Notes on the Institutional Context

Institutions at Different Levels

- Week 7 Note -
Taco Reus
Week 7 Objectives
1. Understanding institutions as multi-level contextual features
2. Recognizing the roles of the State, Market and Civil Society as
important institutional spheres that influence national
institutions
3. Gaining insight in important (inter)national organizations as
institutional drivers
4. Recognizing sources and effects of regional integration

This week considers the drivers and shape of institutions at different levels. As we
mentioned in the previous week, institutions are rules that constrain (or facilitate)
organizational activity and these institutions are created and sustained at different levels
of analysis. At the interpersonal level, colleagues make agreements, set expectations and
deadlines – sometimes formal but more often informal rules that facilitate interactions.
Within a group, formal guidelines may describe the purpose of the group or the activities
that can be expected, and informal routines may emerge over time to replace
timeconsuming formal decision-making processes. These routines can also develop at the
organization-level, and become core competencies that are critical sources of success
because they are valuable for the organization, hard to imitate, and rare (cf. resource-
based view of the firm in strategic management). Regulative, normative and cultural-
cognitive organizational institutions can all work together to stimulate organizational
behavior that best exploits resources in respond to a demanding environment. However,
these institutions can also restrain organizations from formulating and implementing
novel practices that are needed to respond to new environmental demands. Then, these
organizational routines can also become so-called core rigidities that prevent firms to
adapt their procedures while their environment is making these procedures obsolete. At
the industry-level, you can see groups of companies join associations, setting self-
imposed formal standards of environmental performance to industry members as well as
more informal rules of conduct. Other institutions are created or sustained at the
national level, or in a region such as the European Union, or even at higher levels in the
world.
Notes on the Institutional Context

Figure 1 depicts many levels of institutions, and emphasizes that institutions from
different levels influence each other, both bottom-up and top-down. From the bottom-
up, you can think of ways in which, individuals, organizations, or collective bargaining by
industry members or nations attempt to create or lobby for, new institutions, or defend,
enforce or safeguard existing institutions at higher levels – so for example, firms may try
to influence the creation of new laws
regarding climate control at the
regional level. This is institutional
work, which we will come back to in
the final week of the course. From the
top-down, higher level institutions
tend to shape the institutions at lower
levels, and also constrain the
institutional bandwidth in which
certain institutions can vary at a lower
level. For example, European Union
competition law now determines to a
large extent the competition laws of
the EU members at the national level;
the institutional bandwidth - in this
case the variation in national
competition laws among member
states – has been greatly reduced.

When we consider our guiding framework, this week’s note will focus mainly on
institutional spheres and (inter)national organizations as institutional drivers, and while
we could talk extensively about institutions at many levels of analysis, we will focus on
national and supranational institutions that influence exchanges and trade within and
across countries.

2
Notes on the Institutional Context

2.National Institutions
National institutions are the formal and informal rules specific to a particular country that
constrain and facilitate activities, exchanges, behavior, etc. In large part, these
institutions are shaped by the institutional spheres of a country – groups and
organizations within a country that influence the production, enforcement, monitoring of
the rules of the game. At the national level, we refer to the triad of institutional spheres:
the State, the Market, and Civil Society.

The State refers to the organizations, parties and coalitions that govern a country. It
involves a political organization with a centralized government that maintains a monopoly
on the legitimate production of regulatory institutions – laws, constitutions, formal
agreements – within a country. Some countries may be sovereign; they are independent
states and can determine their formal institutions without interference of others. Others
are subject to an external sovereignty or hegemony, where the ultimate influence or part
of the ultimate influence lies in another state or superordinate power (which we will come
to later in this note). The State also is the institutional sphere that can claim to use force,
by army or police, against violations of the interests of the state and its institutions.

The Market consists of parties – buyers and sellers – that engage in transactions. Firms
and entrepreneurs engage in activities that convert inputs into outputs. Some markets
rely on barter systems of exchange. However, most modern day markets sellers offer
goods and services in exchange for money, which is

3
 STATE
perhaps the most central institution to
facilitate exchange on the market.

Civil Society completes the triad, and

involves the organizations and people that
represent, express, and protect the
interests of the citizens of a country. Civil
society includes the family and the private
sphere, distinct from the State and Market.
MARKET CIVIL SOCIETY Its power
is reflected in elements such as
freedom of speech, a judiciary that independent from State, and unions that are
independent of Market interests. The organization of civil society generally relies on
volunteering, intended to improve human quality of life, by non-governmental
organizations and interest groups. A non-governmental organization (NGO) is an
organization that is neither linked to a government, nor to a for-profit business, usually
set up by ordinary citizens. While market players are often driven by relatively short-term
financial objectives, NGOs can be devoted to non-financial issues that require longer time
horizons, such as

4
climate change, reduction of poverty, prevention of human rights or development work.
Together, they form a powerful sphere to influence the other institutional spheres. For
example, the United States has over 1.5 million NGOs, and India has an estimated 2
million NGOs.

Together these spheres determine the national institutions of a country. These spheres
have very distinct institutional logics – organizing principles, or belief systems that shape
the way how people view the world and behave, and provide meaning to social reality.
The institutional logic of the State is rationalization by which informal institutions, such as
traditions, values and emotions as motivators of behavior, are replaced by rational,
calculated formal institutions, such as laws, regulations and formal agreements. The State
regulates human activity through legal and bureaucratic hierarchies, and enforces their
imposed rules through sanctions. As such this form of regulatory enforcement has been
referred to as the “iron hand.” When the Market is “free,” it is independent of other
institutional spheres, and could determine its own rules enforced by the “invisible hand.”
The family, NGOs and other interest groups that make up Civil Society are driven by
protecting and developing the community, and this is reflected in loyalty to members of
the community and their welfare. Civil Society primarily tries to influence the institutional
context by shaping social norms, which has been referred to as the “intangible hand” –
here, activity is motivated by a pursuit of esteem (i.e., respect, appreciation, feeling of
belongingness to the community), and avoiding disesteem.1

Generally, the institutional context is shaped by the extent to which these hands are held
together. Yet, shaping the institutional context also depends very much on a struggle
between spheres that determines which logic prevails in influencing how activities should
be regulated. Depending on which sphere’s institutional logic dominates can greatly
influence the characteristics of institutions in a particular area. For example, think about
who regulates housing and health in your country? Then consider how the institutional
context of housing and health would be different if another “hand” would control it. Or,
who controls education? - Families, markets, churches or states? While some countries
show a mix of universities where each sphere seems to have its schools (e.g., the United
States has a wide variety of public and private schools), other countries have an
educational system that is predominantly influenced by a single institutional sphere (e.g.,
universities in the Netherlands a predominantly public). Countries also vary quite a bit in
who regulates reproduction – while in some countries it is completely at the discretion of
the family, in other countries the church has most influence over this question, and in

1 From Brennan & Pettit’s (2004) “The Economy of Esteem.”

5
 Notes on the Institutional Context

some countries, like China, the State is very influential by limiting child birth. Clearly,
which sphere

determines institutions has a huge impact on characteristics of the institutions, and

how they are enforced.

An influential theory by Gareth Hardin, called the tragedy of the commons, in

economics suggests that individuals, acting independently and rationally according to
each own selfinterest, behave contrary to the long-term interests of the group as a
whole by depleting common resources. Common resources are resources that are
open to all such as the atmosphere, oceans, rivers, fish stocks, national parks and any
other shared resource. Because it’s open to all, according to the theory each
individual will take as much as he can and because
all individuals are doing so the resources eventually
wear out. Scholars have referred to this tragedy to
explain problems with sustainable development,
environmental protection, and global warming.

The State could possibly solve the tragedy by

putting strict laws in place on how to organize the commons (iron hand), or
privatizing them by giving the commons or parts of the commons to private owners,
handing it over to the invisible hand of the Market. Then the common resources
would transform into public or private resources. However, Elinor Ostrom and
colleagues have found that in many instances of common resources a tragedy does
not occur. This is because members of the local communities that are benefiting
from the commons (e.g., a park or open farmland) often come up with solutions to
the tragedy of the commons themselves. They have created institutions that
constrain the possible activity, and all members remain loyal to these rules. So in
effect, the commons are run by the intangible hand.

Institutional spheres often do not act in isolation, and there are many hybrid forms of
organizations that represent inter-relationships between the tripartite of state-
marketsociety. For example, state-owned enterprises (a hybrid between the Market
and the State) are still very common in Western countries, and dominate state-
controlled countries (such as China). Well-known examples of these state-owned
enterprises are Schiphol Airport and KLM-Air France. Other forms of State-Market
hybrids are public-private partnerships (PPPs), that involve a mutual investment by
public and private parties. PPPs are often used for large infrastructural projects, such
as the Amsterdam Subway.

Hybrid organizations can also combine

Civil Society and the Market. For Hybrid forms

6
example, family businesses make up a large
portion of the Market in most countries of
the world (e.g., Heineken, Volkswagen,
Porsche), though their proportion varies
considerably across countries. These
organizations have unique advantages as
family and business interests can be quite
closely aligned, which tends to result in
more careful 52 management and close
supervision. However, they are also often confronted with unique disadvantages, such as
a heightened risk of nepotism (favoritism granted to family members and friends), and
difficulties in finding a (capable) successor. Cooperatives are another Market-Society
hybrid. They are different from public companies in that they do not have shareholders,
but members. These organizations are dominant in banking as well as agriculture (e.g.,
Rabobank, Credit Agricole, Landbouw Coöperatie). Their initial purpose is always to
address the needs of certain groups, often to increase the collective bargaining power of
the group or facilitate critical transactions.

Finally, there are also many hybrids across the boundaries of the State and Civil Society.
Many public universities and hospitals fall in this category. They are partly financed by
government funds and partly funded by members of the Civil Society. The share of
government funds in these organizations tends to vary significantly across countries.

Countries place varying emphases on different institutional spheres, with considerable

implications for the institutional context of different countries.

For example, the liberal model is dominant in the United States and other Anglo-Saxon
countries. This model is characterized by a large
Liberal Model
Market sphere, and a small State. In this model
STATE
there is little overlap between spheres, and the
value of the “free market” is emphasized. There
are few state-owned enterprises, cultures are
generally more individualistic (reflecting the
freedom of individuals), there is dependence on
litigation (rules determined in court), and
MARKET
shareholder value creation is emphasized. The
CIVIL SOCIETY
liberal model originates from Adam Smith’s

7
 Notes on the Institutional Context

Notes on the Institutional Context

Wealth of Nations in which he criticizes the strong coercive influence of the State at
the time of his writing. Critics of the model argue that it fosters a short-term
orientation, and disregards weaker members of society.

The business-statist model is dominant in

Business-Statist Model
East Asia. It is characterized by a relatively small

STATE
small Civil Society, reflected by weak unions,
STATE

few NGOs, and a close cooperation between

the Market and the State, reflected by many
state-owned enterprises. Networks and
relationships are extremely important under
this model – in many Asian countries you find
tightly connected, personalized networks and MARKET CIVIL SOCIETY

interlocking business and political relationships. In Japan these are called

Keiretsu, which are interlocking business relationships through which companies share
ownership in many other companies in their value chain. Keiretsu were originally
initiated by the government, from which they continue to receive support. China has
the Guanxi, which are more personalized networks in which “connections” and
“relationships” are central – Guanxi reflects a moral obligation to maintain a
relationship, as well as social status (“face”). The Guanxi also has an international
dimension: the so-called Bamboo network of overseas Chinese firms operating in
Southeast Asia. South Korea has the Chaebol, which is a conglomerate of a few dozen
large family-controlled corporations that also play a significant role in Korean politics.
The business-statist model is dominant in countries with collectivistic cultures. While
Civil Society tends to have less influence in these countries, select sub-groups of Civil
Society tend to be tightly connected in the networks through exceptionally influential
families.

8
 The corporatist model dominates
Continental Europe. In this model all
spheres are, more or less, equally
important, and spheres overlap
considerably. Germany, France and the
Netherlands all have different forms of
this model (also called the stakeholder
model). Trade unions are sometimes
represented in company boards,
indicative of the power of
Civil Society in the market. Critics stress high income taxes of the welfare state, and
slow decision-making processes. Firms are expected to serve the interests of more
stakeholders than just the firm’s shareholders.

The Polder Model of the Netherlands

The Netherlands has a corporatist model, which has been referred to as the “polder”
model. This Dutch model is a consensus model that emphasizes deliberation over debate.
It recognizes the reality of plurality – that a group or country has sub-groups with a
variety of potentially opposing views. It values cooperation, even with the enemy, in spite
of these differences in views. The origins of such thinking has been linked to the Dutch
fight against the water – as the Netherlands is in large part below sea-level, the biggest
enemy for Dutch people always has been the sea. To survive, different subgroups, who
used to live their lives in relative isolation from each other (e.g., the Protestants, the
Roman Catholics, the socialists and liberals) had to work together in order to fight the big
threat of the sea (after World War II, it became more a fight to overcome poverty and
organize reconstruction). This “super-enemy” has made the institutional context focused
on finding consensus to solve problems.

This is reflected in normative institutions, such as the importance of platforms for social
discussion (every issue has its own forum that allows all opinions to be brought to the
table), and informal discussions between State-Market-Civil Society-representatives.
Informal discussions are also central to influencing regulatory institutions of collective
labor agreements that apply to all workers in different industries. These agreements are
reached through deliberation in the Social Economic Council (Sociaal Economische Raad),
which has 11 crown members appointed by the government, 11 members that represent
the employers in the Netherlands, and 11 members that represent Dutch employees.

9
 Notes on the Institutional Context

The Polder model combined shorter work weeks with

lower wages, which increased Dutch competitiveness
and exports. However, in the 1960s the polder model
showed its vulnerability. In 1959, the Dutch found an
extremely fertile natural gas field in a small farmer’s
village called Slochteren. It instantly made the
Netherlands an oil-rich country: it could rely much less
on energy import, while energy export and its
associated revenues quickly went up. New, more
energy-intensive industries, such as aluminum and
chemicals mushroomed. The Netherlands became one
of the most energy-intensive economies in the world.
Because the State became particularly rich from the
gas,

Notes on the Institutional Context

public services became entangled with business interests. One important side-effect
was that it led to the flow of capital and workers from the traditional sectors, such as
agriculture and manufacturing, to the booming energy sector. The rich energy sector
wanted to pay employees better. And since the centralized bargaining structure for
wages was maintained, this led to the increase in wages in all industries! As a result
the traditional industries quickly lost their competitiveness to surrounding countries.
This process could not be sustained, and the “guided wage policies” collapsed. In
response, government spending increased, particularly on non-traded goods (real
estate, construction), which led to an increase in inflation (up to 8%). The guilder
appreciated, which hurt the exports of traditional manufacturing industries even more,
and made these industries even less competitive. The decline in manufacturing
growth caused unemployment to elevate to 12%, and government spending to grow
even more (up to 61% of GDP) because of generous (and expensive) social security
benefits for the unemployed, and industrial subsidies to stimulate growth (following
Keynesian logic). By 1983, the Netherlands became known as “the Sick Man in
Europe” and the process by which the sudden discovery of natural resources leads to
the weakening of an economy is now referred to as “Dutch Disease,” also referred to
as the “paradox of plenty”.

By the mid-1980s and 1990s, the Netherlands saw a re-birth of the Polder model that
combined wage reductions, privatization and deregulation of markets. This time,
requests from employers to decentralize bargaining for wages (rather than large-scale
collective bargaining) were compensated requests from employees to have shorter
work weeks and more part-time opportunities. Recently, the Polder model received

10
 more criticism because of the slow deliberation process where all participants need to
be heard, and the representatives of employers and employees are less willing to work
together.

Two final models, the religious/autocratic model and community model, have been
less successful economically. The religious/autocratic model is characterized by a small
Market sphere, and strong overlap between the State and Civil Society. It is dominant
in Islamic countries. The community model is dominant in Sub-Saharan Africa, and has
a strong overlap between market and civil society. This model tends to have a very
large informal economy, and small state.

Finally, it’s important to note that the models discussed here represent quite pure forms.
Often countries will have a hybrid of pure forms. For example, many Latin American
countries show a combination of the liberal and corporatist model. In South-East Asia,
while following a business-statist model, it often combines this model with a religious
model.
South Africa combines three models: the liberal, corporatist and community model.

3. Supranational Institutions
We define supranational institutions as those regulatory, normative or cognitive
institutions that transcend established national borders or spheres of interest held by
nations. These are the rules of the game that are set by multinational political or
economic communities. Through multilateral agreements, the supranational institutions
empower international organizations to enforce these rules. At the same time,
international organizations as institutional drivers may provide platforms to create new
supranational institutions, and sustain the credibility and commitment of existing
institutions. Table 1 provides an example of the three pillars of supranational institutions.

11
 Notes on the Institutional Context

Table 1: Supranational Institutions Example

Regulatory supranational institutions Formal trade agreements, “treaties”
Normative supranational institutions Informal peer pressure among G20 leaders:
“We have to rail against protectionism!”
Cognitive supranational institutions (Partial) convergence of worldviews, values

Thorny Road toward Supranational Institutions

International Political Economics is a field of thought that discusses the ways in which
political forces (politicians, political organizations, international organizations, etc.)
influence the economic system. Early views (popular from about 1500 to 1750) about the
linkages between politics and economics were heavily influenced by mercantilism - an
economic theory that suggested that a nation’s prosperity depends on its supply of
capital, and that the global (total) volume of international trade is a given and
unchangeable. Because wealth and possession of monetary assets were considered
identical, the government’s role was to protect the economy by encouraging exports and
discouraging imports. As such, mercantilism fostered a form of economic nationalism.
The mercantilists stressed the need for high tariffs on foreign products, while heavily
subsidizing national

12
 Notes on the Institutional Context

companies in order to promote a positive balance of trade. For example, France banned
the import of woolen products and heavily subsidized its own wool washers, spinners and
related organizations. As a result, the government was heavily involved in economics
controlling the market with the iron hand. Industries were organized in guilds and
monopolies, and production was often regulated by the state.

Some early forms of supranational institutions developed through the overseas colonies.
Rules to facilitate long distance trade were put in place by force or military power and
suppression. However, in general, the rules of the game were limiting international
cooperation among nations, rather than fostering exchange. Instead, mercantilist
viewpoints led to intense violence and wars among countries to gain dominance over
territories and resources. European nations pursued expansion through colonies to gain
dominance over raw materials and distant markets. Since the level of world trade was
considered to be unchangeable, the only way to prosper economically was to take it away
from another country (so-called beggar thy neighbor policy), and more often than not this
meant using force. Because the Netherlands had become the financial center of Europe,
it became a target of choice of several Anglo-Dutch and Franco-Dutch wars.

Mercantilists did not consider possible benefits of absolute and comparative advantage
that became so popular later (Ricardo’s famous thesis was not written until 1817). The
most important critique of mercantilist ideas came from Adam Smith who actually coined
the term mercantilism. In his book Wealth of the Nations, Adam Smith spends
considerable time rebutting mercantilist thought. As already mentioned, Adam Smith
rejected the heavy control of government over production and economic activity, and
instead argued for a need to let the Market run its own course (through the invisible
hand). As such, his ideas required a major institutional shift – it required a completely
different set of formal and informal rules to replace the strict rules enforced by the rulers
of his time. He suggested a market economy motivated by self-interests of buyers and
sellers rather than governed by constraints of the State. This would be most optimal for
buyers and sellers, and would optimally allocate society's resources. In a time of extreme
state influence, suggesting government should take a background position was an
extremely radical thought. However, in the early 19th century mercantilist views slowly
lost dominance and were increasingly replaced by the modern economic views proposed
by Adam Smith and others.

Hegemonic stability theory (e.g., Kindleberger, 1973) provides a different view on

international relations, which holds that the international community more likely remains
stable and shows economic development when the dominant world power is held by a
single nation-state, or “hegemon.” A hegemon is a “superior” state that controls power

13
 Notes on the Institutional Context

over other “subordinate” states, but not necessarily with force. The theory holds that
stable trade requires a hegemon, who can lead and steer the collective in the right
direction. As such, the hegemon sets or has superior influence on the creation of
supranational institutions, and has the power to enforce these institutions.

A hegemon shows its power through military might, ideological supremacy, economic
wealth, institutional ideation, and political persuasion. As a superior power, a country
then can single-handedly dominate the rules of the world trade game – both in regard to
international politics and international economics. The subordinate countries also benefit
from a strong direction and enforcement of institutions because they provide trade
stability. Hegemonic stability theory suggest that if there is no single most powerful state,
or if the most powerful state does not wish to lead or is not accepted, supranational rules
are unlikely to be accepted or legitimately used – the theory therefore predicts that a
hegemonyless period will cause chaos rather than stability.

The British industrialization of the 19th century led to a British Hegemony of world trade.
In the first place, the country’s superiority in production gave it this position. England’s
portion of production reached 37% of European industrial production, 20% of world
industrial production, and 80% of production in new technological industries. As the
industrial revolution in England unfolded, policy makers and influential thinkers began to
see benefits of trade. Economic strength in combination with military might (naval
supremacy) and political clout subsequently helped Britain to topple mercantilism in favor
of free trade with supranational regulations to lower trade barriers.

14
 Notes on the Institutional Context

Figure 2: Hegemonyless Period

However, the British hegemony lost power because of economic crises on the European
continent, policies that again became increasingly protectionist, and expensive wars. In
the early 20th century, another nation could not directly replace the British hegemony.
The Anglo-American collaboration economically, politically and militarily (during WWI)
helped set the stage for a hegemony transfer. However, before WWI the United States
was not yet strong enough, and after WWI, when refrigeration and lowered
transportation costs triggered a tremendous rise in wealth for the United States, the
country simply was not yet willing to accept a Hegemonic role. The first decades of the
20th century can therefore be viewed as the hegemonyless period in the West (see Figure
2) with few and limited supranational institutions. After the Wall Street Crash of 1929 a
period of protectionism further muted any action to create supranational institutions to
facilitate free trade.

During WWII, the United States began to take a firm position

as hegemony state. The US hegemony expressed itself in
military might, political clout, and even cultural influence.
The United States also became the institutional leader in
encouraging more free trade, and reducing protectionism. A
meeting in Bretton Woods (1944) with Harry White (US),
John M. Keynes (UK), together with delegates from 44 allied
nations was instrumental in setting the agenda for a post-
war
period of international economic collaboration. The meeting was very much an
AngloAmerican event, which invited mostly other developed nations. Less developed
countries were mostly missing in the conversations.

The major goal of the meeting was to avoid a recurrence of the closed markets and
economic warfare that had characterized the 1930s. As such, it set the stage for
normative supranational institutions and provided a context for creating more regulatory
supranational institutions to stimulate trade and stability. The meeting was the platform
for creating international organizations, such as the International Monetary Fund, the
World Bank, and the first General Agreements on Tariffs and Trade (GATT). Many
institutions were created, and organizations were installed to enforce these institutions
with credible commitment of the member states.

The International Monetary Fund became an international organization to oversee the

global financial system by following the macroeconomic policies of member countries. It
was formed to stabilize international exchange rates and facilitate development and to

15
 Notes on the Institutional Context

offer financial and technical assistance to its members. It is the so-called “international
lender of last resort.” The head office is in Washington, D.C., and the current Managing
Director is

the French politician, Christine Lagarde –

there is an institution in place, in the form of
a tacit agreement that there will always be a
European Managing Director.
The World Bank is an international
organization that provides financial and
technical assistance to developing countries
for development programs, such as bridges,
roads, schools, etc. Its goal is to reduce
poverty. The head office is also in
Washington and the current president is Jim
Yong Kim. Here, the tacit agreement is that
the president is always from United States.
However, there is an increasing critique of
these tacit agreements from the BRIC
countries.
-Recent Example of IMF Support-
The Greek economy has experienced a severe
crisis, due to a combination of the international
financial crisis and local uncontrolled spending
prior to the October 2009 national elections. It
had the highest budget deficit (12.7% of GDP) and
second highest Debt-GDP ratio in the EU (113% of
GDP in 2009). In April 2010, Greece requested
financial help of the IMF in the form of a €15 billion
loan (in addition to a €30 billion loan from EU
countries). Support was not given easily and
stirred political disputes concerning Greek’s
violations of agreements in the international
community. As such, the intense negotiations
about limits and constraints, and expectations are
a reflection of the creation and enforcement of
supranational institutions.

Perhaps the most important supranational institutions are the General Agreements on
Tariffs and Trade (GATT). The goals of the GATT are to lower tariffs, and establish rules for
conducting international trade and settling trade disputes. In 1993, the GATT (during the
Uruguay Round) created the World Trade Organization (WTO), which is an institutional
body with 159 member countries, headquartered in Geneva, Switzerland. The goals of
the WTO are to supervise and liberalize international trade, to regulate trade between
participating countries, to provide a framework for negotiating and formalizing trade
agreements, and to offer a dispute resolution process.

16
 Notes on the Institutional Context

The United Nations (UN) is another international organization that facilitates cooperation
in international law, international security, economic development, social progress,
human rights, and achieving world peace. It was founded in 1945 after WWII “to stop
wars between countries and to
provide a platform for dialogue.”
It has 193 member states; its
Secretary General is Ban Ki-moon
from South Korea. The IMF and
World Bank are independent,
specialized agencies of the UN.
The last decade much activity is
organized around the so-called
2015 Millennium Goals. With the
year approaching, the United
Nations have initiated a series of
new projects to determine the Post-2015 development agenda.

The Organization of Economic Cooperation and Development (OECD) is a smaller

international organization of 34 countries that accept the principles of representative
democracy and free-market economy. Most OECD members are high-income economies.
The meetings of the OECD form an informal setting in which governments from developed
countries can compare policy experiences, seek answers to common problems, identify
good practices, and coordinate domestic and international policies. As such, the
organization is a meeting place to develop normative institutions. It resembles a forum
where peer pressure can act as a powerful incentive to improve policy and implement
"soft law" — non-binding instruments that can occasionally lead to binding treaties.

G7, G8, G10, G11, G20 are meetings of a group of the nth largest economies. These
meetings bring the most powerful nations together to determine the direction of other
international organizations, such as the OECD, UN, WTO, etc. In these meetings resources
are devoted to creating and maintaining normative institutions. The meetings are often
characterized by a lot of peer pressure. Since March 2014, much pressure was targeted at
Russia following its annexation of the Crimean Peninsula from Ukraine. A meeting of the
G8
(with Russia being the 8th member) that was planned to be held in Sochi following the
Olympic Games was cancelled, and the G7 members are explicitly distancing from Russia.
A national security advisor of Obama made it clear that the G8 may not be meeting again
soon: “Our view is simply that as long as Russia is flagrantly violating international law and

17
 Notes on the Institutional Context

the order the G-7 has helped to build since the end of the Cold War, there’s no need for
the G-7 to engage with Russia.”

A trend in recent years is the increased influence of the larger G20. In response to the
financial crisis, the meetings tended to be with the G20, i.e. the 19 largest economies plus
the EU. The rise of the G20 is viewed by some institutional thinkers as the fall of G7
power. There also is increasing pressure to include the emerging markets and poorer
nations in the discussions, particularly in relation to the worldwide concerns of global
warming. While summits of the G are inherently bases for normative peer pressure they
are intended to initiate concrete steps toward more formal regulatory changes. For
example, the 2009 G20 meeting led to a formal Blacklist of Tax Havens presented by the
OECD.

The preceding discussion particularly focused on the role of politics in international

economics. The organizations and agreements emphasize the role of regulatory
institutions and the emergence and influence of normative institutions in the context of
facilitating or blocking free trade among countries and setting expectations about
economic activity or critical global issues. The United States takes a powerful position in
all organizations either through direct control in place (in Washington or New York) or
high level positions by Americans or its closest allies. Recent developments such as the
financial crisis and the American role in it, global warming, the rise of China and the other
BRIC countries, and strengthening ties among developing countries, might weaken this
strong US hegemonic position. Because firms are directly influenced by supranational
regulations, and the norms set by powerful summits and meetings, it is extremely
important for managers and strategists to pay close attention to them.

In various forms, we can also identify supranational cognitive institutions, although they
are less likely to be explicitly captured in international organizations. The final section on
supranational institutions therefore discusses this dimension of institutions.

Cognitive Supranational Institutions

Cognitive institutions also emerge at different levels in the form of group, organizational,
industrial, national, regional and even global cultures. As we are living in an increasingly
borderless business world, it becomes more important to consider how cultures influence
the rules of the game. At the supranational level, we can distinguish cultural convergence
and cultural divergence. Cultural convergence refers to the increasing similarities in
cognitive institutions in various aspects of work-related attitudes and values,
consumption patterns, strategic decisions, etc. More people from disparate areas in the
world interact with each other as a result of technological advancements, significantly

18
 Notes on the Institutional Context

lowered transportation and travel costs, and more generally because of globalization in
the form of cross-border flows of goods and services, capital and know-how. If there is
indeed a cultural convergence, international business practices would become
increasingly similar. Standard practices and ways to view the world would emerge, and
the complexities and inefficiencies of divergent beliefs and practices would disappear.
Opportunities for cultural convergence come as people from all parts of the world travel
and work together in multinational companies, international organizations, or in high-
powered international conferences, such as the World Economic Forum in Davos.

However, such cultural convergence is less universal than it may seem. Although
globalization has seen an important surge over the last decades, we can only speak of
partial globalization at best. Many countries in Central Asia, Eastern Europe, parts of Latin
America and Africa have governments that are skeptical toward globalization. In fact,
very few people are truly participating in the cross-border flows of products and services,
capital and know-how. Estimates bring the portion to less than 10% of the world’s
population. Cultural convergence seems to be a luxury limited to people in the West and
few elites from non-Western cultures. Samuel Huntington suggested that cultural
convergence is actually a restricted convergence of values held by a highly selective group
of countries and people. Only the highly educated, affluent people, who are fluent in
English, are internationally committed and travel frequently. They share cultural values of
individualism (rather than collectivism), market economies (rather than any other form of
economies), and political democracy.

Convergence of popular culture, such as

Hollywood films and MTV stimulates similarity in
consumption patterns across countries. Yet, this
convergence is only a superficial reflection of
cultural convergence. Eating a Big Mac doesn’t
make you American, just like watching Kung Fu
movies and eating at the Chinese restaurant are not likely to make you more Chinese.
In fact, sporadic or superficial interactions across cultures sometimes seem to
crystallize cultural differences rather than forming the bedrock of cultural
convergence.

Internet and other communication advancements make long-distance interactions easier

than ever before. However, this also has limited influence on true cultural convergence.
Information and knowledge obtained through these computer-mediated communications
are always interpreted through cultural lenses. Deeply rooted cultural values and
practices are transferred from person to person through life-long closely knitted localized

19
 Notes on the Institutional Context

interactions within the family, school, street, organizations, etc., and are unlikely to
transfer easily through computer-mediated communication channels.

While truly global cognitive supranational institutions are unlikely to emerge naturally,
they might emerge partially across selected countries or within regions. Some countries
do exhibit strong tendencies toward cultural convergence – for example, among select
Western countries – while other countries reject convergence because it introduces
profound cultural distortions from their own national culture.

The Clash of Civilizations? is an article by Samuel Huntington that stirred great debate. He
suggested that considerable cultural convergence may actually occur among countries
within age-old regions. In his view, the term civilization is a cultural entity of the highest
order. He explained that “[v]illages, regions, ethnic groups, nationalities, religious groups,
all have distinct cultures at different levels of cultural heterogeneity. The culture of a
village in southern Italy may be different from that of a village in northern Italy, but both
will share in a common Italian culture that distinguishes them from German villages.
European communities, in turn, will share cultural features that distinguish them from
Arab or Chinese communities. Arabs, Chinese and Westerners, however, are not part of
any broader cultural entity. They constitute civilizations” (p24). Huntington argues that
civilizations are culturally converging regions or have nations that are more likely to
converge because they share common objective elements such as language, history,
religion and customs, and share similar worldviews.

As the title of his article hints at, to Huntington such selective cultural convergence may
cause more harm than good. In fact, he predicts that cultural convergence within
civilizations sharpens the cultural “fault lines” that bounds civilizations, and intensifies
cultural divergence between civilizations. The Cold War era was characterized by
ideological differences between democratic and communist views, and economic
differences were often sources of conflict and threat between the so-called 1st and 3rd
world countries.
In a post-Cold War era, he argues the sources of conflict will be cultural. According to
Huntington, civilization consciousness intensifies because of:

1. crystallizing cultural divergence through more cross-civilization interactions

2. reviving religious consciousness that underpins differences between civilizations
3. polarizing feelings between the “West and the rest”
4. increasing economic regionalization

20
 Notes on the Institutional Context

Cultural divergence more often causes conflict because the question is not “Which side
are you on?” but rather a question of “What are you?” The former question
characterized ideological debates – people with a certain ideology can and do change
their answers to such questions. Changing answers to “What are you?” is more difficult
for most people. And in some places the “wrong” answer can have severe consequences
(“you are either with us or against us”). Civilization consciousness also causes conflict
because of the socalled kin-country syndrome. Culturally similar countries rally together
against countries with dissimilar cultures. Torn countries, i.e. countries with many people
from different civilizations, face a struggle to find membership with any kin country.
While they can be viewed as critical opportunities to expand or link to other regions (and
markets for firms), they also are feared and as a result are often not accepted by others.
The continuing struggle Turkey encounters in its attempt to join the European Union is a
clear example.

21
Notes on the Institutional Context

An important consequent for business is that people will hold double standards: people
apply one standard to their kin-countries and a different standard to others. Multinational
companies often experience more severe media scrutiny in faraway countries than they
experience in their home turf.

Regionalization of Supranational Institutions

While supranational institutions facilitate world-trade, there is clear evidence that this trade
is more regional than truly global. There are numerous regional trade blocs that are
characterized by regulatory, normative and even cognitive supranational institutions that
facilitate and constrain exchange at the regional level, rather than worldwide level.

Figure 4: Regional trade blocs

Figure 4 presents some of these regional trade blocs. In 1994, The North American Free
Trade Agreement (NAFTA) has created a trilateral institutional bloc between the Canada,
the United States and Mexico. In terms of purchasing power parity, it is the largest trade
bloc in the world. Mercosur is regional trade bloc that has been created to promote free
trade and the fluid movement of goods, people, and currency in the most developed
countries in Latin American. Maghreb is a region consisting of five northwestern Arabic
countries that have a tradition of more or less cooperation to foster trade. Recently, they
have initiated comprehensive plans to boost lagging regional trade, with infrastructural
investments, the harmonization of customs procedures and the cross-border expansion of
logistics and transport services. The Association of Southeast Asian Nation (ASEAN) is a
political and economic organization of ten countries in Southeast Asia with the purpose to
boost economic, social and sociocultural integration among its members, as well as to
protect regional peace and stability. The Central European Free Trade Agreement (CEFTA) is
a trade agreement among non-EU members in Southeast Europe. It was organized in the
Early 1990s, with the purpose to establish integration into the Western European

22
 Notes on the Institutional Context

institutional context, and to join European political, economic, security and legal systems,
thereby consolidating democracy and free-market economics. Many of the new EU
members previously were member states of CEFTA, so in essence it served as a preparation
for full EU membership, and the link with the EU remains very tight.

Notes on the Institutional Context

The European Union (EU) remains the most

developed regional trade bloc. The original
reason for initiating European economic
integration was to stabilize ruinous
competition in the steel industry across
Europe, foster international cooperation in
agriculture, reduce tariffs and other trade
barriers, and prevent war. Over time, the
EU has created a complex system of
supranational institutions and fosters
intense collaboration to accomplish
decisions through intergovernmental
negotiations among member states.
Important EU organizations include the
European Commission, the Council of the European Union, the European Council, the Court of
Justice of the European Union, the European Central Bank, the Court of Auditors, and the
European Parliament.

We could consider whether the EU has led to convergence of institutions across the EU
member states. First, there is considerable regulatory convergence as regulatory institutions
are now in large part influenced by EU policies and agreements. Much of these institutions
have to do with how we exchange goods and services, or rules of exchange. For example, the
introduction of the Euro as common currency for most EU members is central to economic
unification. Property rights (e.g., N.V., PLC, Ltd, GmbH) are still very nationally oriented
because countries have deep national roots on how these are organized. However, the single
market has led to a substantial rise in so-called mega cross-border mergers – half of the
largest acquisitions in Europe are ones where the firms involved are from different countries.
As a result there is an increasing call for more pan-European incorporation (société
européenne). Competition law to avoid monopolies is also increasingly European.

23
 Together, the complex set of organizations and institutions has created an institutional
context that fosters considerable within E.U. trade rather than global trade. Throughout the
1990s, when the European project came to fruition, worldwide important and export became
substantially more European – from approximately 40% to 49%. And of the international
trade of European firms, about 70% remains in Europe up from about 60% in the 1980s (see
Figure 5), which is considerable more regional trade than other regions in the world show
(see Figure 6). On the one hand, European integration has led to the redistribution of activities
across Europe to exploit lower costs in wages or to be closer to end markets. On the other
hand, this unification has allowed firms to keep plants in the home country because exporting
has become easier with fewer trade barriers and lower transportation costs.

So the European project has been quite successful in increasing trade within the European Union.
Partly, we also see normative and cognitive convergence particularly among the politicians,
lobbyists, large corporations and interest groups that are active in Brussels. Yet, each country
also seems to have European skeptics that seem to emphasize divergence and variety over
convergence and unification. Clearly Europe is a collection of a large number of countries and
groups that hold very different worldviews.

TTIP – Supranational institutions between the EU and US

Currently, the EU and the US are negotiating to create an even larger free trade area across the
transatlantic that would result in strong economic growth between the two continents. This so-
called Transatlantic Trade and Investment Partnership (TTIP) agreement is said to cut businesses'
costs and generate growth and jobs to boost the EU economy by up to €120 bn, and the US by
€90 bn.

The TTip has the following aims:2

2This and more information about the TTIP can be found on the following sites: http://www.ustr.gov/about-us/press-
office/fact-sheets/2013/june/wh-ttip http://ec.europa.eu/trade/policy/in-focus/ttip/

24
 Notes on the Institutional Context

• Further open EU markets, increasing the $458 billion in goods and private services the
United States exported in 2012 to the EU, our largest export market.
• Strengthen rules-based investment to grow the world’s largest investment relationship.
The United States and the EU already maintain a total of nearly $3.7 trillion in investment
in each other’s economies (as of 2011).
• Eliminate all tariffs on trade.
• Tackle costly “behind the border” non-tariff barriers that impede the flow of goods,
including agricultural goods.
• Obtain improved market access on trade in services.
• Significantly reduce the cost of differences in regulations and standards by promoting
greater compatibility, transparency, and cooperation, while maintaining our high levels of
health, safety, and environmental protection.
• Develop rules, principles, and new modes of cooperation on issues of global concern,
including intellectual property and market-based disciplines addressing state-owned
enterprises and discriminatory localization barriers to trade.
• Promote the global competitiveness of small- and medium-sized enterprises.

25
 Notes on the Institutional Context

That developing such supranational institutions are difficult seems clear from the
increasingly loud criticism the TTIP is receiving in various countries.

https://www.theguardian.com/business/2016/may/03/doubts-rise-over-ttip-as-
francethreatens-to-block-eu-us-deal

Interesting Sources for Week 7

Mega Projects through PPPs

PPPs are an important hybrid that combines public and private funds. Such hybrids are
often needed to do large infrastructural projects – the State does not have the capacity,
expertise and resources to complete such projects without the involvement of the private
sector. While there are plenty of successful stories of public-private partnerships, they
are often not without criticism. One of the most famous PPP failures is the Tunnel project
in Boston, which has been labelled “the Big Dig” - a mega project that was supposed to be
completed in 1998 for $2.8B was finally completed in 2006 with escalating costs that are
expected to reach $22B (more than the Panama canal and Hoover Dam combined!). It
became the most expensive highway projects in the U.S. and was plagued with delays,
leaks, design flaws, poor execution and use of substandard materials. After a section of
the tunnel was opened for traffic, a ceiling collapsed due to sub-standard material, killing
one passenger.

PPPs are difficult kind of organization as they require collaboration across institutional
spheres. The State’s lack of understanding, knowledge, and time to conduct thorough
due diligence often makes it difficult to align interests. Particularly for long-term projects,
the coming and going of politicians and administrators complicate the alignment even
further. As a result, there was a lack of effective oversight of the project. In the end, the
Big Dig did succeed in bringing a highly complex structure of highways underground.
Though, any politician or private company that considers joining a PPP might be smart to
study all the challenges, mistakes, complexities the Big Dig encountered. It will serve a
great number of lessons better learned beforehand.

26
 Notes on the Institutional Context

https://www.youtube.com/watch?v=DkZSQS7lpHE

A mega project organized in a supranational PPP was initiated by Obama in 2012. It has
as main objective fighting malnutrition to help lift 50 million people in sub-Saharan Africa
out of poverty in the next 10 years. In this PPP, the State is represented by the G8 and
African countries, while the Market has joined through private companies. This new
alliance for food security and nutrition aims to support agricultural development. Within
one year, this alliance had been able to put $3.75 billion in public-private investment to
use from more than 70 global and local companies.

http://www.interaction.org/article/president-obamas-new-alliance-food-security-
andnutrition

Background readings
Van Tulder and Van der Zwart’s (2006) International Business-Society Management
(Routledge: NY) provides a more detailed account of the diverse roles of institutional
spheres and their influence on corporate responsibility.

For an electronic version of Adam Smith’s Wealth of Nations, click here:

http://www2.hn.psu.edu/faculty/jmanis/adam-smith/wealth-nations.pdf

For hegemony stability theory, please consider Kindleberger’s The World in Depression: 1929-1939
in which he describes how the lack of a hegemony may have contributed to the depression
of the 1930s.

The information on the European Union comes in large part from Fligstein and Merand’s
(2002) “Globalization or Europeanization?” that was published in Acta Sociologica.

27