Institutional fragility at the boundary: reframing systemic decline as a crisis of recalibration

PurposeThis study aims to investigate the impact of institutional fragility on the innovation investments of enterprises by analyzing the moderating effect of government subsidies and the integration of industry and finance.Design/methodology/approachMultiple regression analysis was used on 10,838 samples of 2,356 listed companies in China for the period 2007–2017, to empirically test the influence of institutional fragility on innovation investment. Moreover, Heckman’s two-stage approach was used for the robustness of the regression results.FindingsThe results show that the relationship between institutional fragility and innovation investment is an inverted U-shaped; government subsidies negatively moderate the relationship between institutional fragility and innovation investment, while the integration of industry and finance positively moderates them. Further analysis shows that the relationship between institutional fragility and innovation investment is more significant for high-tech enterprises. Similarly, the relationship between institutional fragility and innovation output also presents an inverted U-shape, which mainly affects enterprises’ breakthrough innovation output, but has no substantial impact on the incremental innovation output.Originality/valueThe conclusions provide new ideas for guiding the government’s reform, promoting the integration of industry and finance and promoting enterprise innovation.

ABSTRACTExtensive research has shown that transition economies often experience internal friction, conflicts, and institutional fragility when different institutional dimensions evolve at an uneven pace. However, limited knowledge exists regarding how institutional fragility specifically affects entrepreneurial activities. This study develops a theoretical framework that integrates institutional theory and public choice theory to examine the impact of institutional fragility on entrepreneurship, considering both institutional costs and government intervention. Our findings reveal an inverted U‐shaped relationship between institutional fragility and entrepreneurial activity in China. Furthermore, we find that regional guanxi culture—a key informal institution in China—mitigates this relationship. Overall, this study provides a novel perspective on institutional fragility, offering new insights into how the institutional environment shapes entrepreneurial activity in China.

Government innovation preferences, institutional fragility, and digital economic development

The relevancy of Minsky’s Financial Instability Hypothesis (FIH) in the current (and still unfolding) crisis has been clearly acknowledged by both economists and regulators. While most papers focus on discussing to what extent the FIH or Minsky’s Big Bank/Big Government interpretation is appropriate to explain and sort out the crisis, some authors have also emphasized the need to consider the institutional foundations of Minsky’s work (Whalen 2007, Wray 2008, Dimsky 2010). The importance of institutions within the FIH was strongly emphasized by Minsky himself, who assigned them the function of constraining the development of financial fragility. Yet only limited literature has focused on the institutional aspects on Minsky’s FIH. The reason for this may be that they were mainly dealt with by Minsky in his latest papers, and they have remained, to some extent, incomplete, unclear, and even ambiguous. In our view, a synthesis of Minsky’s proposals, along with a clarification and theoretical justification, remains to be done. Our objective in this paper is to contribute to this theoretical project. It leads us to propose that the notion of “institutional fragility” can constitute a useful perspective to complement and justify the endogenous development of financial fragility within the FIH. Eventually, this view may contribute to the debate about international financial governance.

Friend or foe: The divergent effects of FinTech on financial stability

This study examines the relationship between institutional fragility and corporate cash holdings. Using data from China between 2004 and 2017, we find that institutional fragility is associated with increased corporate cash holdings. The relationship is stronger for non-state-owned enterprises and stronger when firms have no relationship with banks. Furthermore, we find that institutional fragility reduces current investment opportunities, leading to an increase in corporate cash holdings. Investment opportunities play an intermediary effect; hence, institutional fragility affects corporate cash holdings.

Inclusive growth, driven by social venture, is the most critical factor in alleviating poverty at the bottom of the pyramid. How do institutional changes influence the growth of social ventures? We develop the concept of institutional fragility to emphasise the mutual conflict and contradictions among multiple dimensions of institutions. The empirical analysis uses the Microfinance Information Exchange dataset to analyse the scaling growth of 3,241 microfinance institutes (MFIs) across 81 countries in the industry emergence period. Our findings reveal that institutional fragility significantly curtails the expansion of social ventures. Additionally, institutional fragility negatively affects the dynamic between the borrowing community and MFIs’ growth, as well as the relationship between a gender-focused approach and MFIs’ growth.

We develop the concept of institutional fragility to investigate the outward foreign direct investment (OFDI) behavior of firms from emerging economies. When different dimensions of institutions are not progressing at the same pace, internal friction and conflict arise during institutional development. Such fragility could push a firm to escape its home country as a strategic response. Using a sample of 578,360 Chinese firm-year observations over a 10-year period, we find that institutional fragility at the provincial level is associated with increased OFDI decision. This relationship is weaker when firms have high productivity or have been controlled by state with high ownership, stronger when firms have a high level of export network. Overall, our institutional fragility perspective extends and enriches the institution-based view and offers new insights into OFDI behavior.

We develop the concept of institutional fragility to investigate the outward foreign direct investment (OFDI) behavior of firms from emerging economies. When different dimensions of institutions are not progressing at the same pace, internal friction and conflict arise during institutional development. Such fragility could push a firm to escape its home country as a strategic response. Using a sample of 578,360 Chinese firm-year observations over a 10-year period, we find that institutional fragility at the provincial level is associated with increased OFDI decision. This relationship is weaker when firms have high productivity or have been controlled by state with high ownership, stronger when firms have a high level of export network. Overall, our institutional fragility perspective extends and enriches the institution-based view and offers new insights into OFDI behavior.

Purpose This study investigates the capital structure behavior of nonfinancial firms in Jordan and Palestine, with a focus on the validity of the trade-off theory under institutional fragility, particularly the role of political instability in shaping financing decisions. Design/methodology/approach Drawing on an unbalanced panel of 166 non-financial firms (1,609 firm-year observations) from 2011 to 2021, the study examines the effects of firm-level factors (size, profitability, tangibility, growth, liquidity and non-debt tax shields) and country-level factors (GDP growth, inflation and political instability) on leverage. Both static and dynamic panel estimations are employed, including fixed effects and system GMM models, alongside robustness checks using two-stage least squares (2SLS) and sub-period analysis. Findings The results support the trade-off theory, showing that firms gradually adjust toward target leverage ratios. Political instability significantly reduces leverage, particularly long-term debt, highlighting the institutional constraints in fragile environments. However, the negative effect of profitability and the relatively slow speed of adjustment point to a dual influence of trade-off and pecking order theories in politically volatile contexts. Research limitations/implications The geographic scope may limit generalizability. Future research should include a broader set of politically unstable emerging economies and consider meta-analytic or mixed-method approaches to deepen understanding of capital structure behavior under institutional fragility. Practical implications The findings offer practical guidance for financial managers, investors and regulators operating in fragile institutional contexts. By revealing how political instability drives firms toward short-term debt and hampers capital structure optimization, the study emphasizes the importance of improving institutional stability to foster long-term financing and investment. These insights are particularly relevant for policymakers aiming to enhance financial resilience and investment capacity in politically unstable economies. Social implications By linking political conditions to corporate financing behavior, the study underscores how institutional stability can reduce borrowing costs, enhance capital formation and support sustainable economic development through greater private sector participation and job creation. Originality/value This study contributes to the literature by integrating political instability into capital structure modeling under static and dynamic versions of tradeoff theory, offering novel empirical insights from under-researched fragile emerging markets. By comparing two politically divergent but institutionally similar economies, it offers novel insights into how instability alters leverage behavior and highlights the importance of contextualizing traditional theories in environments characterized by political risk and institutional volatility.

Since 1978, with the disappearance of the historical caudillos (Joaquín Balaguer, Juan Bosch, and José Francisco Peña Gómez), institutional fragility and electoral power have been the keys to the survival of the political party system in the Dominican Republic. The current parties are more stable but not more institutionalized. The authoritarianism that characterized the Dominican political system from the 1960s until the end of the twentieth century relied for its stability not just on power and repression but on political control through clientelism and prebendalism. These mechanisms served not only as an instrument of social control but also as a strong basis for legitimacy. Desde 1978, tras la desaparición de los caudillos históricos (Joaquín Balaguer, Juan Bosch y José Francisco Peña Gómez), la fragilidad institucional y la fuerza electoral han sido las claves de la supervivencia del sistema de partidos en República Dominicana. Los partidos son hoy más estables pero no más institucionalizados. El autoritarismo que ha caracterizado al sistema político dominicano desde los años sesenta hasta finales del siglo XX no se ha apoyado únicamente en la apelación a la fuerza y a la represión; la clave de la estabilidad ha sido el control político a través del clientelismo y la movilización prebendalista. Este mecanismo, no solo es un arma de control social, sino que asegura bases firmes de legitimidad.

This study develops a model to explore the relationship between Confucianism and green innovation and the moderating effects of CEO overseas experience, female CEOs, and institutional fragility on this relationship. Based on data from 11,430 observations across 2,812 Chinese listed firms for the 2014–2019 period, we find that Confucianism has a positive impact on a firm’s green innovation. However, this effect is weakened by CEO overseas experience, female CEOs, and institutional fragility. Our study offers novel insights into how informal institutions, such as Confucianism, affect a firm’s green innovation. In addition, it provides a comprehensive framework for the theoretical understanding of the influence of Confucianism on green innovation by revealing the moderating roles of CEOs’ characteristics and institutional environment.

The Belt and Road Initiative (BRI) is an important policy agenda undertaken by the Chinese government. We explore how the BRI – as well as an associated policy, the creation of Chinese overseas special economic zones – influences Chinese outward foreign direct investment (FDI). We find that host-country institutional fragility positively influences Chinese FDI volumes, and that the impact of institutional fragility on Chinese inward FDI to the host is amplified in the presence of the BRI. Specifically, BRI policy facilitates FDI to countries with weaker rule of law and less government accountability. We argue that, while the BRI may actively facilitate economic growth (i.e., via infrastructure development), and in turn aspects of human development, particularly in less-developed economies, its likely impacts on political rights may not be so promising.

The rapid diffusion of digital technology drives the application of related technologies in various sectors, and promotes the contexts of digitalization across national and regional boundaries. Whether such rapid digital penetration bring desirable outcomes to enterprises remains to be elucidated. In the context of digitalization from emerging markets, we examined the relationships among the degree of regional digitalization, and internationalization speed of enterprise by using the within-between random-effects model and 2009–2019 data from China. We also hypothesized and tested the moderate impacts of local embeddedness and institutional fragility on the above-mentioned relationships. Our results indicate that the effects of digital technology on the internationalization speed of manufacturing enterprises are complicated, influenced by both globalization- and deglobalization-driven forces rather than caused by simple positive or negative relationships. Moreover, local embeddedness means the enhancement of digital connectivity for the enterprise and stable support for enterprises' internationalization. While institutional fragility not only impedes the transformation of digital advantages, but also shows an escape-driven force for enterprise internationalization to some extent. The findings of this study contribute to the theory regarding enterprise internationalization in the era of digitalization.

In this paper, using institutional and organizational learning theories, we argue that institutional fragility within India impacts the internationalization of Indian firms such that firms from more fragile regions are likely to have lower internationalization levels. We also suggest that this effect is moderated by inward (industry-level) foreign direct investment (FDI) and inward (firm-level) linkages with foreign firms. We test our hypotheses based on the analysis of 707 Indian firms over the period 2008–2018. Our study contributes to the literature examining the complexity, and the speed and consistency of institutional progress in emerging economies, and its impact on firms’ internationalization.