INTRODUCTION

It is our pleasure to introduce this Special Issue (SI) of the Journal of International Business Studies. 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. Given the importance of context in IB, the literature has increasingly considered the institutional environment, instead of studying firm behavior in a vacuum (e.g., Chacar & Vissa, 2005; Chacar, Newburry, & Vissa, 2010; Dau, 2012, 2013, 2018; Eden, 2010; Gaur, Ma, & Ding, 2018; Kostova, 1996, 1997; Kostova, Roth, & Dacin, 2008; Li, 2013; Li & Qian, 2013; Xie & Li, 2018). Still, a gap exists in our understanding of informal institutions, as formal institutions have received the bulk of attention in the literature, but they only provide part of the picture (North, 1990, 1991, 2005; Williamson, 2009). 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).

In this SI, we understand institutions to be the shared and established “rules of the game in a society” (North, 1990: 3). They “are the humanly devised constraints that structure political, economic, and social interaction” (North, 1991: 97). Much attention has been paid to formal institutions, which are defined as the written (or codified) rules or constraints. These include laws, policies, regulations, constitutions, contracts, property rights, and formal agreements. On the other hand, much less attention has been given to informal institutions, which are defined as the typically unwritten but socially shared rules and constraints that generate social behavior expectations. These include shared norms, customs, traditions, sanctions, and reward structures (Helmke & Levitsky, 2004, 2006; North, 1990, 1994, 2005; Pejovich, 1999; Sartor & Beamish, 2014; Sauerwald & Peng, 2013). The more limited attention paid to informal institutions is not surprising, as informal institutions are more difficult to conceptualize and measure empirically than formal institutions (Li, Yang, & Yue, 2007).1

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). Some of these norms can be so embedded and fundamental to the functioning of a social structure that even individual members may fail to realize they exist and just see them as ‘the way things are’ (Chacar, Celo & Hesterly, 2018; Chacar & Hesterly, 2008). The behaviors themselves are visible, but the unwritten norms behind them are typically invisible. 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.

It is also important to highlight why informal institutions matter and need to be studied in their own right (Godlewska, 2019; Granville & Leonard, 2010; O’Donnell, 1996; Saka-Helmhout, Chappin, & Vermeulen, 2020; Weyland, 2002; Williamson, 2009). 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. Building on Helmke and Levitsky (2004), we explain that the reason for this is that formal and informal institutions can vary in how harmonious they are relative to each other, in the effectiveness of formal institutions and the subsequent role informal institutions take, in the purpose formal and informal institutions serve, and ultimately in the mechanisms and effects of each. First, formal and informal institutions may range in the degree to which they are convergent or divergent with each other in their outcomes. In other words, following formal rules may lead to certain outcomes, while following related informal rules may lead anywhere from very similar to very different outcomes, depending on how well aligned the two sets of rules are. 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. Second, formal rules may range from being effective to ineffective, and the role that informal institutions take in each case will also be different. Following from the example above, if the formal rules against bribery are in place but are weak and ineffective, informal rules against bribery may take their place, while informal rules favoring bribery may exacerbate their effects. Third, based on the preceding two points, informal institutions can serve different purposes vis-à-vis their formal counterparts. In particular, informal institutions can serve a complementary, substitutive, accommodating, or competing role to that of formal institutions. When formal institutions are effective and well aligned with informal institutions, the latter can serve in a complementary capacity, whereas when they are misaligned the latter can serve in an accommodating capacity. On the other hand, when formal institutions are ineffective, yet well aligned with informal institutions, the latter can provide a substitutive role, whereas when they are misaligned the latter can serve in a competing role. Fourth, as a result of the points above, the mechanisms and effects of formal and informal institutions can range from being very similar to being vastly diverse. 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). The relationship between IB actors and only formal institutions therefore misses a large part of the equation and can lead to incomplete and at times even inaccurate findings and conclusions. This belies the importance of incorporating informal institutions more squarely into institutional work in IB.

This editorial seeks to address these academic lacunae by providing not only an introduction to this SI but more generally an introduction to the topic and a brief review of the literature on informal institutions and IB. After teasing out the key definitions, it proceeds with a selective review to examine general trends in the literature, how the SI papers build on this, and areas for future research. It also classifies the relevant literature into the three main institutional traditions. Ultimately, this editorial strives to reveal what we can learn from studying informal institutions in an IB context, how informal institutions can help enhance our understanding of IB theory and phenomena, and how the study of informal institutions in IB can help contribute to other fields.

This SI has received significant attention and has gone through a meticulous and developmental review process. We received over 80 submissions, showing the great interest that exists in the topic of informal institutions. After a rigorous review process, ten papers were accepted. We worked closely with each of the authors to help them develop their work to its full potential. We are much obliged to the excellent reviewers who were also instrumental in this process. 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. Once the papers were finalized, we developed this essay, which provides an introduction and literature review that contributes to the SI and also to the topic at large. 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.

The papers in this SI showcase the untapped potential of the study of informal institutions in the IB literature. Each work presented in this SI ameliorates our understanding of informal institutions in IB. Collectively, they are likely to become important models for future research on informal institutions and will thus help to advance the field. Together, they also help further our understanding of how informal institutions shape IB, displaying variation across areas of study, topics, theoretical frameworks, levels of analysis, and contexts.

The remainder of the editorial is organized as follows: Sect. 2 further examines the definition of informal institutions in the context of the definitions of institutions and formal institutions, and also clarifies the difference between institutions and organizations, and between informal institutions and culture. Section 3 provides a selective literature review that outlines the three main institutional traditions, where informal institutions fit in, the IB literature on informal institutions in each tradition, and the contributions of the papers in this SI. It also outlines efforts to reconcile the different institutional traditions and how IB can play a critical role in this respect. Section 4 identifies gaps in the literature and proposes a future research agenda. The final section provides the conclusion.

WHAT ARE INFORMAL INSTITUTIONS? DEFINITIONS AND TERM DISAMBIGUATION

Institutions

Following from the definitions for institutions, formal institutions, and informal institutions provided above, here we delve deeper and further tease them out to better clarify them. Institutions are social rules that serve as guidelines of acceptable and unacceptable behavior (Helmke & Levitsky, 2004, 2006; North, 1990, 1994, 2005). These rules provide the fundamental building blocks of society, as they create the structure whereby actors3 can operate and interact. It is important to emphasize that they are shared as they occur at the social group level and not at the individual level. A rule or a belief held by a single individual is not an institution. Institutions are also established in the sense that they need to be actually implemented or in practice. Furthermore, institutions are humanly devised in that they do not arise on their own or exist in a vacuum. This may occur as a conscious effort, such as when a government decides to create new laws to constrain opportunism or malfeasance. 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. Moreover, institutions are intangible and thus not physical in nature.

The idea that institutions both constrain and enable refers to how institutions provide the boundaries and structure within which actors can operate. For example, a business contract can stipulate which activities are acceptable and unacceptable by the parties in an agreement. Similarly, the unwritten norms and traditions that develop over time in a particular family also provide guidelines for acceptable and unacceptable behavior that may or may not be unique to that family. A useful metaphor is to think of institutions as the lines in a new coloring book. The idea to ‘stay within the lines’ while drawing provides a constraint, but it also enables actors to operate within that space by providing structure. 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. In breaking established rules, actors can disrupt the institutional system, which can lead to social uproar and backlash, but it can also lead to institutional change and institutional innovations.

Institutions versus organizations: term disambiguation

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.), but it is important to distinguish between institutions and organizations for academic purposes to examine the relationship between them (Jepperson, 1991; North, 1990, 2005; Perrow, 1986, 2002; Scott, 2013). As North states, “what must be clearly differentiated are the rules [i.e., institutions] from the players [i.e., organizations and other actors]” (North, 1990: 4). “Organizations…are groups of individuals bound by some common purpose to achieve objectives” (North, 1990: 5). “Both what organizations come into existence and how they evolve are fundamentally influenced by the institutional framework. In turn, they influence how the institutional framework evolves” (North, 1990: 5). For instance, NATO is an organization that provides a formal institutional framework of written rules to which its member countries agree to adhere. Simultaneously, membership in NATO creates informal (or unwritten) institutional norms and structures between member nations, such as reciprocity and interdependency expectations.

Formal and Informal Institutions

The main difference between formal and informal institutions is that the former are written or codified while the latter are not (North, 1990, 2005). However, this distinction leads to other aspects that are important to consider. Formal institutions such as national laws and legal contracts are visible, so they are easier for individuals to understand what they are and how they work. There are typically also more evident repercussions of failing to follow such constraints, which may or may not be fully enforced in different societies, making them more salient for social actors. Informal institutions are unwritten, so they are largely invisible. The way that actors behave based on those informal institutions is often visible, but the unwritten rules that lead to those behaviors are invisible. For instance, a shared norm of politeness (what constitutes being polite to other people) is invisible itself, but the way people interact with each other as a result of that rule is visible. Informal institutions are also shared, so for many actors who are not exposed to other sets of informal institutions, they may readily believe that those institutions are universal or may even take them for granted and see them as the way that human beings interact de facto. Yet even if many actors fail to realize informal institutions even exist, they are the invisible strands that weave together the social fabric of society, which is why it is so critical to make them a key focus of IB.

In addition, a key distinguishing factor between formal and informal rules is the enforcement in place. Formal rules enforcement is undertaken by legitimate actors such as the state, supra-national or transnational organizations such as the WTO, or the firm. Social- and self-enforcement are the primary drivers of adherence to informal institutions. These can be enforced by a desire to ‘fit in’ in terms of expectations of social appropriateness and can sometimes be morally governed (Scott, 2008, 2013).

Institutional systems are sets of formal and informal institutions that operate together in a systemic and dynamic fashion. Such institutional structures change and evolve together in ways that affect each other. For instance, societies typically have a set of written laws that provide the formal institutional structure, while also having an invisible layer of invisible rules or norms that provide the informal institutional structure. These written and unwritten rules function together as part of this system, where changes in one can affect the other. For example, as shared social expectations of acceptable or desirable behavior evolve in a society, eventually laws will likely follow to mirror or counter these expectations. Similarly, as laws are implemented or changed, eventually public norms will evolve to mirror or counter these changes.

It is also important to differentiate between single informal institutions and informal institutional systems or structures, as these are typically simply referred to as informal institutions in the literature. A single informal institution would be one unwritten rule or norm, such as the norm of reciprocity (e.g., I do something for you and there’s a shared social expectation that you do something for me in return). An informal institutional system is a set of unwritten norms that work together and are not always easy to disentangle. Examples of these include 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 (Batjargal, 2007; Chen, Chen, & Xin, 2004; Chua, Morris, & Ingram, 2009; Ledeneva, 1998; Millington, Eberhardt, & Wilkinson, 2005; Opper, Nee, & Holm, 2017; Park & Luo, 2001; Smith, Torres, Leong, Budhwar, Achoui, & Lebedeva, 2012; Zhou, Wu, & Luo, 2007). 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). Each of these terms represents not just one norm, but a set of norms that together capture the rules governing processes of social interaction. Most of these have received limited attention in the IB literature and would be worthy of further study.

Informal institutions versus culture: term disambiguation

In the SI call for papers, we invited submissions on informal institutions and not culture. Much prior work in IB and other fields has treated culture and informal institutions as synonymous. 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. We thus propose that much of this valuable research would be better classified as being part of the IB literature on culture and not on informal institutions.

The terms informal institutions and culture are distinct. However, they can overlap at times (Calvert, 1995; Helmke & Levitsky, 2004; Knight, 1992). Definitions of culture vary in the literature, but it is often defined as a broader term in IB that captures “the collective programming of the human mind that distinguishes the members of one human group from those of another. Culture in this sense is a system of collectively held values” (Hofstede, 1984: 51). It “is the deeper level of basic assumptions and beliefs” (Schein, 1985: 6–7; see also, Hofstede, 1980, 1994; House, Hanges, Javidan, Dorfman, & Gupta, 2004; Schein, 2004; Tung & Verbeke, 2010). 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). For instance, whereas culture is often captured with broad values-based dimensions such as the degree of uncertainty avoidance (Hofstede, 1980), embeddedness (Schwartz, 1992), or assertiveness (House et al., 2004), informal institutions specifically refer to the shared unwritten norms or social expectations in a society, organization, or other social groupings.

More importantly, because institutional and cultural frameworks arose largely independently from different disciplinary and ontological traditions, their underlying assumptions, boundary conditions, and logics are often incompatible. Indeed, even within work on culture, there are two main traditions, each with distinct logics. 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). As the names of the two traditions suggest, the most evident distinction between the two is that the values-based framework (which has received much more attention in IB) conceptualizes culture primarily as shared values, whereas the cognitions-based framework moves away from values and instead conceptualizes culture as the underlying cognitions or cognitive-schemata. Describing the differences between the two cultural traditions (and even the differences within each tradition) is beyond the scope of this editorial, but it is important to note these conceptualizations are different from that of informal institutions as the shared unwritten rules or expectations of social behavior. For a more detailed treatment of the differences between the concepts of culture and informal institutions, see Helmke and Levitsky (2004).

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. 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. See also the Reconciliation Efforts section below.

LITERATURE REVIEW: INSTITUTIONAL TRADITIONS, INFORMAL INSTITUTIONS, AND IB

The Three Institutional Traditions and the Role of Informal Institutions in Each

To fully understand informal institutions, it is critical to examine how institutions are conceptualized in the different traditions and where informal institutions fit in. This section therefore provides a brief description of the main institutional traditions that have been developed in the literature. It also reviews the IB literature on informal institutions for each tradition, including the papers in the SI.

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. So it is critical to understand them for anyone doing work on the topic.

It can be challenging at times to tell the three frameworks apart, because many publications do not identify explicitly which one they draw from. This is particularly common in institutional work in IB, where researchers often cite across traditions interchangeably without considering whether the views are compatible (Aguilera & Grøgaard, 2019). 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). 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). It is thus critical to specify which one of these paradigms is being used to develop a body of IB work.

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. Indeed, as we discuss below, there are ongoing efforts to combine elements of all three views (e.g., Campbell, 2004; Campbell & Pedersen, 2001; Hall & Taylor, 1996; Immergut, 1998; Suchman, 1997; Thelen, 1999). This can be valuable as each perspective has different strengths and weaknesses, while also having problems in common that have proved challenging to resolve, but that may be addressed with a cross-perspective approach (Campbell, 2004; Hall & Taylor, 1996).

To help address these issues, we provide a brief overview of the three institutional frameworks. Table 1 summarizes the discussion, by displaying the differences and areas of commonality between the three paradigms. For each, it provides a brief historical description of its disciplinary origins and disciplines where it is used, the definition of institutions and how they are broken down, where informal institutions fit in, and the assumptions, boundary conditions, and mechanisms or logics that are most commonly used, as well as some seminal and representative articles. The final column draws from efforts to reconcile or combine elements of the three perspectives. Then, Table 2 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.

Table 1 Summary of main institutional traditions and role of informal institutions in each.
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Table 2 Summary of Special Issue papers
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It is important to note that Table 1 and the discussion of each framework provide a generalized or ‘idealized’ case, based on the most seminal work and established positions within that view. There are many exceptions as work within traditions may diverge, for instance by relaxing a commonly held assumption or developing alternate mechanisms. 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 “reconciliation efforts” column includes even more variability, as there is no consensus and efforts in this respect have often been disconnected and from different fields (e.g., Immergut, 1998; Lowndes, 1996; Peters & Pierre, 1999; Suchman, 1997; Thelen, 1999; Westney, 1993). We include in that column some of the main aspects that have been proposed for how such a commonality could be achieved, but acknowledge that these ideas are far from settled. We discuss this further in the Reconciliation Efforts section below. Furthermore, providing a comprehensive comparison of the three paradigms is beyond the scope of the editorial, due to space limitations.

We bring this discussion to the IB literature in order to show how IB research fits into these perspectives and can contribute to this literature, as well as how informal institutions fit into each view. Later, we will discuss that this can serve not only as a means to learn how to better incorporate institutional work to help strengthen the IB literature, but also to develop ways for IB to contribute to institutional work beyond an IB audience.

Rational Choice Institutionalism

Rational choice institutionalism (RCI) emerged from the field of economics in the 1970s. It is also known as institutional economics or new institutional economics. 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). It was developed through the work of scholars such as Williamson (1975, 1985, 2000), North (1981, 1990, 1991, 2005), and others (e.g., Acemoglu & Johnson, 2005; Acemoglu, Johnson, & Robinson, 2001; Djankov, Glaeser, Porta La, Lopez-de-Silanes, & Shleifer, 2003; Shleifer & Vishny, 1998). Over time, other disciplines beyond economics have increasingly contributed to this framework, including sociology (e.g., Coleman, 1990; Nee, 1998), political science (e.g., Peters & Pierre, 1999), political economy (Campbell, 1998), Law (Abbott, 2008), and international business (e.g., Cantwell, Dunning, & Lundan, 2010; Meyer, Estrin, Bhaumik, & Peng, 2009), making it a multidisciplinary paradigm.

Definitions, elements, and role of informal institutions

North’s definition of institutions is as follows: “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction” (North, 1990: 3). “...they consist of formal written rules as well as typically unwritten codes of conduct that underlie and supplement formal rules” (ibid: 4). This definition thus explicitly incorporates formal and informal institutions (North, 1990; Rutherford, 1996). This has become perhaps the most commonly used definition across disciplines, often found in work that builds on the other two institutional paradigms as well. This is likely because the definition is broad enough to encompass what all three perspectives refer to as institutions, as well as formal and informal institutions, while being specific enough to be meaningful yet easy to understand. This is why we embraced this definition for this SI, albeit the Special Issue call for paper submissions welcomed studies that built on different institutional traditions.

Incentive for action

An important aspect to understand about RCI is in what it perceives as the main incentive for action. It focuses on a logic of instrumentality (instrumental rationality), where actors behave instrumentally vis-à-vis their official mandates or goals. In this view, the focus is on efficiency. Although some authors have relaxed them, this perspective rests on several key assumptions, including rational self-interested behavior and bounded rationality of actors. This suggests actors will seek their own interest, but their rationality is limited by imperfect information availability and their cognitive capacity (Arthur, 1994a; Brinton & Nee, 1998; Coleman, 1990; Knight & Sened, 1998; Langlois, 1986; Rutherford, 1996; Scharpf, 1997). For instance, because informal institutions are not always evident in a market, foreign MNEs and managers operating there will often make decisions based on imperfect or incomplete informal institutional information, which can lead to unexpected and potentially even detrimental results.

Institutional change processes

One area in which there are more differences within each of the three institutional views than across them is in the mechanisms behind the process of change (Campbell, 2004). Each approach uses path dependency as their process of change. Path dependency tells us that history matters. What formal and informal institutions and institutional systems are today is a function in large part of what they were yesterday (North, 1990, 2005).

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). Strategic Equilibrium refers to the static case where institutions tend to remain static over time. This is perhaps the least popular view, as it would entail no institutional change. It has been used particularly by game theorists (e.g., Bates, Greif, Levi, Rosenthal, & Weingast, 2020). Evolution refers to the case where institutions evolve slowly and gradually over time. 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.). Punctuated Evolution tells us that institutions are always changing gradually and incrementally, but that there are moments when there are large changes (Blyth, 2002; Krasner, 1984). North (1990), for example, argues for path dependency based on an evolutionary pattern. He tells us that institutions evolve slowly and incrementally over time. He also mentions that formal institutions may change radically from one day to another, but that informal institutions will change much slower and will, in the long term, smooth out those radical changes. Therefore, in the long term, change will appear much more gradual and evolutionary. We would argue that the different authors are looking at institutional change with different lenses. Some, ‘zoom in’ more than others, if you will. If one looks at institutional change from ‘up close’, there may seem to be moments of equilibrium (no change), succeeded by moments of radical change. However, if one looks at the big picture, in terms of change over a longer period of time, the change will appear much more gradual.

Another important logic that is common to the three theories is the process of diffusion (Arthur, 1994b; Coleman, Katz, & Menzel, 1966; Strang & Meyer, 1993). This captures the way that formal and informal institutions are transmitted or diffused between actors, across generations, and so on. All three perspectives would argue that institutions are diffused through a process of path dependence, but the underlying mechanisms whereby this occurs vary for each of the three. RCI would be more likely to see diffusion as occurring through learning and coercive processes, such as governments forcing actors to comply with their laws.

Research in IB on the different processes of informal institutional change and how they relate to the processes of formal institutional change is an area that has received scant attention and that could lead to important advances in the field.

Analytical level

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. This focus on micro-level analysis lends itself well for research on institutions and firms, which helps explain why this perspective has taken root in business academia.

Contributions of the IB literature and SI articles

The IB literature has increasingly built on RCI, often referring to it as institutional economics or by other related names (e.g., Cantwell et al., 2010; Dau, 2012, 2013, 2018; Meyer et al., 2009). Given the clear distinction made between formal and informal institutions in the definitions for this perspective, it has also facilitated greater work on the latter (e.g., Gao, Yang, Huang, Gao, & Yang, 2018; Kshetri, 2018; Makhmadshoev, Ibeh, & Crone, 2015; Sartor & Beamish, 2014; Sun, Chen, Sunny, & Chen, 2019). It is thus not surprising that six of the ten SI papers most closely connect with this tradition. 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).

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). A strand that has received significant attention is that of work on corruption (e.g., Godinez & Liu, 2015; Lewellyn & Bao, 2017; Muellner, Klopf, & Nell, 2017), which by its very nature entails unwritten social norms of behavior. This work does not always refer to corruption practices as informal institutions or using informal institutional logics, which creates some degree of disconnect with other work on unwritten norms. We would thus encourage authors doing this type of work to explicitly connect it with informal institutions, to help advance this body of work in a more cohesive manner.

IB research has also focused on other informal institutions, such as social trust and guanxi, which can be important market differentiators, regardless of the formal institutions in place (Chua et al., 2009; Garrone, Piscitello, & D'Amelio, 2019; Kim & Li, 2014; Kshetri, 2015; Liu, Xia, Jiangyong, & Lin, 2019; Lu et al., 2018). Two of the SI articles extend this research by examining the informal institution of social trust. The paper by Brockman, Ghoul, Guedhami, and Zheng, entitled “Does social trust affect international contracting? Evidence from foreign bond covenants”, is an international finance paper that examines how the informal institution of social trust impacts international contracting. 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. 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. The article finds that the combination of high levels of social trust and strong formal institutions leads multinational enterprises (MNEs)6 to require a smaller percentage of their subsidiary managers to be from the home market. A third article from the SI, entitled “Navigating informal institutions in emerging markets: Entrepreneur’s 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. This paper finds that the effect of the political participation of entrepreneurs on their internationalization using high commitment modes of entry, is mediated by their resource acquisition and self-perceived status.

The literature has also examined the relationship between informal institutions and factors such as absorptive capacity and knowledge acquisition (e.g., Dau, 2010, 2015, 2016). 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. This paper finds that the effect of absorptive capacity on firm performance is greater in markets where informal institutions are in place that reduce behavioral and environmental uncertainty, and where informal institutions are well aligned with formal institutions. A second article, entitled “Understanding the unwritten rule of the game: Government work experience and salary premiums in foreign MNC subsidiaries”, by Sofka, Grimpe, and Kaiser, examines informal institutions in the context of government work experience and MNE salaries. This paper proposes that MNEs tend to hire employees with government experience and pay them a salary premium as a means of acquiring knowledge about the host market’s formal and informal institutions.

Another relevant area of research is that of non-market strategy (Baron, 1995), which “refers to a firm’s concerted pattern of actions to improve its performance by managing the institutional or societal context of economic competition” (Mellahi, Frynas, Sun, & Siegel, 2015: 143). 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)]. One of the SI articles helps address this gap by examining MNE activities as a potential antecedent to informal institutional change in a host market. In particular, the paper by Brandl, Moore, Meyer, and Doh, entitled “The impact of multinationals on community informal institutions and rural poverty”, finds that MNE acquisitions of land in host markets diminishes the informal institutions of local communities and increases poverty in rural areas. 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.). 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.

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). We encourage additional work in these areas.

Organizational Institutionalism

Organizational institutionalism (OI) arose from sociology and organizational theory (Powell & DiMaggio, 1991). It is also known as Neo-Institutional Theory (Meyer, Scott, Zucker, DiMaggio, & Powell, 2005). 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. The old version of OI first arose in the early 20th century, building on the work of Durkheim, Weber, and others. The new version came into prominence with the work of several organizational theorists (e.g., DiMaggio & Powell, 1983; Meyer & Rowan, 1977; Scott, 1995). As with RCI, OI is also multidisciplinary, with scholars from different fields working from this framework, particularly contributing to fields such as international relations (e.g., Finnemore, 1996; Jepperson, Wendt, & Katzenstein, 1996; Katzenstein, 1996) and international business (e.g., Kostova & Roth, 2002; Muralidharan & Pathak, 2017; Oliver, 1997; Stephan, Uhlaner, & Stride, 2015; Xu & Shenkar, 2002). However, it has had a more limited impact on economics.

Definitions, elements, and role of informal institutions

Scott’s definition of institutions is as follows: “Institutions provide guidelines and resources for acting as well as prohibitions and constraints on action” (Scott, 1995: 50). “… 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). This definition of institutions as ‘guidelines’ is therefore largely compatible with North’s (1990, 2005) definition as ‘rules’ of socially sanctioned behavior.

As opposed to the other two perspectives that separate institutions into formal and informal, Scott (1995) proposes that institutions are made up of three institutional pillars: Regulative, Normative, and Cultural-Cognitive. Scott explains that the Regulative pillar includes formal and informal rules, as well as enforcement mechanisms. The Normative pillar refers to shared norms, values, and normative expectations of behavior. The Cultural-Cognitive pillar refers to the taken-for-granted beliefs and cognitive schemas and structures.

A few points are important to note here. 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. 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. In addition, OI work often puts more emphasis on the Normative and Cultural-Cognitive pillars than on the Regulative pillar (Campbell, 2004). Furthermore, by including informal institutions in the Regulative pillar and not in the Normative pillar, it runs counter to the definition that the other two traditions use for such unwritten rules, making this perspective more difficult to reconcile with the other two. At the same time, the Cultural-Cognitive component is one that has not been fully incorporated into the other two institutional traditions, although there have been attempts at including cognitions to a greater extent (e.g., Garrett & Weingast, 1993; Goldstein & Keohane, 1993). We discuss a possible way to address these issues in the Reconciliation Efforts section below.

Incentive for action

An important difference between OI and RCI is in what it considers the main mechanism or incentive for action. Whereas the former focuses on a Logic of Instrumentality or Instrumental Rationality – where organizations seek to increase efficiency and their economic benefits – the latter explains behavior based on a Logic of Appropriateness. This Logic of Appropriateness suggests that organizations act appropriately in terms of their official goals, with the aim of achieving legitimacy (Harmon, Green, & Goodnight, 2015; Kostova & Zaheer, 1999). Organizations adopt whatever practices they believe their institutional environment deems appropriate or legitimate regardless of whether these practices increase organizational efficiency or otherwise reduce costs relative to benefits. This is a critical distinction that can lead the two perspectives to be at odds (March & Olsen, 2004, 2006; Meyer & Rowan, 1977; Scott & Meyer, 1994). Examining the role of informal institutions in attaining legitimacy is an important area that some of the SI papers tackle, as we discuss below.

Institutional change processes

An aspect of similarity among the three institutional paradigms is that they all suggest that institutions constrain the behavior of actors. OI makes it a point to tell us that institutions not only constrain, but also enable behavior (Clemens & Cook, 1999). However, although the other perspectives may not say this as explicitly, they do hint at this. For instance, North mentions that institutions both “define and limit the set of choices of individuals” (North, 1990: 4). The notion is that formal and informal institutions delineate the framework for action, providing actors the limits, boundaries, or constraints whereby they may act, but also providing them with a clear scope and guidelines that enable them to act.

As mentioned earlier, all three perspectives incorporate logics for the process of change and diffusion of institutions. 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. However, OI differs from the others on the underlying mechanisms for how diffusion occurs. It focuses on three mechanisms of diffusion or isomorphic pressures. These are coercive, mimetic, and normative isomorphism (DiMaggio & Powell, 1983; Mizruchi & Fein, 1999). Coercive refers to when actors are forced to comply with formal and informal rules and enforcement/compliance mechanisms. Mimetic occurs due to uncertainty. When actors are unsure as to what the best way to act is, they may tend to imitate others and in the process become more isomorphic (or similar). They may also engage in ceremonial or symbolic adoption of a practice (Kostova & Roth, 2002; Meyer & Rowan, 1977). Normative stems from professionalization. For example, managers will tend to be trained in similar universities which will lead them to be more similar than not. Also, employees will many times leave a company and go work for a competitor, so there will be similar ways of doing things across organizations. These three forces will lead organizations within an organization field to become more isomorphic among each other (DiMaggio & Powell, 1983).

Analytical level

In terms of the level of analysis, in OI, institutions are most commonly examined at the levels of the nation7 and organizational fields. The former is similar to the level of analysis of the other two perspectives. But the focus on organizational fields is unique to OI. An organizational field refers to a set of organizations within a given sphere, such as firms in the same industry, value chain, or location. More specifically, it refers to “those organizations that, in the aggregate, constitute a recognized area of institutional life: key suppliers, resource and product consumers, regulatory agencies, and other organizations that produce similar services or products” (DiMaggio & Powell, 1983: 148). This focus on organizational fields lends itself well to IB, which helps explain the popularity of this institutional approach in the field.

Contributions of the IB literature and SI articles

The IB literature has devoted considerable attention to OI (e.g., Dau et al., 2015; Kostova, 1999; Kostova & Roth, 2002; Kostova & Zaheer, 1999; Oliver, 1997; Xu & Shenkar, 2002). Indeed, of the three traditions, this has been the one that has generated the largest research output in IB, in part because of its focus on the national and organizational levels of analysis (Kostova et al., 2020).

However, the topic of informal institutions per se has received limited attention in this framework, likely due to its focus primarily being on the three pillars instead of on the formal and informal institutional distinction. 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. We propose ways to address this issue in the Reconciliation Efforts section below.

Three of the papers in the SI build most directly from OI. Each makes important contributions to the literature on informal institutions and international business. One of these articles, entitled “Impact of informal institutions on the prevalence, strategy, and performance of family firms: A meta-analysis”, authored by Berrone, Duran, Gomez-Mejia, Heugens, Kostova, and van Essen, develops a new informal institutional embeddedness index to examine family firms. The article finds that family business legitimacy increases the prevalence, strategic differentiation, and performance of family controlled firms, relative to non-family controlled firms. By developing a novel measure of informal institutions, namely the Family Business Legitimacy Index (FBLI), this paper can lead to significant future IB research on informal institutions and family business.

Another paper, entitled “MNC response to superstitious practice in Myanmar IJVs: Understanding contested legitimacy, formal–informal legitimacy thresholds, and institutional disguise”, by Andrews, Nimanandh, Htun, and Santidhirakul, uses a qualitative methodology to examine the effects of superstition in Myanmar on MNEs. 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. In the presence of conflicting formal and informal institutions in the market, MNEs may seek to accept, reject, or influence superstitious practice based on their perceived reputational risk and other factors. 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.

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. The article finds that public sentiment in the host country toward the MNE’s home country impacts the level of acquisitions by that firm in that host country. 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. By conceptualizing public sentiment as an informal institution, this article also opens an interesting topic that can be further examined in future work.

Historical Institutionalism

Historical institutionalism (HI) emerged and has been developed primarily in the fields of political science, political economy, and economic sociology (Fioretos, Falleti & Sheingate, 2016; Steinmo, Thelen, & Longstreth, 1992). In the latter, this perspective is often referred to as Comparative Institutionalism (Hotho & Pedersen, 2012). The roots of this perspective can be traced back to an older version of the institutional perspective dating back to at least the early 20th century and the work of Weber, Marx, and others. The newer version was developed through the work of scholars such as Polanyi (1957), Granovetter (1985), Block (1994), Hall and Soskice (2001), Fukuyama (2004), and others (Steinmo, 2001). The perspective is known as HI given its particular focus on historical trends over longer periods of time in society and the international political economy (Fioretos et al., 2016; Steinmo, 2008).

Definitions, elements, and role of informal institutions

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). These include formal and informal rules and compliance procedures (Granovetter, 1985; Thelen & Steinmo, 1992), giving informal institutions an explicit role and making this classification also compatible with that of RCI (North, 1990, 2005; Williamson, 1985, 2000). This definition using institutions as “patterns” instead of as “rules” can be valuable as it could be said to be more comprehensive than that put forth in RCI, as it can also encompass aspects such as cognitions, but at the same time it has been criticized for arguably being excessively broad and thus not specific enough.

Another important similarity between the three institutional approaches is in terms of social embeddedness. They all argue that institutions are embedded in social structures (Campbell, 2004). However, they do so to different degrees as per the discussion above. Based on the ideas of Granovetter (1985, 2017), one may argue that RCI is an under-socialized perspective, OI is over-socialized, and HI is a socially embedded perspective. RCI would be considered an under-socialized perspective because social relationships are not given as much importance in its theoretical models. Of course, some RCI scholars have focused more on social aspects (e.g., North, 1990, 2005) than others (e.g., Shleifer & Vishny, 1998), but the tradition has done so to a lesser extent relative to the other two perspectives (e.g., Granovetter, 1985). OI can be seen as an over-socialized perspective because behavior is largely determined by the institutional environment, by the logic of appropriateness, by isomorphic pressures, and other related logics (DiMaggio & Powell, 1983; Meyer & Rowan, 1977; Powell & DiMaggio, 1991; Scott, 1995). Although OI would argue that institutions also enable actors, it has been criticized for having underspecified mechanisms and for not allowing much room for agency or rationality (Hirsch, 1997; Rao, Monin, & Durand, 2003). 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). This provides an advantage for HI that could help enhance work on informal institutions in IB.

Incentive for action

A key aspect of HI is that it considers both a logic of instrumentality and a logic of appropriateness as key incentives for action. Whereas RCI focuses on the former and OI on the latter, HI incorporates both, allowing it to bridge the other two perspectives in terms of this aspect (Hall, 1993; March & Olsen, 1989, 1996, 2004). IB work on informal institutions in this tradition could thus examine how mechanisms of efficiency and legitimacy interact in explaining firm behavior.

Institutional change processes

As with the other two perspectives, HI also uses logics for the process of change based on path dependency, and work within this view ranges from conceptualizing change as either a Strategic Equilibrium, Punctuated Equilibrium, Evolution, or Punctuated Evolution (Fioretos et al., 2016). Furthermore, it also embraces the logic of the process of diffusion (Djelic, 1998; Duina, 1999). Consistent with RCI, it would be more likely to see diffusion as occurring through learning and coercive processes (Katznelson & Weingast, 2005).

Analytical level

In terms of the level of analysis, as with RCI, formal and informal institutions are most commonly examined at the national or societal level. However, whereas RCI often examines aspects related to micro-analytic exchanges, HI mostly focuses on aspects at the country level over extended periods of time (Fioretos et al., 2016).

Contributions of the IB literature and SI articles

Of the different institutional perspectives, HI has received relatively less focus in IB and related literatures (Aguilera & Grøgaard, 2019), with some notable exceptions (e.g., Musacchio, 2009; Schneider, 2004). The strand in this literature that has received the most attention is the comparative capitalism approach (Edwards, Sanchez-Mangas, Jalette, Lavelle, & Minbaeva, 2016; Fainshmidt, Judge, Aguilera, & Smith, 2016; Hotho, 2013; Jackson & Deeg, 2008, 2019; Judge, Fainshmidt, & Brown, 2014; Witt & Jackson, 2016). This strand examines how formal and informal institutional configurations and coordination mechanisms arise and evolve in different markets over time (Hall & Soskice, 2001; Streeck & Thelen, 2005). Indeed, recent IB research in this strand categorizes institutional contexts on the basis of actual practice instead of on formal or written rules, precisely to ensure that both formal and informal institutional configurations are considered (Witt & Reading, 2013; Witt, Kabbach de Castro, Amaeshi, Mahroum, Bohle, & Saez, 2018). This view thus specifically suggests that it is both formal and informal rules, developed historically over a significant period of time, which help to determine how markets are structured and business activities are coordinated in different countries, thus recognizing the salient role of informal institutions in IB.

Of the SI papers, the one that aligns most closely with the HI perspective is entitled “Historical institutions and contemporary foreign direct investment: Evidence from China”, by Zhang. This article provides an examination of how historical informal institutional legacies can endure and continue to have an effect on current IB practices over the long term. In particular, it examines how the social and economic disruptions caused by China’s Cultural Revolution during the country’s Treaty Port’s Era (which spanned from 1842 to 1943) led to what were formal institutions transforming into informal institutions that have endured to this day. It argues and finds support for the notion that such historical informal institutional legacies can help explain current flows of foreign direct investment. In doing so, the paper contributes to the IB literature on informal institutions, as well as to other fields such as business history (Decker, Üsdiken, Engwall, & Rowlinson, 2018), by emphasizing the often neglected role of informal institutional historical patterns on IB outcomes. We believe this can lead to very interesting future IB work on informal institutions.

Reconciliation Efforts: Towards an Integrative Research Agenda

In this section, we first examine attempts in the literature at large and in the IB literature to combine elements from the three institutional frameworks, and then propose steps to move toward this reconciliation that can help enrich work on both formal and informal institutions. There have been several efforts to build bridges across the three different institutional traditions. As we discussed, each of the frameworks has strengths and weaknesses, often based on their disciplinary backgrounds, training, and focus. In addition, all the frameworks have issues in common that they have been unable to address fully within their frameworks (e.g., Campbell, 2004). Therefore, an interdisciplinary, inter-framework conversation could bear fruit as a means of learning from each other and examining the same issues from vastly different points of view. The last column in Table 1 aims to summarize these efforts, while also adding some elements we believe could help further bridge the gap across the frameworks.

Most of these authors acknowledge that the frameworks are based on underlying assumptions and logics that are often incommensurable and with foundational contradictions with those of the other frameworks. Therefore, these efforts have typically focused on combining certain elements across frameworks (e.g., Campbell & Pedersen, 2001; Hall & Taylor, 1996; Immergut, 1998; Peters & Pierre, 1999; Suchman, 1995, 1997; Thelen, 1999). For instance, Campbell (2004: 1) sought to develop an all-encompassing definition and suggested the following: “Institutions are the foundation of social life. They consist of formal and informal rules, monitoring and enforcement mechanisms, and systems of meaning that define the context within which individuals, corporations, labor unions, nation-states, and other organizations operate and interact with each other”. He also sought to tease out some of the mechanisms for how institutions are transmitted and change over time, so he developed the concepts of translation and bricolage (ibid). As another example from the IB literature, Westney (1993) focused on bridging the gap between institutional pressures and efficiency or technical rationality. Each of these efforts have been valuable in creating bridges, but there is still a way to go if one seeks to combine the frameworks.

A noteworthy effort to bridge the different perspectives is the Institution-Based View that has been developed in the Strategy and International Business literatures (Peng, 2002; Peng, Sun, Pinkham, & Chen, 2008, 2009) and which has led to a considerable body of work (e.g., Carraher & Shi, 2017; Kim, Kim, & Hoskisson, 2010; Van Essen, Heugens, Otten, & Oosterhout van, 2012). This research strand is based on the conceptualization of having a ‘tripod’ of three leadings perspectives in the field (Peng et al., 2009; Su, Peng, & Xie, 2016): the resource-based view (Barney, 1991; Penrose, 1959), the industry-based view (Porter, 1980), and the institution-based view (North, 1990). This strand has sought to bridge especially aspects from RCI and from OI by drawing concepts from both. However, it has been criticized for doing so without first reconciling the underlying or foundational assumptions and logics of the different perspectives (Aguilera & Grøgaard, 2019). Furthermore, the institution-based view perspective’s arguments and logics are primarily consistent with an economics perspective and with RCI.

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. However, in so doing, it has also countered some of the key elements of RCI and HI, such as the underlying assumption of bounded rationality and the logic of instrumentality. Also, in including informal institutions in the regulatory pillar and not the normative pillar, it limits informal institutions to those related to regulations and not norms, which is again counter to the definition of most authors in the other frameworks. Similarly, in including formal and informal institutions in the regulatory pillar, the distinction between them is not highlighted. This is thus particularly problematic for the study of informal institutions. At the same time, authors have pointed out that OI focuses more on the normative and cultural-cognitive pillars than on the regulatory pillar, thus further disconnecting it from the other two institutional frameworks. 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). 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. 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.

What is clear is that in order to develop a framework that encompasses the key elements of the different frameworks, without alienating most of the authors from the other perspectives, some underlying assumptions need to be relaxed and some logics need to be embraced. In the last column of Table 1, we aim at providing some of the elements that could help move us in that direction. A full development of course would require a much longer treatment, so here we simply provide some suggestions for how this conversation could move forward. In particular, one could start with North (1990)’s definition of institutions as socially developed rules, that include formal and informal rules, and add cognitive rules or schemata. One would basically have three layers, with formal institutions being the most salient and evident, informal institutions being unwritten norms and traditions that individuals can still perceive, and cognitive institutions as the underlying rules or schemas that are programmed into the mind and are often taken for granted. This is similar to the three pillars in OI, while allowing a greater role for both formal and informal institutions, and a more explicit distinction between them and the cognitive realm. At the same time, it would be important to find a balance between the institutional perspectives, by seeking to be more socially embedded than RCI and less so than OI, while also being more open to different levels of analysis than most HI research has been. It could do so by embracing both the logics of instrumentality (i.e., instrumental rationality) and the logic of appropriateness (i.e., legitimacy). It could embrace the notion of bounded rationality, or that actors attempt to act rationally but do so with limited information and knowledge, while also embracing the notion that actors often act based on their ‘gut’ or emotions, and that when information is lacking they will tend toward isomorphism as a means to attain legitimacy. 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. These reconciliation efforts would thus help provide a more solid foundation for work in IB not only on informal institutions, but on institutions in general.

AVENUES FOR FUTURE IB RESEARCH ON INFORMAL INSTITUTIONS

This editorial uncovers a number of gaps and areas for future research in the IB literature on informal institutions. First, there has been limited work on informal institutions and IB in general. Most IB work on institutions has focused on formal institutions in part because they are much more straightforward to conceptualize and measure. This is unfortunate as informal institutions can be just as critical for IB as their formal counterparts. 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. Much of this literature therefore would be better categorized as being part of the culture literature. This displays how little actual work has been done on informal institutions and IB, indicating a clear gap and area for future research.

We propose that IB can be an ideal field for developing theory on informal institutions that can deeply influence not just our field, but other fields as well. The IB field often laments how it tends to learn and build from other fields while having a limited impact on them (e.g., Buckley, Doh, & Benischke, 2017). This is truly unfortunate, as IB by its very nature is interdisciplinary, contextual, and cross level, providing distinctive advantages over many of these other fields for the study of informal institutions. We explore each of these aspects below, as well other potential areas for future research.

Interdisciplinary

The IB field’s interdisciplinary nature can be especially beneficial as informal institutions cross-disciplinary boundaries, and IB researchers are trained to engage in frame shifting and looking at the world from the point of view of different disciplines. However, most of the work in IB on informal institutions has been in the subfields of international management and strategy, with limited work from other areas such as international entrepreneurship, and even less from other subfields of IB such as international finance, accounting, marketing, supply chain, and others. This is unfortunate, as work on informal institutions could help enrich IB work not only across sub-disciplines, but also that connects sub-disciplines. We thus encourage future work on informal institutions and IB to endeavor to better incorporate the different sub-disciplines.

For instance, examining how unwritten norms of a global supply chain provide invisible threads that connect international organizations, governments, MNEs, and other players would be a fascinating topic to study. As another example, unwritten norms of acceptable and unacceptable behavior in an accounting firm may lead to unethical accounting practices and corrupt behavior. As a final example relating to marketing and consumer behavior, the unwritten expectations that consumers have of companies and vice-versa could also be conceptualized as informal institutions to try to understand consumer preferences. Furthermore, future work on informal institutions could engage in interdisciplinary work by focusing on connecting aspects of different IB sub-disciplines.

Contextual

Its focus on context makes IB particularly well suited to studying the systemic intricacies of informal institutions across contextual settings and to advance theory. However, there has been particularly limited research on informal institutions in some parts of the world, especially in some parts of the developing world. Based on our review, a clear gap in the literature is that much more focus has been given to certain contexts, such as developed markets and the largest emerging markets like China and India. Informal institutional frameworks can vary dramatically across contexts, so examining different ones can yield unique and important findings. We would encourage further work on emerging and developing countries in regions such as Latin America, Africa, the Middle East, and Central Asia, among others; as well as comparative studies across different parts of the world. As mentioned in section 2, 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.

In addition, it would be beneficial to have additional work on how informal institutions can influence international firm strategy (Dau, 2010, 2015, 2016). For instance, this could include the relationship between informal institutions and international strategic decisions such as whether to internationalize and to which locations, entry modes and considerations of strategic alliances, international entrepreneurship and innovation, global social and environmental responsibility, international marketing practices, and so on. 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). 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. 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.

Cross Level

Furthermore, the IB field’s cross-level nature can be particularly useful as institutions are typically conceptualized at the national or organizational-field levels of analysis, but those are not the only levels at which institutions can exist. There are several other levels in which written and unwritten rules exist, such as the supranational level, sub-national level, industry level, firm level, department level, and so on. For instance, institutions can exist at the supranational level, where there are formal and informal rules that bind nations, such as the rules created through international organizations and agreements. 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. They can exist at the international joint venture or strategic alliance level between companies, based on formal rules in contracts and informal rules based on trust and mutual respect. They can exist at the MNE level with the written and unwritten rules in place for those working in a given company at its headquarters and throughout its network of subsidiaries. They can similarly exist at the affiliate level with specific rules that might apply for example just to one foreign subsidiary of an MNE or to a standalone company. They can also exist at the department level within a company. Institutions can also be conceptualized at the family level, as typically informal or unwritten norms within families tend to develop and evolve over time. This could be an important path for future family firm research, examining for instance how family institutions and national institutions clash or complement each other or even co-evolve.

Moreover, if we understand institutions as existing at different levels, there may be many institutions existing at the same time. Indeed, future research could examine the relationships of institutions within the same level as well as across levels, such as by examining how firms through non-market strategies can influence the formal and informal institutional frameworks of the nations where they operate, and how those national institutions, in turn, impact the institutional structures within the firm. Similarly, future work may examine whether formal institutions may predominate at certain levels (e.g., written laws and regulations at the national level), while informal institutions do so at other levels (e.g., unwritten norms of acceptable practice within a business group or a family firm). 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.

In short, examining informal institutions at different levels of analysis, as well as the interactions of these institutions across levels of analysis, can thus lead to a rich and valuable stream of literature.

IB Theoretical Frameworks

The study of informal institutions can be quite useful for advancing other theoretical frameworks used in IB. This can help enhance other theories by bringing an important contextual element that they often lack. 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.

For instance, how do informal institutions interact with internalization theory (Buckley & Casson, 1976), the Uppsala model of sequential internationalization (Johanson & Wiedersheim-Paul, 1975), the Eclectic paradigm (Dunning, 1980), the product’s life cycle theory (Vernon, 1966), network theory (Johanson & Mattsson, 1987), the upper echelons theory (Hambrick, Li, Xin, & Tsui, 2001; Li & Hambrick, 2005), work on born globals (Knight & Cavusgil, 1996; Oviatt & McDougall, 1994), and so on? Examining these relationships could lead to rich theoretical advances and perhaps even breakthroughs in our field.

Conceptualization and Measurement

This SI offers a step to help address concerns about gaps in many areas and by providing IB papers that focus on conceptualizing and measuring informal institutions in different ways. However, this is only a first step, as more work is required on this topic. An important area for future research is to develop additional measures and indices of informal institutions that are squarely built on an institutional framework.

IB and Informal Institutional Change

Understanding how IB influences institutional change and vice-versa can also be a rich area for additional research. The interplay between economic actors and institutions has received considerable attention, but much more needs to be done on the interplay between IB and informal institutions (Vaccaro & Palazzo, 2015). For instance, how do MNEs and other IB actors engage in non-market strategies to influence informal norms in subtle and not-so-subtle ways? Research here needs to pay special attention to change dynamics and the process of institutional change (see e.g., Chacar & Celo, 2012; Chacar et al., 2018).

DISCUSSION AND CONCLUSION

In short, this editorial has provided an introduction not only to the SI but also to the topic of informal institutions and IB. First, it provides definitions for institutions, as well as for formal and informal institutions, while disambiguating between the terms institutions and organizations, and the terms informal institutions and culture. Then, it reviews the literature by summarizing the three main institutional traditions to show where work on informal institutions fits in. It also examines the contributions of IB and the SI papers to the literature on informal institutions. It proceeds with a discussion of efforts to reconcile the different traditions and how this could help advance work on informal institutions. It then proposes a future research agenda based on the identified gaps in the literature.

This editorial provides several important contributions to the literature. First, it provides a brief but rich introduction to the topic of informal institutions and IB. This helps clarify what informal institutions are and are not, and to disambiguate them from terms such as organizations and culture. Furthermore, by providing a review of the literature on informal institutions and IB, as well as a summary of the SI papers, it shows what has been done by past work and how the articles in this SI add to that conversation. 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. Similarly, providing a discussion of reconciliation efforts between the three institutional traditions helps to show how IB could be at the center of this interdisciplinary conversation on formal and informal institutions. Finally, it identifies a number of gaps in the literature, which can help open a significant literature stream in IB on the topic of informal institutions in the years to come.

This editorial also has several important implications for IB managers and policy-makers. As the editorial and SI show, informal institutions are as relevant and meaningful as their formal counterparts for IB. International practitioners thus would be well served learning as much about the informal institutional environment of a market, as well as its relationship to the formal institutional environment, as a means to increase the likelihood of success of their ventures.

In conclusion, the topic of informal institutions and IB is very important and understudied, providing a meaningful avenue for rich future work in our field. This SI has been an effort to launch additional work on the topic, which has been achieved with over 80 submissions, some of which appear in this SI and others that will start appearing in other IB and business journals over the next few years. 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. We thus look forward to a rich and engaging academic conversation on the topic in the years to come.

NOTES

  1. 1

    As we elaborate later in the editorial, we selected North’s definitions because they are the most commonly accepted among the three main institutional traditions.

  2. 2

    See literature review section for further discussion of institutional change processes.

  3. 3

    The term ‘actors’ refers to market participants that create and influence formal and informal institutions. These include: individuals (e.g., workers, managers, entrepreneurs, politicians, etc.), business enterprises (e.g., MNEs, small and medium enterprises, non-profit enterprises, etc.), and organizations (e.g., governmental organizations or agencies, non-governmental organizations, etc.).

  4. 4

    For instance, Pejovich (1999: 166) suggests that “informal institutions are the part of a community’s heritage that we call culture”. Ahlstrom et al., (2014: 572) indicate that “culture and commercial conventions represent important informal institutions”. Lewellyn and Bao (2014: 1167) state they study “the informal institutional effects of national culture”. Lewellyn and Bao (2017: 798) “argue that national culture dimensions of power distance and institutional collectivism… serve as informal institutional forces”. Deephouse et al., (2016: 463) explain they “focus on… national culture, an important informal institution”. Cao et al., (2018: 304) state that “national culture is an important aspect of informal institutions”. Cumming et al., (2017: 128) refer to “informal institutions, such as culture”. Holmes et al. (2013: 531) refer to “the country’s informal institutions, in the form of the cultural dimensions of collectivism and future orientation”. Schwens et al., (2011: 331) define “informal institutional distance… as the cultural and ideological differences between a firm’s home and host country”, “… measured by indices from the GLOBE study” (ibid: 338). Hitt et al., (2016: 60) refer to “informal institutions (e.g., culture)”. Golesorkhi et al., (2019: 105) state that “informal institutions consist of culture”. Estrin et al., (2009: 1175) state that “the notion of informal institutions encompasses culture”. Filiou and Golesorkhi (2016: 130) indicate that “culture is an important reflection of national informal institutions”. Keig et al., (2019: 5) explain that their “measure of the informal institutional distance is based on cultural distance”. Abdi and Aulakh (2012: 485) use “cultural distance… to assess the extent to which… informal institutional environments differ”. Dikova et al., (2010: 232) explain that “informal institutional distance, pertains to… cultural differences” and use measures of power distance and uncertainty avoidance. Liou et al., (2016: 601) state that “informal institutional distance represents the national cultural differences”. Orcos et al., (2018: 852) explain that “informal institutions… comprise cultural traits that shape the behavior of a particular society” and capture them using the cultural measure of uncertainty avoidance. Li et al., (2016: 590) state that “the informal institutions are captured by national culture”. Jiang et al., (2014: 349) “measure informal institutional distance using Hofstede’s… cultural dimensions data and Kogut and Singh’s… method”.

  5. 5

    The three main traditions can be further broken down into different research strands (e.g., Aguilera & Grøgaard, 2019). Here, we focus on the three main traditions and discuss different strands within each tradition.

  6. 6

    We use the terms multinational enterprise (MNE) and multinational corporation (MNC) interchangeably in this editorial. We primarily use MNE, but we use MNC when it is included in a direct quote or in the title of a particular paper.

  7. 7

    Work in sociology also often focuses on the societal level, which may or may not be equivalent to the national level. 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).