INTRODUCTION

Kenya’s president Mwai Kibaki ran in 2002 on a platform of ousting corruption in what is considered one of the most corrupt countries in the world. His effort to reduce graft in Kenya promised businesses a more hospitable environment for operations and, in turn, a higher economic growth. However, his promises have not come to fruition because corruption is still pervasive in Kenya. Corruption continues to limit the growth of businesses, making it much more difficult to obtain licenses and even birth certificates [Matheson 2005]. Interestingly, corruption does not seem to have a similar impact on economic performance in other regions. Chinese firms, for example, have excelled in the international market, despite the prevalence of corruption [Lin and Li 2003]. The contrasting experience of Kenya and China suggests that the economic impact of social and political variables, such as corruption, deserves more attention from economists. There is already a large literature on the impact of corruption and other institutions (i.e., social and political variables) on economic outcome [Hall and Jones 1999]. A number of studies have focused on the role of corruption [Kimuyu 2007; Shleifer and Vishny 1993; Mauro 1995], while others have focused on variables such as law and order [Commander and Svejnar 2007; Gaviria 2002]. These studies suggest that the disparity in economic performance across different countries can be partially attributed to differences in their institutional environments. In other words, countries with corrupt government officials, poor legal system, and excess government interference are likely to have poorer economic performance. An alternative stream of research also focuses on the role of culture as an important determinant of economic performance. According to Hofstede [1983], there are several distinctive culture dimensions (e.g., individualism versus collectivism, society’s views on autocratic power relations, etc.) which may affect overall economic performance by shaping social views of work, ethics, and change. These factors can indirectly influence productivity and innovation, which can provide another explanation for the persistent differences in economic performance across different countries [Barboza 2005]. As Franke et al. [1991] indicate, ‘‘differences in national culture rather than in material and structural conditions, are ultimate determinants of human organization and behavior, and thus of economic growth’’ (p. 165). This paper brings together two schools of thought: (1) institutions and (2) cultural dimensions. To the best of our knowledge, no study on firm performance has explicitly examined how institutions and culture influence firm performances. In particular, the paper contributes to the literature by exploring the relationship between institutions and culture. Of course, modeling these relationships become difficult due to a number of complexities. For example, it is not clear how government corruption impacts firm performance. On one hand, bribes and managerial resources used to expedite government regulatory activities to obtain business licenses will raise costs and reduce profits. On the other hand, bribes and managerial resources incurred to circumvent government regulations such as health and environmental standards may reduce the net cost to the company, even if it imposes social costs. Cultural attributes, such as individualism versus collectivism or a society’s views on autocratic power relations, may also explain why corruption is more acceptable in some cultures more than others. Thus, cultural attributes may impact institutional variables such as corruption, which in turn, may impact firm performance. As a first step toward understanding the complex relationship between culture, institutions, and economic performance, we therefore examine two questions in this paper. First, how do cultural dimensions affect the institutional environment in different countries? Second, how do these institutional factors influence the economic performance of firms in these countries?