Informal institutions and absorptive capacity: A cross-country meta-analytic study

Abstract

The informal institutions construct has not been well understood in prior research. We contribute to the informal institutions literature by developing a generalized two-by-two conceptualization of institutions that juxtapose the dimension of behavioral uncertainty versus environmental uncertainty and the dimension of informal institutions versus formal institutions. In particular, we theorize informal institutions based on the extent to which they reduce behavioral uncertainty or environmental uncertainty, as well as their alignment with the formal institutional environment with respect to the two types of uncertainty. Leveraging this fourfold typology, we shed new light on the importance of informal institutional conditions in theories of firms’ absorptive capacity and performance. Using a cross-country meta-analytical approach, we find that a firm’s absorptive capacity is more positively related to performance outcomes in countries with informal institutions that reduce behavioral uncertainty and environmental uncertainty. Furthermore, the misalignment between informal and formal institutions with respect to behavioral uncertainty and environmental uncertainty weakens the relationship between absorptive capacity and performance outcomes. Overall, by re-emphasizing the fundamental role of informal institutions in reducing behavioral and environmental uncertainties, our typology offers a fine-grained perspective to conceptualize informal institutions and constitutes an opportunity to advance theory in informal institutions and international business.