Institutional Theory and Types of Institutions

Institutional Theory

• Insinsufficient coordination among parties, leading to social and economic inefficiencies.way to resolve conflicts before These inefficient coordination mechanisms can lead to inconsistent decision-making, disrupting the overall functioning of an organization or society, and ultimately slowing down economic growth..
• New Institutional Theory views institutions as social constructs that l
• imit behavior and provide rules for business. This perspective suggests that institutions can shape the way individuals interact with each other, influencing decisions and actions in both formal and informal settings.
• Formal Institutions: These institutions exist in written form, such as laws, regulations, and contracts, and are enforced by external authorities. They use the threat of force and sanctions to prompt compliance.
• Institutions are collections of norms that structure the relations of individuals to one another.

Types of Institutions

• Formal Institutions: influence behavior through laws and regulations, use threat of force and sanctions.
• Informal Institutions: influence behavior through norms, values, customs, and ideologies, no penalty for noncompliance.
• Informal Normative Institutions: organizations that establish standards and propagate principles (e.g. UN, NGOs).
• Informal Cognitive Institutions: collections of shared ideas that define reality by means of conceptual frameworks or schema (e.g. guanxi).

Characteristics of Institutions

• Institution Type: Formal, Informal, Informal Normative, Informal Cognitive
• Social Agreement: Regulative, Normative, Cognitive
• Compliance: Expedience, Social Obligation, Predisposition
• Institutionalization: Coercion, Norms, Imitation
• Logic: These three logics, namely Means to an End, Appropriateness, and Conformance, serve as guiding principles for institutional behavior. Means to an End refers to the pursuit of specific goals or outcomes, while Appropriateness emphasizes the relevance and adequacy of actions aligning with the institution's objectives. Conformance, on the other hand, deals with the conformity of actions to established rules and standards.
• Legitimacy: Legal, Moral Governance, Cultural Support
• Indicators/Evidence: Rules, Laws, Sanctions, Certification, Accreditation, Prevalence, Similarity

International Monetary Institutions

• International Monetary Fund (IMF): fosters global monetary cooperation, financial stability, international trade, high employment, sustainable economic growth, and reduction of poverty.
• IMF provides Special Drawing Rights (SDRs), an international reserve asset established by the IMF.
• IMF and Exchange Rates: Fixed exchange rates with par value based on gold and the U.S. dollar.
• Criticisms of the IMF: forcing free-market policies obn poor countries, increasing poverty and political chaos.

International Monetary Institutions (Cont.)

• Current IMF issues: aid coupled with mandatory advice to reduce budget deficits and inflation, leading to increased poverty.
• IMF largely controlled by developed Western countries.
• IMF strengthens economies of dictatorial regimes, making them markets for multinationals.
• IMF attempts to address these issues.

World Development and Trade Organizations

• World Trade Organization (WTO): establishes and helps implement rules of trade between nations, with 164 members representing 98% of all world trade.
• WTO Principles: trade without discrimination, freer trade through negotiation, predictability through binding and transparency, promoting fair competition, encouraging development and economic reform, and protecting the environment.

Economic Integration Agreements

• Association of Southeast Asian Nations (ASEAN): agreement among Southeast Asian nations that began as a security agreement, grew to a free trade agreement, and is continuing toward a free trade area, known as AFTA.
• European Union (EU): a body of 27 European countries that resulted from the Maastricht Treaty, with three areas of integration: economic, foreign policy, and domestic affairs.

Economic Integration Agreements (Cont.)

• European Union: Economic and Monetary Union (EMU) established the euro, with the European Parliament representing the people of Europe, the Council of the European Union representing the member states, and the European Commission administering daily operations.
• ASEAN and EU: examples of economic integration agreements.