Research Highlight Unwritten rules of the game: the role of informal networks
Strong informal institutions, in the form of unwritten codes of conduct, still coexist alongside the long arm of the law and other formal institutions. Maral Muratbekova-Touron and her co-authors unpack the “black box” of informal institutions and explain the role of informal networks in maintaining or modifying the (often invisible to outsiders) rules of the game, offering important insights for international businesses.
It has been more than three decades since the Berlin Wall came down, and most countries are considered transparent, market economies, with formal processes for tenders, recruitments and other contracts. Yet guanxi, a Chinese system of exchange of favours that emerged during the Maoist period to obtain scarce products, is still used to obtain business permits, jobs or purchase real estate. Even in established democracies with effective formal institutions, unwritten rules persist, like piston (preferential treatment obtained through personal acquaintances) in France.
Why do such informal institutions survive? The question posed by a team of researchers – Dana Minbaeva from King’s College London, Alena Ledeneva from University College London, Maral Muratbekova-Touron from ESCP Business School and Sven Horak, from St John's University– is particularly relevant for businesses, as “firms operating in foreign environments [...] consciously or unconsciously [deal] with informal institutions on a daily basis”, they explain in Academy of Management Review.
Symbiotic relationships between formal and informal institutions
The researchers found answers by examining the mechanisms at work in the interplay between formal and informal institutions. They described the relationship by borrowing terms from evolutionary biology. Symbiosis (“living together” in Greek) is a word usually employed to describe long-term interactions between two species, like ivy living on a tree.
So how do formal and informal institutions function together?
A first approach contrasts unwritten, socially shared rules with those enforced through official state institutions. According to this view, informal institutions are ‘compensatory structures’, filling a void left by formal ones. Using the evolutionary biology metaphor, this type of relationship is labelled ‘parasitic symbiosis’ -- one species benefits while the other is harmed.
A second approach sees a logic of formalization, i.e. informality is slowly absorbed into the institution-building process. In urban development, for example, informal dwellings such as favelas in Brazil start without sewage systems or electricity; as these infrastructures are gradually brought in, the (originally) informal homes remain. This type of relationship is ‘commensalistic’: one of the species benefits (formal institutions), and the other is unaffected.
The researchers suggest a third alternative in which formal and informal institutions benefit from each other: a ‘mutualistic symbiosis’. They analysed this interplay through the prism of informal networks upon which informal institutions rest.
The role of informal networks in channelling change or ensuring continuity
So how do informal networks enable traditional rules of the game to persist, even as globalization and other mega-trends of the 21st century supposedly weaken them?
“Informal institutions persist because of their ability to change and adapt in the face of mature formal institutions, while enduring internal consistency, continuation and legitimacy,” answer the researchers, adding that this ability “is enabled by the dual functionality of the informal networks upon which they rest.” The dual role of informal networks is that of transmission and transformation.
For example, in South Korea, legislation in support of gender equality is not effective because local informal institutions (Confucian values, whereby women have historically been treated as secondary to men) are strong, being guarded and enacted by the male-dominated networks known as yongo, networks based on blood ties, region of origin or university.
Open/closed and affective/instrumental networks
Depending on their nature, informal networks can be vectors of increased change or factors of continuity.
‘Relatively closed’ informal networks are relatively tight. Examples include kinship-based networks – kin being more or less loosely defined, through blood or marriage – and elite alumni networks (old-boy networks in the UK). The strong sense of belonging can express itself as solidarity, with extended families helping each other out during hard times, or as social domination, where alumni of France's grandes écoles create insider ties between government cabinets and the private sector.
‘Relatively open’ networks, like wāsta in the Middle East and guanxi in China, can include members from different circles, through school, family or hobby connections. They channel more change to their informal institutions than relatively closed ones do.
The second key feature of informal networks relates to the affective commitment of their members. Relations can range from “purely instrumental” (based on calculation) to involving “a degree of affection”, both components usually being present to different degrees.
Instrumental relationships, for example, market-exchange networks like blat (“useful” friendships), which were used in the former Soviet Union to obtain scarce resources by bypassing the official system, may disappear if no longer perceived as useful. Conversely, affective ties are a constituent part of personal identity and as such more persistent.
Applications for businesses and policymakers
Better understanding the role of informal institutions is useful in particular, for multinational corporations operating in foreign markets. For instance, in markets with ‘relatively closed’ networks, companies need to ‘buy’ or ‘borrow’ human capital to achieve local embeddedness, but ‘build’ human capital in markets dominated by ‘relatively open’ networks. In markets dominated by ‘relatively affective’ networks, it is up to management to decide how ethical or risky it is to compose with local kinship rules.