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Peng and Heath (1996)Management > Comparative Management > Lectures > Independent Research > Peng and Heath > Institutions > Formal institutions
Formal InstitutionsIn planned economies, bureaucratic control and a planned regime is very strong. These are some of the formal constraints. The system is very much like the M-form (Meyer, 2001a also said this). The government acts as the corporate headquarters and the firms as its subsidiaries. The dismantling of the planned system is the most obvious change in the formal institution, but what was required to take its place was a legal institution which supported property rights, but this was lacking, which lead to high transaction costs. Previously the bureaucratic controls meant there was no need for laws, but now it was gone, things started to fall apart, as there was nothing to hold together the now autonomous business units. The lack of property rights has also led to a sharp increase in opportunism. A lack of property rights is often accompanied by an uncertain political institution. In China, there have been numerous reforms over the years, from centralised to decentralised control. This has resulted in great uncertainty in the business world. A lack of a developed framework and unstable political structure has led to an absence of strategic factor markets, such as financial markets to oversee proper transfer of ownership. Western firms are unwilling to invest in such countries until strategic factor markets have been established
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