Institutions and the Global Marketplace
Institutions are the parameters placed and enforced on a society to define acceptable behavior and interaction, also known as rules of the game (North, 1991). Institutional frameworks have two facets one formal the other informal. Formal rules are those imposed on a society by the state or ruling body, which has the authority to administer the rules. Informal institutions are the constraints placed on a society that are found in their “norms, culture, and ethics” (Peng M. , 2014, p. 94). Peng (2014) further states that three pillars “regulatory, normative, and cognitive” (94) support these institutions. Because the state has the authority to enforce its rules, regulatory pillar is its main support for formal institutions. Normative (how practices, principles, and ethics of others in a society affect the behavior of the individual) and cognitive (the individuals intrinsic understanding of what is right and wrong) pillars support informal institutions. While most societies have formal institutions, all societies have some informal institutions.
In the context of global business strategy, institutions play the role of regulating commerce and thereby reducing the cost of transaction. The nature of institutions varies from one country (or even region within a country) to the next. Even among developed western nations, differences in rule of law exist. For example in the United States, a company is free to insert any truth in publication, advertising, or products no matter how tasteless or offensive, it may not be wise business but it is legal. In the United Kingdom, that same article, ad, or product may be banned or result in a fine (Waters, 2008; Quinn, 2012; Cohen, 2011). In emerging markets, where laws are based on other than common law, differences in formal institutions are even greater. In some cases where rule of law is weak formal institutions may take second place to informal institutions.
Strong rules of law create or allow for the creation of institutions such as property rights, courts, banks, and police. A state with strong rule of law has the authority to enforce adherence to the rules by forcing parties to complete agreements or extract punishment from violators of the rules. In the absence of these institutions, societies rely on informal institutions. Informal institutions are effective in small local economies where parties are known to each other and are known to the rest of the society. A party’s success within this small economy depends on trust between parties; if someone within the society breaks the rules, the rest of the society knows and shuns that party effectively shutting them out of commerce. Informal institutions can leave owners of property, recognized by the local community as the owner, without title eliminating their ability to hold claim, sale, or to use it as collateral (Fandl, 2008). When parties involved are distant, do not know each other, or do not care...