Formal Institutional Environment Research Articles

Aligning empirical evidence on ESG with ancient conservative traditions

Environmental, social, and governance (ESG) issues have attracted increasing attention worldwide. However, there is a concomitant growing concern regarding the motivation behind firms' ESG practices. This has even become a hotly debated issue among politicians. To provide empirical evidence of academic neutrality, we use a virtue ethics lens to investigate how informal institutions, specifically Confucian virtues, which are widespread, centuries-old, conservative traditions in China and many Ascian countries, affect corporate ESG activities. We reason that Confucian virtues provide guidelines and motivation for developing better ethical leadership. Our results indicate that companies located in places with stronger Confucianism have better ESG performance, consistent with ESG engagement resonating with Confucian emphasis on the public good. Additionally, our identified virtue and ethics effects are more pronounced for non-state-owned enterprises (consistent with ESG being more associated with firms distanced from the public sector) and for firms located in places with less developed formal institutional environments (consistent with cultural factors and informal institutions substituting for formal institutions).

Operational risk disclosure quality and national culture: Evidence from the E.U. Banking industry

In this study, we analyze the association between national culture and voluntary operational risk disclosure quality in the European Union banking industry. Complementarily, we assess whether the potential impact of culture differs between global banks and banks with low levels of internationalization. Finally, we consider the impact of the formal institutional environment. Our sample covers 15 countries, and we construct a disclosure score based on hand-collected data. Three main results were obtained. First, banks in societies that score higher on individualism or long-term orientation and lower on uncertainty avoidance or power distance have better disclosures. Second, in global banks, where executive board members interact with stakeholders from different cultures, these associations are absent. Finally, contextual factors also affect the association between culture and disclosure, but this substitution effect is weaker than the one we document for globalization. Our results are robust to instrumental variables estimation, the use of the GLOBE project’s cultural dimensions, and a subsample analysis of civil code law countries.

Research on the impact of digital transformation on the production efficiency of manufacturing enterprises: Institution-based analysis of the threshold effect

Digital transformation is the core strategic orientation in the digital economy era and is evolving into a pivotal competitive advantage among countries, industries and enterprises. Based on the analysis of its mechanism, this paper focuses on the data of A-share listed manufacturing enterprises in China from 2011 to 2021; measures and analyses the variables relating to the impact of digital transformation on the production efficiency of manufacturing enterprises; and conducts empirical tests. The research shows that digital transformation plays a significant role in promoting the production efficiency of manufacturing enterprises, and the promotion effect is more obvious for high-tech enterprises and non-state-owned enterprises than for non-high-tech enterprises and state-owned enterprises; digital transformation has a greater promotional effect on the production efficiency of manufacturing enterprises with formal institutions or informal institutions switching from low value intervals to high value intervals. Accordingly, this paper proposes accelerating the digital transformation process of manufacturing enterprises and adopting targeted policies in accordance with the principle of resource endowment. Moreover, from the perspective of institutional environment optimization in digital transformation, this paper proposes building a proper formal institutional environment and strengthening the construction of informal institutions. Our study provides new ideas for constructing enterprise digital transformation indicators. We also offer new insights into the different institutional levels of the effect of digital transformation.

How does digital transformation affect the ESG performance of Chinese manufacturing state-owned enterprises?-Based on the mediating mechanism of dynamic capabilities and the moderating mechanism of the institutional environment.

Against the background of sustainable development policies, the ESG performance of Chinese manufacturing enterprises is still generally poor. As the leading enterprises in the manufacturing industry, state-owned enterprises should take the lead in responding to the national call for sustainable development and actively explore the path to improve their ESG performance. This study aims to explore whether and how state-owned manufacturing enterprises can improve their poor ESG performance through digital transformation in the digital economy. This study takes Shanghai and Shenzhen A-share state-owned listed manufacturing enterprises as the research sample and constructs an unbalanced panel. OLS regression analysis is used to empirically test the impact of digital transformation on the ESG performance of the sample firms. Further attempts are made to discuss the influence mechanism of digital transformation from the perspectives of dynamic capabilities and the institutional environment through stepwise and hierarchical regression methods, respectively. The study shows that, firstly, digital transformation is an important influencing factor in promoting the improvement of enterprises' ESG performance, and at the same time, there are significant structural differences in this influence. Second, under the dynamic capability perspective, digital transformation can improve corporate ESG performance through an absorptive feedback mechanism, matching response mechanism, and innovation efficiency enhancement mechanism. Third, from the perspective of the institutional environment, the informal system has a significant positive moderating effect on the relationship between digital transformation and ESG performance, i.e., the informal system and digital transformation have a synergistic governance effect on corporate ESG performance. The moderating effect of the formal institutional environment on digital transformation and ESG performance is not significant. The findings of the study clarify the controversy over the relationship between digital transformation and ESG performance of manufacturing state-owned enterprises and enrich the research on the influencing factors of corporate ESG performance. It also provides a theoretical foundation and empirical evidence for manufacturing SOEs to improve ESG performance and lead to sustainable development.

A configurational analysis of innovation ambidexterity: evidence from Chinese niche leaders

Purpose Innovation ambidexterity is crucial for fostering growth and gaining a competitive advantage in small and medium enterprises (SMEs). Previous research indicates that achieving a balance between exploration and exploitation is a multifaceted phenomenon occurring across various levels. This paper aims to examine the influence of individual, organizational and institutional factors on the ambidextrous innovation of Chinese niche leaders using a configurational perspective. Design/methodology/approach This study uses secondary data collected from 69 Chinese niche leaders in the new equipment manufacturing industry. The authors use fuzzy-set qualitative comparative analysis to investigate how owner openness, age, digitization, the formal institutional environment and the informal institutional environment jointly influence innovation ambidexterity. Findings By using fuzzy set analysis, this study categorizes combinations of interdependent factors that promote innovation ambidexterity. In particular, the authors pinpoint three configurations that foster high innovation ambidexterity and two configurations that lack such high levels of innovation ambidexterity. The analysis results suggest that innovation paradoxes in SMEs are linked to a nested system comprising leadership, organizational factors and the institutional environment. Originality/value This study elucidates the mechanism of innovation ambidexterity through a configurational perspective. This research proposes and validates a framework that enables SMEs to develop ambidextrous innovation capabilities, thereby integrating organizational ambidexterity theory and shedding light on the intricately complex nature of innovation ambidexterity.

Interlocking directorates and family firm performance: an emerging market’s perspective

PurposeThis study analyses interlocking directorates from the perspective of an emerging market, Mexico, where formal institutions are weak, and family firms with high ownership concentration dominate. It responds to recent calls in the literature on interlocks, which urge the differentiation between family and non-family businesses and to complete more research on emerging economies.Design/methodology/approachA database was constructed for 89 non-financial companies (52 family-owned) listed on the Mexican Stock Exchange (BMV) from 2001 to 2014. This period includes normal times and an episode of financial crisis (2009–2010). To test the hypotheses, a dynamic panel model (in two stages) is used, applying GMM.FindingsIn normal times, the advantages of Board Chairman (COB) interlocks for the performance of publicly traded Mexican family firms are obtained regardless of the weak formal institutional environment. By contrast, during financial crisis, interlocking family COBs are more likely to jointly expropriate minority shareholders with actions that further their family objectives, which mitigates the positive effect of interlocks on performance. These findings contrast with the insignificant effects of COB interlocks found for non-family corporates.Originality/valueA new framework is proposed which, through agency theory, finds points of concordance among resource dependence and class hegemony theories, to understand the effect of interlocking directorates on the performance of family firms operating in Mexico. The results of the empirical exercise for family companies listed on BMV during normal and financial crisis periods suggest its applicability.

FDI Motives and Location Decisions of Emerging Country Business Groups: Entry Mode, Ownership and Institutional Environment

The purpose of this paper is to introduce and explain our understanding of the internationalization process of emerging country business groups (EBGs) according to the entry mode choice, ownership structure, and formal institutional environment of the host country. The internationalization models of Dunning and Mathews are integrated with the institutional environment in the internationalization process of EBGs because they are unable to explain the rise of EBGs alone. Content analysis is used to investigate the internationalization strategies of EBGs. The findings of this study revealed three categories of FDI motives: main motives (market-seeking and strategic asset-seeking), sector-based motives (efficiency-seeking and resource-seeking), and facilitative motives (relational asset-seeking). FDI motives, entry mode, ownership, formal institutional environment, and location decisions are investigated together in the context of emerging country dynamics. This exploratory study contributes to the expanding global research on EBGs based on a suggested framework that can provide novel insights regarding the internationalization processes of EBGs.

Relationship between Diversification, Institutional Environment and Growth: A Study of Agricultural Companies in China

China’s economic growth has been heavily driven by its agriculture-related industries. This growth has been attributed to several factors, including government policies, technological advancements, and changing consumer preferences. This research aims to shed light on the underlying mechanisms that have enabled agriculture-related listed companies to thrive in China’s rapidly evolving economic landscape. Specifically, this study examines the role of the institutional environment, diversification strategy, and Confucian culture in the growth of these companies. Based on the institutional basic view theory, transaction cost theory, principal–agent theory, brand theory, and enterprise growth theory, this study uses empirical research to analyse the diversification strategy and growth of 204 agriculture-related listed companies from 2010 to 2019. The study selected companies listed as Class A in agriculture, forestry, animal husbandry, and fishery with complete data and more than three years of history. The selection also covered those whose income from agriculture accounted for more than 50% of the total in 2021, or those with the highest income related to agriculture accounting for over 30% of the total income. The collected data is analysed with SPSS and Stata. The results showed that the formal institutional environment significantly suppresses the diversification strategy of agriculture-related listed companies, while the Confucian culture in the informal institutional environment significantly promotes it. The interaction between the formal and informal institutional environments has a complementary effect on the choice of diversification strategy. The study also finds that diversification strategy significantly suppresses the growth of agriculture-related listed companies, and the formal institutional environment has a more significant inhibitory effect on the diversification strategy of agriculture-related listed companies. In the informal institutional environment, Confucian culture plays a more significant role in promoting the diversification strategy of agriculture-related listed companies. The output of this study is an empirical investigation of the level of institutional setting and diversity production, which could aid in sustainable development and revitalisation of rural communities. Applying the results of this study could help managers anticipate future policy changes and adjust their strategies accordingly, while also assisting companies in developing new products and services that meet changing demand.

Conflicts between mining companies and communities: Institutional environments and conflict resolution approaches

AbstractAlthough companies recognize the importance of social responsibility and community engagement, conflicts between companies and communities have been noticeably increasing. To better understand the role of institutional environments in company–community conflicts, we analyze two mining conflicts—Minera Yanacocha's Minas Conga extension project in Peru and Minera Los Pelambres' El Mauro Tailings Dam in Chile. Our findings imply that, to prevent negative consequences and alleviate company–community conflicts, mining companies should address underlying structural causes and pursue informal approaches in order to obtain and maintain their social license. We find that better formal institutional environments not only alleviate conflict intensity but also facilitate informal approaches through which companies and communities can cooperate to resolve conflicts. The best practice would be to start and continue dialogs between communities and companies, mediated by impartial governments, to understand the concerns of the counterparty and find means by which to address the causes.

Turismo rural pedagógico em fazendas de café: Estratégias interdisciplinares no ensino médio

Educational rural tourism manifests educational practices outside the formal school and institutional environments through tourism activities in rural areas. In this context, coffee farms were chosen as the guiding element of this research due to their historical, cultural, and economic relevance in Brazil. The aim was to analyze the potential of educational tourism on coffee farms in developing interdisciplinary experiences in Brazilian high schools. The research is characterized as qualitative, descriptive, and analytical. We used the bibliographic research as methodological procedures, based on publications about the themes of educational tourism, rural educational tourism, tourism on coffee farms, and documentary research, based on official documents from the Ministry of Education, including the National Common Curricular Base. Thus, the results point to the coffee production environment as a promoter of interdisciplinary teaching-learning experiences, involving traditional areas of knowledge such as History, Geography, Sociology, Biology, Chemistry, and Physics. Furthermore, the learning and appreciation of the production in the field can occur from activities that relate in a practical way to the primary skills expected in formal education. The planting, processing, architectural structures, landscapes, among other rural elements, make it possible to think about schooling through different approaches, such as environmental, food, and heritage.

Formal and informal institutions and fair value opinion shopping: an institutional anomie theory perspective

PurposeThe objective of this study is to examine how formal and informal institutional environment influences managers’ fair value opinion shopping behaviour in the largest International Financial Reporting Standards adopter, China.Design/methodology/approachTo test the hypotheses, I conduct a 2 × 2 between-subject randomised experiment since the inferences about cause and effect are important in this study. The between-subject experimental situations are manipulated on the basis of the financial condition of companies and boards’ oversight.FindingsI find that managers are likely to seek favourable fair value opinions from external valuation professionals when they are under the weak boards’ oversight and high stress to meet the regulation target of the China Securities Regulatory Commission. These results are more pronounced for managers with higher both rent-seeking and favour-seeking guanxi orientations are more likely to engage in fair value opinion shopping.Originality/valueConsistent with theoretical analysis of Balfoort et al. (2017), this study provides empirical evidence that guanxi influences the neutrality and faithful representation in fair value measurement in China. In addition, the findings extend Salzsieder’s study (2015) and reflect the context-embeddedness nature of accounting.

Perceived Social Capital and Institutional Environment‘s Impact On the Success of Regional Cluster Policies

Abstract Cluster policies (CPs) are said to be one of the crucial elements supporting the innovativeness of local and regional economies. However, what drives the success of CPs has not been made fully explicit. We tested the impact of perceived quality and strength of social capital (SC) and the formal institutional environment (FIE) upon CPs. We studied this relationship by applying structural equation modelling to data from quantitative CATI research on members of 20 cluster initiatives from four Polish administrative regions (NUTS 2), referred to as voivodships. We have revealed that the formal institutional environment has a strong influence on CPs, whereas, surprisingly, SC hardly matters.

Effect of green technology innovation on the upgrading of the manufacturing value chain: Evidence from China

Green technology innovation is an important driving force for the upgrading of the manufacturing value chain. The purpose of this study is to explore the effect of green technology innovation on the upgrading of the manufacturing value chain under institutional environments. To this aim, the panel data of 28 provinces in China from 2010 to 2019 and panel threshold regression model are applied. Empirical results show that the effect of green technology innovation on the upgrading of the manufacturing value chain is nonlinear under institutional environments. The effect of formal and informal institutional environments on the relationship between green technology innovation and the upgrading of the manufacturing value chain is also different. The positive effect of green technology innovation on the upgrading of the manufacturing value chain is best when the level of formal institutional environment is high and informal institutional environment is moderate. In addition, when we divide the sample into three regions (Eastern, Central, Western), the effect of green technology innovation on the upgrading of the manufacturing value chain under institutional environments shows regional heterogeneity. Hence, with this calculated optimal interval of institutional environments, the government can adjust and improve institutional environments so as to provide the most favorable institutional conditions for green technology innovation to promote the upgrading of the manufacturing value chain. This research is helpful for the government to make rational decisions according to the situation.

Cryptocurrency legitimation through rhetorical strategies: an institutional entrepreneurship approach

ABSTRACT How can cryptocurrency gain legitimacy in the eyes of users? Drawing upon the theories of institutional uncertainty and legitimacy, we propose a process model in which legitimacy for cryptocurrencies acquired at the market level via rhetorical strategies (i.e. evasive action) will reduce uncertainty in the formal institutional environment. This reduction in institutional uncertainty will beget additional legitimacy, and thus higher performance for individual crypto firms, on average. This study (1) advances institutional entrepreneurship research by investigating the legitimation process of cryptocurrency; (2) extends our understanding of the evolution of an innovation and its diffusion under institutional uncertainty; (3) contributes to the development of institutional theory by elucidating how cryptocurrencies can change existing institutions, and even create new ones, through evasive entrepreneurship; and (4) provides an overall theoretical rationale for how cryptocurrency can become more widely accepted.

The effect of subnational legal effectiveness and social trust on foreign firm performance: from subnational analysis in emerging economies

PurposeThis study aims to verify the respective and interactive effects of subnational formal and informal institutions (i.e. legal effectiveness and social trust) on foreign firm performance, and further identify the contingent factor (i.e. institutional experience) that moderates these relationships.Design/methodology/approachDrawing on the institutional-based view, this study develops several hypotheses that are tested using a comprehensive dataset from four main data sources. The authors’ unit of analysis is foreign firms operating in China. The authors ran ordinary least squares (OLS) regression model to investigate the effects. A series of robustness tests and endogeneity tests were performed.FindingsThe results show that both legal effectiveness and social trust at subnational level positively affect foreign firm performance respectively. Legal effectiveness and social trust at subnational level have complementary effect in promoting the performance of foreign firms. Foreign firm's institutional experience in target region of emerging economies host country strengthens the positive impact of subnational legal effectiveness on performance, but weakens the positive impact of subnational social trust on performance.Practical implicationsIt is important to fully understand the impact of heterogeneous institutional environments of subnational regions in emerging economies on foreign firm performance, which would help foreign firm make a more suitable secondary choice decision of investment destinations at the subnational regional level.Originality/valueFirst, drawing on institutional-based view, the authors incorporate the subnational formal and informal institutional factors to investigate their impacts on foreign firm performance by switching the attention from national level to subnational level in emerging economy host countries. Second, this research furthers existing studies by bridging a missing link between both subnational formal and informal institutional environments and foreign firms' outcomes. Third, the authors prove that the model of subnational formal and informal institutions in influencing foreign firms' performance is contingent on their institutional experience in target subnational region of emerging economy host country.

It’s Not All About the Money: Why and How Firms Enact CSR Activities in Developing Countries

Existing research in corporate social responsibility (CSR) is mainly developed on two assumptions. First, firms expect an economic return from CSR. Second, firms follow progressive CSR, ensuring economic gains, following laws and regulations, conducting business in an ethical manner, and finally philanthropy. Nevertheless, insights following this approach were obtained by mainly analyzing firms in locations where laws are present and fairly enforced. In our analysis, we suggest that firms have different reasons and methods to pursue CSR. Our results show that firms operating in locations with a weak formal institutional environment participate voluntarily in CSR activities depending on their perspective—whether a firm’s CSR activities are cost- or investment-oriented—and focus—whether a firm’s CSR activities are value creating or value distributing.

Mandatory corporate social responsibility and firm performance in emerging economies: An institution-based view

Leveraging theoretical insights from Mike W. Peng's institution-based view, this paper examines how mandatory corporate social responsibility investment regulations impact on firm performance in emerging economies, such as India. We thus first discuss the overview of India's statutory provisions and disclosure guidelines related to corporate social responsibility, which became effective from the financial year 2014–2015. Then, because in the emerging economy, formal institutional environments such as the rule of law greatly influence a firm's strategic decisions and performance, we propose a contingency framework of the impact of mandatory corporate social responsibility investment on a firm's overall performance, i.e., firm-specific advantages, financial outcome, and competitive advantage. In this way, we also explore how corporate social responsibility implementing intermediary agencies’ mediating role with third-party contractual terms will moderate the relationship between the focal firm's social investment agendas and performance. In so doing, the study contributes to and advances understanding of the institution-based perspective on the relationship between the focal firm's mandatory social investment and performance in emerging economies and brings the institution-based view into the mainstream of corporate social responsibility literature. Taken together, the novelty of our work is to study the association between sustainable social agendas and firm-specific and competitive advantages, as well as the mediating role of registered social intermediary agencies.

Individualism, formal institutional environments, and bank capital decisions

We examine how individualism affects bank capital decisions worldwide and in the United States at the state level. Based on a sample of 7034 banks in 68 countries, we establish three major findings. First, individualism is negatively and significantly associated with bank regulatory capital, and the association is independent of the influence of formal institutional environments. Second, effective legal enforcement magnifies individualism's negative effect on bank regulatory capital. Finally, focusing on the United States, we also find that banks in individualistic states hold less regulatory capital than banks in collectivist states do. Effective state-level legal enforcement magnifies the effect of individualism. Our findings suggest that individualism constrains regulators, as regulatory guidelines or formal institutional factors operate very differently depending on the informal institutional environment.

Institutional entrepreneurial orientation: Beyond setting the rules of the game for blockchain technology

Regulations keep evolving on currency-based blockchain technology, making it difficult for entrepreneurs within this realm to find a home. Going beyond temporal regulations and traditional metrics to help entrepreneurs evaluate formal institutional environments, we apply and extend the theoretical framework of entrepreneurial orientation (EO) to the institutional level (termed institutional EO) to index an institution's innovativeness, proactiveness, and risk-taking towards blockchain technology. Evaluating a country's institutional EO allows entrepreneurs to understand how embedded the institution is within a certain technology (in this case blockchain technology), which in turn, signals to entrepreneurs longer-term havens in which to locate to develop and commercialize the technology.

Formal Institutional Distance and cross-border M&A-Contract Ineffectiveness: Moderating Role of Advisory Organizations

Advisory organizations on cross-border mergers and acquisition deals performed as advisory governance can fill the distance between the formal institutional environment of host and home economies. This study examined the formal institutional distance between emerging and developed economies and their role in M&A initial contract ineffectiveness by expanding the phenomena of the pre-completion stage of M&A-contracts. We examine our key questions using data of 832 cross-border M&A-contracts of developed economies’ firms with emerging economies’ firms in the international business high-technology industry from 1984-2011. We find that formal institution distance explains part of the variation in the ineffectiveness of M&A-contracts. Further the gain from the external capabilities provided by advisory organizations helps in reducing the effect of institutional distance on the M&A-contract ineffectiveness.