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University of Arkansas, Fayetteville ScholarWorks@UARK Economics Undergraduate Honors Theses Economics 5-2018 Gender Diversity around the World: The Role of Country Legal Regulations and Culture Madison E. Newton University of Arkansas, Fayetteville Follow this and additional works at: http://scholarworks.uark.edu/econuht Part of the International Business Commons, and the International Economics Commons Recommended Citation Newton, Madison E., "Gender Diversity around the World: The Role of Country Legal Regulations and Culture" (2018). Economics Undergraduate Honors Theses. 26. http://scholarworks.uark.edu/econuht/26 This Thesis is brought to you for free and open access by the Economics at ScholarWorks@UARK. It has been accepted for inclusion in Economics Undergraduate Honors Theses by an authorized administrator of ScholarWorks@UARK. For more information, please contact scholar@uark.edu, ccmiddle@uark.edu. Abstract The goal of this project is to analyze the factors that contribute to the gender discrepancy in labor force participation rates around the world. This paper will explore potential drivers of the gender disparity phenomenon through the analyzation of country-specific elements to detect related impacts that may be imposed on a country’s composition of labor force as it relates to gender. More specifically, I interpret the degree to which specific factors can directly influence the proportion of female presence in labor forces around the world. My empirical results suggest that the societal factors, legal regulations, culture, total fertility rate (births per woman) are all determinants of female labor force participation rates by country. My results confirm theoretical and economic theories, as well as findings from existing literature. It is of upmost importance to study these relationships as they explain much of the labor force participation rates around the world. 1 1. Introduction Labor force participation rates have been in a global decline for both men and women - but this decline has been particularly accentuated for women. (World Economic Forum, 2017) Women compose one-half of the world’s population and therefore their equal participation in the labor force, alongside an equal share of men, is fundamental to whether and how economies and societies survive. Despite recent advances towards lessening the global gender gap, it remains apparent that women are significantly underrepresented within labor force participation rates on a global scale. As a result, the full integration of women into the talent pool has become a must. The list of barriers to female representation in business is analogous to the list of barriers to female labor force participation rates. If labor force participation rates are high for women, then more women will be working and should eventually enter corporate boardrooms if there are no other barriers to female leadership. This suggests that economic and cultural factors may be important barriers to female career advancement. In turn, we must ensure the healthy development and appropriate use of half of the world’s total talent pool as it holds a vast bearing on the growth, competitiveness, and future readiness of economies and businesses worldwide. This paper will examine various cultural aspects and social norms country-by-country, further analyzing the extent in which they may explain the variation in global labor force participation rates for women. The use of culture in finance literature has been well established overtime. Our study adds to the existing literature by further investigating the international aspect of this research. The behavioral patterns of women ultimately determine their subsequent career path decisions, those of which are impacted by various societal factors as well as upbringing culture. With this, our study fills the gap by using cross-country cultural differences in explaining the behavior of women in choosing careers. To adequately assess shocks to female 2 labor participation rates on a country-by-country basis, we must analyze the effects of several fundamental components, including differences within the following areas: cultural dimensions and subsequent norms, legal restrictions and regulations, demographics, and population distributions. I also consider additional country factors such as organizational structure, maternity leave policy, education level and several other world development indicators to collectively explain the discrepancy in gender representation. Several general hypotheses explain these differences; however, the research community still does not completely understand how to combat this problem. Mainly, I hypothesize that cultural norms and values around the world determine the behavior of women in choosing varying career paths and their subsequent decision to actively participate in the global labor force. Finally, I propose my related models as means of improving this disparity and increasing the female participation in the economy. 2. Literature Review 2.1 Gender Diversity and Economic Efficiency A growing body of literature points to the relationship between female labor force and economic growth. The World Bank’s 2012 World Development Report argues that gender equality matters in its own right, but that it is also “smart economics” because it can enhance economic efficiency. (World Bank, 2012) The World Economic Forum’s 2014 Global Gender Gap Report finds a positive correlation between gender equality and per capita GDP, the level of competitiveness, and human development indicators. (World Economic Forum, 2014) A variety of models and empirical studies have suggested that improving gender parity may result in significant economic dividends, which vary depending on the situation of different 3 economies and the specific challenges they are facing. Notable recent estimates suggest that economic gender parity could add an additional US$250 billion to the GDP of the United Kingdom, US$1,750 billion to that of the United States, US$550 billion to Japan’s, US$320 billion to France’s and US$310 billion to the GDP of Germany. Other recent estimates suggest that China could see a US$2.5 trillion GDP increase from gender parity and that the world as a whole could increase global GDP by US$5.3 trillion by 2025 by closing the gender gap in economic participation by 25% over the same period. (World Economic Forum, 2017) Gender-diversity may hold positive impacts within a board’s level of efficiency and its associated firm performance. However, results in existing literature are not conclusive. In Spain, gender-diversity has a positive effect on firm value and the opposite causal relation is insignificant. (Campbell & Mínguez-Vera) Studies using data at one or two points in time find that gender diversity in boards is associated with higher stock values and greater profitability. However, studies using panel data over a number of years, which explore the effects of adding women to boards, generally show no effects or negative effects. This suggests that the association between board diversity and performance in cross-sectional studies is simply explained as a consequence of the fact that successful firms appoint women to their boards. (Dobbin & Jung, 2011) However, on the positive side, one study (Smith, Smith, & Verner, 2004) showed that the proportion of women in top management jobs tends to have positive effects on firm performance, even after controlling for numerous characteristics of the firm and direction of causality. The results also showed that the positive effects of women in top management strongly depend on the qualifications of female top managers. Despite a significant number of studies conducted on various aspects of board diversity as they relate to board effectiveness, the debate on conclusive effects is still ongoing. Scholars have assumed that 4 if board diversity affects corporate performance, it is through its influence on group processes in the board room. (Dobbin & Jung, 2011) 2.2 The Role of Culture Culture plays a significant role in the evolution of women’s careers. For example, if family values are strong then it may be difficult for women to accept more demanding positions. Women may also be passed over for promotion because of the perception that women are not natural leaders. A growing literature argues that culture has an important role to play in explaining female work outcomes. (Olivetti & Goldin, 2013) argued that female labor force participation increased substantially after World War II because it led to changes in attitudes towards working women (Fernández & Fogli, 2009) also argue that culture matters and use characteristics of the countries of (Insight Report The Global Gender Gap Report 2013) origin for US immigrants, such as female labor supply, to proxy for culture. The many varying aspects of cultural diversity contains both positive and negative effects depending on its specific area of focus. The management literature generally identifies cultural diversity as a “double-edged sword” (Milliken & Martins, 1996), recognizing both positive and negative aspects that come from cultural diversity. Findings have indicated that cultural diversity in boards can have a negative impact on firm performance (measured with Tobin’s Q and ROA), with the degree of impact determined by the size and complexity of the observed firm. (Frijns, Dodd, & Cimerova, 2016) Overall, complex firms experience increased levels of cultural diversity which further increases the potential of negative impacts to firm performance. As such, these negative impacts may be mitigated by smaller firms with a minimal amount of foreign sales and operations. Despite the potential of complex firms to be more culturally-diverse and 5 correspondingly produce negative levels of performance these same complex environments can paradoxically provide an increased opportunity for female inclusion in the work force. Interestingly, boards that operate within complex environments are also more likely to have gender-balanced boards as compared to others. (Terjesen, Couto, & Morais, 2016) The role of culture on financial decision has gained wide acceptance in the finance literature in more recent years. County specific cultural norms impact behavior of managers in corporate decision making, in choosing mergers and acquisitions, in cross-border cooperation and in establishing subsidiaries in foreign countries. Culture impacts the behavior of individual investors, as research shows that in highly individualistic society’s stock markets generate greater return. As a result, this overconfidence in stock market outcome leads to higher trading activity and momentum around the world. There are many ways to measure the role of culture and the most popular one is the measure created by Professor Geert Hofstede. Based on his definition, culture is “the collective programming of the mind distinguishing the members of one group or category of people from others.” Culture is a broad variable that takes several dimensions – individualism, masculinity, confidence, power distance, long term orientation and uncertainty avoidance. The main variables of interest are as follows: Power Distance Index (PDI), Individualism vs. Collectivism (IND), Masculinity vs. Femininity (MAS), Uncertainty Avoidance Index (UAI), and Long-term Orientation vs. Short-term Normative Orientation (LTO). These explanatory variables are detailed within my dataset under Section 5.4 – Hofstede: Six Dimensions of National Culture. Each cultural dimension is represented by a score which is backed by extensive survey type research performed by IBM in 70 countries (Hofstede uses the first 40 countries with the largest numbers of respondents). Hofstede’s cultural framework has been used extensively in research in 6 recent years to help explain differences in performance rates for businesses of all kinds. Hofstede’s framework, when applied to these measures, includes aspects of cultural differences that are not equally important once considered as explanations used for describing certain statistical phenomena. 2.3 The Role of Imposed Quotas and Country Regulations Another topic for debate in determining female participation highlights the use of quotas and regulations imposed on a country for gender equity attainment reasons. The introduction of female quotas in Italy in the 1990s tripled the probability of voting for women (De Paola & Scoppa, 2010) and increased female representation in politic (Bonomi, Brosio, & Di Tommaso, 2013). (Kang, 2013) found that the success of gender quota laws in Niger depended on the design of the law, the institutional context, and having female activists monitoring its application. The perceived notion concerning gender quotas most often accredits an achievement of superior levels of gender proportion directly to strength in regulation levels for a country. Contrarily, the issue can become quite paradoxical and as a result, proves to be a dilemma that is increasingly far reaching. In 2014, only 20% of directorships on average were held by female directors in the largest European companies, with an important heterogeneity across countries. These further supplement gender inequality statistics as they point towards an overwhelming underrepresentation of females and their inclusion within most labor force sectors across the globe, especially within leadership positions and higher levels of business and finance. As a result, improving board-level gender diversity has become a global agenda that aims to promote gender equality in our societies. This “global agenda” is commonly perceived as an efficient means for increasing firm accountability and improving performance through better corporate 7 governance. (Rebérioux & Roudaut, 2016) Unfortunately, this link is not so straightforward, especially regarding quotas. For example, in 2008 the Norwegian experience completed the first implementation of a gender quota and provided results inconsistent with their hypothesis as they further demonstrated a negative relationship between gender diversity and firm performance. (Storvik & Teigen, 2010) Quotas have shown inconsistent results across countries as they have been noted within a vast amount of research globally. Highlighting Sweden and Finland as primary examples, corresponding data per country revealed boards had achieved successes in board diversity without the use of quotas. Both countries contained top ranking values for female representation on boards and paradoxically contained zero targets regarding the improvement of gender diversity. (Kamonjoh, 2014) When looking at within-board effects rather than between, other studies have provided conflicting results concerning the effectiveness of gender quotas. Within French boards, quotas have successfully opened the doors of boardrooms to new, unseasoned females and have distinctive characteristics that set them apart from other board members. Additionally, this influx of women into French boards were all subjects that – whether a seasoned female or not – experienced an inner glass ceiling with “positional” gender segregation. This also resulted in an associated gender fee gap of 5% due to the amplification of the segregation process from the imposed quotas alone. Although these quotas have helped women enter the boardroom, it has not succeeded in preventing positional gender segregation within board composition. (Frijns & Dodd, 2014) The Institutional Shareholder Services further analyzed the average gender diversity on boards at companies in 30 countries around 5 continents. This study compared the differences between genders and further conducted an analysis on its various related drivers, including regulation as a primary explanatory variable. 8 (Kamonjoh, 2014) Results reveal that levels of gender diversity are disproportionate across countries and intrinsically encompass supplementary variables that should be accounted for in order to more accurately explain the variation amongst labor participation ratios between genders across cultures. Many believe incorporating a maternity leave policy can aid in increasing the rate of females in the labor force. While maternity leave policies can support female labor force participation rates (Jaumotte, 2003), it also has a non-linear effect on labor force participation rate when accounting for the duration of leave. (Edin & Gustavsson, 2008) Independent of duration, maternity leave has a negative effect on the gender gap (Thévenon & Solaz, 2013). Additionally, the presence of a maternity leave policy that is long in duration as compared to a paternity leave policy that is short in duration (or entirely non-existent) can encourage employer discrimination (Mandel & Semyonov, 2005) As such, cultures need policies with a greater parity between the maternity leave and paternity leave. Keeping these disparities in mind, it is apparent that not all regulation is equal in terms of its efficiency for increasing female participation country-by-country. As such, this is a farreaching dilemma and entails additional variables beyond a country’s presence of mandatory quotas as primary means for achieving gender diversity on a global scale. As such, the question remains whether a society’s differing cultural aspects can provide advantageous economic impacts that may further reflect social trends towards assuring gender equity in labor force participation rates. 9