The effect of formal and informal institutions on firms’ performance: an analysis of emerging economies

Abstract

Institutions significantly shape the strategy and performance of firms in emerging economies. Institutions consist of both informal and formal constrains. Also, it is very clear that treating institutions as “background” will not advance strategy research on emerging economies very far. Thus, by proposing a conceptual model with the relationship between formal and informal institutions, and firms’ performance, this research aims to understand the effect of institutions on performance in emerging economies. By analyzing 241 firms in the stock exchange indexes from the BRICS economies, I provide empirical evidence for the effect of institutions on firms’ performance. Therefore, I found a negative relationship between formal and informal institutions, and firms’ performance. Furthermore, I found a positive moderating effect of firms’ size on the relationship between institutions and performance. Hence, by answering the research question, the results contribute to the body of research on the institutional theory in emerging economies.