Trust, Formal and Informal Market Institutions: Embeddedness

This policy note examines the role of trust and institutions in enabling and constraining entrepreneurial behaviour. We explore the relationship between formal institutions and informal institutions and show how entrepreneurs often rely on informal institutional mechanisms in contexts where formal institutions are perceived as weak or dysfunctional. Using the concept of embeddedness, we argue that entrepreneurial activity is rooted in social relationships, networks and institutional contexts rather than operating in isolation. These networks shape access to information, resources and credibility particularly in uncertain environments. Our findings suggest that strong and reliable formal institutions support entrepreneurial growth and reduce transactional uncertainty. However, where confidence in formal institutions is limited, entrepreneurs rely more heavily on embedded social ties and informal institutional arrangements to overcome market challenges. In this sense, embedded networks and informal institutions become important mechanisms for sustaining entrepreneurial activity where formal institutional support is inadequate.