Examine the overall manner in which formal and informal institutions combine to influence a firm’s behavior. Provide two (2) examples that depict the effects that formal and informal institutions can have on a firm’s strategy.
Answer:- The translation of formal and informal constraints within the nations’ institutional framework can be reflected by the strategies used by the firms. There are different sources from where formal and informal institutions initiates within the firm’s institutional environment despite that they have a very strong influence on impacting the firm’s behavior. Particularly when formal constraints are absent or incomplete , in order to balance out the uncertainty and guiding the managers, informal constraints intervene.
Informal institutions can be presented in the form of societal activities , culture and ethics which will be boosted and promoted by the normative and cognitive pillars. Normative pillar will influence the strategic behavior in such a manner that strategies are connected such informal institutions as societal norms. Cognitive pillars can also influence the strategic behavior in such a manner that informal institutions can be internalized into firm level decision.
Depending upon the time and nation, the balance between formal and informal can be varied. Thus similar types of institutions will be drawn by the firms that have same institutional environment for conveying the similar decisions. For example, culture as an informal institution may convey strategic decision in the absence of formal institutions.
For example, during the political collapse of formal Soviet Union, Russian entrepreneurs tried to launch and survive with the help of social ties and connections within their local networks. Culture also have the informal institutions so that social ties can be utilized for providing economic exchange and continuity of the firms can be ensured under the formal change in political-economic situations.
Other example can be seen in Chile, the Czech Republic, Hungry , India, Poland and South Korea when some institutions transitions were made. The common phenomenon in these special environments is the convergence towards informal institutions due to reduced or absent formal institutions. Particularly, the reliance based strategies are used by many firms which can be applied with the help of prevailing cultural norms. In order to avoid the negative impact of weak contracting institutions , different ways are found by the individual and institutions for changing the terms of their formal and informal contracts.
Formal institutions such as nation’s laws try to implement the safe work environment in employee work environments can be understood within a shared institutional environment, yet the minimum quality standards which are followed may be executed differently amongst the cross section of the firms.