Cultural diversity and its impact on governance

Hofstede’s six cultural dimensions make it possible to measure the culture of countries but are criticized for assuming the homogeneity of each country. In this paper, we propose two measures based on Hofstede’s cultural dimensions which take into account the heterogeneous structure of citizens with respect to their countries of origin. Using these improved measures, we study the influence of heterogeneous culture and cultural diversity on the quality of institutions measured by the Worldwide Governance Indicators, which encompass Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. We use a linear regression model allowing for dependence in spatial and temporal dimensions as well as high correlation between the governance indicators. Our results show that the effect of cultural diversity improves some of the governance indicators while worsening others depending on the individual Hofstede cultural dimension. Most notably, diversity in the Power Distance cultural dimension has a negative impact on Political Stability.