The Cross Cultural Relativity of Institutional Environment for Economic Transaction Governance

Despite the broad consensus that the institutional environment matters for firm strategies and outcomes, the question of how different social cultural settings enable a common set of basic governance mechanisms work with or against each other to form relatively different institutional environments in organizing economic activities has remained largely unanswered. This paper aims to integrate and extend previous research to answer the question and explain economic transaction governance across different institutional environments from a social cultural perspective. The starting point is that economic exchanges are often coordinated by a combination of spontaneous market forces, social relations, and legal restraints that serve as the basic governance mechanisms for shaping an institutional environment for economic transaction governance. This study further proposes that different social cultural attributes will shape different types of institutional environment that relies more on one mechanism but less on another between legal restraints and social relations, to supplement spontaneous market forces to regulate economic transactions.