Formal institutions refer to some written rules, including the laws and regulations of the national and local governments, contract, and enterprises’ and department’s rules. Formal institutions usually rely on rigid means to ensure government orders, contracts, and articles of association works. Informal institution refers to that it formed in the process of long-term social interaction, and accepted in the protocols, the common code of conduct. In the informal institution, ideology is in a core position, because it not only contains values, ethics, morality, customs, and habits, but also forms some "a priori" modes for formal institutional arrangements.
When both parties choose one constraint to ensure implementation of the agreement, they …show more content…
In such markets, informal institution and formal institution can replace each other (Affiliations 2006). However, Keefer and Shirley points out that under the condition of modern market economy, informal institution is not the basis of economic development. Firstly, informal institution cannot effectively prevent crime and government officials of predatory behavior; Second, the informal institution cannot benefit for most people in the market. On the other side, there are two benefits of the formal institution. Firstly, because more people can use formal institution, market trading volume increases, and the division of labor and production scale produce more economic benefits. Secondly, since the market participants cannot equally use informal institution, the institution result in unfair income …show more content…
People deeply recognize that the informal institution has more ability to determine the economic growth and social development level. Effective institutional arrangements are combine necessarily formal institution and informal institution. For economic development and trade cooperation, informal institution mainly has a positive role in the following several aspects. Firstly, the informal institution can help people more easily get all kinds of information, resources and business opportunities. Individuals have the more extensive networks. Especially in the economic transition stage, the lack of formal institution makes people take resources and information from the normal channels is difficult, so people will use informal institution to receive them. For example, establish friendly relations between the key figures of enterprise and government departments can get preferential policies; keep good relationship with the bank can easier get a loan; meet and know more persons is easier to receive all kinds of business opportunities. According to the report of the GEM which recorded 34 participating countries and regions, in 2003, about 49.4% of outside capital providers of venture enterprises are from the close family members; 26.4% from friends and neighbors; 7.9% from colleagues; 6.9% from other relatives; 6.9% from strangers (Mason 2005). Obviously, informal institution quietly impact on the venture
When both parties choose one constraint to ensure implementation of the agreement, they …show more content…
In such markets, informal institution and formal institution can replace each other (Affiliations 2006). However, Keefer and Shirley points out that under the condition of modern market economy, informal institution is not the basis of economic development. Firstly, informal institution cannot effectively prevent crime and government officials of predatory behavior; Second, the informal institution cannot benefit for most people in the market. On the other side, there are two benefits of the formal institution. Firstly, because more people can use formal institution, market trading volume increases, and the division of labor and production scale produce more economic benefits. Secondly, since the market participants cannot equally use informal institution, the institution result in unfair income …show more content…
People deeply recognize that the informal institution has more ability to determine the economic growth and social development level. Effective institutional arrangements are combine necessarily formal institution and informal institution. For economic development and trade cooperation, informal institution mainly has a positive role in the following several aspects. Firstly, the informal institution can help people more easily get all kinds of information, resources and business opportunities. Individuals have the more extensive networks. Especially in the economic transition stage, the lack of formal institution makes people take resources and information from the normal channels is difficult, so people will use informal institution to receive them. For example, establish friendly relations between the key figures of enterprise and government departments can get preferential policies; keep good relationship with the bank can easier get a loan; meet and know more persons is easier to receive all kinds of business opportunities. According to the report of the GEM which recorded 34 participating countries and regions, in 2003, about 49.4% of outside capital providers of venture enterprises are from the close family members; 26.4% from friends and neighbors; 7.9% from colleagues; 6.9% from other relatives; 6.9% from strangers (Mason 2005). Obviously, informal institution quietly impact on the venture