turn-of-the-month effects: evidence from the S&P 500 Index futures contract. FRN Atlanta Working paper 2000-11. 2000.

[101] Schwert GW. Anomalies and market efficiency. Handbook of the Economics of Finance. 2003;1:939-74.

[102] Steeley JM. A note on information seasonality and the disappearance of the weekend effect in the UK stock market. Journal of Banking & Finance. 2001;25(10):1941-56.

[103] Hui T-K. Day-of-the-week effects in US and Asia-Pacific stock markets during the Asian financial crisis: A nonparametric approach. 2005.

[104] Kling G, Gao L. Calendar effects in Chinese stock market. Annals of Economics and Finance. 2005;6(1):75-88.

[105] Rossi M. Calendar anomalies in stock returns: Evidence from South America 2008.

[106] Lukas M. Stock Market Seasonality: Day of The Week Effect and January Effect: Thesis; 2009.

[107] Sewell M. Characterization of financial time series. Research Note, University College London, Department of Computer Science (RN/11/01). 2011. p. 1-35.

[108] Ariel RA. High stock returns before holidays: Existence and evidence on possible causes. The Journal of Finance. 1990;45(5):1611-26.

[109] Jaffe J, Westerfield R. Patterns in Japanese Common Stock Returns: Day of the Week and Turn of the Year Effects. The Journal of Financial and Quantitative Analysis. 1985;20(2):261-72.

[110] Arsad Z, Andrew Coutts J. Security price anomalies in the London International Stock Exchange: a 60 year perspective. Applied Financial Economics. 1997;7(5):455-64.

[111] Bildik R. Are Calendar Anomalies Still Alive?: Evidence from Istanbul

Stock Exchange. SSRN Electronic Journal. 2004.

[112] Kohli RK, Kohers T. The weekof-the-month effect in stock returns: The evidence from the S&P Composite Index. Journal of Economics and Finance. 1992;16(2):129.

[113] Lukas J. Analysis of stock market anomalies: US cross-sectoral comparison (Bachelor thesis). Charles University in Prague, Faculty of social sciences, Institute of economic studies. 2012.

[114] Tevdovski D, Mihajlov M, Sazdovski I. The day of the week effect in South Eastern Europe stock markets. Annals-Economy Series. 2012;3(3):20-4.

[115] Caporale GM, Gil-Alana LA, Plastun O, Makarenko I. The weekend effect: a trading robot and fractional integration analysis. DIW Berlin Discussion Paper2014.

[116] Oprea DS, Tilica E. Day-of-the-Week Effect in Post-Communist East European Stock Markets. International Journal of Academic Research in Accounting, Finance and Management Sciences. 2014;4(3):119-29.

[117] Rossi M, Gunardi A. Efficient Market Hypothesis And Stock Market Anomalies: Empirical Evidence In Four European Countries. Journal of Applied Business Research (JABR). 2018;34:183-92.

[118] Aziz T, Ansari VA. The Turn of the Month Effect in Asia-Pacific Markets: New Evidence. Global Business Review. 2017;19(1):214-26.

[119] Bhana N. The Monday effect on the Johannesburg stock exchange. South African Journal of Business Management. 1985;16(1):7-11.

[120] Paul A, Theodore P. Calendar Anomalies in an emerging African

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[131] Anatolyev S, Gerko A. A Trading Approach to Testing for Predictability. Journal of Business & Economic Statistics. 2005;23(4):455-61.

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[132] Todea A, Ciupac-Ulici M,

Banking. 2009;01(1):007-13.

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[137] Shi H-L, Jiang Z-Q, Zhou W-X. Time-Varying Return Predictability in the Chinese Stock Market. Reports in Advances of Physical Sciences.

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[125] Bundoo S. An Analysis of Stock Market Anomalies and Momentum Strategies on the Stock Exchange of Mauritius. AERC Research Paper

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Market: Evidence from the Ghana Stock Exchange. Journal of Economics. 2006;52(12):58-96.

*Emerging Markets*

2001;25(10):1941-56.

2005;6(1):75-88.

America 2008.

p. 1-35.

Effect: Thesis; 2009.

1990;45(5):1611-26.

parametric approach. 2005.

[104] Kling G, Gao L. Calendar effects in Chinese stock market. Annals of Economics and Finance.

[105] Rossi M. Calendar anomalies in stock returns: Evidence from South

[106] Lukas M. Stock Market Seasonality: Day of The Week Effect and January

[108] Ariel RA. High stock returns before holidays: Existence and evidence on possible causes. The Journal of Finance.

[109] Jaffe J, Westerfield R. Patterns in Japanese Common Stock Returns: Day of the Week and Turn of the Year Effects. The Journal of Financial and Quantitative

Analysis. 1985;20(2):261-72.

[110] Arsad Z, Andrew Coutts J.

Security price anomalies in the London International Stock Exchange: a 60 year perspective. Applied Financial Economics. 1997;7(5):455-64.

[111] Bildik R. Are Calendar Anomalies Still Alive?: Evidence from Istanbul

[107] Sewell M. Characterization of financial time series. Research Note, University College London, Department of Computer Science (RN/11/01). 2011.

[101] Schwert GW. Anomalies and market efficiency. Handbook of the Economics of Finance. 2003;1:939-74.

[102] Steeley JM. A note on information seasonality and the disappearance of the weekend effect in the UK stock market. Journal of Banking & Finance. Stock Exchange. SSRN Electronic

[112] Kohli RK, Kohers T. The weekof-the-month effect in stock returns: The evidence from the S&P Composite Index. Journal of Economics and

Finance. 1992;16(2):129.

[113] Lukas J. Analysis of stock market anomalies: US cross-sectoral comparison (Bachelor thesis). Charles University in Prague, Faculty of social sciences, Institute of economic studies.

[114] Tevdovski D, Mihajlov M,

[115] Caporale GM, Gil-Alana LA, Plastun O, Makarenko I. The weekend effect: a trading robot and fractional integration analysis. DIW Berlin

[116] Oprea DS, Tilica E. Day-of-the-Week Effect in Post-Communist East European Stock Markets. International Journal of Academic Research in Accounting, Finance and Management

[117] Rossi M, Gunardi A. Efficient Market Hypothesis And Stock Market Anomalies: Empirical Evidence In Four European Countries. Journal of Applied Business Research (JABR).

[118] Aziz T, Ansari VA. The Turn of the Month Effect in Asia-Pacific Markets: New Evidence. Global Business Review.

[119] Bhana N. The Monday effect on the Johannesburg stock exchange. South African Journal of Business Management. 1985;16(1):7-11.

[120] Paul A, Theodore P. Calendar Anomalies in an emerging African

Discussion Paper2014.

Sciences. 2014;4(3):119-29.

2018;34:183-92.

2017;19(1):214-26.

Sazdovski I. The day of the week effect in South Eastern Europe stock markets. Annals-Economy Series. 2012;3(3):20-4.

Journal. 2004.

2012.

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[122] Brishan R. Calendar Effects on the Nine Economic Sectors of the Johannesburg Stock Exchange. Johannesburg: University of the Witwatersrand; 2012.

[123] Ndako UB. The Day of the Week effect on stock market returns and volatility: Evidence from Nigeria and South Africa. . 2013.

[124] Cifuentes JCA, Córdoba BEG. The day-of-the-week effect: the civets stock markets case. Journal of Applied Business and Economics. 2013;15(3):102-16.

[125] Bundoo S. An Analysis of Stock Market Anomalies and Momentum Strategies on the Stock Exchange of Mauritius. AERC Research Paper 2011;227(1):1-48.

[126] Kalidas S, Mbululu D, Chipeta C. Changing patterns in the day-of-the-week effects in African stock markets. International Business & Economics Research Journal (IBER). 2013;12(10):1157-74.

[127] Derbali A, Hallara S. Day-ofthe-week effect on the Tunisian stock market return and volatility. Cogent Business & Management. 2016;3(1):1147111.

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[131] Anatolyev S, Gerko A. A Trading Approach to Testing for Predictability. Journal of Business & Economic Statistics. 2005;23(4):455-61.

[132] Todea A, Ciupac-Ulici M, Silaghi S. Adaptive Markets Hypothesis - Evidence from Asia-Pacific Financial Markets. The Review of Finance and Banking. 2009;01(1):007-13.

[133] Ito M, Noda A, Wada T. The evolution of stock market efficiency in the US: A non-Bayesian time-varying model approach. Applied Economics. 2016 Feb 7;48(7):621-35.

[134] Dyakova A, Smith G. Bulgarian stock market relative predictability: BSE-Sofia stocks and South East European markets. Applied Financial Economics. 2013;23(15):1257-71.

[135] Mobarek A, Fiorante A. The prospects of BRIC countries: Testing weak-form market efficiency. Research in International Business and Finance. 2014;30:217-32.

[136] de Almeida Dourado G, Tabak B. Testing the Adaptive Markets Hypothesis for Brazil. Brazilian Review of Finance. 2014;12(4):517-53.

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[153] Heymans A, Santana L. How efficient is the Johannesburg Stock Exchange really? 2018. 2018;21(1).

[154] Obalade A, Muzindutsi P-F. Are there Cycles of Efficiency and Inefficiency? Adaptive Market Hypothesis in Three African Stock Markets. Frontiers in Finance and Economics. 2019;15:185-202.

[155] Lim K-P, Hooy C-W. Non-Linear Predictibility in G7 Stock Index Returns\*. The Manchester School. 2013;81(4):620-37.

**85**

2020;13(3):215-34.

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature*

[165] Kok SC. Recent Developing Trends in Calendar Anomaly Literature. Malaysian Journal of Business and Economics (MJBE). 2015;2(1):25-33.

[166] Urquhart A. An empirical analysis of the adaptive market hypothesis and investor sentiment in extreme circumstances. Newcastle: Newcastle

[167] Urquhart A, McGroarty F. Calendar effects, market conditions and the Adaptive Market Hypothesis: Evidence from long-run U.S. data. International Review of Financial

Analysis. 2014;35:154-66.

[168] Bampinas G, Fountas S,

Panagiotidis T. The Day-of-the-Week Effect is Weak: Evidence from the European Real Estate Sector. Rimini Centre for Economic Analysis; 2015.

[169] Al-Khazali O, Mirzaei A. Stock market anomalies, market efficiency and the adaptive market hypothesis: Evidence from Islamic stock indices. Journal of International Financial Markets, Institutions and Money. 2017;51:190-208.

[170] Zhang J, Lai Y, Lin J. The day-ofthe-Week effects of stock markets in different countries. Finance Research

Panagiotidis T. Another look at calendar anomalies. The Quarterly Review of Economics and Finance. 2019.

hypothesis in the Tunisian stock market. International Journal of Trade and Global Markets. 2020;13:42.

Letters. 2017;20:47-62.

[171] Chatzitzisi E, Fountas S,

[172] Obalade AA, Muzindutsi PF. Validating the adaptive market

[173] Agnani B, Aray H. The January effect across volatility regimes.

[174] Shahid MD, Sattar A, editors. Behavior of calendar anomalies,

Quantitative Finance. 2011;11(6):947-53.

University; 2013.

*DOI: http://dx.doi.org/10.5772/intechopen.94438*

[156] Fabozzi FJ, Francis JC. Stability Tests for Alphas and Betas over Bull and Bear Market Conditions. The Journal of

Finance. 1977;32(4):1093-9.

1987;22(3):345-51.

2013;23(21):1649-62.

Analysis. 2016;47:39-49.

[157] Klein A, Rosenfeld J. The Influence of Market Conditions on Event-Study Residuals. The Journal of Financial and Quantitative Analysis.

[158] Lo AW. Adaptive markets: Financial Evolution at the Speed of Thought. 1st ed. Princeton, New Jersey: Princeton University Press; 2017.

[159] Zhou J, Lee JM. Adaptive market hypothesis: evidence from the REIT market. Applied Financial Economics.

[160] Urquhart A, McGroarty F. Are stock markets really efficient? Evidence of the adaptive market hypothesis. International Review of Financial

[161] Svensson L, Soteriou A. Testing the Adaptive Market Hypothesis on the OMXS30 Stock Index: 1986-2014 : Stock Return Predictability And Market

Conditions [Student thesis]2017.

[162] Obalade AA, Muzindutsi P-F. Return predictability and market conditions : evidence from Nigerian, South African and Mauritian stock markets. African Journal of Business and Economic Research. 2018;13(2):7-23.

[163] Obalade AA, Muzindutsi P-F. Static or adaptive? the month-of-the-year and intra-month effects in African stock markets. International Journal of Monetary Economics and Finance.

[164] Borges MR. Calendar Effects in Stock Markets: Critique of Previous Methodologies and Recent Evidence in European Countries. Research Unit on Complexity and Economics WP 37/2009/DE/UECE; 2009. 2009.

*Are African Stock Markets Inefficient or Adaptive? Empirical Literature DOI: http://dx.doi.org/10.5772/intechopen.94438*

[156] Fabozzi FJ, Francis JC. Stability Tests for Alphas and Betas over Bull and Bear Market Conditions. The Journal of Finance. 1977;32(4):1093-9.

*Emerging Markets*

of Developed and Emerging Bond Markets: Evidence from Long-Spans of Historical Data. University of Pretoria, Department of Economics; 2017.

Artificial Neural Networks: Evidence from Pakistan. Global Regional Review.

[147] Patil A, Rastogi S. Multifractal Analysis of Time-Varying Market Efficiency: Implications for Adaptive Market Hypothesis. Test Engineering

[148] Mushinada VNC. Are individual investors irrational or adaptive to market dynamics? Journal of Behavioral and Experimental Finance.

[149] Jiang J, Li H. A new measure for market efficiency and its

[150] Yang B, Xue F, Su Y, Yan C. Is informational inefficiency priced in stock markets? A comparison between the U.S. and Chinese cases. Pacific-Basin

Finance Journal. 2019;55:222-38.

Economics. 2014;82(2):258-75.

[151] Smith G, Dyakova A. African Stock Markets: Efficiency and Relative Predictability. South African Journal of

[152] Numapau Gyamfi E. Adaptive Market Hypothesis: Evidence from the Ghanaian Stock Market. Journal of African Business. 2018;19(2):195-209.

[153] Heymans A, Santana L. How efficient is the Johannesburg Stock Exchange really? 2018. 2018;21(1).

[154] Obalade A, Muzindutsi P-F. Are there Cycles of Efficiency and Inefficiency? Adaptive Market Hypothesis in Three African Stock Markets. Frontiers in Finance and Economics. 2019;15:185-202.

[155] Lim K-P, Hooy C-W. Non-Linear Predictibility in G7 Stock Index Returns\*. The Manchester School.

2013;81(4):620-37.

application. Finance Research Letters.

2019;IV(II):190-203.

and Management. 2020;83:

16646-60.

2020;25:100243.

2020;34:101235.

[139] Kumar D. Market Efficiency in Indian Exchange Rates: Adaptive Market Hypothesis. . Theoretical Economics

[140] Belaire-Franch J, Contreras D, editors. Ranks and signs-based multiple variance ratio tests. Spanish-Italian Meeting on Financial Mathematics, VII; 2004: Spanish-Italian Meeting on Financial Mathematics Cuenca.

[141] Urquhart A. How predictable are precious metal returns? The european journal of finance. 2017;23(14):1390-413.

[143] Rosini L, Shenai V. Stock returns and calendar anomalies on the London

[144] Almudhaf F, Aroul RR, Hansz JA. Are markets adaptive? Evidence of predictability and market efficiency of lodging/resort REITs. International

Journal of Strategic Property Management. 2020;24(2):130-9.

Research. 2018;3(2):33-44.

[145] Ahmad F, Shahid M, Ateeq A, Zubair A, Saif. Emerging Markets Efficient or Adaptive? Evidence from Asia. Journal of Organizational Behavior

[146] Kayani S, Ayub U, Jadoon IA. Adaptive Market Hypothesis and

Stock Exchange in the dynamic perspective of the Adaptive Market Hypothesis: A study of FTSE100 & FTSE250 indices over a ten year period. Quantitative Finance and Economics.

2020;4:121-47.

[142] Shahid Muhammad N, Jehanzeb M, Abbas A, Zubair A, Akbar Mahmood AH. Predictability of precious metals and adaptive market hypothesis. International Journal of Emerging Markets. 2019;15(5):1011-27.

Letters. 2018;8(9):1582-98.

**84**

[157] Klein A, Rosenfeld J. The Influence of Market Conditions on Event-Study Residuals. The Journal of Financial and Quantitative Analysis. 1987;22(3):345-51.

[158] Lo AW. Adaptive markets: Financial Evolution at the Speed of Thought. 1st ed. Princeton, New Jersey: Princeton University Press; 2017.

[159] Zhou J, Lee JM. Adaptive market hypothesis: evidence from the REIT market. Applied Financial Economics. 2013;23(21):1649-62.

[160] Urquhart A, McGroarty F. Are stock markets really efficient? Evidence of the adaptive market hypothesis. International Review of Financial Analysis. 2016;47:39-49.

[161] Svensson L, Soteriou A. Testing the Adaptive Market Hypothesis on the OMXS30 Stock Index: 1986-2014 : Stock Return Predictability And Market Conditions [Student thesis]2017.

[162] Obalade AA, Muzindutsi P-F. Return predictability and market conditions : evidence from Nigerian, South African and Mauritian stock markets. African Journal of Business and Economic Research. 2018;13(2):7-23.

[163] Obalade AA, Muzindutsi P-F. Static or adaptive? the month-of-the-year and intra-month effects in African stock markets. International Journal of Monetary Economics and Finance. 2020;13(3):215-34.

[164] Borges MR. Calendar Effects in Stock Markets: Critique of Previous Methodologies and Recent Evidence in European Countries. Research Unit on Complexity and Economics WP 37/2009/DE/UECE; 2009. 2009.

[165] Kok SC. Recent Developing Trends in Calendar Anomaly Literature. Malaysian Journal of Business and Economics (MJBE). 2015;2(1):25-33.

[166] Urquhart A. An empirical analysis of the adaptive market hypothesis and investor sentiment in extreme circumstances. Newcastle: Newcastle University; 2013.

[167] Urquhart A, McGroarty F. Calendar effects, market conditions and the Adaptive Market Hypothesis: Evidence from long-run U.S. data. International Review of Financial Analysis. 2014;35:154-66.

[168] Bampinas G, Fountas S, Panagiotidis T. The Day-of-the-Week Effect is Weak: Evidence from the European Real Estate Sector. Rimini Centre for Economic Analysis; 2015.

[169] Al-Khazali O, Mirzaei A. Stock market anomalies, market efficiency and the adaptive market hypothesis: Evidence from Islamic stock indices. Journal of International Financial Markets, Institutions and Money. 2017;51:190-208.

[170] Zhang J, Lai Y, Lin J. The day-ofthe-Week effects of stock markets in different countries. Finance Research Letters. 2017;20:47-62.

[171] Chatzitzisi E, Fountas S, Panagiotidis T. Another look at calendar anomalies. The Quarterly Review of Economics and Finance. 2019.

[172] Obalade AA, Muzindutsi PF. Validating the adaptive market hypothesis in the Tunisian stock market. International Journal of Trade and Global Markets. 2020;13:42.

[173] Agnani B, Aray H. The January effect across volatility regimes. Quantitative Finance. 2011;11(6):947-53.

[174] Shahid MD, Sattar A, editors. Behavior of calendar anomalies,

#### *Emerging Markets*

market conditions and adaptive market hypothesis: Evidence from Pakistan stock exchange2017.

[175] Rich S. Calendar Effects on the Johannesburg Stock Exchange: A Markov Switching Approach: University of Pretoria; 2018.

[176] Obalade A, Paul-Francois M. The Adaptive Market Hypothesis and the Day-of-the-Week Effect in African Stock Markets: the Markov Switching Model. Comparative Economic Research. 2019;22(3):145-62.

[177] Obalade AA, Muzindutsi P-F. Calendar Anomalies, Market Regimes, and the Adaptive Market Hypothesis in African Stock Markets. Journal of Management and Business Administration Central Europe. 2019;27(4):71.

[178] Seetharam Y. The dynamics of market efficiency: testing the adaptive market hypothesis in South Africa. Johannesburg: University of the Witswatersrand; 2016.

**87**

**Chapter 5**

**Abstract**

*Chee-Heong Quah*

member of the society.

**1. Introduction**

**Keywords:** pandemic, state, virus outbreak, society

"Pandemic" in a Stateless Society

This chapter debunks the myth that only the state is capable of handling a pandemic. Instead, without the state, private individuals and entities, when given the full freedom, can better ameliorate the risk and harm of a virus outbreak and at the same time maximize the well-being of the entire society. In particular, this chapter discusses what would have happened in a world without a state and how would the economic laws in the Austrian tradition drive individuals to act in ways that maximize the net benefits not only to themselves but ultimately to every

In response to the coronavirus pandemic that began in China, most governments have resorted to shutting down cities, communities, businesses, and almost every human activity that are deemed to be too dangerous and risky, possibly proliferating the spread of the virus. States and governments have heavy-handedly expanded their powers on civil societies to levels that are hardly imaginable in peacetime. Individuals are stripped of their freedom of movement, and in many places, their freedom of expression too is taken away. Arrests, fines, and severe punishments on ordinary citizens are made for carrying out their daily life activities that nobody could have imagined would constitute crimes. In countries where basic freedoms have always been suppressed, harmless activity such as jogging alone on the road is treated as

high crime where so-called offenders are locked up, fined, or even jailed.

Amid these draconian actions by governments, the fundamental question that remains is whether harsh ruling is the only and the best way to respond to an outbreak of a highly contagious disease. Must coercion, force, and threat be used by the state on the civil society? Are there no better alternatives to contain the plague? Would private individuals, led by the invisible hand, better handle and resolve the crisis or would have they avoided the plague totally? The objective of this chapter is to find out what could have happened in a society without the state, also known to some people as anarchy. While the literature contains myriad definitions and conceptions of anarchy, anarchism, and statelessness, for this exercise the stateless society is governed by private institutions and agents that include private courts, security firms, defense agencies, and so forth to ensure that law and order is maintained and preserved. For detailed discussions on the functioning of a stateless society and its legal system, see, for example, Block [1], Chartier [2], Hoppe [3], Murphy [4], Rothbard [5, 6], and Stringham [7]. In the tradition of classical liberalism and Austrian economics, the remaining discussion walks through the logic of what might have happened in a world where virtually, if not all of the lands, premises, properties, and waters are owned by genuine private persons or entities.

#### **Chapter 5**

*Emerging Markets*

stock exchange2017.

of Pretoria; 2018.

2019;22(3):145-62.

2019;27(4):71.

Witswatersrand; 2016.

[177] Obalade AA, Muzindutsi P-F. Calendar Anomalies, Market Regimes, and the Adaptive Market Hypothesis in African Stock Markets. Journal of Management and Business Administration Central Europe.

[178] Seetharam Y. The dynamics of market efficiency: testing the adaptive market hypothesis in South Africa. Johannesburg: University of the

market conditions and adaptive market hypothesis: Evidence from Pakistan

[175] Rich S. Calendar Effects on the Johannesburg Stock Exchange: A

Markov Switching Approach: University

[176] Obalade A, Paul-Francois M. The Adaptive Market Hypothesis and the Day-of-the-Week Effect in African Stock Markets: the Markov Switching Model. Comparative Economic Research.

**86**

## "Pandemic" in a Stateless Society

*Chee-Heong Quah*

#### **Abstract**

This chapter debunks the myth that only the state is capable of handling a pandemic. Instead, without the state, private individuals and entities, when given the full freedom, can better ameliorate the risk and harm of a virus outbreak and at the same time maximize the well-being of the entire society. In particular, this chapter discusses what would have happened in a world without a state and how would the economic laws in the Austrian tradition drive individuals to act in ways that maximize the net benefits not only to themselves but ultimately to every member of the society.

**Keywords:** pandemic, state, virus outbreak, society

#### **1. Introduction**

In response to the coronavirus pandemic that began in China, most governments have resorted to shutting down cities, communities, businesses, and almost every human activity that are deemed to be too dangerous and risky, possibly proliferating the spread of the virus. States and governments have heavy-handedly expanded their powers on civil societies to levels that are hardly imaginable in peacetime. Individuals are stripped of their freedom of movement, and in many places, their freedom of expression too is taken away. Arrests, fines, and severe punishments on ordinary citizens are made for carrying out their daily life activities that nobody could have imagined would constitute crimes. In countries where basic freedoms have always been suppressed, harmless activity such as jogging alone on the road is treated as high crime where so-called offenders are locked up, fined, or even jailed.

Amid these draconian actions by governments, the fundamental question that remains is whether harsh ruling is the only and the best way to respond to an outbreak of a highly contagious disease. Must coercion, force, and threat be used by the state on the civil society? Are there no better alternatives to contain the plague? Would private individuals, led by the invisible hand, better handle and resolve the crisis or would have they avoided the plague totally? The objective of this chapter is to find out what could have happened in a society without the state, also known to some people as anarchy. While the literature contains myriad definitions and conceptions of anarchy, anarchism, and statelessness, for this exercise the stateless society is governed by private institutions and agents that include private courts, security firms, defense agencies, and so forth to ensure that law and order is maintained and preserved. For detailed discussions on the functioning of a stateless society and its legal system, see, for example, Block [1], Chartier [2], Hoppe [3], Murphy [4], Rothbard [5, 6], and Stringham [7]. In the tradition of classical liberalism and Austrian economics, the remaining discussion walks through the logic of what might have happened in a world where virtually, if not all of the lands, premises, properties, and waters are owned by genuine private persons or entities.

#### *Emerging Markets*

It is widely accepted that the novel coronavirus originated in Wuhan, China, in late 2019, either from a wet market selling exotic animals as raw food or from a not-far-away laboratory that carries out virological research. In either case, in the authoritarian China, both entities are owned and managed by the government, probably the former by the municipal authority and the latter by one of the agencies under the purview of the central government. Since no election of government officials exists in this regime governed by a single communist party, the owners and managers of both entities are likely to be government bureaucrats who need not satisfy the needs of voters or answer to the wants of the people. Also, since only government-run markets are allowed to operate and only in selected locations permissible by local authorities, the local populace have limited options if they want to purchase goods that are available for sale at this type of wet market. In other words, a wholesale market like this can easily be a monopoly in a locality. Even if privately owned markets are allowed, they are likely to be linked to the interests of high officials since operating licenses and other permits are monopolized by the officials. Therefore, the local bureaucrats have little to worry about the business and the revenues from rental and other sources. But even if the market does fail in luring sufficient customers, the government which is not driven by profit and loss, will not ever go bankrupt and the officials in charge will still keep their job. The same can be deduced for the research institute of virology in which, if things go awry, the managers who are likely closely linked to the officials of the authoritarian regime are unlikely to be held accountable. By and large, bureaucrats and officials will hardly lose their job or be brought to justice for reasons of negligence and incompetence in a country where the state overpoweringly controls the media, the police force, and the judicial system. Instead, more likely they will lose their job for reasons of politics and relationships. Following this, it is extremely improbable that the operations of the market and the laboratory can be as effective and efficient in serving their customers, stakeholders, and the local community with the highest quality, a dimension that includes also hygiene and safety.

Quite the opposite, a privately owned wholesale wet market that operates in a stateless society faces totally different circumstances. Driven by nothing but profit and loss and passion in serving their fellow men and women, the entrepreneurs behind the business must not only meet the needs and preferences of customers but, at the same time, appease the demands of other stakeholders which include the local community. In this society of competing private courts, enforcement agencies, and security firms, no one single authority or entity has absolute power in a specific area as to grant anyone or any business with privileges and protection against any lawsuit from anyone. No business or entity will be granted monopoly privileges. There are no licensures and barriers against new entrants into the market. Competition, either current or potential, even for the locality market will be stiff. Thus, the owners and managers of the wet market must ensure that every food item sold and every service rendered at their premises are absolutely safe and hygienic.

In the face of stiff competition, the management might even have to obtain certain certification or endorsement from certain private agencies specializing in evaluating, testing, and endorsing food suppliers and markets with ranks and ratings of safeness and hygiene. Even in our current world, various ratings are available for various businesses and services, either online or brick and mortar. However, agencies, services, and businesses owned or run directly and indirectly by the government are either immune or not really dependent on such quality check. Their existence and the taxpayer money that funds them are not subject to any market test and quality check, whatsoever. Quite the reverse, since the privately owned wet market in a competitive stateless world needs to promote and market its goods and services, it has no choice but to accept the scrutiny of private media and rating with

**89**

society.

*"Pandemic" in a Stateless Society*

*DOI: http://dx.doi.org/10.5772/intechopen.93373*

that the media too are not exempted from the market test.

anyone from receiving any news that he or she wants to hear.

media is preserved in the stateless society.

open arms. Only businesses that are competent and transparent in their operations will survive the test of the market. No consumers will patronize businesses that are associated with suspicious or questionable practices. Remember also that in this stateless world, every media company must compete for audience and customers so

Along this line of reasoning, in the stateless society, it is almost impossible that any live exotic animal that is sold for consumption at any market poses any infection threat to consumers, not to mention the transmission of virus from animal to human. In this world where media are extremely competitive, any trader that appears to pose any threat to consumers would have instantaneously been exposed to the public. Hence, if such a dangerous animal is indeed up for sale or if such an infection does in fact occur, the public and the media would have quickly disseminated such a news because the quicker they are, the greater the satisfaction a private individual can get and the more profits the media companies can make from spreading the news. It does not matter if the news eventually turns out to be a false alarm because in the long run only the news provider that produces good news will sustain. If some audience prefers fake news, there is a niche for it. If most people prefer valid news, then the vast majority of news providers would provide valid news. Ultimately, those who want fake news will turn to fake news providers, while those who want genuine truths will turn to genuine news providers. In a free society, no one has the right of denying

In a stateless society, the freedom of expression and media is likely to be high or completely absolute since private courts that rule out such freedom will be put out of business by consumers if most consumers prefer to have such freedom. Rational persons would prefer the freedom of expression and media because naturally human beings want to know more than less, possess more than less information, particularly when making crucial decisions. It is natural for individuals to prefer to have more choices even in the sphere of information, data, and knowledge. Only complete freedom of expression and media can provide the public and every individual with the most information and data possible, without any censorship and filtering by any authorities. Individuals too would like to freely express themselves, be it, satisfaction, dissatisfaction, criticism, compliment, happiness, or unhappiness toward something. For the above reasons, the freedom of expression and

Back to the origin of the virus, the same line of logic for the wet market can be applied to the laboratory if it operates in a stateless society. The owners and managers of the laboratory have to satisfy their customers, most likely pharmaceutical companies and drug makers, and at the same time boost the research firm's reputation and status in the community. Nobody would want to deal with a research institute or laboratory that undeliberately or deliberately does harm or leaks any virus to the public. In addition, this private entity is subject to lawsuits and its rivals would want it to close down or acquire it. Furthermore, it is extremely hard if not impossible for the research laboratory to bribe and silence the media, the enforcement officers, and the private courts because these service providers too must compete in their respective markets for customers or be driven out of business. Thus, any leakage accident and lawsuit can lead to great losses and probably bankruptcy for the private research firm. As that in any other private business, the owners would not want to suffer losses on investments and the managers and personnel would not want to lose their job. Incentives matter. Without any protection from the omnipotent state, the managers and employees have no choice but to be as airtight as possible in quality and safety control. Hence, akin to the wet market, the chances of a deadly mistake such as a virus leakage from the laboratory are essentially zero in a stateless

#### *"Pandemic" in a Stateless Society DOI: http://dx.doi.org/10.5772/intechopen.93373*

*Emerging Markets*

It is widely accepted that the novel coronavirus originated in Wuhan, China, in late 2019, either from a wet market selling exotic animals as raw food or from a not-far-away laboratory that carries out virological research. In either case, in the authoritarian China, both entities are owned and managed by the government, probably the former by the municipal authority and the latter by one of the agencies under the purview of the central government. Since no election of government officials exists in this regime governed by a single communist party, the owners and managers of both entities are likely to be government bureaucrats who need not satisfy the needs of voters or answer to the wants of the people. Also, since only government-run markets are allowed to operate and only in selected locations permissible by local authorities, the local populace have limited options if they want to purchase goods that are available for sale at this type of wet market. In other words, a wholesale market like this can easily be a monopoly in a locality. Even if privately owned markets are allowed, they are likely to be linked to the interests of high officials since operating licenses and other permits are monopolized by the officials. Therefore, the local bureaucrats have little to worry about the business and the revenues from rental and other sources. But even if the market does fail in luring sufficient customers, the government which is not driven by profit and loss, will not ever go bankrupt and the officials in charge will still keep their job. The same can be deduced for the research institute of virology in which, if things go awry, the managers who are likely closely linked to the officials of the authoritarian regime are unlikely to be held accountable. By and large, bureaucrats and officials will hardly lose their job or be brought to justice for reasons of negligence and incompetence in a country where the state overpoweringly controls the media, the police force, and the judicial system. Instead, more likely they will lose their job for reasons of politics and relationships. Following this, it is extremely improbable that the operations of the market and the laboratory can be as effective and efficient in serving their customers, stakeholders, and the local community with the highest

quality, a dimension that includes also hygiene and safety.

Quite the opposite, a privately owned wholesale wet market that operates in a stateless society faces totally different circumstances. Driven by nothing but profit and loss and passion in serving their fellow men and women, the entrepreneurs behind the business must not only meet the needs and preferences of customers but, at the same time, appease the demands of other stakeholders which include the local community. In this society of competing private courts, enforcement agencies, and security firms, no one single authority or entity has absolute power in a specific area as to grant anyone or any business with privileges and protection against any lawsuit from anyone. No business or entity will be granted monopoly privileges. There are no licensures and barriers against new entrants into the market. Competition, either current or potential, even for the locality market will be stiff. Thus, the owners and managers of the wet market must ensure that every food item sold and every service rendered at their premises are absolutely safe and hygienic. In the face of stiff competition, the management might even have to obtain certain certification or endorsement from certain private agencies specializing in evaluating, testing, and endorsing food suppliers and markets with ranks and ratings of safeness and hygiene. Even in our current world, various ratings are available for various businesses and services, either online or brick and mortar. However, agencies, services, and businesses owned or run directly and indirectly by the government are either immune or not really dependent on such quality check. Their existence and the taxpayer money that funds them are not subject to any market test and quality check, whatsoever. Quite the reverse, since the privately owned wet market in a competitive stateless world needs to promote and market its goods and services, it has no choice but to accept the scrutiny of private media and rating with

**88**

open arms. Only businesses that are competent and transparent in their operations will survive the test of the market. No consumers will patronize businesses that are associated with suspicious or questionable practices. Remember also that in this stateless world, every media company must compete for audience and customers so that the media too are not exempted from the market test.

Along this line of reasoning, in the stateless society, it is almost impossible that any live exotic animal that is sold for consumption at any market poses any infection threat to consumers, not to mention the transmission of virus from animal to human. In this world where media are extremely competitive, any trader that appears to pose any threat to consumers would have instantaneously been exposed to the public. Hence, if such a dangerous animal is indeed up for sale or if such an infection does in fact occur, the public and the media would have quickly disseminated such a news because the quicker they are, the greater the satisfaction a private individual can get and the more profits the media companies can make from spreading the news. It does not matter if the news eventually turns out to be a false alarm because in the long run only the news provider that produces good news will sustain. If some audience prefers fake news, there is a niche for it. If most people prefer valid news, then the vast majority of news providers would provide valid news. Ultimately, those who want fake news will turn to fake news providers, while those who want genuine truths will turn to genuine news providers. In a free society, no one has the right of denying anyone from receiving any news that he or she wants to hear.

In a stateless society, the freedom of expression and media is likely to be high or completely absolute since private courts that rule out such freedom will be put out of business by consumers if most consumers prefer to have such freedom. Rational persons would prefer the freedom of expression and media because naturally human beings want to know more than less, possess more than less information, particularly when making crucial decisions. It is natural for individuals to prefer to have more choices even in the sphere of information, data, and knowledge. Only complete freedom of expression and media can provide the public and every individual with the most information and data possible, without any censorship and filtering by any authorities. Individuals too would like to freely express themselves, be it, satisfaction, dissatisfaction, criticism, compliment, happiness, or unhappiness toward something. For the above reasons, the freedom of expression and media is preserved in the stateless society.

Back to the origin of the virus, the same line of logic for the wet market can be applied to the laboratory if it operates in a stateless society. The owners and managers of the laboratory have to satisfy their customers, most likely pharmaceutical companies and drug makers, and at the same time boost the research firm's reputation and status in the community. Nobody would want to deal with a research institute or laboratory that undeliberately or deliberately does harm or leaks any virus to the public. In addition, this private entity is subject to lawsuits and its rivals would want it to close down or acquire it. Furthermore, it is extremely hard if not impossible for the research laboratory to bribe and silence the media, the enforcement officers, and the private courts because these service providers too must compete in their respective markets for customers or be driven out of business. Thus, any leakage accident and lawsuit can lead to great losses and probably bankruptcy for the private research firm. As that in any other private business, the owners would not want to suffer losses on investments and the managers and personnel would not want to lose their job. Incentives matter. Without any protection from the omnipotent state, the managers and employees have no choice but to be as airtight as possible in quality and safety control. Hence, akin to the wet market, the chances of a deadly mistake such as a virus leakage from the laboratory are essentially zero in a stateless society.

Despite the above, in the unfortunate and rare event that either an animalto-human transmission or a virus leakage does indeed occur in a stateless world, how would the society react to it? First, we must begin our logical analysis by understanding that a society is nothing but a group consisting of many different individuals with diverse needs, preferences, and goals who face different circumstances over their lifetimes. It must not be misunderstood, as what communism or socialism suggests that a society or community is a whole under which the so-called common interests and needs of the whole are more important to those of the individuals. While individuals certainly share some common characteristics and interests, because circumstances surrounding each person through his or her lifetime are different from each other's since the person is born, even if all persons are born identical in every aspect, they are bound to be different in needs, tastes, preferences, desires, and life goals.

Simply by knowing this, in our current world, a one-size-fits-all response by many governments to the viral outbreak will certainly either overdo or underdo in preventing transmission among pockets of individuals in the society. An acrossthe-board ruling necessitates coercion, overreach, and intrusion into individual rights of liberty by enforcement officers even in perfectly safe situations where transmission is impossible. Meantime, tougher penalties on supposed offenders will only open up opportunities for enforcement officers to solicit bribes. Even if state leaders and officials are genuinely sincere in trying to eradicate the plague, they do not and will never possess the vital localized information pertinent to an individual, which enables that person to avoid getting infection and at the same carry on with his or her life as close to usual as possible.

Second, in the world without the state, all lands, waters, premises, and properties will be privately owned. Hence, all dwellings, cities, townships, roads, railways, airports, ports, train stations, walkways, rivers, beaches, hospitals, schools, playgrounds, parks, hills, mountains, forests, and everything that is usually owned or managed by the state will be owned, in one way or another, by private individuals or groups. Since there is no state to protect them, all these private entities operate in a competitive environment. They face constant threats from direct rivals and indirect substitutes. The structure and arrangement of these private ownerships and how they work are beyond the present discussion (for details, see references). The objectives of these private owners, though, can be profit- or charity-maximizing or both. Unquestionably, people work for pecuniary income and profits but also for various reasons, passions, and interests, and among others, the passion to help the needy and unfortunate.

#### **2. Reactions of a stateless society**

Given the above first and second conditions, how would a stateless society handle and resolve a contagion or initial outbreak? Certainly, most rational individuals will try their best to avoid infection, given the latest and most complete information provided by various media platforms which enjoy complete freedom in disseminating all information. In this regard, it is up to rational individuals to choose the right information and act upon it. If certain mentally sound individuals wish to risk their lives or intentionally contract the virus, they are allowed to do so because they have all the rights to their own bodies and lives. Members of society may persuade and advice but ultimately the choice is theirs. Nonetheless, their actions should in no way harm or inconvenience other persons. If they contract the virus and need treatment, they should pay all by themselves or they can get funding

**91**

*"Pandemic" in a Stateless Society*

completely close their borders.

businesses have to deliver.

*DOI: http://dx.doi.org/10.5772/intechopen.93373*

death which may result from their intentional actions.

from willing persons, certainly not from taxpayers as what exists in our current system. If all private health-care suppliers and even charitable organizations refuse or are unable to help, these rational people should face all the consequences including

Nonetheless, it can be safely assumed that most people will act rationally and accordingly to their best interests, and if there are certain outliers, their eccentric behaviors should not prevent other persons to pursue their objectives of safeguarding their health. The standard libertarian principle applies in which everyone is free to exercise his rights provided that he does not prevent others to exercise their equivalent rights. Those harming others who have not consented to

If most people in the society prefer not to be infected, the risk of infection can be minimized or eliminated and this can be executed in the best ever manner, certainly more effective, precise, and efficient through voluntary private incentives than what governments have done today. This is possible and will certainly be done because virtually everything is privately owned. Let us begin with a simple case. When one owns a house and perhaps also the surrounding area, in this stateless society, he has the absolute right to allow or prevent anyone from entering his premises. If he suspects someone has an infection or that he just wants to be perfectly safe and therefore isolate himself, he can just prohibit a particular person or just anyone from accessing his premises. To safeguard his borders, he may hire private security. Similarly, when shops, eateries, malls, townships, roads, housing estates, airports, trains, planes, and all other transportations and premises are owned by private owners, it is up to the owners or managers to decide whether to take precautionary measures, prohibit any suspicious persons from accessing, or

To profit-maximizing owners, they have to weigh the benefits against the costs of every option. Since most people do not want to contract the virus, owners of these businesses have no choice but to meet this new need of their customers and other stakeholders but at the same time also meet customers' demands for goods and services. If some entrepreneurs predict most of their customers will not purchase anything, they may choose to just suspend their businesses. However, if certain businesses predict that customers will still demand for their goods or services despite the risk of infection, they will carry on with their operations. Knowing that their customers and other stakeholders are fearful of infection, the business managers will now find ways of delivering goods and services and at the same time meet their additional need of prevention of infection. This additional need now becomes part of the service the

This is no surprise because entrepreneurs have to constantly adapt and meet the changing demands, needs, tastes, and preferences of customers and other stakeholders, including in the period of fear of infection. Unlike the state, they operate in a competitive environment and during a period of panic and distress, only businesses that can innovate and alleviate the fear can sustain their sales and reputation. Accordingly, in this stateless world, one will find different businesses and organizations, incentivized by profits or passion or both, will employ innovative ways to ensure the safety and well-being of customers, associates, members, and other stakeholders. It is then up to the rational individuals to choose which sellers they want to patronize or whom they want to associate with. In fact, even in our current world with the state, various voluntary cooperations and initiatives to tackle the coronavirus pandemic have been carried out despite the counterpro-

ductive, obstructionist, and harmful actions of the state.

be harmed will be brought to justice by the private judicial system.

#### *"Pandemic" in a Stateless Society DOI: http://dx.doi.org/10.5772/intechopen.93373*

*Emerging Markets*

preferences, desires, and life goals.

carry on with his or her life as close to usual as possible.

Despite the above, in the unfortunate and rare event that either an animalto-human transmission or a virus leakage does indeed occur in a stateless world, how would the society react to it? First, we must begin our logical analysis by understanding that a society is nothing but a group consisting of many different individuals with diverse needs, preferences, and goals who face different circumstances over their lifetimes. It must not be misunderstood, as what communism or socialism suggests that a society or community is a whole under which the so-called common interests and needs of the whole are more important to those of the individuals. While individuals certainly share some common characteristics and interests, because circumstances surrounding each person through his or her lifetime are different from each other's since the person is born, even if all persons are born identical in every aspect, they are bound to be different in needs, tastes,

Simply by knowing this, in our current world, a one-size-fits-all response by many governments to the viral outbreak will certainly either overdo or underdo in preventing transmission among pockets of individuals in the society. An acrossthe-board ruling necessitates coercion, overreach, and intrusion into individual rights of liberty by enforcement officers even in perfectly safe situations where transmission is impossible. Meantime, tougher penalties on supposed offenders will only open up opportunities for enforcement officers to solicit bribes. Even if state leaders and officials are genuinely sincere in trying to eradicate the plague, they do not and will never possess the vital localized information pertinent to an individual, which enables that person to avoid getting infection and at the same

Second, in the world without the state, all lands, waters, premises, and properties will be privately owned. Hence, all dwellings, cities, townships, roads, railways, airports, ports, train stations, walkways, rivers, beaches, hospitals, schools, playgrounds, parks, hills, mountains, forests, and everything that is usually owned or managed by the state will be owned, in one way or another, by private individuals or groups. Since there is no state to protect them, all these private entities operate in a competitive environment. They face constant threats from direct rivals and indirect substitutes. The structure and arrangement of these private ownerships and how they work are beyond the present discussion (for details, see references). The objectives of these private owners, though, can be profit- or charity-maximizing or both. Unquestionably, people work for pecuniary income and profits but also for various reasons, passions, and interests,

and among others, the passion to help the needy and unfortunate.

Given the above first and second conditions, how would a stateless society handle and resolve a contagion or initial outbreak? Certainly, most rational individuals will try their best to avoid infection, given the latest and most complete information provided by various media platforms which enjoy complete freedom in disseminating all information. In this regard, it is up to rational individuals to choose the right information and act upon it. If certain mentally sound individuals wish to risk their lives or intentionally contract the virus, they are allowed to do so because they have all the rights to their own bodies and lives. Members of society may persuade and advice but ultimately the choice is theirs. Nonetheless, their actions should in no way harm or inconvenience other persons. If they contract the virus and need treatment, they should pay all by themselves or they can get funding

**2. Reactions of a stateless society**

**90**

from willing persons, certainly not from taxpayers as what exists in our current system. If all private health-care suppliers and even charitable organizations refuse or are unable to help, these rational people should face all the consequences including death which may result from their intentional actions.

Nonetheless, it can be safely assumed that most people will act rationally and accordingly to their best interests, and if there are certain outliers, their eccentric behaviors should not prevent other persons to pursue their objectives of safeguarding their health. The standard libertarian principle applies in which everyone is free to exercise his rights provided that he does not prevent others to exercise their equivalent rights. Those harming others who have not consented to be harmed will be brought to justice by the private judicial system.

If most people in the society prefer not to be infected, the risk of infection can be minimized or eliminated and this can be executed in the best ever manner, certainly more effective, precise, and efficient through voluntary private incentives than what governments have done today. This is possible and will certainly be done because virtually everything is privately owned. Let us begin with a simple case. When one owns a house and perhaps also the surrounding area, in this stateless society, he has the absolute right to allow or prevent anyone from entering his premises. If he suspects someone has an infection or that he just wants to be perfectly safe and therefore isolate himself, he can just prohibit a particular person or just anyone from accessing his premises. To safeguard his borders, he may hire private security. Similarly, when shops, eateries, malls, townships, roads, housing estates, airports, trains, planes, and all other transportations and premises are owned by private owners, it is up to the owners or managers to decide whether to take precautionary measures, prohibit any suspicious persons from accessing, or completely close their borders.

To profit-maximizing owners, they have to weigh the benefits against the costs of every option. Since most people do not want to contract the virus, owners of these businesses have no choice but to meet this new need of their customers and other stakeholders but at the same time also meet customers' demands for goods and services. If some entrepreneurs predict most of their customers will not purchase anything, they may choose to just suspend their businesses. However, if certain businesses predict that customers will still demand for their goods or services despite the risk of infection, they will carry on with their operations. Knowing that their customers and other stakeholders are fearful of infection, the business managers will now find ways of delivering goods and services and at the same time meet their additional need of prevention of infection. This additional need now becomes part of the service the businesses have to deliver.

This is no surprise because entrepreneurs have to constantly adapt and meet the changing demands, needs, tastes, and preferences of customers and other stakeholders, including in the period of fear of infection. Unlike the state, they operate in a competitive environment and during a period of panic and distress, only businesses that can innovate and alleviate the fear can sustain their sales and reputation. Accordingly, in this stateless world, one will find different businesses and organizations, incentivized by profits or passion or both, will employ innovative ways to ensure the safety and well-being of customers, associates, members, and other stakeholders. It is then up to the rational individuals to choose which sellers they want to patronize or whom they want to associate with. In fact, even in our current world with the state, various voluntary cooperations and initiatives to tackle the coronavirus pandemic have been carried out despite the counterproductive, obstructionist, and harmful actions of the state.

#### **3. Who cares for the workers?**

The next question one may ask is, while customers and the general public are taken care of by themselves and by the owners and managers of private properties and enterprises, who shall protect the working class? Will they not be subject to infection risk by their cruel and mean employers? First and foremost, in this world without the state, private enterprises are owned or run by people who are incentivized by pecuniary profits or by passion or a combination of both. Entrepreneurs, businesspersons, and managers hire employees for their services of which the value created is expected to outweigh the cost of hiring an additional employee. Hence, no sound-minded bosses would want their employees to fall sick and become unproductive. In this highly competitive world, every worker counts and every productive hour of the worker is highly valuable. No one is going to subsidize any employer for hiring certain group of people or penalize any employer for not hiring certain people. The labor market too is completely free and competitive. To meet the demand of customers, businesses must ensure smooth operations of the production process. In this regard, employers too would take precautionary measures to prevent their workers from contracting the disease. To put in perspective, keeping workers from any danger at the workplace is just a rational practice for profit-maximizing businesses even in this current world with the state. This is more so in a stateless world. Maltreatments by employers will not only undermine profitability but also damage the brand, image, and reputation of private enterprises and employers since the media industry is highly efficient and effective in the stateless world.

The same line of reasoning can be applied for enterprises and organizations that are driven by passionate individuals who do not prioritize economic reward. To keep their cause and activity going, employees, members, and associates must be healthy and productive. Not to mention viral infection, every risk of workplace accident, hazard, and stress will also be minimized. Every organization has goals to achieve, and without any financing by taxpayer money, every private organization has to treat workers and associates the best they can if they ever need them to achieve those goals. If workers are not really important, they would not have been employed in the first place. In this world without the state and taxation, every decision and action of private firms is completely rational, given the circumstances and limitations of decision makers. There will be no distortion in decisions due to arbitrary state regulations. Remember that there will still be private law and order and hence no rational firms will purposely expose non-consenting rational workers to danger or infection since harming others (or even negligence) is still a crime in this libertarian society. In short, as individuals, workers can take care of themselves in the face of infection danger, and on top of that, when working or at the workplace, employers will make sure they are as safe and as healthy as possible.

#### **4. The unhealthy health-care industry**

The common reason for lockdown given by governments is to prevent patients from overwhelming hospital capacity in their respective countries. This narrative implies that the state has always exerted an overbearing control over the supply and quality of medical services in general and hospital beds and equipment in particular. Ironically, no one would have ever heard of impending overload of hotel capacity so that the state must step in to reduce the influx of guests and tourists from abroad or within. Also, no one will ever imagine a possible overload of foodservice, cinema, or stadium capacity so that the authorities must help to chase away by force excessive guests from patronizing all these business premises. Only

**93**

*"Pandemic" in a Stateless Society*

of all patients.

*DOI: http://dx.doi.org/10.5772/intechopen.93373*

for the peculiarity in the health-care sector.

in state-owned or -controlled sectors one can find that the rising demand for a product or service is a bad thing so that harsh measures must be taken to curtail the increase in demand or to limit the amount one can purchase at a time. In a competitive private economy, no business and certainly no industry will ever grumble of too high sales or too much demand from customers. Two main reasons account

First, the health-care sector has always been restrained or suppressed by the state from fully unleashing its potential. This is done through direct or indirect state ownership and management of health-care facilities and through various regulations and bureaucracies on private players that produce health-care workforce, drugs, equipment, devices, methods, and so forth. Regulations stifle innovation and risk-taking that is essential even in the health-care service. Specifically, occupational licensing enforced by the state restricts new entrants into the industry, directly reduces supply, and suppresses competition. Regulations and licensing laws are often set or crafted by elected politicians and unelected bureaucrats together with existing dominant players that seek to shield current suppliers from competitors and substitutes. Consequently, incomes of current players are propped up, not to mention the corruption, rent-seeking, and kickback that may be involved. This barrier to entry not only limits the quantity and quality but also the breadth of choice that consumers can choose legally. Hence, it is of no surprise that health-care service providers in many countries find it difficult to cope with the surge in demand amid the coronavirus outbreak. As a result, quantity supplied has to be rationed or quality has to be compromised or a combination of both has to happen in the treatment

Second, the price mechanism has always been restrained, inhibited, or held back by the state from being fully operational in many sectors including also health care. In some countries, the health-care provider is none other than the state, and in many countries, the government and the private sector co-provide health-care services. In the latter regime, the state crowds out resources available in the economy and competes unfairly with the private health-care providers by undercutting private suppliers in price. Government providers can afford lower prices because they are funded in whole or partially by taxpayer funds. The reliance on cheaper priced services offered by government providers would grow over time because the state restricts total supply through regulations, causing long-term undersupply and hence higher prices of health care. This is on top of the general price inflation that is also created by the state. These conditions perpetuate a vicious cycle in which the

public will keep on relying on the state for cheaper health-care services.

the medical expenses all by themselves when they fall sick.

The financing of health care by the state gives the illusion to the general public, especially the low-income group, that health care is more affordable than otherwise and hence this tends to disincentivize them to act rationally. In the wake of viral outbreak, knowing that the government is always there to take care of them, the general public will be less cautious and careful than otherwise if they had to finance

Quite the opposite, this moral hazard does not arise in the stateless society. Individuals must finance medical expenses using funds of themselves, relatives, friends, other willing persons, philanthropists, and/or charitable organizations. Consequently, when demand for health care surges, price will tend to go up accordingly, and this increase in price will discourage more demand. Individuals will be more cautious about their health knowing that they have to pay the full expenses of medical services. Health-care capacity can hence be allocated properly since in the short run, total capacity can be rigid or constant. The deterrence to demand more health care buys time for entrepreneurs and businesses along the value chain to increase supply. This is true for all health-care services, not just that

#### *"Pandemic" in a Stateless Society DOI: http://dx.doi.org/10.5772/intechopen.93373*

*Emerging Markets*

**3. Who cares for the workers?**

The next question one may ask is, while customers and the general public are taken care of by themselves and by the owners and managers of private properties and enterprises, who shall protect the working class? Will they not be subject to infection risk by their cruel and mean employers? First and foremost, in this world without the state, private enterprises are owned or run by people who are incentivized by pecuniary profits or by passion or a combination of both. Entrepreneurs, businesspersons, and managers hire employees for their services of which the value created is expected to outweigh the cost of hiring an additional employee. Hence, no sound-minded bosses would want their employees to fall sick and become unproductive. In this highly competitive world, every worker counts and every productive hour of the worker is highly valuable. No one is going to subsidize any employer for hiring certain group of people or penalize any employer for not hiring certain people. The labor market too is completely free and competitive. To meet the demand of customers, businesses must ensure smooth operations of the production process. In this regard, employers too would take precautionary measures to prevent their workers from contracting the disease. To put in perspective, keeping workers from any danger at the workplace is just a rational practice for profit-maximizing businesses even in this current world with the state. This is more so in a stateless world. Maltreatments by employers will not only undermine profitability but also damage the brand, image, and reputation of private enterprises and employers since

the media industry is highly efficient and effective in the stateless world.

employers will make sure they are as safe and as healthy as possible.

The common reason for lockdown given by governments is to prevent patients from overwhelming hospital capacity in their respective countries. This narrative implies that the state has always exerted an overbearing control over the supply and quality of medical services in general and hospital beds and equipment in particular. Ironically, no one would have ever heard of impending overload of hotel capacity so that the state must step in to reduce the influx of guests and tourists from abroad or within. Also, no one will ever imagine a possible overload of foodservice, cinema, or stadium capacity so that the authorities must help to chase away by force excessive guests from patronizing all these business premises. Only

**4. The unhealthy health-care industry**

The same line of reasoning can be applied for enterprises and organizations that are driven by passionate individuals who do not prioritize economic reward. To keep their cause and activity going, employees, members, and associates must be healthy and productive. Not to mention viral infection, every risk of workplace accident, hazard, and stress will also be minimized. Every organization has goals to achieve, and without any financing by taxpayer money, every private organization has to treat workers and associates the best they can if they ever need them to achieve those goals. If workers are not really important, they would not have been employed in the first place. In this world without the state and taxation, every decision and action of private firms is completely rational, given the circumstances and limitations of decision makers. There will be no distortion in decisions due to arbitrary state regulations. Remember that there will still be private law and order and hence no rational firms will purposely expose non-consenting rational workers to danger or infection since harming others (or even negligence) is still a crime in this libertarian society. In short, as individuals, workers can take care of themselves in the face of infection danger, and on top of that, when working or at the workplace,

**92**

in state-owned or -controlled sectors one can find that the rising demand for a product or service is a bad thing so that harsh measures must be taken to curtail the increase in demand or to limit the amount one can purchase at a time. In a competitive private economy, no business and certainly no industry will ever grumble of too high sales or too much demand from customers. Two main reasons account for the peculiarity in the health-care sector.

First, the health-care sector has always been restrained or suppressed by the state from fully unleashing its potential. This is done through direct or indirect state ownership and management of health-care facilities and through various regulations and bureaucracies on private players that produce health-care workforce, drugs, equipment, devices, methods, and so forth. Regulations stifle innovation and risk-taking that is essential even in the health-care service. Specifically, occupational licensing enforced by the state restricts new entrants into the industry, directly reduces supply, and suppresses competition. Regulations and licensing laws are often set or crafted by elected politicians and unelected bureaucrats together with existing dominant players that seek to shield current suppliers from competitors and substitutes. Consequently, incomes of current players are propped up, not to mention the corruption, rent-seeking, and kickback that may be involved. This barrier to entry not only limits the quantity and quality but also the breadth of choice that consumers can choose legally. Hence, it is of no surprise that health-care service providers in many countries find it difficult to cope with the surge in demand amid the coronavirus outbreak. As a result, quantity supplied has to be rationed or quality has to be compromised or a combination of both has to happen in the treatment of all patients.

Second, the price mechanism has always been restrained, inhibited, or held back by the state from being fully operational in many sectors including also health care. In some countries, the health-care provider is none other than the state, and in many countries, the government and the private sector co-provide health-care services. In the latter regime, the state crowds out resources available in the economy and competes unfairly with the private health-care providers by undercutting private suppliers in price. Government providers can afford lower prices because they are funded in whole or partially by taxpayer funds. The reliance on cheaper priced services offered by government providers would grow over time because the state restricts total supply through regulations, causing long-term undersupply and hence higher prices of health care. This is on top of the general price inflation that is also created by the state. These conditions perpetuate a vicious cycle in which the public will keep on relying on the state for cheaper health-care services.

The financing of health care by the state gives the illusion to the general public, especially the low-income group, that health care is more affordable than otherwise and hence this tends to disincentivize them to act rationally. In the wake of viral outbreak, knowing that the government is always there to take care of them, the general public will be less cautious and careful than otherwise if they had to finance the medical expenses all by themselves when they fall sick.

Quite the opposite, this moral hazard does not arise in the stateless society. Individuals must finance medical expenses using funds of themselves, relatives, friends, other willing persons, philanthropists, and/or charitable organizations. Consequently, when demand for health care surges, price will tend to go up accordingly, and this increase in price will discourage more demand. Individuals will be more cautious about their health knowing that they have to pay the full expenses of medical services. Health-care capacity can hence be allocated properly since in the short run, total capacity can be rigid or constant. The deterrence to demand more health care buys time for entrepreneurs and businesses along the value chain to increase supply. This is true for all health-care services, not just that

for pandemic. Incentivized by the higher marginal market price, suppliers of all goods including capital goods through the value chain will find ways to increase production at fastest speeds possible. Entrepreneurs know that speed is important to enable them to capture the higher marginal profit. In the event of viral outbreak, if masks are in shortage, the rise in the marginal price of masks will signal the suppliers to increase output as efficiently as possible. Scarce resources such as trees, paper, string, and rubber will now be directed more to the production of masks instead of other production, given the higher price of mask relative to other goods in the market. More labor hours too can be directed to producing masks than producing other goods. More mask-making machineries are produced. The same goes for machines to make the ingredients to mask-making machineries. All these actions are coordinated voluntarily and seamlessly by multitude market suppliers and participants as led by the higher price of the final consumption good, namely, mask.

How about in our present world having the government command producers to manufacture more masks and at the same time retain the previous lower retail price? How about the state also distributing the additional supply of masks? On human grounds, any form of coercion is not only immoral but certainly a crime and should be denounced. Having the state mandate production of certain goods is just like pointing guns to a person forcing him to work involuntarily, an act no different from enslavement. On economic grounds, coercion does not incentivize a person to act in the most productive, effective, and efficient manner. If the state were to force mask producers to increase production but at the previous lower selling price despite the overwhelming demand and scarcity of supply and resources, entrepreneurs and managers would not act with their best efforts and certainly not with their best knowledge in assembling the factors of production through the best method to produce more masks. Matters are even worse if the government forces non-mask-making manufacturers to produce masks.

Specifically, managers would not select the best materials and workers to produce the additional output and also would not deploy the best method of production that could produce most effectively and efficiently. Even if managers were willing to employ the best workers, the quality workers too would need additional compensation for working more. If more quality workers are needed, higher rates of wages are involved. All these require greater marginal profits to finance. Similarly for the best materials and so forth. Only with market prices, will best materials be delivered to the mask manufacturers at the right time and place. The same applies to machinery and other resources, inputs, and complementary products and services provided by other suppliers through the value chain before the finished masks are packaged and displayed on retail shelves or delivered to hospitals. Without additional profits from higher prices of masks, the resources, materials, inputs, and services would not be shipped or delivered accordingly at the right quality, time, and place. Instead, these items and services would be used in current or other production or other uses that would be more profitable. For example, without additional rewards, logistic companies would rather ship other goods or delay shipping the masks, if shipping those other goods yields greater payoffs. In addition, greater marginal profits would attract more competitors to the marketplace at a much faster speed.

Without having the essential local knowledge and specific information through the value chain, the government would not be able to effect prompt supply of quality masks at the right places because the actors through the value chain would not be incentivized to do so even if the state were to coerce all involved actors. The result of coercion on production will be inferior quality, quantity, or both. In addition, without the lead given by the higher prices and differences of price across places, the government also does not know how much to produce and how

**95**

**Author details**

stateless society if it must happen.

Chee-Heong Quah

Malaysia

Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur,

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

\*Address all correspondence to: quahch@um.edu.my

provided the original work is properly cited.

*"Pandemic" in a Stateless Society*

of the masks.

*DOI: http://dx.doi.org/10.5772/intechopen.93373*

to allocate the supply. Under this authoritarian regime, the state would certainly oversupply or undersupply, using up exorbitantly more resources than otherwise, and harass more individuals in the society because more and more people in different jobs and sectors must be coerced to give up their freedoms, rights, and properties so as to produce the amount required by the state and distribute the supply of masks to those of whom, according to the bureaucrats, are most in need

On the supply side, without the price system to allocate scarce resources, misallocation of resources in both quality and quantity will be put into production and elsewhere at the wrong time or at the wrong place or both. On the demand side, without the functioning price signal to direct the allocation to consumers of different needs and preferences, at different times and locations, certain consumers will be given more than demanded and others will be given less. Besides mismatch of quantity supplied and actual need, those who require higher quality masks will get lower quality ones, while those who want lower quality ones will get higher quality, and on

In conclusion, the government has done more harm than good in imposing one-size-fits-all curfew-like measures through coercion. Akin to any other kind of intervention in the free society, the seen and unseen costs of government actions in tackling the viral outbreak and consequently the pandemic far outweigh the benefits. By stark contrast, in a society without the state, every private actor would act to his or her best interests in minimizing the risks and costs of such plague and simultaneously maximizing freedom and happiness. While not perfect, individuals with local and specific knowledge can make better decisions than what bureaucrats can. Hence, in our current world with the "omnipotent" state, instead of seizing more control from the private sector, more and more freedoms, rights, and powers should be returned to the private actors not only during a crisis but at all times. Had the state not meddled in every facet of society in the first place, any societal problem would have been a much milder one if not prevented. The word "pandemic" as appears in the title of this writing would have been "an infection" in a

top of that, delivery will tend to take place at the wrong place and time.

#### *"Pandemic" in a Stateless Society DOI: http://dx.doi.org/10.5772/intechopen.93373*

*Emerging Markets*

manufacturers to produce masks.

for pandemic. Incentivized by the higher marginal market price, suppliers of all goods including capital goods through the value chain will find ways to increase production at fastest speeds possible. Entrepreneurs know that speed is important to enable them to capture the higher marginal profit. In the event of viral outbreak, if masks are in shortage, the rise in the marginal price of masks will signal the suppliers to increase output as efficiently as possible. Scarce resources such as trees, paper, string, and rubber will now be directed more to the production of masks instead of other production, given the higher price of mask relative to other goods in the market. More labor hours too can be directed to producing masks than producing other goods. More mask-making machineries are produced. The same goes for machines to make the ingredients to mask-making machineries. All these actions are coordinated voluntarily and seamlessly by multitude market suppliers and participants as led by the higher price of the final consumption good, namely, mask. How about in our present world having the government command producers to manufacture more masks and at the same time retain the previous lower retail price? How about the state also distributing the additional supply of masks? On human grounds, any form of coercion is not only immoral but certainly a crime and should be denounced. Having the state mandate production of certain goods is just like pointing guns to a person forcing him to work involuntarily, an act no different from enslavement. On economic grounds, coercion does not incentivize a person to act in the most productive, effective, and efficient manner. If the state were to force mask producers to increase production but at the previous lower selling price despite the overwhelming demand and scarcity of supply and resources, entrepreneurs and managers would not act with their best efforts and certainly not with their best knowledge in assembling the factors of production through the best method to produce more masks. Matters are even worse if the government forces non-mask-making

Specifically, managers would not select the best materials and workers to produce the additional output and also would not deploy the best method of production that could produce most effectively and efficiently. Even if managers were willing to employ the best workers, the quality workers too would need additional compensation for working more. If more quality workers are needed, higher rates of wages are involved. All these require greater marginal profits to finance. Similarly for the best materials and so forth. Only with market prices, will best materials be delivered to the mask manufacturers at the right time and place. The same applies to machinery and other resources, inputs, and complementary products and services provided by other suppliers through the value chain before the finished masks are packaged and displayed on retail shelves or delivered to hospitals. Without additional profits from higher prices of masks, the resources, materials, inputs, and services would not be shipped or delivered accordingly at the right quality, time, and place. Instead, these items and services would be used in current or other production or other uses that would be more profitable. For example, without additional rewards, logistic companies would rather ship other goods or delay shipping the masks, if shipping those other goods yields greater payoffs. In addition, greater marginal profits would attract more competitors to the marketplace at a much

Without having the essential local knowledge and specific information through

the value chain, the government would not be able to effect prompt supply of quality masks at the right places because the actors through the value chain would not be incentivized to do so even if the state were to coerce all involved actors. The result of coercion on production will be inferior quality, quantity, or both. In addition, without the lead given by the higher prices and differences of price across places, the government also does not know how much to produce and how

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faster speed.

to allocate the supply. Under this authoritarian regime, the state would certainly oversupply or undersupply, using up exorbitantly more resources than otherwise, and harass more individuals in the society because more and more people in different jobs and sectors must be coerced to give up their freedoms, rights, and properties so as to produce the amount required by the state and distribute the supply of masks to those of whom, according to the bureaucrats, are most in need of the masks.

On the supply side, without the price system to allocate scarce resources, misallocation of resources in both quality and quantity will be put into production and elsewhere at the wrong time or at the wrong place or both. On the demand side, without the functioning price signal to direct the allocation to consumers of different needs and preferences, at different times and locations, certain consumers will be given more than demanded and others will be given less. Besides mismatch of quantity supplied and actual need, those who require higher quality masks will get lower quality ones, while those who want lower quality ones will get higher quality, and on top of that, delivery will tend to take place at the wrong place and time.

In conclusion, the government has done more harm than good in imposing one-size-fits-all curfew-like measures through coercion. Akin to any other kind of intervention in the free society, the seen and unseen costs of government actions in tackling the viral outbreak and consequently the pandemic far outweigh the benefits. By stark contrast, in a society without the state, every private actor would act to his or her best interests in minimizing the risks and costs of such plague and simultaneously maximizing freedom and happiness. While not perfect, individuals with local and specific knowledge can make better decisions than what bureaucrats can. Hence, in our current world with the "omnipotent" state, instead of seizing more control from the private sector, more and more freedoms, rights, and powers should be returned to the private actors not only during a crisis but at all times. Had the state not meddled in every facet of society in the first place, any societal problem would have been a much milder one if not prevented. The word "pandemic" as appears in the title of this writing would have been "an infection" in a stateless society if it must happen.

#### **Author details**

Chee-Heong Quah Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia

\*Address all correspondence to: quahch@um.edu.my

© 2020 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Section 2

Country Case-Studies

Section 2
