formal and informal institutions in international business

Journal of International Business Studies, 39(4): 540561. The three main traditions can be further broken down into different research strands (e.g., Aguilera & Grgaard, 2019). Luis Alfonso Dau. We received over 80 submissions, showing the great interest that exists in the topic of informal institutions. However, they can overlap at times (Calvert, 1995; Helmke & Levitsky, 2004; Knight, 1992). At the same time, much of the work that has been done on informal institutions and IB uses them synonymously or interchangeably, theoretically and/or empirically, with the concept of culture. In formal institutions, these channels are official ones such as constitutions, laws, rules, courts, and legislatures. Journal of International Business Studies, 49(2): 222245. Miller, J. Perrow, C. 1986. Seeking assurances when taking action: Legal systems, social trust, and starting businesses in emerging economies. Journal of International Management, 9(3): 271285. ODonnell, G. 1996. The hierarchical structure of collectivism. Schemata in cognitive anthropology. The World Bank is seeking a consulting firm to undertake a study on informal settlement upgrading in Somalia. Granovetter defines institutions as follows: Social institutions are sets of persistent patterns defining how some specified collection of social actions are and should be carried out (Granovetter, 2017: 136). Furthermore, when formal institutions change, there is a clear paper trail, allowing for a straightforward examination of such change, whereas when informal institutions change or evolve, the resulting markers can be subtle and difficult to capture.2 As a result, studies examining informal institutions often rely on imperfect conceptualizations and measurements, which complicates their publication in top journals and thus reduces the incentives for authors to develop this type of work. Journal of International Business Studies, 40(3): 490508. An organizational field refers to a set of organizations within a given sphere, such as firms in the same industry, value chain, or location. The role of the state in the economy. It has been used particularly by game theorists (e.g., Bates, Greif, Levi, Rosenthal, & Weingast, 2020). Article Steinmo, S. 2001. 1996. Journal of Management, 39(2): 531566. The business of international business is culture. Rijeka: InTech. Liou et al., (2016: 601) state that informal institutional distance represents the national cultural differences. It is also known as Neo-Institutional Theory (Meyer, Scott, Zucker, DiMaggio, & Powell, 2005). Estrin et al., (2009: 1175) state that the notion of informal institutions encompasses culture. This latter term can lead to some confusion, as all three institutional paradigms emerged from older versions and have developed into the current new versions. Schein, E. H. 2004. At the same time, IB researchers from the three perspectives can learn much from each other and develop theoretical contributions by combining elements of the three, but this requires first clearly understanding the differences between them, then clearly explaining in the paper what those are and how they are relaxed or bridged. Chacar, A. S., & Celo, S. 2012. Furthermore, the fact that this SI garnered so many submissions is notable, as many of the papers not appearing in the SI are likely being published in other journals, leading to a renaissance of interest on the topic beyond what appears in this SI. American Sociological Review, 48: 147160. T/F: New institutional theory suggests that institutions be understood as collections of ruled and codes of conduct that limit behavior. Vernon, R. A. One may wonder why informal institutions should be of interest, instead of just studying formal institutions (which are typically easier to conceptualize and measure) as proxies for all institutions. This article has been with the authors for one revision and was single-blind reviewed. Exporting the American model: The postwar transformation of European business. Informal institutions, on the other hand, is a more narrow term that captures the actual unwritten rules and norms of behavior (North, 1990, 2005), which likely arise as a result of and in conjunction with the cultural framework, but also of formal structures in place in a given location (Helmke & Levitsky, 2004). Journal of International Business Studies, 11(1): 931. North, D. C. 2005. Markus, H. R., Kitayama, S., & Heiman, R. J. 2013. Evidence from foreign bond covenants, is an international finance paper that examines how the informal institution of social trust impacts international contracting. The Cultural-Cognitive pillar refers to the taken-for-granted beliefs and cognitive schemas and structures. Gendered effects of climate shock, formal and informal financial institutions, and welfare in post-conflict Somalia February 2023 DOI: 10.21203/rs.3.rs-2625587/v1 Under what institutional conditions does overseas business knowledge contribute to firm performance? 2018. Medical innovation: A diffusion study. In S. T. Cavusgil, & T. Madsen (Eds. Jiatao Li acknowledges the financial support from the Research Grants Council of Hong Kong (HKUST# 16507219). Mellahi, K., Frynas, J. G., Sun, P., & Siegel, D. 2016. Cambridge, MA: Harvard University Press. Similarly, they have indicated that the framework has struggled to develop some of the key underlying mechanisms for the theory, arguably because the theory provides a limited role for rationality and is over socialized (Granovetter, 1985). Similarly, future work can examine how firms develop internal capabilities and organizational learning (Crossan, Lane, & White, 1999) to better cope with informal institutional processes (Easterby-Smith & Lyles, 2011; Lyles, 2014) and multiple institutional logics (Besharov & Smith, 2014; Zhou, Gao, & Zhao, 2017). All definitions of institutions generally entail that there is a level of persistence and continuity. New York: Columbia University Press. Cet ditorial prsente la littrature des institutions informelles et des affaires internationales (International Business IB) ainsi que le numro spcial. Thousand Oaks: Sage Publications. For instance, Pejovich (1999: 166) suggests that informal institutions are the part of a communitys heritage that we call culture. Edwards, T., Sanchez-Mangas, R., Jalette, P., Lavelle, J., & Minbaeva, D. 2016. In the last column of Table1, we aim at providing some of the elements that could help move us in that direction. One example is a study by Dhanaraj, Lyles, Steensma and Tihanyi (2004), which addresses tacit (unwritten) knowledge, and how tacit knowledge is shared through social contexts in international joint ventures. Kim, H., Kim, H., & Hoskisson, R. E. 2010. Perrow, C. 2002. Rediscovering institutions. Guanxi vs. networking: Distinctive configurations of affect-and cognition-based trust in the networks of Chinese vs. American managers. Each approach uses path dependency as their process of change. Cambridge: Harvard University Press. Related to this notion, the three approaches use either a Strategic Equilibrium, Punctuated Equilibrium, Evolution, or Punctuated Evolution, to explain the process of change (or lack thereof) (Campbell, 2004). They include tax laws, legal regulations, political freedoms, ethno-linguistic fractionalisation, religion, and infrastructure. Path dependency tells us that history matters. The other paper, entitled Public sentiment is everything: Host country public sentiment toward home country and acquisition ownership during institutional transition, by Yiu, Wan, Chen, and Tian, examines informal institutions in the context of ownership in foreign acquisitions. Culture and the self: Implications for cognition, emotion, and motivation. Filiou, D., & Golesorkhi, S. 2016. This provides an advantage for HI that could help enhance work on informal institutions in IB. It argues and finds support for the notion that such historical informal institutional legacies can help explain current flows of foreign direct investment. Institutions, resources, and entry strategies in emerging economies. They all argue that institutions are embedded in social structures (Campbell, 2004). What formal and informal institutions and institutional systems are today is a function in large part of what they were yesterday (North, 1990, 2005). Do country-level institutional frameworks and interfirm governance arrangements substitute or complement in international business relationships? 1993. Journal of International Business Studies, 51(4): 467497. Hitt et al., (2016: 60) refer to informal institutions (e.g., culture). Khanna, T., & Palepu, K. G. 1997. The effects of institutional development and national culture on cross-national differences in corporate reputation. Albany: State University of New York Press. Institutional conditions for diffusion. Organizing America: Wealth, power, and the origins of corporate capitalism. Vaccaro, A., & Palazzo, G. 2015. Ann Arbor: University of Michigan Press. Markets and hierarchies, analysis and antitrust implications: A study in the economics of internal organization. In J. Berry, Y. Poortinga & J. Pardey, (Eds. Thelen, K. 1999. He tells us that institutions evolve slowly and incrementally over time. 2013. The issue with this is that the three paradigms are based on different assumptions, boundary conditions, and mechanisms or logics that are incommensurable or at odds with each other (Hay & Wincott, 1998). These are the values-based framework (e.g., Bond, 1987, 1988; Hofstede, 1980, 2001; House, 1998; House et al., 2004; Realo, Allik, & Vadi, 1997, 2002; Rokeach, 1973; Schwartz, 1992, 1994; Triandis, Bontempo, Villareal, Asai, & Lucca, 1988) and the cognitions-based framework (e.g., Casson, 1983; DiMaggio, 1997; Lehman, Chiu, & Schaller, 2004; Markus & Kitayama, 1991; Markus, Kitayama, & Heiman, 1996; Miller, 1997; Sewell, 1992, 1999; Sperber & Hirschfeld, 1999; Swidler, 1986). International Business Review, 3(1): 114. 2019. Through its conceptualization of superstition as an informal institution, the use of a qualitative methodology, and the study of a market that has received limited attention in IB, this article thus opens up interesting avenues that could lead to further important work. Policy paradigms, social learning, and the state: The case of economic policymaking in Britain. They are created, communicated and enforced through channels of generally accepted official organizations (courts, legislatures, bureaucracies) and state-enforced rules (constitutions, laws, regulations). In R. E. Goodin (Ed. International Business Review, 28(1): 104118. You are not currently authenticated. Of course, an alternative is to provide concerted efforts to integrate both literatures, which we would welcome, but doing so properly would be a more challenging approach. Journal of International Management, 21(2): 100116. Handbook of organizational learning and knowledge management. Notre Dame, IN: Kellogg Institute for International Studies. Whereas the former focuses on a Logic of Instrumentality or Instrumental Rationalitywhere organizations seek to increase efficiency and their economic benefitsthe latter explains behavior based on a Logic of Appropriateness. Also, examining how home- and host-country informal institutions may affect local and foreign-firm strategic responses differently (e.g., Chacar & Vissa, 2005), and how international firms respond to supranational institutions that cross borders, is an area that could benefit from additional work. ), Advances in international marketing: 1126, vol. Deephouse, D. L., Newburry, W., & Soleimani, A. A the institutional framework, governing a particular context is made up of formal and informal institutions governing individual and firm behavior. New York: Norton. Ithaca: Cornell University Press. Google Scholar. This is particularly common in institutional work in IB, where researchers often cite across traditions interchangeably without considering whether the views are compatible (Aguilera & Grgaard, 2019). It studies how foreign MNEs operating in Myanmar, where superstition is prevalent, are affected by and try to influence the role of superstition in their subsidiaries. For instance, societies may cross-national borders (e.g., the Basque society, which exists in parts of the nations of Spain and France) or only be in part of a nation (e.g., the society of Quebec, which exists in a region of Canada). University of Illinois Law Review, 1: 5. Both what organizations come into existence and how they evolve are fundamentally influenced by the institutional framework. Granovetter, M. 1985. Lewellyn, K. B., & Bao, S. R. 2014. Li, J. Cambridge: Cambridge University Press. International Business Review, 28(5): 101485. Como resultado, ha habido pocos trabajos sobre el tema, una falta de claridad sobre cmo conceptualizar y medir las instituciones informales, y un entendimiento limitado del papel que juegan en los negocios internacionales. a. Indeed, even within work on culture, there are two main traditions, each with distinct logics. It is the deeper level of basic assumptions and beliefs (Schein, 1985: 67; see also, Hofstede, 1980, 1994; House, Hanges, Javidan, Dorfman, & Gupta, 2004; Schein, 2004; Tung & Verbeke, 2010). This opens up an interesting line of research that could allow IB to more readily contribute to other disciplines, such as sociology and political economy, by examining how business can help shape unwritten social norms. Institutions, institutional effects, and institutionalism. Buckley, P. J., Doh, J. P., & Benischke, M. H. 2017. The recent literature on the impact of institutions on development has largely concentrated on the impact that institutions have on economic growth. It proceeds with a discussion of efforts to reconcile the different traditions and how this could help advance work on informal institutions. Why focused strategies may be wrong for emerging markets. ), The Oxford handbook of political scienceOxford: Oxford University Press. Journal of European Public Policy, 4(1): 1836. Governance, 9(3): 247264. First, we must emphasize the necessity of strengthening our understanding of institutions, including informal rules such as codes of conduct and practices in corporate economic activities, in addition to explicit rules such as economic laws that are part of economic institutions in target countries. Institutions and social conflict. In addition, a key distinguishing factor between formal and informal rules is the enforcement in place. Under the 2% IMMT, a two cents per dollar tax is added to transactions between $10 and $500 000. The other paper, entitled Societal trust, formal institutions, and foreign subsidiary staffing, by Gaur, Pattnaik, Singh, and Lee, is an international strategy paper that examines the effects of the interaction of host market social trust and economic freedom on the expatriate ratio of subsidiary managers. Law and finance. For instance, instead of seeing them as opposing underlying assumptions, theory could be developed for how the twin forces of profit-maximization and legitimacy-maximization create conflicting forces that lead to cognitive compromise. It also outlines efforts to reconcile the different institutional traditions and how IB can play a critical role in this respect. On the contrary, an informal institution involves the principle of self-employment. 2005. In the advent of globalization, the international business literature has increasingly emphasized the importance of considering the institutional environment, instead of studying firm behavior in a vacuum (Dau, 2012, 2013, 2017; Eden . The impact of communist norms and conventions, 19982004. institutions are multifaceted, durable social structures, made up of symbolic elements, social activities, and material resources They are relatively resistant to change They tend to be transmitted across generations, to be maintained and reproduced (Ibid: 49). Institutions and Organizations. Journal of Business Ethics, 57(3): 255268. First, it enriches institutional theory and innovation research by establishing a framework that encompasses multidimensional, formal, and informal institutional forces, with a focus on their independent and joint impacts on firms' innovation decisions and performance. Aguilera, R. V., & Grgaard, B. New York: Free Press. Realo, A., Koido, K., Ceulemans, E., & Allik, J. Socio-Economic Review, 11: 265300. Rev. Krasner, S. D. 1984. Factional groups: A new vantage on demographic faultlines, conflict, and disintegration in work teams. Success of crowd-based online technology in fundraising: An institutional perspective. Decker, S., sdiken, B., Engwall, L., & Rowlinson, M. 2018. Explaining social institutions: 5793. Journal of Personality and Social Psychology, 54: 323338. HI has been said to fall in between the other two views in that it focuses on social relationships, so it is socially embedded, but it also allows for rationality and agency (Campbell, 2004). The case of electricity in Sub-Saharan Africa. However, this is only a first step, as more work is required on this topic. In extreme cases, formal and informal institutions may lead to vastly dissimilar outcomes, requiring careful analysis of the motivations and mechanisms of each and the interactions between the two in order for the actor behavior to be fully understood (Helmke & Levitsky, 2004). Journal of International Business Studies, 41(2): 223245. American Journal of Sociology, 83(2): 340363. Indeed, at some levels, there may be very few written rules, but the unwritten norms are critical to understanding the mechanics of such social groupings. Princeton: Princeton University Press. they consist of formal written rules as well as typically unwritten codes of conduct that underlie and supplement formal rules (ibid: 4). North, D. C. 1981. 1992. Trojan horses or local allies: Host-country national managers in developing market subsidiaries. This paper finds that bond creditors in markets with higher levels of social trust tend to require fewer binding contracts or covenants on local bond issuers. T/F: Informal cognitive institutions are not important to international managers . Organizational behavior 2: Essential theories of process and structure, 371. This captures the way that formal and informal institutions are transmitted or diffused between actors, across generations, and so on. A key aspect of HI is that it considers both a logic of instrumentality and a logic of appropriateness as key incentives for action. This strand has sought to bridge especially aspects from RCI and from OI by drawing concepts from both. We are proud partners of several Institutions. Capturing unwritten rules, such as shared norms of behavior, can be challenging, as they can be considered invisible and tacit, and thus elusive (Dau, 2010, 2016; Dau, Moore, & Bradley, 2015). For instance, if a law clearly states that bribery is illegal, but informal norms have fully normalized this practice, then the two sets of rules are divergent or misaligned. Of course, this metaphor is also useful in that it shows us that one can decide to break the stipulated rules and draw outside of those lines, which may lead to a chaotic piece of art but may also lead to a novel and creative one. Commentary: Social institutions and social theory. The other was informal and unplanned. Weyland, K. 2002. Performance persistence and the impact of business group affiliation. After a rigorous review process, ten papers were accepted. Is the common law law? In order for research on the topic of informal institutions and IB to move forward, it is thus critical to clearly differentiate it from the literature on culture. Cultures consequences: Comparing values, behaviors, institutions, and organizations across nations, chapter 7. Elaborating the new institutionalism. The Oxford Handbook of Political Institutions, 5: 320. . In addition, it would be beneficial to have additional work on how informal institutions can influence international firm strategy (Dau, 2010, 2015, 2016). Institutions in economics: The old and the new institutionalism. Fukuyama, F. 2004. Our assessments, publications and research spread knowledge, spark enquiry and aid understanding around the world. Learning across geographic space: Pro-market reforms, multinationalization strategy, and profitability. The American Economic Review, 84(2): 406411. One could say that OI has aimed at capturing all of the different elements of the frameworks, by including formal and informal institutions in the regulatory pillar, norms and values in the normative pillar, and cultural cognitions in the cultural-cognitive pillar. ), The handbook of economic sociologyPrinceton: Princeton University Press. Young, S. L., Welter, C., & Conger, M. 2018. Journal of World Business, 53(6): 850861. This editorial introduces the literature on informal institutions and international business (IB) as well as the Special Issue. Xu, D., & Shenkar, O. Other articles in the SI also connect with the non-market strategy literature (e.g., Informal institutions, entrepreneurs' political participation, and venture internationalization by Li et al.). Rational choice, in being considered under socialized, has been able to simplify reality in a way that is easier to examine, but has lost some of the richness of social interaction as a result, while OI in being considered over socialized considers so much richness that it complicates fully teasing out its mechanisms. 1, 2nd edition. Institutions can be generally classified as formal and informal. Jindal Global University. The new institutionalism. Great transformations: Economic ideas and institutional change in the twentieth century. Garrett, G., & Weingast, B. This is unfortunate, as work on informal institutions could help enrich IB work not only across sub-disciplines, but also that connects sub-disciplines. These written and unwritten rules function together as part of this system, where changes in one can affect the other. The purpose of this SI is to encourage the study of informal institutions in international business (IB), deepen our understanding of these institutions and their role, and propose avenues for future research. A third article from the SI, entitled Navigating informal institutions in emerging markets: Entrepreneurs political participation, self-perceived status, and new venture internationalization and authored by Li, Wei, Cao, and Chen, also extends this stream by studying Guanxi as an informal institutional structure in the context of the effects of political participation of entrepreneurs on internationalization in China. Hambrick, D. C., Li, J., Xin, K., & Tsui, A. S. 2001. It is important to note that Table1 and the discussion of each framework provide a generalized or idealized case, based on the most seminal work and established positions within that view. Provided by the Springer Nature SharedIt content-sharing initiative, Over 10 million scientific documents at your fingertips, Not logged in Theory and Society, 37(5): 427. Contextualizing international learning: The moderating effects of mode of entry and subsidiary networks on the relationship between reforms and profitability. 2015. Comparing capitalisms and taking institutional context seriously. Xie, Z., & Li, J. Makhmadshoev, D., Ibeh, K., & Crone, M. 2015. Acemoglu, D., & Johnson, S. 2005. Download or read book Informal Institutions in Policy Implementation written by Anna Korppoo and published by Edward Elgar Publishing. Prior work has connected them primarily with work on transaction-cost economics, agency theory, and the resource-based view, but other theoretical frameworks could benefit from a deeper contextual understanding, so we would encourage work in this respect.