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Informal Networks: Concepts, Constructs, Emerging Theories

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DOI: 10.1108/978-1-83982-878-220221002

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Horak, S. (2022). Informal Networks: Concepts, Constructs, Emerging Theories (pp. 3 -22). In Horak, S. (Ed.),
Informal Networks in International Business. Emerald Publishing, Bingley, UK.
DOI: 10.1108/978-1-83982-878-220221002

Informal Networks: Concepts, Constructs, Emerging Theories

Sven Horak
St. John’s University, New York

Abstract
The rise of emerging markets such as China, Brazil, Russia, and the Middle East has led to an
increase in interest in understanding the nature and working mechanisms of informal networks
(guanxi, yongo, wasta, blat/svyazi, etc.), which are instrumental in international business (IB)
activities in these markets. Unlike Chinese informal networks, which have been researched
extensively, studies on several other important informal networks remain sporadic and peripheral.
From a theoretical point of view, it can be argued that the typical characteristics and behavioral
ideals implied by social network theory do not fully reflect the networking ideals and practices in
many non-Western countries. At the same time, international business practitioners may not have
a thorough understanding of how to engage effectively in informal networking abroad or of how
local managers actually network. Motivated by the wish to close this knowledge gap and work
toward an inclusive and integrative theory of informal networks in international business studies,
this paper suggests treating informal networks as an important type of social capital and informal
institution of the respective business environment at the same time. As such, researching informal
networks can be regarded a distinct research area positioned at the intersection of social capital,
social network, and (informal) institution theory. Finally, emerging theories are presented that
indicate a path for developing informal network theory further in international business studies.

Keywords
Informal networks, Informal institutions, Social capital, International business, Cross-cultural
management, Emerging markets, Guanxi, yongo, wasta, blat/svyazi, jeitinho

Version January 2022

An identical version has been accepted for Informal Networks in International Business
(Ed S. Horak, Emerald)
Copyright © 2022 Horak
All rights reserved.

1
Introduction
Networking has received substantial attention as an academic field and is equally popular in the
mainstream media. Given the rising education levels in many societies and the increased
competition for adequate jobs, networking and the quality of the networks that one possesses are
seen as a secret major source of a relational competitive advantage over competitors as an
individual, as a group of individuals, or as an organization. Following popular opinion, notions
about networking include ideas that in principle everybody can and should network (Byham,
2009). Extraversion is seen a positive trait in developing and expanding networks, and extroverts
have been found to perform better than introverts in networking (Swickert, Rosentreter, Hittner,
& Mushrush, 2002). Networking is seen by many as an instrumental act. However, not everybody
likes networking. Research has found that some people actually dislike networking as it makes
them feel “dirty” (Casciaro, Gino, & Kouchaki, 2014), which is especially the case when
networking is pursued in predominantly instrumental ways. There seems to be an urge, particularly
among businesspeople, to network as much as possible due to a belief that one cannot be successful
without it. As Clark (2014, para 4) noted, “I dutifully signed up to attend 500-person networking
breakfasts, because ‘that’s what you do’ as a businessperson.” Networking is not intended to be
about seeking friendship; it is typically viewed as being about building rapport for instrumental
business relationships. However, when broadening this perspective, these features and ideals are
not particularly clear in the context of informal networking in an international business sense when
referring to the informal network constructs of, for instance, yongo in South Korea, guanxi in
China, wasta in the Middle East, or blat/svyazi in Russia and the post-Soviet Union, to name some
typical examples. Besides their structural features, do we actually understand the nature and
characteristics of informal networks and the ideals upon which their operating modes are based?
Recent research has revealed that we still do not know much about the networking ideals that
people follow, for instance, in the East Asian region, not to mention the differences between guanxi
and Western-style networking (Burt & Batjargal, 2019). Though trust, for instance, seems to play
a central role in guanxi as well as in many other informal networks, they are still “fundamentally
different from networks in the West” (Burt & Burzynska, 2017, p. 222). While networking in the
same cultural context, ideals and characteristics are internalized by the individual and do not need
to be defined explicitly. From an international business perspective, however, we can assume that
networking ideals are based on different sets of underlying values and norms since these vary

2
across cultures. As even social network research in the international business field has been
perceived as rather limited (Cuypers, Ertug, Cantwell, Zaheer, & Kilduff, 2020), informal network
research is clearly underrepresented and still rather undefined as a research field. As informal
networks arguably play an important role in coordinating business activities in developed (e.g.
Korea and Japan) and emerging markets (e.g. China, Brazil, and Russia) alike, it is important for
practitioners and scholars to understand their nature and operating modes better. Informal network
research in international business studies has many access points as it lies at the intersection of
institutional theory (Jackson & Deeg, 2008; Peng, Wang, & Jiang, 2008; Sauerwald & Peng, 2013)
and international management studies, where it connects especially well to the cross-cultural
management tradition.
Where are the differences between social networks and informal networks? Social
networks “can be defined as a set of nodes as well as the connections and the absence of
connections between these nodes” (Cuypers et al., 2020, p. 715). This conventional view stresses
the formal structural aspects of connections between people. Informal network researchers have
tended to show more interest in the variety and diversity of intangible factors that make individuals
behave in the way that they do among and between each other in a business context.1 Against the
background of this tradition, the following definition may inspire new thinking about informal
networks. Informal networks are characterized by people who feel attached to each other through
a common background and/or through friendship and affection. That could be provided either by
consanguineal, family-, and quasi-family-based ties or simply by affective or emotional ties
between people. Network members often share a common background, like having attended the
same educational institution (school or university) or having been born in the same region. A
common background is often a cause for ad hoc trust ascriptions between members, even if they
have not met before. Though variation between these ties can be assumed, they have in common
that their cohesiveness can be explained by affectiveness and trust.
Exploring the effects of cultural differences in managing business worldwide is a central
pillar of research in international business studies. While a variety of approaches have been
pursued to map cultural contexts, focusing on values (Hofstede, 2001; House, Hanges, Javidan,
Dorfman, & Gupta, 2004), value archetypes (Venaik & Midgley, 2015), norms (Gelfand, Nishii,

1
Instead of concentrating solely on formal structures between A and B as nodes, we may think of networks as
resembling a painting by Pollock that is unstructured, a little chaotic, and differently accentuated.

3
& Raver, 2006), and schema (Leung & Morris, 2015), to mention only a few, the informal network
perspective is less established in international business studies as yet. The way in which informal
ties and networks are concluded, maintained, strengthened, and governed is often embedded in the
respective cultural context in which interpersonal transactions in business take place. By drawing
predominantly on institutional theories (e.g., North, 1990; Peng et al., 2008), management studies
have recently underlined the important role that informal institutions play in driving interpersonal
transactions and decision-making behavior (Boddewyn & Peng, 2021; Peng, 2016; Peng et al.,
2008). Surprisingly, thus far, research exploring the mechanisms of informal coordination and
organizational practices, in general, has neither produced an integral concept or theory (Minbaeva
& Muratbekova-Touron, 2013) nor determined whether firms have found ways to identify, control,
and manage them.
Informal network research has so far been treated as a section of social capital research
and/or as a variant of an informal institution (Peng et al., 2008), a concept that itself can be regarded
as rather difficult to define. While institutions have often been viewed in an oversimplified bipolar
way as being either formal or informal, it is not so clear whether the bipolar approach is realistic
or merely a theoretical construct serving analytical purposes. Their formal or informal nature is
context dependent, and their interpretation depends on the subjective perspective of the observer.
Especially in the field of emerging market research in international business studies, informality
in business is rather the norm, for instance, in transactions, in employment relations, or in
registering businesses and so on. It is questionable whether the formal–informal distinction is
useful in an emerging market context, as Guha-Khasnobis, Kanbur, and Ostrom (2006) noted:
“One might expect to see a clear definition of the concepts, consistently applied across the whole
range of theoretical, empirical, and policy analyses. We find no such thing. Instead, it turns out
that formal and informal are better thought of as metaphors that conjure up a mental picture of
whatever the user has in mind at that particular time” (pp. 2–3).
Understanding informal networks and networking abroad thoroughly is of central
importance for multinational corporations (MNCs) and their international managers (expatriates)
alike since informal networks are a societal phenomenon and as such are carried into organizations.
As values and norms differ across societies, the ways in which informal networking is conducted
also differ across societies. Hence, informal networks “need to be managed differently in different
countries” (Michailova & Worm, 2003, p. 509). From a practical point of view, informal networks

4
are relevant to expatriate adjustment, performance, and well-being, to business development, to
the management of relationships between an MNC and its suppliers and other stakeholders,
including the government, to the protection of intellectual property, and finally to competition on
relational terms in host countries, to name just a few examples.
Below, we put informal networks into the context of neighboring concepts that have been
used in the past as analytical frames and outline the similarities and differences. Next, we present
and describe selected informal network constructs and suggest a typology of them. Finally, we
present the emerging theories and future research directions.

Concepts
Conceptualizing informal networks is not a straightforward task as they are pronounced and used
differently in each country. Thus, they differ in their characteristics. A popular way to
conceptualize informal networks is to use the social capital concept as a base upon which
individuals form networks. Besides that, informal networks have been described as an informal
institution. However, since informal networks are complex and dynamic constructs, none of these
concepts can fully capture them. Nevertheless, they are (inter-)related and as such remain part of
the family while maintaining their own conceptual identity.
Social capital and networks. Informal networks have often been regarded as social capital
and analyzed in that frame by using general social capital definitions to describe case studies of
informal networks and related phenomena (Ko & Liu, 2017; Kropf & Newbury-Smith, 2016; Lin
& Si, 2010). The ways in which social capital is defined in the literature are rather diverse. While
numerous definitions exist, social capital originally focused on individuals or small groups (Portes,
2000) and has been defined as the “glue” between people that makes them “work together either
for reasons of their own or due to pressure within the group” (Paldam, 2000, p. 529). Prominently,
Bourdieu (1986) viewed social capital as the accumulation of potential resources that an individual
possesses, which can be converted into capital. The engrained connection to groups, that is, to seek
accession and collaborate informally to secure benefits, is the fundament upon which social
network research has flourished, as stressed by Lin’s (1999) network theory of social capital and
other essential works that have defined the field. Amongst others, Burt’s (1995, 2000) seminal
works in the field of quantitative sociology explored the effects of network structures and aspects

5
of brokerage within and between networks. Network closure has been studied by Coleman (1988,
1990) and Putnam and colleagues (Putnam, 1995; Putnam, Leonardi, & Nanetti, 1993).
As the concept of social networks (as well as social capital) has been utilized to frame
research on guanxi or wasta, questions emerge on whether the concept is truly universally
applicable or rather represents a reflection of typical social ties and networks in the West as it was
largely developed by Western scholars. The typical characteristics and ideas that constitute social
networks hardly seem to match the characteristics of those in many other (non-Western) countries.
In general, social capital-based ties and networks are described as being rather depersonalized and
instrumental (Portes, 1998). Especially weak ties are of particular value to individuals and
important for acquiring information or jobs (Granovetter, 1973, 1995, 2017). In principle, though
not exclusively, social capital highlights the notion of ties being predominantly instrumental.
Everybody is in principle able to develop networks and should do so as social networks have many
benefits. There is usually a distinction between friendships and social network partnerships (comp.
Table 1). It is these characteristics that have served as the backbone of the concepts of social capital
and related social networks. At the same time, they are exactly the reason why scholars have
challenged the universality of the constructs (Hamaguchi, Kumon, & Creighton, 1985; Sato, 2013).
In East Asia, for instance, as well as in the Arab world, informal networks are rather
described as being strongly personalized, emotional, and less instrumental. Consanguineal and
kinship-based ties play as much of a role as non-kinship-based ties (Li, 2012; Luo, 2000).
Furthermore, in some cases, social networks cannot easily be accessed as accession happens quasi
by birth, so individuals can be “born into” informal networks. This means that, as is assumed in
the case of social networks, actors cannot easily develop ties to and networks with certain groups
as they already exist. In Korea, for instance, informal network status is considered to be
“immutable and irreversible” (Horak, 2014, 2016). In the Arab world, wasta networks are
predominately rooted in family and kinship ties (Hutchings & Weir, 2006a).
Given these differences in the nature of social ties and networks, Sato (2013) critically
remarked that Western constructs are actually unsuitable for the assessment of local network
phenomena as their basic assumptions are different and too tight to reflect the complexity and
multiplexity of the social relationships that we see in many other countries around the world,
which, taken together (e.g. China, Japan, the Arab world, Russia and the post-Soviet Union
countries, Brazil, etc.), represent a large portion of the world’s population and possibly outnumber

6
the Western countries where the idea of social networking as we know it in the literature originated.
In other words, as ideas on social networking are likely not to be universal, we need to extend and
develop the concept further to recognize and integrate the features of informal networks. This will
lead to a more precise conceptualization and a better understanding of managerial behavior in IB
studies.

Table 1. Prototypical ideals characterizing social networks versus informal networks (selection)

Social Networks Informal Networks

• Open and accessible • Often closed and difficult to access*
• Predominantly used instrumentally • Often affective and emotional
• Usually purpose driven • Not necessarily purpose driven
• Weak ties are the most beneficial • Strong ties are the most beneficial
• Loyalty among members is usually • Loyalty among members is usually
weakly pronounced pronounced
• Rather depersonalized • Rather personalized
• Partnership ideals prevail • Friendship ideals prevail
Social Capital
Intangible resources convertible into capital
(examples: alumnus status, family/clan affiliation, social class, etc.)
Note: * Especially for foreigners (e.g. business expatriates).

Source: own

Informal institutions. Given the conceptual overlap of informal networks and social capital
and social networks on one side but the deviations in their defining characteristics on the other,
institutional theory, distinguishing formal from informal institutions, provides a rather neutral,
though less used, frame for the assessment of informal networks. The connection to institutional
theory has been drawn by, for instance, studies on guanxi. An established idea (see the “persistence
hypothesis” below) in international business studies suggests that, when formal institutions are
underdeveloped and ineffective or simply do not exist (institutional void; see Boddewyn & Peng,
2021; Li & Xie, 2019), informal institutions, that is, guanxi, jump in and fill this gap by providing
a mechanism for securing transactions through reliance on personalized trust and the sharing of
values and norms of behavior instead of relying on contracts and enforcement through peer
pressure. As a positive side effect, guanxi reduces transaction costs and hence is cheap and
relatively reliable.

7
 Popularized by North (1990), informal institutions have been defined in many ways across
the disciplines of the social sciences. They have been described as “conventions, norms of
behavior, and self-imposed codes of conduct” (North, 1995, p. 23) or characterized, in contrast to
formal institutions, as “socially shared rules, usually unwritten, that are created, communicated,
and enforced outside of officially sanctioned channels. By contrast, formal institutions are rules
and procedures that are created, communicated, and enforced through channels widely accepted
as official. This includes state institutions (courts, legislatures, bureaucracies) and state-enforced
rules (constitutions, laws, regulations)” (Helmke & Levitsky, 2004, p. 727). Still, since the
definitions of informal institutions are broad, it is not exactly clear what informal institutions are
specifically and how they operate (Williamson, 2000). Though the institutional view is meanwhile
an important pillar of international business studies (Boddewyn & Peng, 2021; Peng et al., 2008),
it pays more attention to formal institutions, while “informal aspects of the institutional framework
are often not explicitly considered” (Sauerwald & Peng, 2013, p. 524).
There is a link between informal institutions and informal networks. While informal
networks are structures, the way in which actors behave within those structures is determined by
the cultural norms, values, and behavioral ethics that are embedded in them through network
members. The behaviors of the latter reflect the social ideals that are unwritten and shared among
the members and often the society at large, as the literature on, for example, guanxi, yongo, or
wasta has implied (Horak et al., 2020).
In sum, the social network concept has mostly been developed in the Western world of
academia, bearing in mind the interpersonal relationship characteristics that are typical of that part
of the world (Henrich, Heine, & Norenzayan, 2010; Li, 2007; Sato, 2013). Moreover, in the
Western world, the formal institutional environment is generally well regarded and functional.
Since informal networks are more specific than the general characterization of social networks but
can still be regarded as a source of social capital, they may be better treated as a distinct type of
social networks, which form a broader category that thus serves better as an umbrella term for all
kinds of networks. Social capital may be seen as a fundament upon which different kinds of
network types develop (Qi, 2013). Furthermore, since informal institutions determine the modes
of operation of informal networks through their actors following social ideals of behavior typical
of a respective environment, there is an overlap with the social capital concept. Together they may
be seen as two frames for accessing informal networks (see Figure 1). The proposed

8
conceptualization will help in exploring informal networks more precisely, which will contribute
to construct clarity and a better understanding and further development of the knowledge of
informal networks.

Figure 1. Informal networks as an original network category

Social Networks

Informal Networks

Social Capital
Informal Institutions

Source: own

In the following chapter, some selected informal networks are introduced to illustrate their
differences and similarities.

Informal network constructs

In this section, the most common informal networks that have a certain track record in the
international business literature2 will be characterized. While the characterization of each of the
constructs could fill books, the intention here is to present their nature to make it clear that they
are distinct and that it is important to distinguish between them. Based on the latter approach, a
typology of informal networks is suggested, highlighting similarities, overlaps, and differences.
Guanxi has been researched at the dyadic and network levels. The word guanxi “refers to
the concept of drawing on connections in order to secure favors in personal relations. It forms an
intricate, pervasive relational network which Chinese cultivate energetically, subtly, and
imaginatively” (Luo, 2007, pp. 1–2). Guanxi is pervasive in all spheres of Chinese society,

2
A comprehensive overview of informal ties, networks, and practices is available in The Global Encyclopedia of
Informality (Volumes 1 and 2, edited by Ledeneva, 2018).

9
including politics and business. It is persistent and longitudinal studies show that using guanxi for
acquiring jobs has increased over the years (Bian, 2022). Developing guanxi has been deemed
mandatory for business success in China. Although guanxi has deep roots in a historical and
cultural context, its pervasiveness is assumed to be caused by many of China’s weak or ineffective
formal institutions, whereby trustful informal relationships fill the void left by the lack of formal
institutions. Guanxi can, in principle, be developed by anybody, including foreigners and
expatriates. Since developing guanxi is a necessity and a social norm, its characteristics are shaped
by different contexts. Family-related guanxi, for instance, involves high emotionality and is less
instrumental than guanxi between individuals who do not know each other well and who network
solely for win-win reasons. As guanxi is open to the latter, that is, to transactions that help to
achieve certain ends, it is in principle open to anybody. Since guanxi ties can have different
qualities and intensities, top-quality guanxi in elite circles is rather exclusive and access is very
limited.
Compared with guanxi, yongo-based ties in South Korea are comparably homogeneous
and, for outsiders, for example foreign international managers like business expatriates, almost
impossible to access (Horak and Park, 2022). While inmaek is the Korean term for networks in
general, and is possibly equivalent to guanxi, yongo is special and traditionally comprised of three
ties: those built during high school or university days; regional origin ties; and family connections.
Since the latter two are given by birth, they can hardly be established by non-Koreans, particularly
business expatriates. Hence, they tend to be more exclusive than Chinese guanxi ties. Yongo is
influential and widely used in Korea, particularly in business, politics, or academia, throughout
social hierarchies but is especially important in top management and administration. Since
individuals who share yongo feel like family members who have no secrets from each other, yongo
is emotional in nature and, through its three traditional bases, it is closed to outsiders and especially
to foreigners who were not born in Korea. As some features of yongo are acquired by birth, it has
been described as affective and informal per se and not as instrumental in nature. However, it can
be and is used instrumentally.
According to Torres and Nascimento (2022), in Brazil, jeitinho can be translated as “little
way” and is understood as achieving ends informally through others. Similar to other informal
networks, it has bright and dark sides. It can include deception and trickery, even corruption, when
for instance used to circumvent excessive bureaucracy and complex processes. It also includes the

10
exchange of favors, is applied to avoid and de-escalate conflicts, and is utilized for finding
solutions in creative ways (Akira Miura, Pilati, Lemos Milfont, Cristina Ferreira, & Fischer, 2019).
Essentially, jeitinho is similar to yongo in Korea; it is deeply engrained in the Brazilian society
and is commonly used in everyday life to find quick and indirect solutions to problems in informal
ways (Smith et al., 2012) as well as in organizational contexts in the form of a problem-solving
strategy (Duarte, 2006). Characteristically, jeitinho can be differently accentuated but in very
general terms and, in comparison with other networks as it is not usually built on consanguineal
ties, emotionality is limited and it is quite open to trusted others as long as they provide help in
solving problems. As such, it has rather an instrumental nature.
Blat relationships, recently called svyazi relationships, can be defined as patron–client ties,
in which interconnected clients “serve” a usually powerful patron who can command a network of
clients (Horak & Bader, 2019). From a horizontal point of view, blat/svyazi ties are described as
exchange relationships at the dyadic and network levels and include a certain level of sociability.
In Soviet Union times, they were particularly instrumental in exchange relationships for goods and
services that were in short supply. While the literature has often equated blat with illegal activities
or corruption, originally it did not consider it to involve monetary transactions for favors (Horak
& Bader, 2019; Lennhag, 2009; Onoshchenko & Williams, 2014). Since especially blat but also
svyazi ties include an element of sociability, they are in principle purpose driven and opportunistic
rather than affective. As such, they are conventionally used instrumentally. Though access to them
needs to be developed by being perceived as a trustworthy individual, they are in principle open
to individuals who have something to offer.
Finally, wasta, which is pervasive across the Middle East, has its roots in the mediation
practices of tribes that are in conflict with each other (Alhussan and Al-Husan, 2022; Sayfutdinova,
2018). Similar to other informal network types, it is deeply rooted in the Middle Eastern cultural
context, and, compared with other network types, for example Korean yongo, wasta is based on
family and kinship relationships. It enables information and knowledge sharing within informal
political and business networks and provides opportunities for people involved in the process to
gain benefits in terms of an informational advantage and access to other influential people. As seen
in other network types, favoritism is prevalent in wasta ties, so it is not necessarily the person with
the best skills who is given the job but instead the one with better wasta ties (Ali & Weir, 2020;
Alsarhan et al., 2021; Hutchings & Weir, 2006b). Since family and family-like sentiments

11
characterize wasta, the emotional involvement of individuals is rather high. Foreigners, for
example expatriates, have difficulties acquiring wasta or gaining access to wasta networks as they
often do not have family and clan status. Contrary to instrumental usage, affective relationships
play a large role in wasta circles.
Based on the above, Figure 2 summarizes the characteristics of the respective informal
networks presented above and suggests an informal network typology.

Figure 2. Characterization of selected informal networks

Type: Socio-cultural network

High Wasta Yongo Close Low

Consanguineal/
clan-driven ties Affective ties
typically not
typically family and
instrumental or purpose
pseudo-family ties
driven

Emotional Openness Instrumental

involve- usage
ment

Opportunistic Pragmatic ties

ties informal network
purpose driven, practice to get things
instrumental done efficiently

Blat/
Low svyazi Jeitinho Open High
Type: Organizational efficiency network

Guanxi
Mix of all characterizations mentioned above

Source: own

12
Emerging theories and future research directions
As mentioned at the outset, and similar to the ongoing debate on the Western bias in theory
development (e.g. Bruton, Zahra, Van de Ven, & Hitt, 2021; Muzio, 2021), scholars believe that
social capital and network theories have been almost exclusively developed in the West based on
thoughts about typical Western social ties and networks that have rarely taken into account the
character and nature of informal ties and networks and the way in which they are formed in other
parts of the world (Li, 2012, 2016). Arguably, with the exception of guanxi (China), many other
informal networks have been widely neglected in theory building so far. It is hardly imaginable
that progress toward a higher level of generalization can be achieved without taking them into
account.
Contrary to conventional network theories, which usually imply that everybody can and
should network, informal networks are specific and do not perfectly fit into the notion of
conventional Western-style networking. Informal networks and informal networking are culture
specific; as such, many of their features and characteristics differ across countries and regions,
while others overlap and are similar to each other. Relevant to the field of international business
scholarship, in some countries, they are virtually given by birth, which represents a burden for
expatriates who are born abroad and thus unable to develop strong informal networks with local
stakeholders. As a consequence, their effectiveness is strongly limited (Horak, 2016; Horak &
Yang, 2016, 2017; Ledeneva, 2008, 2009; Luo, 2008; Minbaeva & Muratbekova-Touron, 2013).
These observations have implications for the advancement of theory, in particular institutional
theory (e.g., North, 1990), including transaction cost economics (e.g. Williamson, 1979, 1996) and
the social capital debate (Bourdieu, 1986; Granovetter, 1973, 2017; Putnam, 2000). However, the
development of a theory of informal networks has seldom been embarked on as separate networks
have been assessed as separate phenomena without integrating insights to derive generalizations.
Nevertheless, some research streams have tried to generalize, and those streams may further
develop into theories. The ones that stand out are discussed in the following.
Persistence. The persistence hypothesis is probably the most comprehensively debated
one. Scholars have been speculating about whether informal networks may persist or decline in
the future. It has been assumed that, the more a country advances economically, the more formal
institutions stabilize and develop towards effectiveness, the less people feel the need to rely on
informal relationships. On the contrary, recent research has shown that, even in industrialized

13
nations with stable and effective formal institutions, informal networks play an immanent role in
business (Horak & Park, 2022; Horak & Klein, 2016; Horak & Taube, 2016). This debate rests on
institutional theory, specifically formal–informal institutional interaction, an area with still many
unknown factors. Formal and informal institutions interact with and thus determine the
effectiveness of one another (North, 1990; Pejovich, 1999). However, institutional interaction and
the resulting co-evolution are a challenging theme. Given the lack of empirical studies, the nature
and operating modes of the linkages between informal and formal institutions and their interaction
and influence on each other’s developmental direction represent an important, yet poorly
understood, field of study (Hodgson, 2002). It can be assumed that either cultural or institutional
dynamics or both play a role, but the exact role may differ across regions. Better knowledge of
these processes that take place in respective regions will benefit the overall understanding of the
effectiveness of formal institutions and the evolution of both formal and informal institutions.
Inaccessibility. The inaccessibility hypothesis can be framed by several theories used in
international business studies. In the field of expatriate adjustment to the local business
environment, it has commonly been assumed that expatriates establish social ties to locals that are
helpful for business purposes and well-being (Wang & Kanungo, 2004). However, research has
implied that even well-adjusted expatriates may face difficulties in gaining access to informal
networks as specific types of networks determine access through consanguineal ties or otherwise
predefined informal affiliation. This in turn has led to the assumption that, independent of the level
of cross-cultural intelligence that a foreign manager reaches, it will not be a success factor for
gaining access to informal networks. The difficulty of gaining network access has recently been
identified as a liability of foreignness, which appears to be a wicked problem that is difficult for
expatriates to solve. There are, however, strategic choices that expatriates and firms can make to
bypass this dilemma. A reactive strategy, for instance, involves hiring local managers who possess
a high level of local network endowment, and proactive strategies involve trying to develop one’s
own informal networks, hence becoming less dependent on local managers, who may use their
power for their own personal benefit (Lee, Paik, Horak, & Yang, 2021).
Loyalty. Protecting intellectual property rights (IPR) is a well-known problem in
international business studies (Peng, Ahlstrom, Carraher, & Shi, 2017). Whereas the production,
trade, and sales of counterfeit products, products of art, or industrial espionage have often been
discussed in relation to IPR challenges, more subtle nuances have been debated less. Among these

14
are the transfer of firm-internal data on, for example, component purchase prices, customer
portfolios, R&D strategies, product roadmaps, and many more. The questions of “if,” “how,” and
“why” informal networks are potentially involved in this process remain a matter of speculation
and an important area of future research. However, it appears likely that they are involved.
Whereas domestic firms know well how to deal with these local ways of competition, foreign firms
often do not even recognize that they are exposed to such a threat. Drawing on a series of interview
data with business expatriates in Korea, Horak (2014) provided a representative quote by a
corporate CEO, who mentioned in relation to informal networks in Korea, “I haven’t seen in other
Asian countries that high degree of loyalty between people who graduated from the same
university. It lasts for a lifetime. By formal rules only, you just cannot keep firm-related
information secret” (Horak, 2014, p. 94). Education-based ties in Korea constitute a central pillar
of yongo ties, which appear virtually uncontrollable for foreign managers in relation to information
transfer. As mentioned above, loyalty is supposedly the pivotal force enabling information transfer
across a network. Loyalty toward network members is so pronounced that employees behave more
loyally to their informal networks than to a corporate code of conduct. Hence, secret firm-internal
information can travel to competitors via informal networks. Though methodological challenges
might be difficult to solve, more research is needed to verify whether loyalty is the source of
cohesion and the driver of the exchange of classified information and whether this can be
generalized across other informal networks.
Ethical ambivalence. Conventionally, social networking is considered to be a positive and
desirable activity that is recommended to everyone who wants to advance in life by obtaining
information on job opportunities through networks and so on. The ethicality of networking has
seldom been questioned, but, due to differences in values and norms in international business
activities, how can we know whether our networking partner shares the same ideals of putative
adequate behavior? As indicated by the loyalty hypothesis above, will international managers be
expected to break corporate codes of conduct and display loyal behavior unconditionally to their
network partner when concluding network ties abroad? Research has also pointed out links
between corruption, bribery, and favoritism in connection to informal networking in China, Korea,
and Russia. We do not know much about how business expatriates deal with these factors when
adjusting to a different social environment and building local networks as they are regarded as
important for business and well-being. However, when we do not know what the behavioral norms

15
and expectations are that guide behavior and ideals within informal networks, we face behavioral
risks. On the corporate level, MNCs deal either consciously or unconsciously with informal
networks on an everyday basis in respective markets worldwide, yet we know little about how
MNCs deal with informal networks. There are, however, exceptions. Some studies have mentioned
that Korean MNCs have systematic processes in place to manage informal ties (Kim, 2007) by
collecting personal data from their employees about their friends, relatives, and classmates
employed by the government, political parties, and so on to create so-called inmaek (English
“network”) maps to exploit these networks strategically (Lee et al., 2021). Other firms may have
more discrete or hidden processes in place and possibly still others may avoid them, increasing the
risk of falling behind in highly networked environments in competitive terms. In any case, MNCs
must decide whether engaging in informal networking is ethical. Drawing on a position between
ethical universalism and relativism, that is, the integrative social contract theory, Dunfee and
Warren (2001) normatively discussed whether guanxi can be considered as ethical informal
networking. In sum, the authors proposed an “it depends” result, pointing to the difficulties of
drafting simple and clear recommendations for practice. This result reflects well the ethical
ambivalence of informal networking in a global context. As many other networks have so far not
been assessed in terms of ethical ambivalence, there is clearly a need to understand better the ethics
involved in engaging in informal networking. Figure 3 summarizes the emerging informal network
theories discussed.

16
Figure 3: Emerging and developing theories on informal networks and networking

Persistance

Emerging
Ethical informal
Inaccessibility
ambivalence network
theories

Loyalty

Source: own

Conclusion
Since the nature and characteristics of informal networks (guanxi, yongo, wasta, etc.) and social
networks diverge, informal networks should be treated as a specific and separate category under
the umbrella term of social networks. Conventional social network theory was developed
predominately in a Western, specifically Anglo-Saxon, context and was therefore less attentive to
social phenomena that are attributed to informal networks. The latter predominantly exist in
contexts in which family or quasi-family particularism is pronounced, along with a preference for
concluding affective ties in business over instrumental ties, and in which people feel strongly

17
connected by sharing a similar background, leading to ad hoc trust, to name a few examples.
Though apparently incompatible with Western thoughts on social network characteristics and
ideals, social capital theory in a broader sense can be regarded as a source for the formation of
informal networks. As informal networks influence the management and organization of business
activities to a great extent by providing guidance through values and behavioral norms, they can
be viewed at the same time as an influential informal institution.
Informal networks play a central role in international business activities in emerging as
well as in developed economies, either at the micro-level, at which international managers
(expatriates) are sent abroad and required to connect to informal networks to manage local
employees or conduct business effectively and successfully, or at the macro-level, at which MNCs
need to develop trustful ties to suppliers, foreign governments, and other stakeholders. Since
informal networks are taken from the outside, that is, the society, to the inside of the organization,
informal network research in international business can be positioned at the intersection of
sociology and cross-cultural and indigenous management, helping to gain a better understanding
of the business environment and its informal institutions. Following this path, a variety of
important research questions remain to be tackled in international business research, which will
help in developing better-integrated and more inclusive international business theories.

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