Informal institutions and the international strategy of MNEs: Effects of institutional effectiveness, convergence, and distance

Abstract

Informal institutions influence all aspects of international business (IB), but they have received limited attention in the literature relative to formal institutions. This article extends prior IB work by examining the relationships between several key formal and informal institutional factors and the international strategy of MNEs. First, it examines the direct effects of formal and informal institutional effectiveness, convergence, and distance on MNE local adaptation, developing arguments and propositions for each relationship. Second, it focuses on the interactions of formal and informal institutional effectiveness and convergence to develop an eight-fold typology of market institutional configurations. This typology depicts the role that informal institutions take in a market depending on the interaction of these three institutional factors. Third, it builds on these interactions and the concept of institutional distance to develop a conceptual framework of market and MNE institutional diversity and dynamism. This framework captures the formal and informal institutional relationships within a home market, host market, parent firm, and foreign subsidiary, as well as the formal and informal institutional relationships across each of these entities over time. In so doing, this article helps advance research on informal institutions and IB, which can lead to considerable future work on the topic.

The influence of state ownership on environmental proactivity: An institutional perspective of international firms

“…Indeed, the management literature supports the finding that a larger dissimilarity between institutional standards in the home and host market implies further pronounced differences between the legitimacy of local practices and institutional requirements abroad (Beugelsdijk et al, 2018;Dau et al, 2022;Reus & Lamont, 2009;Wei et al, 2020), leading to potential conflicts in a firm's strategic choices and practices derived from such cultural distance (Drogendijk & Holm, 2012;Lee et al, 2021;Schwens et al, 2011;Siegel et al, 2013).…”

“…Finally, a firm's expansion into new international markets often entails environmental institutional distances due to the cultural differences in green practices that exist between the firm's home and host country (Aguilera‐Caracuel et al, 2013; Ko et al, 2021; Ye et al, 2022). Indeed, the management literature supports the finding that a larger dissimilarity between institutional standards in the home and host market implies further pronounced differences between the legitimacy of local practices and institutional requirements abroad (Beugelsdijk et al, 2018; Dau et al, 2022; Reus & Lamont, 2009; Wei et al, 2020), leading to potential conflicts in a firm's strategic choices and practices derived from such cultural distance (Drogendijk & Holm, 2012; Lee et al, 2021; Schwens et al, 2011; Siegel et al, 2013).…”

Inter-state war, institutions and multinationals: insights from the Russian-Ukraine war

“…Informal institutions may partly explain this success. Ukrainian MNEs may be relying on home market informal institutions such as social capital and resilience to protect assets, relocate activities or to secure new business (Dau et al , 2022). In addition, given that political violence can entrench or create new informal norms at the local level (Bellows and Miguel, 2006), future studies should understand how host market informal institutions evolve as a result of political violence, the impact for MNEs and how MNEs may influence such change.…”

The formalization of microenterprises in middle-income countries: informal institutions as a mechanism to address institutional incongruence

“…As such, informal institutions compensate for the shortcomings of formal ones, providing a sort of legitimacy in the absence of effective formal institutions ( de Soto, 1989;Easterly, 2010). This marks a stark difference from high-income countries such as the United States, Canada and much of Western Europe, where informal institutions are meaningful but to a relatively lesser extent than in other parts of the world (Dau et al, 2022a(Dau et al, , 2022b.…”

“…One reason that informality has persisted is institutional congruence, defined as the degree to which formal and informal institutions are aligned and reinforce one another (Dau et al, 2022a(Dau et al, , 2022b. Recent studies show that, often, the higher the institutional incongruence the greater the number of unregistered businesses (Siqueira et al, 2016;Thai and Turkina, 2014;Webb et al, 2009), particularly in low-and middle-income settings (Vu, 2014;Webb et al, 2013Webb et al, , 2009Webb et al, , 2010Moore et al, 2021).…”