Effects Of Formal Institutions Research Articles

Entrepreneurial ecosystems in conflict regions: evidence from Ukraine

Entrepreneurship is a productive force of innovation and economic development. However, in post-conflict regions, there is a greater challenge in allocating entrepreneurial talent to productive entrepreneurship. In this study, we examine the entrepreneurship ecosystem, which is built on the “bottom-up” principles to understand whether its pillars can facilitate productive entrepreneurship in two Ukrainian regions shaken by multiple revolutions and regime change. We introduce a model that puts entrepreneurial conditions in cities and formal institutional changes to a competitive test. Building on the regional entrepreneurship literature, we perform an empirical study in a developing country to reveal what drives productive entrepreneurship in post-conflict regions with entrepreneurship culture, formal networks, debt and equity financing emerging as important determinants of productive entrepreneurship. The effect of formal institutions is significant but highly correlated with rent-seeking behavior of government and corruption. Our analysis suggests that the entrepreneurial conditions in regions focusing on the bottom-up processes of supporting entrepreneurship should work better to enhance productive entrepreneurship activity in a post-conflict region.

How to Prevent Time Preference Risk: Evidence from Tax Avoidance

ABSTRACT This paper investigates whether future time reference in languages affects corporate tax avoidance. Consisting of 265,652 firm-year observations, we cover 42 countries during the 1989 to 2020 periods. The results show that those firms have relatively low cash effective tax rates when their country’s language does not distinguish grammatically between future and present events. Thus, adopting IFRS accounting and the local legal environment could moderate this condition. Our findings remain after considering endogeneity problems and implementing a series of robustness tests. Moreover, we provide additional evidence regarding the effects of formal institutions on tax avoidance and a new approach for regulators to encourage tax compliance and evaluate their local legal environments to more effectively reducing financial risk.

National Culture and Financial Inclusion: Evidence from Belt and Road Economies

Financial Inclusion is a key factor in achieving the sustainable development goals of the United Nations. The research in the area of financial inclusion is becoming more critical for scholars and policymakers. In previous studies, effects of formal institutions on financial inclusion have been explored. However, influence of informal institutions (culture) on financial inclusion remained untapped. To fill this gap, we investigate how national culture affects the financial inclusion of 81 Belt and Road economies using 17 years of data from 2004 to 2020. The empirical findings of the two-stage least square (2SLS) show that Hofstede’s cultural dimensions are significantly associated with financial inclusion with different signs and levels of magnitude. We find that financial inclusion is lower in countries where uncertainty avoidance and power distance is high and that the opposite is true for individualism and masculinity. The overall results are reliable to a series of robustness checks and provide a useful basis for policymakers, regulatory agencies, and other stakeholders in achieving the sustainable development goal of financial inclusion in Belt and Road countries.

How does Buddhism affect corporate cash holdings?

PurposeThis study explores whether and how Buddhism impacts corporate cash holdings. Buddhist culture affects investors' perception of how cash is deployed and then influences corporate cash holdings. This study first examines the impact of Buddhism on corporate cash holdings and then investigates whether formal governance mechanisms such as legal institutions and institutional ownership influence the relationship between Buddhism and corporate cash holdings.Design/methodology/approachThe authors conduct empirical tests with data on Chinese listed companies between 2006 and 2019. Buddhism is measured with the natural logarithm of the number of Buddhist temples within a radius of a certain distance around a firm's headquarters. The authors adopt the OLS method to regress and take the 2SLS method, Heckman selection model and FEVD approach to address the endogeneity issue.FindingsThe results show a positive relationship between Buddhism and corporate cash holdings. This positive relation is more prominent for firms located in regions with weak legal institutions and for firms with low institutional ownership. Further analysis shows that Buddhism works through the channel of alleviating agency problems and finally improves the value of cash to investors.Research limitations/implicationsThe authors’ findings have important implications. First, this study provides inspiration for incorporating the ethical values of traditional cultures, such as Buddhism, into the corporate governance system. Second, the findings imply that informal institutions can influence corporate financial decisions beyond the effect of formal institutions, suggesting that informal systems should be emphasized when dealing with business affairs in countries where legal institutions are relatively weak. Third, the results suggest the significance of encouraging research on religious culture to explore its active role in corporate governance.Originality/valueThis study illustrates the positive value of religious culture in advancing corporate governance by relating Buddhism to corporate cash holdings based on the explanation of investors' perception. It makes a marginal contribution to the literature that investigates the determinants of cash policies and explores the firm-level consequences of religious culture, adding to the research area of culture and corporate finance.

The effect of Guanxi culture on the voting of independent directors: Evidence from China

The effect of formal institutions on the monitoring behavior of independent directors has been recognized, but knowledge of informal institutions, which can help explain how independent directors act in different social and cultural environments, is lacking. Based on the conformity theory, we investigated the influence of regional guanxi culture, a new informal institution, on directors' voting behavior. We found that the likelihood of independent directors casting a dissenting vote was lower when they were appointed to firms located in regions with an intense guanxi culture. The specific guanxi culture of the locations in which independent directors reside had a negatively moderating effect on the relationship between the firms' guanxi culture and the likelihood of their dissenting votes. In addition, independent directors who had dissented before departing a firm obtained fewer future directorships in local provinces with intense guanxi cultures. We argue that directors adapt to maintain their interpersonal relationships when the guanxi culture is intense, leading to a weaker monitoring effect and less independence.

The Joint Effects of Formal Institutions and Business Characteristics on Interfirm Guanxi in China: A Fuzzy Set Analysis

ABSTRACT Purpose: This research intends to investigate the effects of formal market institutions on managers’ willingness to use personal networks, such as guanxi in China, for business success. Methodology: We collect data from a major cellular phone manufacturer and its 277 retailers across China. We employ Fuzzy set Qualitative Comparative Analysis (FsQCA) to identify necessary conditions and causal recipes (combinations of antecedent conditions) for three elements of guanxi between boundary spanners (i.e., ganqing, information favor, and business support) and a firm’s operational performance. Findings: We find that formal market institutions are not the sole factor influencing managers’ decisions on exercising guanxi practices and, in turn, achieving interfirm collaboration. We also find that there exists more than one causal recipe leading to each key element of guanxi between boundary spanners. The results also suggest that well-established formal market institutions would never be able to completely eliminate guanxi practices in China. Originality: This paper is among the first to examine the joint effects of formal market institutions and key characteristics of interfirm relationships on the use of guanxi practices.

Influence of individual values on attitudes toward corruption: What undermine formal anticorruption effectiveness

The causes of corruption are often researched by scholars from the macroscopic perspectives of institutional and cultural factors. Neglected is scholarship on the relationship between individual values and corruption. People’s definitions and attitudes toward corruption are largely determined by personal values. However, scarce scholarly attention has been paid to what and how value factors exert influence on people’s attitudes toward corruption and how values moderate the relationship between the effectiveness of formal institutions against corruption and people’s anticorruption willingness. Drawing on the first‐hand survey data collected among Chinese civil servants, this research explores the impact of civil servants’ values on their tolerance towards corruption and willingness to engage in anticorruption. Adopting Hofstede’s (1984) four values model (power distance, collectivism, uncertainty avoidance, and masculinity), this study reveals that respondents high on collectivism or masculinity hold higher corruption tolerance and lower willingness to participate in actions against corruption whereas uncertainty avoidance is negatively related to corruption tolerance and positively associated with the respondents’ willingness to engage in anticorruption. Furthermore, the values serve as moderating roles in the relationship between formal anticorruption effectiveness and civil servants’ willingness to engage in combating corruption. Specifically, both collectivism and masculinity dilute the positive impact of the government’s anticorruption effectiveness on anticorruption willingness.

Institutional Support of Internalization of Negative external Effects of Old Industrial Production Models

The article substantiates the conceptual provisions for the institutional support of the internalization of the negative externalities of old industrial production models. To internalize negative externalities, it is necessary to create institutional conditions under which all parts of the internalization process (waste producers, central regulators, local communities, recipients of negative impacts) will be interested in conscientious performance of their functions. It is suggested that a unique regulatory system should be established within each individual industry sector. It is determined that the threat of opportunistic behavior on the part of agents is a potential negative factor in the centralized collection of information and distribution of payments for public benefit. The effectiveness of formal institutions should be viewed through the prism of informal rules that have developed in society. Informal rules are the quintessence of natural motives for human behavior. Psychological features of motives of human behavior determine the expediency of appropriate adaptation of the institutional system. That is, the complex of institutions must be built in such a way that the individual has the opportunity to meet their needs through socially useful actions. It is substantiated that the recipients of institutional transformations should be authorized persons (or groups of persons) who will be responsible for collecting information and distributing internalization payments.

Institutional Support of Internalization of Negative external Effects of Old Industrial Production Models

The article substantiates the conceptual provisions for the institutional support of the internalization of the negative externalities of old industrial production models. To internalize negative externalities, it is necessary to create institutional conditions under which all parts of the internalization process (waste producers, central regulators, local communities, recipients of negative impacts) will be interested in conscientious performance of their functions. It is suggested that a unique regulatory system should be established within each individual industry sector. It is determined that the threat of opportunistic behavior on the part of agents is a potential negative factor in the centralized collection of information and distribution of payments for public benefit. The effectiveness of formal institutions should be viewed through the prism of informal rules that have developed in society. Informal rules are the quintessence of natural motives for human behavior. Psychological features of motives of human behavior determine the expediency of appropriate adaptation of the institutional system. That is, the complex of institutions must be built in such a way that the individual has the opportunity to meet their needs through socially useful actions. It is substantiated that the recipients of institutional transformations should be authorized persons (or groups of persons) who will be responsible for collecting information and distributing internalization payments.

Factors of subjective household economic well-being in transition countries

PurposeThe purpose of this paper is to analyze the relationship between social capital and subjective ranking of household economic well-being in transition countries. The current study tests whether the performance of formal institutions moderates this link.Design/methodology/approachThe analyses are based on the data from the second wave of the Life in Transition Survey. The measures “generosity of welfare policy (social safety nets)” and “ability of formal institutions to control inflation” were provided by the Bertelsmann Transformation Index Project. The study uses four measures of social capital: trust in family, trust in friends and acquaintances, trust in most people and the number of support sources. To test the hypotheses, the study employs mixed-effects regression models.FindingsThe study indicates a significant positive effect of social capital on subjective household well-being. Formal institutions do not have a significant effect on subjective ranking of household well-being. The evidence on institutions as moderators rejects the substitution effect between formal institutions and social capital. Higher generosity of welfare policy institutions and higher ability of formal institutions to control inflation strengthen the positive effect of particular trust (trust in family and trust in friends and acquaintances) on subjective ranking on the ladder of social standing (subjective ranking of household well-being), which is in line with the “crowding in” theory.Originality/valueThe paper adds on the limited research on transition countries. The paper contributes to the discussion on “crowding in” and “crowding out” effects of formal institutions on social capital.

Institutional Configuration of Regional Business Environment

The subject of the article is effective institutional support of entrepreneurship in Russian regions. Modern conditions of Russian business activity are characterized by a significant level of uncertainty in the institutional environment, which considerably varies in different regions. In order to improve the quality of institutional parameters of the business environment research in a spatial context, it is proposed to use the institutional configurations methodology. The authors assume that real differentiation of business conditions in the regional context is determined by the parameters of the institutional configuration of the business environment. As a result of the study, the definition of the concept of “institutional configuration of regional business environment” was clarified. According to it, effectiveness of formal institutions is determined by the nature of their interpretation and application by economic agents in the course of interaction between basic and additional regional institutions and stakeholders. Even in conditions of a formally identical institutional environment, officials in different regions have a free hand to apply different “rules of the game” to business entities. The authors substantiate the idea that most of the time the power structures interpret and apply formal rules to business entities in a format that increases administrative pressure on business and leads to additional withdrawal of business entities’ entrepreneurial income. The authors propose a model of assessing parameters of the institutional configuration of the business environment basing on the criterion of administrative pressure on business entities, which allows to calculate trends and possible scenarios of interaction between government and business structures in the Russian regions in the context of existing institutional configurations of the regional business environment. The results obtained in the article can be used in the institutional designing process of business environment while justifying parameters of the system of the state regulation of entrepreneurship at the regional and federal levels.

The Evolution of Culture and Institutions: Evidence From the Kuba Kingdom

We use variation in historical state centralization to examine the long-term impact of institutions on cultural norms. The Kuba Kingdom, established in Central Africa in the early 17th century by King Shyaam, had more developed state institutions than the other independent villages and chieftaincies in the region. It had an unwritten constitution, separation of political powers, a judicial system with courts and juries, a police force, a military, taxation, and significant public goods provision. Comparing individuals from the Kuba Kingdom to those from just outside the Kingdom, we find that centralized formal institutions are associated with weaker norms of rule following and a greater propensity to cheat for material gain. This finding is consistent with recent models where endogenous investments to inculcate values in children decline when there is an increase in the effectiveness of formal institutions that enforce socially desirable behavior. Consistent with such a mechanism, we find that Kuba parents believe it is less important to teach children values related to rule-following behaviors.

The Economic-Social Duality for Executive Rationale: The Interplay between Resource Pool and Game Rule for Sense-Giving and Sense-Making

I truly enjoyed reading the perspective article entitled ‘Advancing indigenous management theory: Executive rationale as an institutional logic’ by Gordon Redding and Michael Witt (2015), especially its implications for a ‘promising avenue for indigenous management research’ (179). I agree with the authors in general terms that the research on the impact of culture as an informal institution, and also the effect of formal institutions, on business practices must come down from a highly abstract level to a more pragmatic ground, especially their interaction and integration as embodied by various specific mechanisms to guide practices. For that purpose, Redding and Witt introduce an interesting notion of ‘executive rationale’ to guide action. Applying the abstract notion of institutional logic to specific business practices, executive rationale refers to the ‘socially constructed, historical patterns of material practices, assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space, and provide meaning to their social reality’ (Thornton & Ocasio, 2008: 101) in the specific context of business practices. In other words, executive rationale provides a mental blueprint for practical actions in a business context. In addition, the authors have empirically generated a tentative model with multiple dimensions to compare the dominant executive rationales as institutionally-embedded across five key economies.

Moderating Effect of Formal Institutions on Individual Social Entrepreneurship Entry

Our study examines the contingent effect of formal institutions namely financial, educational and political systems on the relationship between people’s access to resources and the likelihood of th...

Incentives and Norms in Anticorruption Reform

This paper examines corruption in the Australian Customs and Border Protection Service (ACBPS). Corruption is framed as an exchange problem between a public official and the state. New Institutional Economics suggests such problems can be overcome using formal and informal institutional structures (e.g. laws and norms). Behavioural economics emphasises that norms may render formal rules less effective. The role of norms in fostering corruption and the constraints on the effectiveness of formal institutions in general and in the ACBPS in particular highlights the importance of addressing the role of norms in anticorruption reform. Current and proposed ACBPS reforms emphasising formal structural incentives need to more explicitly consider and outline the intended effect of reforms upon norms, and/or the expected relationship between the new formal institutional structures and the norms of the organisation.

Effects of Formal Institutions on Business Performance in the Philippines

The resilience of Asian firms in the face of the current economic downturn in North America and Western Europe is attracting renewed attention to the role of government in sustaining firm competitiveness. The paper adds to this debate by drawing from institutional theory to assess the impacts of selected formal government institutions on business performance in the Philippines. Based on a large-scale survey (n = 658) of business owners in the Philippines undertaken by the World Bank, the study finds that access to finance, the rule of law and regulatory quality contribute significantly to business performance. The policy implications of the findings are fully discussed, along with avenues for future research.

Effects of formal institutions on the performance of the tourism sector in the Philippines: The mediating role of entrepreneurial orientation

Although formal institutions and entrepreneurial orientation have both been found to contribute separately and positively to firm performance, the interplay between the two factors has not received much attention. This study draws from institutional theory and the entrepreneurship literature to argue that entrepreneurial orientation (EO) provides the mechanism through which the formal institutional environment influences the performance of firms in the tourism sector. Using structural equation modelling and data from a large-scale survey of firms in the tourism sector in the Philippines, it is shown that elements of the institutional environment, by themselves, only have limited influence on tourism firms' performance. EO is shown to partially enhance the effects of the institutional environment on firm performance. The strong mediating effect of entrepreneurial orientation on the relationship between the institutional environment and firm performance is a novel finding and highlights the important role of the government in ensuring that the formal institutional environment promotes entrepreneurship which, in turn, enhances the performance of the tourism sector.

The Interrelationships Among Informal Institutions, Formal Institutions, and Inward Foreign Direct Investment

This research contributes to institutional theory by examining the influence of informal institutions on formal institutions and the effects of formal institutions on inward foreign direct investment. In particular, the authors integrate prior research from multiple disciplines to identify and to examine the roles of a country’s formal regulatory, political, and economic institutions. The results suggest that the country’s informal institutions, in the form of the cultural dimensions of collectivism and future orientation, shape the country’s formal institutions. In turn, each of the three formal institutions affects the country’s level of inward foreign direct investment differently. To facilitate future research, the authors also provide a set of measures for formal institutions in 50 countries.

Country of Origin Effects in Capital Structure Decisions: Evidence from Foreign Direct Investments in China

We investigate the role of managers' country of origin in leverage decisions using data on foreign joint ventures in China. By focusing on foreign joint ventures in a single country, we are able to hold constant the financing environment, eliminate the effects of formal institutions in the foreign managers' home country, and consequently reveal the effects of informal institutions such as national culture on corporate finance decisions. Using cultural values of embeddedness, mastery, and uncertainty avoidance to explain country of origin effects, we find that national culture has significant explanatory power in the financial leverage decisions of foreign joint ventures in China. Country-level variation is evident in capital structure and appears to work through choices of firm characteristics, industry affiliation, ownership structure, and region of investment.