2.

INSTITUTIONS
AND
ORGANIZATIONS
Emerging Markets
Fall 2023
Jakob Arnoldi

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 INSTITUTIONS
Basic idea:
Human interactions - including transactions – are guided and coordinated by
social institutions - rules of the game.

Such rules are Examples:

everywhere. Most Traffic (traffic law);
social interaction Going to this class (conventions Also competitions follow rules
guided by about student behaviour/AU code of
institutions. Most conduct);
actions we as Playing a football match (Football
humans take are rules and unwritten rules regarding
institutionalized. sportsmanship).

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 SPOT THE INSTITUTION

1 2

Marriage A school
JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 DEFINITIONS OF
INSTITUTIONS
​Background conditions for economic activities that through
regularity and enforcement create ‘rules of the game’, which in
turn reduce uncertainty (e.g. by creating trust/reducing
information asymmetries) and transaction costs.
​‘Humanly devised constraints that shape human interaction’
(North, 1990).
​‘Institutions are composed of cultural-cognitive, normative, and
regulative elements that, together with associated activities
and resources, provide stability and meaning to social life’.
(Scott, 200la: 48)
North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University
Press.
Scott, R. W. (2008). Institutions and Organizations. Los Angeles: Sage.

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 THREE PILLARS (RICHARD SCOTT,
2008, 51)
Regulative Normative Cultural-
Cognitive
Basis of Expedience Social obligation Taken for granted
compliance shared
understanding
Basis of order Regulative rules Binding Constitutive
expectations Schema
Mechanisms Coercive Normative Mimetic
Logic Instrumentality Appropriateness Orthodoxy
Indicators Rules, laws, Certification, Common beliefs,
sanctions accreditation isomorphism
Affect Fear, guilt, Shame, horror Certainty/
innocence confusion
Basis of Legally Morally governed Comprehensible,
legitimacy sanctioned recognizeable,
JAKOB ARNOLDI

culturally
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
supported
 FORMAL AND INFORMAL

Codified and non-codified:

Institutions are perfectly analogous to the rules of the game in a
competitive sport. That is, they consist of formal written rules as
well as typically unwritten codes of conduct that underlie and
supplement formal rules…the rules and informal codes are
sometimes violated and punishment is enacted. Therefore, an
essential part of the functioning of institutions is the costliness of
ascertaining violations and the severity of punishments.
(North, 1990)

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 ​https://www.youtube.com/watch?v=l1_RQI8Lcno

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 INSTITUTIONS AND
ORGANIZATIONS
​Institutions are rules
​Organizations are players
​Players strategize based on the (institutional) rules.
​ ules are formal or informal, law and norms, ways of seeing the world
R
(cognitive schemata).
​Organizations are parliaments, firms, schools, trade unions, sports clubs,
gangs…

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 WHAT IS A MARKET INSTITUTION?
​Background conditions for economic activities that through regularity and
enforcement create ‘rules of the game’,
​Entities which reduce information asymmetries; uncertainty about outcomes
​In many cases the basis on which market intermediaries operate – for example
accountants.

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 INSTITUTIONS…
reduce uncertainty;
​provide a structure to
actions and transactions
(by supporting
expectations);
​create and enforce
regularity and
accountability;
​define and limit the set of
choices – support routines;
​reduce transactions costs;
​ensure coordination and
cooperation.
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
THEY DO SO IN DIFFERENT WAYS:
• Through rules, constraints or 1. Regulative
regularities of action – the
breach of which can be
punished.
• Through legitimacy (in terms 2. Normative
of trustfulness and fairness
etc.) and acceptability.
• Through taken for granted
“modes of thinking” or 3. Socio-cognitive
cognitive frames which in
turn support belief systems.
JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
 COOPERATION AND COORDINATION

I am reluctant to send money to pay for something I only receive

upon payment, the seller is reluctant to send before having
received money: Market institutions (and market platforms such as
Ebay) help solve such (prisoner’s) dilemmas.

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 ANOTHER EXAMPLE: USED CAR
MARKET
A market with a high degree of
information asymmetry
​How can such assymetries be reduced?

Market intermediaries tend to be linked to institutions

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 INSTITUTIONS AND TRANSACTIONS
COSTS
​Transactions costs: costs of gaining information, ensuring property rights and
otherwise reducing uncertainty due to potential opportunistic behaviour.
• Opportunistic behaviour: Acting in self-interest, ”self-interest seeking with
guile” (Williamsson, 1975)
​Institutions (and market intermediaries) reduce said costs.
​Transaction costs one part of overall production costs.

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 INSTITUTIONS CAN REDUCE
TRANSACTION COSTS
​By making it less costly to acquire information.
​By making it less costly to maintain and enforce ownership rights.

Institutions can also enhance markets and create greater specialization:

• Institutions make it possible to transact with strangers.
• Create standardized information that reduce information asymmetries and contextual
knowledge.
• Creates more efficient markets which enable households and firms to specialize because
they can purchase all other needed goods and services.

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 A HISTORICAL MOVEMENT
TOWARDS MORE COMPLEX TRADE
1) small and geographically local barter; personalized exchange; repeat
dealing; cultural homogeneity: low transactions costs but high transformation
costs.
2) impersonal exchange (and greater geographical range); supported by rituals,
kinship, codes of conduct; based on rudimentary support of the state (which
however could be partial to one of the sides in the transaction and highly
unpredictable).
3) Impersonal exchange with third party enforcement.

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 STABILITY AND CHANGE
​Institutions are relatively stable but not necessarily efficient.
​Institutions change incrementally due to actions by organizations (and
individuals).
​Informal institutions build on cultural norms.
​Given cultural differences, this over time leads to divergence across countries.

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 THREE BASIC PROPOSITIONS
REGARDING EMS AND
INSTITUTIONS:
​Emerging markets are characterized by absence or inefficiency of markets
institutions and market intermediaries. = institutional voids.
​In emerging markets, firms can compensate for inefficiencies in market
institutions by relying on informal institutions (the substitution thesis).
​Emerging markets exibit – partly due to emphasis on informal institutions,
partly due to developments path different from Western societies – institutional
orders different than from ‘the West.’

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY
 QUESTIONS (INSTEAD OF
SUMMATION)
​What is the difference between formal and informal institutions?
​ an you provide examples of two informal and two formal institutions?
C
​Are market intermediaries the same as institutions?
​ re institutional voids equivalent to lack of formal institutions?
A

JAKOB ARNOLDI
25 MAY 2021 PROFESSOR
DEPARTMENT OF MANAGEMENT
AARHUS UNIVERSITY