Formal Market Institutions Research Articles

Socialist imprints and innovation strategies in a transition economy

ABSTRACT This paper contributes to research at the intersection of institutional theory and the emerging literature on institutional imprinting by studying how the persistence and decay of founding institutional imprints affect network-based innovation strategies in small firms during later stages of economic transition. In do so, we are able to investigate both the extent of imprints and the boundary conditions that serve to strengthen or weaken their persistence. We situate our study in a fast-growing but under-studied transition economy, Vietnam, applying multiple estimation methods on a multilevel panel sample of 2644 small entrepreneurs over 6 years. Our major findings are, firstly, that firms launched before transition are influenced by socialist imprints and rely more on small and concentrated informal social networks, while firms launched after transition rely more on newer formal market institutions to generate innovations, and, secondly, that management and industry experience strengthens network-based innovation strategies and, thus, amplifies the persistence of socialist imprinting in firms established prior to transition.

Community Membership and Reciprocity in Lending: Evidence from Informal Markets

We study how wholesalers assess borrower credit risk and extend trade credit to retailers in economies where formal market institutions, such as financial reporting systems, auditing, and courts, are nonexistent or function poorly. Using the setting of a large market in India, we find that community membership plays a strong role in the access to credit. Wholesalers are more likely to provide trade credit and to offer less restrictive credit terms to within-community retailers, are more lenient when these retailers default, and are less likely to experience defaults from them. Our analyses suggest that this cooperation between same-community wholesalers and retailers is achieved through an indirect reciprocity mechanism, which is sustained by within-community information flows and provides insurance against income shocks.

Does religion enhance firm performance? Evidence from private firms in China

We study the impact of religiosity on firm performance in China. We find that entrepreneurs with religious beliefs have higher accounting performance. Firms are more likely to obtain bank credit if entrepreneurs have religious beliefs as religiosity stimulate them to invest more in networking, which further enhance the access to bank credit. Religious entrepreneurs have more trust towards external people, which incentivizes them to adopt a shareholding reform and employ external professional CEOs instead of family members, and thus enhances the corporate governance of these firms. In contrast, religious entrepreneurs also prefer family members as shareholders and inheritance of the firm by family members. The preference of inheritance of the firm by family members undermines the enhancing effect of external CEOs on firm performance. Religious entrepreneurs are more likely to spend more on safety insurance for employees, which is driven by the altruism originated from religious doctrines and also the risk aversion channel. The impact of religiosity complements market institutions, and political and social status of the entrepreneurs, which shows the interaction between religion and formal market institutions. We find that it's mainly Buddhism that drives our results, while other religions have limited impact on business activities in the country.

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.

Institutional Voids and the Role of Network Strategies: Evidence from China

While the existing literature shows that network strategies can facilitate firm/entrepreneurial performance in emerging markets by filling institutional voids, it is less clear how institutional voids affect the usage and performance of different network strategies. Focusing on two widely-adopted network strategies in China, i.e., guanxi-based exchange and broker-based exchange, this study examines this issue using data from a 1994 nationally representative survey of private entrepreneurs. It finds, first, that different types of institutional voids have different effects on two network strategies: Entrepreneurs rely more on broker-based exchange under higher uncertainty for accessing key resources and markets but more on guanxi-based exchange after encountering dissatisfied legal resolution of contractual disputes. Second, the effects of different network strategies on performance are contingent on the overall severity of the problem of institutional voids. Compared with guanxi-based exchange, broker-based exchange brings lower performance in regions with severe problem of institutional voids, but higher performance in regions where formal market institutions are relatively strong.

Institutional isomorphism and Chinese private corporate philanthropy: state coercion, corruption, and other institutional effects

The corporate philanthropy literature generally assumes corporate philanthropy is either voluntary or strategic. Institutional theory has downplayed coercion as an isomorphic mechanism. Using the case of China, this paper contributes to both literatures by demonstrating that state coercion can play a large role in corporate philanthropy. A further contribution is demonstrating that strategic corporate philanthropy in a setting with weak formal market institutions, such as China, can take the form of corruption disguised as corporate philanthropy. This paper also finds some evidence for mimetic isomorphism via peer imitation at the provincial level and normative isomorphism via industrial associations.

Bribery and Innovation in Transition Economies: An Institutional Perspective

This paper investigates how the market and social institutions condition the innovating firm’s propensity to engaged in bribery. Firms that undertake innovative activities sustain survival and profitability in uncertain and dynamic environments, but they may encounter even more uncertainties and difficulties when the formal market institutions are deficient. Using cross-country establishment-level data covering transition economies in Central and Eastern Europe, this study shows that innovating firms are more prompt to bribe when the formal market institutions are less developed. Moreover, the positive association between the underdevelopment of market institutions and innovating firm’s propensity to bribe is more pronounced in the industries where the bribery is pervasive and viewed as a legitimate way of doing business.

Social entrepreneurs' strategies for addressing institutional voids in developing markets

Institutional theory is used in literature to explain entrepreneurs' behaviours in forming new institutions or changing existing ones to overcome institutional voids in developing countries. Social entrepreneurs address these voids as opportunities serving their interests alongside other beneficiaries'. This article tackles the theoretical underpinning of social entrepreneurship, creating a venue for reviewing the formal market institutional voids that social entrepreneurs face in developing countries. Grounded theory is employed in five developing countries' contexts, studying twenty social entrepreneurs to address and develop operational definitions per market void. This research proposes a holistic categorisation for formal market institutions, as well as a context-related informal institutional one. Moreover, the research moves forward by projecting a taxonomy of strategies employed by social entrepreneurs to tackle the earlier voids addressed.

Spontaneous Market Emergence

Abstract Drawing insights from the literature and from the author's own survey work on contractual practices among manufacturers and traders in Africa, we study the transition from anonymous to personal to impersonal exchange. Using a dynamic game with heterogenous agents and information sharing, we derive precise conditions under which relational contracting spontaneously emerges and deters opportunistic breach even in the absence of formal market institutions. Exclusion of cheaters is not required for contracting to begin. As exchange develops, newcomers may be excluded from contracting when screening costs are high and agents long lived. Reputational equilibria in which cheaters are permanently excluded are not decentralizable unless contracting is already developed and breach of contract is interpreted as a sign of impending bankruptcy.

Factors impeding credit use in small‐farm households in Bolivia

Sample survey data show few Bolivian small‐farm households using credit, but most would like to borrow from formal market institutions. A theoretical framework is developed to formulate testable hypotheses to identify factors that inhibit credit use. Major impediments to borrowing are scale of operations, as measured by amount of useable land, and borrower's transactions costs that arise from loan paperwork, use of Indian language, remoteness from market, little education and low degree of market integration. When farmers with these characteristics borrow they tend to use informal market sources because of the lower transactions costs compared to those of formal market lenders. The policy implication is if formal market lenders are to reach more farmers they must lower transactions costs.