National culture matters more than corporate culture

by Dr David Hugh-Jones

6 Jan 2016

Volkswagen recently admitted its cars had cheated on emissions tests. The news damaged the company, and caused soul-searching in Germany. Would the country lose its valuable reputation for reliable engineering?

The scandal underscores the social importance of honesty. We all need business partners we can trust, and products that perform as promised. Predictably, the Volkswagen scandal led to calls for a change in corporate culture at the firm.

The idea of corporate culture is that an organization can have its own inspiring values. This idea has a weakness: what happened at VW was probably driven not by individual selfishness, but by a desire to benefit the company. (Of course, the methods backfired, but that is hindsight.) It might be hard to maintain a company culture which consistently frowns upon doing such things.

Another weakness is that employees have already been socialized in ways that are hard to undo. Just as adults find it hard to learn a new language, it is also hard for them to learn that cheating and lying are wrong, if they have not done so already as children. (Almost every adult knows to say they are wrong, but that is not the same.)

So, a better way to improve culture is to start outside the company, in schools and in families. Teaching honesty, like any other form of education, is a national responsibility more than a corporate one.

A first step is to discover how well different countries are doing at making honest citizens. To find out, I ran two online experiments on people from fifteen countries, from Argentina to Switzerland.

First, my subjects flipped a coin and reported the result. They got a cash reward for reporting “heads”. We can’t tell whether any individual reported honestly, but if 90 out of 100 people in a country reported heads, it’s unlikely that all of them are telling the truth.

Second, subjects took a quiz, again for a cash reward. Some questions were difficult, but very easy to cheat on. You probably don’t know when Debussy was born. But you can find out by typing his name into Google. Of course, as the instructions pointed out, that would be cheating.

Results showed large differences between countries. For example, in Great Britain about half of my subjects reported flipping “heads”, as you would expect if all of them were reporting honestly. In China, more than 80% reported heads. Some people in all countries got high scores on the difficult quiz questions, but again, there were big differences between countries.

The differences correlate with national GDP, but not with GDP growth in the past fifty years. One can’t make strong claims about causality from a sample of just fifteen countries, but here is a story that fits the data. Earlier in history, some nations created a culture in which individual honesty was highly valued. This culture helped countries to prosper in the environment of early capitalism – one in which legal institutions were relatively weak, forcing people to rely more on their partners’ intrinsic business ethics. Later, as institutions and technology developed to prevent cheating, honesty became less important for economic growth. For example, China, which performed poorly in my tests, has grown fast for a generation.

Even if honesty won’t make a country rich, it is still worth striving for. We still rely on promise-keeping in important parts of our lives, such as marriage. And most people think that truthfulness is simply a worthwhile value in its own right. It will be important for future research to understand how cultures of honesty are created and maintained: a challenge that even Volkswagen engineers have not yet solved.

David Hugh-Jones is a Senior Lecturer in economics at the University of East Anglia.

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