The Role of Institutions

Question 1

What are institutions?

Answer 1

(a) “Rules of the game” (North, 1991)

(b) More specifically…
“humanly devised constraints that structure human interaction”

Question 2

What makes up institutions?

Answer 2

(1) Formal institutions: Institutions represented by law, regulations and rules.
(2) Informal institutions: Institutions represented by norms, cultures and ethics.
(3) 3 “pillars” support these institutions:

The regulatory pillar, existing under the bracket of formal institutions and regards the coercive power of governments to command adherence to the formal institutors.

The remaining pillars fall under the scope of informal institutions; the normative pillar concerns how social norms influences the behaviour of focal individuals and firms (Peng, 2014:94).

The cognitive pillar “refers to the internalised taken-for-granted values and beliefs that guide individual and firm behaviour” (Peng, 2014:95).

Question 3

What is the key role of institutions?

Answer 3

Mike Peng (2014: 95): “while institutions do many things, their key role, is to reduce uncertainty”
…
by “conditioning the ruling norms of behaviour; defining the boundaries of what is legitimate” Peng et al. (2009).
…
Thereby, “constraining the range of acceptable actions” (Peng, 2014:95).
…
“In turn, ‘actors rationally (bounded) pursue their interests and make choices within a given institutional framework’ (Peng, 2009).

Question 4

Uncertainty

Answer 4

Uncertainty can manifest in diverse ways, e.g.

(1) “Political uncertainty such as terrorist attacks and ethnic roots may render long-range planning obsolete” (Peng, 2014:95).
(2) Uncertainty surrounding economic transactions can manufacture transaction costs i.e. the costs of doing business (Peng, 2014:95).

Question 5

Transaction Costs

Answer 5

Such costs impede trade.

One source is opportunism:self-interest seeking with guile.

Examples include misleading, cheating and confusing other parties in transactions that will increase transaction costs”. (Peng, 2014: 97).

Question 6

How do institutions reduce uncertainty?

Answer 6

Responsibility for reducing uncertainty typically lies with both formal and informal institution whom…“outline the rules of the game so that violations can be mitigated with relative ease” (Peng, 2014:97).

(1) Arm’s length transactions:formal, rule-based,impersonal exchanges with third-party enforcement: “a way of economic exchange based on formal transaction which parties keep distance” (Peng, 2014:99).

E.g. arbitration

(2) The 3 pillars can ensure compliance or legitimacy:

The regulatory pillar enforces expedience, alternatively.

The normative pillar; social obligation

The cognitive pillar can place it on a taken for granted basis (Peng, 2009: 66-67)

Question 7

Emerging Markets

Answer 7

The rise of emerging economies on the worldwide stage has provided “opportunities to extend and develop the institution-based view” (Peng at al. 2008:924).

Khanna et al. (2005:63): most multinational corporations struggle to develop successful strategies abroad because of “the absence of specialised intermediaries, regulatory systems and contract-enforcing mechanisms in emerging markets”.

…“Services provided by intermediaries either aren’t available in emerging markets or aren’t very sophisticated”

…thus, “corporations cant smoothly transfer the strategies they employ in their home countries to those in emerging markets” (Khanna et al. 2005:64)”.