Scott, W. R. 2001. Unbundling institutions. New York: Homes & Meier Publishers. Witt, M. A., Kabbach de Castro, L. R., Amaeshi, K., Mahroum, S., Bohle, D., & Saez, L. 2018. Under the 2% IMMT, a two cents per dollar tax is added to transactions between $10 and $500 000. ), Beyond the cultural turn: New directions in the study of society and cultureBerkeley: University of California Press. Economics as a Process: Essays in the New Institutional Economics. The institutional literature is made up of not one but three distinct paradigms: rational choice institutionalism, organizational institutionalism, and historical institutionalism (Campbell, 2004; Campbell & Pedersen, 2001; Hall & Taylor, 1996; Hotho & Pedersen, 2012; Kostova, Beugelsdijk, Scott, Kunst, Chua, & Essen van, 2020).5 These have areas of commonality, but also important ontological differences that can at times be incompatible. 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. These rules provide the fundamental building blocks of society, as they create the structure whereby actors3 can operate and interact. Much of this literature therefore would be better categorized as being part of the culture literature. Perrow, C. 2002. Introduction The impressive worldwide growth of foreign direct investment (FDI) has resulted in multinational enterprises (MNEs) becoming important players in both developed and emerging markets ( Dunning and Lundan, 2008 ). Other promising topics that have received limited attention in the IB literature include informal institutional capital (Gao, et al., 2018), informal institutional voids (Garrone et al., 2019), relational reliability (Zhou & Poppo, 2010), and informal institutional distances/differences (Liu et al., 2019; Sartor & Beamish, 2014). Li, J., Yang, J. Y., & Yue, D. R. 2007. There have been several efforts to build bridges across the three different institutional traditions. informal and formal revocable trust deposits. Competitive strategy. Institutions (singular: institution) are humanly devised structures of rules and norms that shape and constrain individual behavior. Three of the papers in the SI build most directly from OI. ), Organization theory and the multinational corporation: 5376. Of course, if we consider work that focuses on the normative pillar as capturing informal institutions, the number of articles would be much greater, but that may not always be the intention of the authors. Collectively, they are likely to become important models for future research on informal institutions and will thus help to advance the field. For instance, Campbell (2004: 1) sought to develop an all-encompassing definition and suggested the following: Institutions are the foundation of social life. Hall, P. A., & Taylor, R. C. 1996. Triandis, H., Bontempo, R., Villareal, M., Asai, M., & Lucca, N. 1988. 2001. Jiang et al., (2014: 349) measure informal institutional distance using Hofstedes cultural dimensions data and Kogut and Singhs method. 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). Elaborating the new institutionalism. The Oxford Handbook of Political Institutions, 5: 320. Journal of Management, 42(1): 143173. Identity, community, and audience: How wholly owned foreign subsidiaries gain legitimacy in China. Zhou, L., Wu, W. P., & Luo, X. Furthermore, the institution-based view perspectives arguments and logics are primarily consistent with an economics perspective and with RCI. European Management Journal, 32(1): 132136. Rutherford, M. 1996. B. Journal of Management, 17(1): 99120. 2009. Bond, M. 1988. Kostova, T. 1999. Each makes important contributions to the literature on informal institutions and international business. By this we mean that either theoretically the two terms are used interchangeably, which measures of culture are used to capture informal institutions, or both (see footnote for specific examples).4 Furthermore, the main measures of culture used in this literature (e.g., Hofstede, 1980, 2001; House, 1998; Schwartz, 1992) are based on values and do not capture shared rules, such as norms, customs, and traditions. London/New York. Journal of Management, 39(2): 531566. These informal institutions include common values, cognitions, beliefs, traditions, customs, sanctions, and norms of behavior that are often expected or taken for granted (North, 1990, 2005). Calvert, R. (1995). American Sociological Review, 51: 273286. EN. This study focuses on the negative versus positive perceptions of Moroccan, Chinese, and German entrepreneurs to formal and informal institutions, and the associations of these perceptions with self-efficacy and market versus network . 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. The last column in Table1 aims to summarize these efforts, while also adding some elements we believe could help further bridge the gap across the frameworks. This can help enhance other theories by bringing an important contextual element that they often lack. Knight, J. Meyer, K. E., Estrin, S., Bhaumik, S. K., & Peng, M. W. 2009. Seeking assurances when taking action: Legal systems, social trust, and starting businesses in emerging economies. Interorganizational relations in industrial systems: A network approach compared with the transaction-cost approach. The future of the multinational enterprise. New York: Cambridge University Press. Golesorkhi, S., Mersland, R., Randy, T., & Shenkar, O. Organizational behavior 2: Essential theories of process and structure, 371. Tung, R. L., & Verbeke, A. Journal of International Business Studies, 50(1): 419. Informal institutions are defined as morals, values, conventions, norms, traditions, codes of conduct, habits, attitudes, and beliefs. As another example from the IB literature, Westney (1993) focused on bridging the gap between institutional pressures and efficiency or technical rationality. (Eds.). Section4 identifies gaps in the literature and proposes a future research agenda. These are coercive, mimetic, and normative isomorphism (DiMaggio & Powell, 1983; Mizruchi & Fein, 1999). 2013. Journal of International Business Studies, 41 (8) (2010 . In V. Taras, & M. A. Gonzalez-Perez (Eds. Djankov, S., Glaeser, E., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. The impact of vicarious experience on foreign location strategy. Furthermore, institutions are humanly devised in that they do not arise on their own or exist in a vacuum. It is also important to highlight why informal institutions matter and need to be studied in their own right (Godlewska, 2019; Granville & Leonard, 2010; ODonnell, 1996; Saka-Helmhout, Chappin, & Vermeulen, 2020; Weyland, 2002; Williamson, 2009). Our research contributes to the international business literature by examining the micromechanism of the interplay between formal and informal institutions and to the international entrepreneurship literature by highlighting the critical role that individual cognition plays in new ventures' internationalization decision-making. Lebanon shows that the most important corporate features can be informal. In previous articles, we have discussed the advantages and strategies of each, but today we are making a thorough comparison. As we discussed, each of the frameworks has strengths and weaknesses, often based on their disciplinary backgrounds, training, and focus. Strategic Equilibrium refers to the static case where institutions tend to remain static over time. Download Free PDF. A the institutional framework, governing a particular context is made up of formal and informal institutions governing individual and firm behavior. Another relevant area of research is that of non-market strategy (Baron, 1995), which refers to a firms concerted pattern of actions to improve its performance by managing the institutional or societal context of economic competition (Mellahi, Frynas, Sun, & Siegel, 2015: 143). 2019. The impact of market based institutional reforms on firm strategy and performance: Review and extension. J Int Bus Stud 53, 9851010 (2022). At the same time, OI has advanced our understanding of institutional processes significantly, so it could play a pivotal role in bridging the gap with the other frameworks. Kim, P. H., & Li, M. 2014. In common parlance and in some research (e.g., Teegen, 2003), the term institutions is often used to refer to well-established organizations (e.g., governments, international organizations, non-governmental organizations, etc. However, it may also occur unconsciously, such as when social sentiment evolves slowly over time on an issue, leading to new and shifting norms and expectations. Shleifer, A., & Vishny, R. W. 1998. We encourage additional work in these areas. Long Range Planning, 49(1): 129144. DiMaggio, P. 1997. Culture, cognition, and evolution. 2019. Special issue introduction: Historical research on institutional change. 1994a. One of the articles from the SI, entitled Bringing informal institutions into absorptive capacity research: A cross-country meta-analytic study, by Yao, Jiang, Combs, and Chang, connects informal institutions with absorptive capacity research using a meta-analysis methodology. : 475. ), Handbook of institutional approaches to international business: 236273. Selznick, P. 1957. Punctuated Equilibrium tells us that institutions are in a state of equilibrium (no change) for certain periods of time but that there are certain bursts or moments when there are radical changes (e.g., due to revolutions, political changes by dictators, natural catastrophes, etc.). Conversely, a trustworthy relationship with the government and other individuals makes people more inclined to comply. However, the bulk of prior research has focused on formal institutions, such as in studying how market reforms and other regulatory changes affect international business strategy and performance over time (e.g., Dau, Moore, & Kostova, 2020; Young, Welter, & Conger, 2018). Another example is common law, which is based not just on written rules (laws), but also largely on unwritten norms relating to legal history, precedent, and custom (Schauer, 1989). We focus on the four largest emerging economies: Brazil, Russia, India, and Chinacommonly referred to as the BRIC countries. This gap is particularly problematic in developing and emerging markets with weaker formal institutions, where informal institutions may have a more prominent role, enabling and facilitating business transactions (Khanna & Palepu, 1997, 2000; Li & Fleury, 2020; Verbeke & Kano, 2013). 1, 2nd edition. Hotho, J. The new institutional economics: Taking stock, looking ahead. Administrative Science Quarterly, 44(4): 653683. This provides an advantage for HI that could help enhance work on informal institutions in IB. Much prior work in IB and other fields has treated culture and informal institutions as synonymous. Scott explains that the Regulative pillar includes formal and informal rules, as well as enforcement mechanisms. However, a careful reading of North (1990, 1991, 2005) and others (e.g., Acemoglu et al., 2001; Djankov et al., 2003; Shleifer & Vishny, 1998; Williamson, 1985, 2000) suggests that what they refer to as informal institutions is consistent with the Normative pillar, as it captures shared norms and expectations of behavior. As mentioned in section2, papers can for instance examine the specific role of informal institutional structures such as Guanxi/Guanxiwang in China, Blats/Svyazy in Russia, Wasta in the Arab World, Yongo in Korea, Kankei in Japan, Jeito/Jeitinho in Brazil, and grease payments in different parts of the world. Journal of Economic Issues, 40(1): 125. Annual Review of Sociology, 23(1): 263287. Lehman, D. R., Chiu, C. Y., & Schaller, M. 2004. Understanding how IB influences institutional change and vice-versa can also be a rich area for additional research. Organization Science, 15(2): 200209. In J. Goldstein, & R. O. Keohane (Eds. Historical institutionalism. European Journal of Personality, 16: 163184. American Journal of Sociology, 91(3): 481510. Organizing America: Wealth, power, and the origins of corporate capitalism. We discuss a possible way to address these issues in the Reconciliation Efforts section below. American Journal of Sociology, 108(4): 795843. A formal institution permits or forbids activities through laws and regulations. New York: Willey. Northeastern University, 309 Hayden Hall, 360 Huntington Ave., Boston, MA, 02115, USA, Florida International University, 11200 S.W. Moreover, by outlining the three main institutional traditions, how their logics can be incommensurable, and the role of informal institutions in each, it helps clarify prior ontological confusion in the literature and sets up the field to move forward on a more solid foundation in its study of informal institutions and international business. In terms of the level of analysis in RCI, formal and informal institutions are typically conceptualized at the national or societal level, with a particular interest in how they affect micro-economic transactions, or exchanges between organizations. Work on informal institutions has been more limited, likely in part due to the difficulty in their conceptualization and limited availability of appropriate measures (Sartor & Beamish, 2014). Although this is a broad framework that can encompass the effects of business on both formal and informal institutions, most work has focused on the former [particularly on corporate political activity and strategic corporate social responsibility (Mellahi et al., 2015)]. Sewell, W. 1992. Our assessments, publications and research spread knowledge, spark enquiry and aid understanding around the world. Academy of Management Journal, 50(1): 175190. This is perhaps the least popular view, as it would entail no institutional change. Academy of Management Journal, 45(1): 215233. Mellahi, K., Frynas, J. G., Sun, P., & Siegel, D. 2016. As with the other two approaches, the understanding of how institutions change can vary, either through a Strategic Equilibrium, Punctuated Equilibrium, Evolution, or Punctuated Evolution. b. False True India is a democracy as its citizens elect representatives to govern the country on their behalf. An institution-based view of executive compensation: A multilevel meta-analytic test. Kim, H., Kim, H., & Hoskisson, R. E. 2010. Carraher, S., & Shi, W. S. 2017. The internationalization of entrepreneurial firms from emerging economies: The roles of institutional transitions and market opportunities. It is also known as Neo-Institutional Theory (Meyer, Scott, Zucker, DiMaggio, & Powell, 2005). 15 Informal International Lawmaking as a Panacea in the Absence of Regime Focus? The papers in this SI showcase the untapped potential of the study of informal institutions in the IB literature. 1998. Formal and informal institutions combine to govern firm behavior. Institutional perspectives on political institutions. Chen, C. C., Chen, Y. R., & Xin, K. 2004. 2013. ), Communication between culturesBelmont: Wadsworth. Zhou, K. Z., Gao, G. Y., & Zhao, H. 2017. The moderating impact of informal institutional distance and formal institutional risk on SME entry mode choice. Drawing from institutional theory, this research examined the effect of EE on the rates of student entrepreneurship, particularly how this relationship is moderated by formal and informal institutions. We believe this can lead to very interesting future IB work on informal institutions. The old version of OI first arose in the early 20th century, building on the work of Durkheim, Weber, and others. Theoretical issues in cultural psychology. California Management Review, 37(2): 4765. 2002. What are institutions? Theory and Society, 15(12): 1145. An institution-based view. International Business Review, 24(1): 3342. A key aspect of HI is that it considers both a logic of instrumentality and a logic of appropriateness as key incentives for action. Wis. L. Examining the role of informal institutions in attaining legitimacy is an important area that some of the SI papers tackle, as we discuss below. Hodgson, G. M. 1998. State ownership and firm innovation in China: An integrated view of institutional and efficiency logics. Princeton, NJ: Princeton University Press. Rokeach, M. 1973. The main difference between formal and informal institutions is that the former are written or codified while the latter are not (North, 1990, 2005). Also, there is work that spans more than one framework, with or without explicitly stating this as an effort to combine them or bridge them. The approach of institutional economics. Journal of Comparative Economics, 31(4): 595619. Then, Table2 provides a brief summary of the SI papers, including which institutional tradition each of them is most closely aligned with, their conceptualization of informal institutions, and the context(s) they study. Hodgson, G. M. 2006. Krasner, S. D. 1984. Social trust in subnational regions and foreign subsidiary performance: Evidence from foreign investments in China. Academy of Management Review, 27(4): 608618. Peters, G. & Pierre, J. 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. Its disciplinary origins can be traced back to the old institutional economics and neoclassical economics of the early 20th century, as it draws its foundational ideas from both (Campbell, 2004; Hodgson, 1998, 2006; Rutherford, 1996). Luis Alfonso Dau. Addressing the cross-boundary missing link between corporate political activities and firm competencies: The mediating role of institutional capital. 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. Por ltimo, identifica reas que han recibido poca Annual Review of Psychology, 55: 689714. New York: Russell Sage Foundation. Factional groups: A new vantage on demographic faultlines, conflict, and disintegration in work teams. Baron, D. P. 1995. (Eds.). Journal of World Business, 53(3): 403414. New York: Free Press. Schwens et al., (2011: 331) define informal institutional distance as the cultural and ideological differences between a firms home and host country, measured by indices from the GLOBE study (ibid: 338). The American Economic Review, 84(2): 406411. Dau, L.A., Chacar, A.S., Lyles, M.A. Institutions and social conflict. Of the different institutional perspectives, HI has received relatively less focus in IB and related literatures (Aguilera & Grgaard, 2019), with some notable exceptions (e.g., Musacchio, 2009; Schneider, 2004). This chapter-report analyzes the current state of formal and informal procedure and processes in American law, prepared for the International Association of Procedural Law (meetings held in Moscow, September, 2012). In the latter, this perspective is often referred to as Comparative Institutionalism (Hotho & Pedersen, 2012). d. Campbell, J. L. 2004. As in the case of formal institutions, we add to this literature by showing that the pro-trade eect of migrant networks increases with dis-tance. Culture in action: Symbols and strategies. Toward a theory of international new ventures. 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. It is also known as institutional economics or new institutional economics. Filiou, D., & Golesorkhi, S. 2016. The future of business groups in emerging markets: Long-run evidence from Chile. The three faces of China: Strategic alliance partner selection in three ethnic Chinese economies. Scott suggests that the Regulative pillar encompasses the formal and informal rules and enforcement mechanisms as outlined by North (1990), which would mean that RCI fails to include the Normative and Cultural-Cognitive pillars altogether. https://doi.org/10.1057/s41267-022-00527-5, DOI: https://doi.org/10.1057/s41267-022-00527-5. Doctoral Dissertation. 2013. 15; August 2012 30 The Impact of Formal Institutions on Global Strategy in Developed vs. However, OI differs from the others on the underlying mechanisms for how diffusion occurs. Informal institutional frameworks can vary dramatically across contexts, so examining different ones can yield unique and important findings. Principal-principal conflicts under weak institutions: A study of corporate takeovers in China. New York: The Guilford Press. Work in sociology also often focuses on the societal level, which may or may not be equivalent to the national level. Profiting from globalization: Pro-market reforms, firm internationalization strategy, and firm profitability. Organization Studies, 41(11): 15511575. Comparing capitalisms and taking institutional context seriously. ), Polyphonic anthropology: Theoretical and empirical cross-cultural fieldwork: 175186. In addition, OI work often puts more emphasis on the Normative and Cultural-Cognitive pillars than on the Regulative pillar (Campbell, 2004). It then reviews the literature on the three main institutional traditions, explaining for each the role of informal institutions, and connecting them to the IB literature and Special Issue articles. 3 An example of an informal institution is the norm of In S. Ghoshal, & D. E. Westney (Eds. However, it has had a more limited impact on economics. Institutions and international entrepreneurship. (2013: 531) refer to the countrys informal institutions, in the form of the cultural dimensions of collectivism and future orientation. 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). International Journal of Business and Social Science Vol. IB work on informal institutions in this tradition could thus examine how mechanisms of efficiency and legitimacy interact in explaining firm behavior. Third, based on the preceding two points, informal institutions can serve different purposes vis--vis their formal counterparts. Hitt et al., (2016: 60) refer to informal institutions (e.g., culture). Informal institutions can include norms such as corruption, political ideology, and culture. However, on closer inspection of the references cited, assumptions drawn from, and logics developed in a particular publication, one can usually determine upon which framework they build (Campbell, 2004). First, the distinction between formal and informal consociational institutions does not map onto the more familiar contrast between liberal and corporate consociationalism, also known as the self- versus pre-determination of those entitled to a share of power. (Eds.). Ithaca: Cornell University Press. This could include anything from grocery stores to restaurants, petrol stations, banks, insurance companies, or more. They can also exist at the industry/sector level such as with the formal and informal rules among firms in an industry created by their membership in an industry association or chamber of commerce. Are indigenous approaches to achieving influence in business organizations distinctive? Here, we focus on the three main traditions and discuss different strands within each tradition. Witt, M. A., & Redding, G. 2013. Transnational transfer of strategic organizational practices: A contextual perspective. An evolutionary approach to understanding international business activity: The co-evolution of MNEs and the institutional environment. This editorial introduces the literature on informal institutions and international business (IB) as well as the Special Issue. American Economic Review, 91(5): 13691401. North, D. C. 1981. In W. W. Powell, & P. J. DiMaggio (Eds. Penrose, E. 1959. 2010. Stephan, U., Uhlaner, L. M., & Stride, C. 2015. The article finds that public sentiment in the host country toward the MNEs home country impacts the level of acquisitions by that firm in that host country. International Journal of Emerging Markets, 11(2): 121147. Individualism and collectivism: Cross-cultural perspectives on self-ingroup relationships. International Business Review, 28(5): 101584. But this is only the beginning as there is so much more work to be done on the topic, as per the areas for future research identified above. MNEs that believe they are perceived as legitimate in the host market will be more likely to acquire a greater share in the ownership of foreign operations in that market. 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. Academy of Management Proceedings, 180183. New York: Free Press. About us. Formal institutions Informal institutions Location Performance 1. In G. Wood, & M. Demirbag (Eds. For example, a business contract can stipulate which activities are acceptable and unacceptable by the parties in an agreement. Global standardization or national differentiation of HRM practices in multinational companies? Por fim, ele identifica lacunas e prope uma agenda para pesquisa futura. International Business Review, 28(5): 101485. Organizationsare groups of individuals bound by some common purpose to achieve objectives (North, 1990: 5). (Eds.). Chacar, A. S., & Hesterly, W. 2008. Finnemore, M. 1996. In addition, we had a full-day Paper Development Workshop (PDW) at the Academy of International Business (AIB) Annual Meeting and a panel at the Strategic Management Society (SMS) Annual Meeting to further provide detailed feedback from all the editors to the authors, have an open conversation among the editors and authors, and encourage cross-fertilization of ideas across the SI papers.