policy as myth and ceremony? the global spread of stock...

POLICY AS MYTH AND CEREMONY?THE GLOBAL SPREAD OF STOCK EXCHANGES, 1980–2005

KLAUS WEBERNorthwestern University

GERALD F. DAVISUniversity of Michigan

MICHAEL LOUNSBURYUniversity of Alberta

We examine the antecedents and consequences in developing countries of creating anational stock exchange, a core technology of financial globalization. We study localconditions and global institutional pressures in the rapid spread of exchanges since the1980s and examine how conditions at the point of adoption affected exchanges’subsequent vibrancy. Little prior research connects the process of diffusion with theoperational performance of adopted policies. We find that international coercion wasassociated with more ceremonial adoption but that, contrary to expectations commonin institutional research, contagion processes via peer groups and normative emula-tion of prestigious actors enhanced vibrancy.

Economic globalization provides a generativecontext in which to consider the policy implica-tions of organizational theory and research. Glob-alization creates both opportunities and challengesfor countries on the periphery of the world econ-omy. The central question for policy makers iswhat structures and institutions they should adoptto promote economic and social vibrancy. Notably,waves of alternative theories and associated pack-ages of reforms have swept over the globe in recentdecades. Observing this process of global diffusion(and often abandonment) of policies and practices,Meyer, Boli, Thomas, and Raminrez (1997) ex-tended analyses of myth and ceremony at the or-ganization level to the nation-state in their “worldsociety” approach. A core idea in this work is thatcoercion and mimicry of peers or competitors, typ-ically based in a substrate of network ties, oftenprompt adoption (Henisz, Zelner, & Guillen, 2005;Polillo & Guillen, 2005). Yet the study of adoptionhas been largely decoupled from the study of effec-tiveness. After states adopt these practices, what

happens next? Researchers know who adopts andwhy but have much less sense of when an adoptedpractice works as expected, and how conditions atthe time of adoption influence effectiveness.

Findings at the organizational level may apply atthe country level. Some practices work as pre-dicted, or their implementation may improve overtime with learning. The multidivisional form (“M-form”) of corporate organization (Williamson,1975) has been an example. Other practices areadopted in earnest but fail to live up to their prom-ise; many cases of the adoption of total qualitymanagement (TQM) evidence the latter (Zbaracki,1998). Organizations adopt some practices cyni-cally, with little intention of following through, asin the case of many corporations announcing stockbuy-back plans that they never implement (West-phal & Zajac, 2001). Still other practices areadopted ceremonially, as a gesture of compliance,yet nonetheless create real change: companies maycreate an office of equal employment opportunityas a symbol to fend off lawsuits, but once in placesuch offices can actually change employment out-comes (Sutton & Dobbin, 1996). The implication ofthe cited studies is that why one adopts may affecthow one adopts, and how effectively.

This study is one of the first to simultaneouslyexamine the causes and consequences of adoption.We draw on the world society variant of new insti-tutional theory (Meyer et al., 1997) to examine thespread of stock exchanges around the world andtheir vibrancy in terms of growth in size (equities

We thank Mauro Guillen and three anonymous AMJreviewers for their insights and questions, and ChrisMarquis, Mark Mizruchi, Huggy Rao, and Sid Tarrow forcomments on drafts. We also thank Simone Polillo,David Strang, and Chang Kil Lee for sharing data andadvice on measurement, and Andrei Jirnyi for statisticalprogramming assistance. The study benefited from fund-ing by the William Davidson Institute at the University ofMichigan.

� Academy of Management Journal2009, Vol. 52, No. 6, 1319–1347.

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listed and market capitalization). Stock exchangesspread widely around the world during the 1980sand 1990s. In 1980, only 59 countries had ex-changes, but over the next 25 years, 58 moreopened their first indigenous stock exchanges.Table 1 lists the countries that created marketsbetween 1960 and 2005, and Figure 1 graphs theprevalence of markets among independent statesover the period 1800 –2005.

Stock exchanges provided a particularly usefulcontext for our study because they were adoptedout of diverse motivations and showed great varia-tion in subsequent performance. Exchanges informer Soviet bloc countries were typically createdas mechanisms for mass privatization (e.g., Spicer,2002); other countries, such as Guatemala andUganda, created them de novo. It is also clear thatsome exchanges thrived while others floundered.Trading at the Swaziland Stock Exchange, foundedby a former World Bank executive in 1990, waslimited to a total of 50 transactions for the fivelisted equities in 2000, but the Shanghai Stock Ex-change rapidly achieved valuations that rivaledthose of the world’s largest developed economies.

We ask two questions: Why did some countriesbut not others adopt their initial post–World War IIstock exchanges between 1980 and 2005? And whatmade for success? Our contributions are two. First,we seek to draw out the implications for interna-tional policy makers of new institutional theory.Second, we contribute to the study of institutionsby examining how the sources and consequencesof new practices are linked, an undertheorizedand underresearched problematic. Empirically, wefound that practices adopted through a process ofmimesis were more likely to thrive, but thoseadopted owing to coercive processes were lesslikely to do so.

STOCK MARKETS ANDECONOMIC DEVELOPMENT

Stock exchanges are a central component of thecontemporary global economy, as cross-border fi-nancial flows have vastly expanded and equities inemerging markets have attracted substantial atten-tion from globally oriented institutional investors.But this is a relatively recent phenomenon. Formalstock exchanges in the immediate postwar era werelargely limited to countries with sufficiently largeincomes to generate domestic savings. Of the 49countries with stock exchanges in 1950, 24 werelocated in Europe, and 13 were in current or formerBritish colonies such as the United States, Canada,and Australia (Goetzmann & Jorion, 1999). Stockexchanges, in short, were widely legitimate and

institutionalized, but their policy applicability waslargely seen as limited to wealthy countries in the“global north.”

Given the low level of indigenous savings onwhich to draw in developing nations, and limited

TABLE 1Countries Creating Stock Markets between

1960 and 2005

Year Countries

1960 Nigeria1961 Taiwan1962 –1963 –1964 Malaysia1965 –1966 Iran1967 –1968 Jamaica1969 Ecuador, Tunisia1970 –1971 –1972 –1973 –1974 Cote d’lvoire, Thailand1975 –1976 Jordan, Costa Rica1977 Indonesia, Paraguay1978 –1979 Bolivia1980 Fiji1981 Trinidad and Tobago1982 –1983 –1984 Saudi Arabia, Kuwait1985 Iceland1986 –1987 Bahrain, Barbados1988 Oman1989 Ghana, Mauritius, Guatemala, Yugoslavia1990 Honduras, China, Soviet Union, Malta,

Swaziland, Panama, Hungary1991 Croatia, Poland, Bulgaria1992 Czechoslovakia, Ukraine, Namibia, Lithuania,

Mongolia, El Salvador1993 Armenia, Latvia, Bhutan, Cyprus1994 Botswana, Uzbekistan, Nepal1995 Kyrgyz Republic, Malawi, Moldova, Zambia,

Macedonia, Romania, Estonia1996 Lebanon1997 Uganda, Kazakhstan, Qatar1998 Tanzania1999 Georgia, Algeria2000 United Arab Emirates, Papua New Guinea,

Azerbaijan, Vietnam, Bahamas2001 –2002 Maldives2003 Guyana2004 Iraq2005 Cape Verde

since 2005 Suriname (2006), Libya (2007), Syria (2009); inpreparation as of 2009: Cambodia, Lao,Albania, Afghanistan

1320 DecemberAcademy of Management Journal

infrastructures for channeling foreign capital, stockmarkets played little role in their economic devel-opment activity and policy discourse prior to themid 1980s. Rather, capital for economic develop-ment came from other sources, according to the

theories of development dominant at the time (Mc-Michael, 1996). In the 1950s and 1960s, state-to-state foreign aid was the dominant form of capitalflow from advanced industrial countries to devel-oping economies (Armijo, 1999). During the 1970s,

FIGURE 1Prevalence of Stock Markets among Independent Modern Countries, 1800–2005

0

50

100

150

200

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Number of Independent States and Stock Exchanges

Number of states Number of states with exchanges

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Percentage of Independent States with Exchanges

01800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

5

10

15

20

25Number of Adopting States, Four-Year Moving Average

(a)

(b)

(c)

2009 1321Weber, Davis, and Lounsbury

long-term lending by banks to governments in de-veloping countries increased dramatically andnearly matched the level of foreign aid. Aggressivebank lending ended abruptly in 1982, when Mexicosuspended external debt service and signaled thebeginning of a debt crisis throughout the develop-ing world (Manzocchi, 1999). The rest of the 1980shas been called the “lost decade” in development,as private financial flows to developing economiescontracted substantially.

In response to the perceived failures of the de-velopment project and to the 1980s debt crisis, theglobalization project (McMichael, 1996) theorizedand promulgated a market-based strategy of eco-nomic development. Rather than relying on aid orbank-to-state lending, the new model relied on pri-vate investment flows to the private sector in de-veloping economies. The International MonetaryFund (IMF) and the World Bank facilitated thespread of this model as part of a package of “struc-tural adjustment” reforms during the 1980s, as didAntoine Van Agtmael (1984), an economist at theInternational Finance Corporation who coined thephrase “emerging markets” as an appealing alterna-tive to “third world.” This shift in thinking legiti-mated stock markets, already an institutionalizedpolicy solution to managing capital markets in de-veloped countries, as a solution to the differentproblem of economic development.

Initially, portfolio investment in low-incomecountries was inconsequential. In the late 1980s,however, portfolio investment in the newly chris-tened emerging markets began to flow in earnest, asinvestors were attracted by the returns availablefrom high-growth economies. The late 1980s andearly 1990s saw a wave of market liberalizationsthat allowed foreign investors to buy domestic eq-uities (Bekaert, Harvey, & Lundblad, 2005), and bythe mid 1990s, the trickle of foreign investmentbecame a torrent as emerging market funds becamestaples in the portfolios of institutional investors inadvanced economies. The World Bank reportedthis: “In 1986 there were 19 emerging market coun-try funds and 9 regional or global market funds. By1995 there were over 500 country funds and nearly800 regional and global funds. The combined assetsof all closed- and open-end emerging market fundsincreased from $1.9 billion in 1986 to $10.3 billionin 1989 to $132 billion at the middle of 1996”(1997: 16).

The new theory of development is reflected inthe World Bank’s World Development Report for2000. The theory, in brief, is that the creation of“well-regulated” financial markets open to foreigninvestors provides the surest path to rapid eco-nomic development. At the receiving end, busi-

nesses in low-income countries gain direct accessto the enormous stocks of private capital generatedin industrialized countries. Rather than having torely on aid and loans mediated by political organ-izations, they receive capital directly from privateinvestors. Bypassing potentially inefficient or cor-rupt government structures frees local entrepre-neurial potential and accelerates economic growth.Policy makers and corporate managers are thus en-couraged to make future-oriented decisions aboutthe governance of their economic systems. Thissystem also offers a unique opportunity for capital-deprived developing countries that can convinceinvestors about the future prospects of their econ-omies. Rather than wait for domestic capital toform in a slow process, they can borrow from or sellequity to foreign savers to speed development andso join the global economy much more quickly. More-over, stock markets generate a wealth of intelligencethrough the operation of the price system, whichhelps guide decisions of both managers and investors.The benefits to investors are rooted in prospectivegrowth rates unattainable in advanced economiesand high returns matching the risks involved.

The “financial market theory of development”has found support in several academic studies (fora concise review of the evidence, see chapter 3 ofthe 2000 World Development Report). Filer, Ha-nousek, and Campos (1999), for instance, reportedthat stock market activity enhanced economicgrowth in low- and middle-income countries, inkeeping with a number of studies by Levine and hiscoauthors on the beneficial effects of financial de-velopment (Levine, 1998). But if stock markets areso manifestly beneficial, the appropriate questionis perhaps not, “Why have they spread so quicklyin the recent past?” but “Why do only half theworld’s economies have them?” The financial mar-ket theory of development implies that stock mar-kets will enhance economic growth to the extentthat they are embedded in an institutional matrixthat ensures that their signals guide decision makerstoward growth opportunities. But countries vary sub-stantially in the extent to which they provide hospi-table climates for financial markets. Thus, the criticalquestion for understanding the uneven spread andperformance of stock exchanges is, What are theconditions that facilitate or inhibit the creationand development of stock exchanges in particu-lar countries?

THE POLICY PROCESS OF CREATINGAN EXCHANGE

We regard the creation and development of astock exchange as a country-level policy decision.


This is to emphasize that although government pol-icy makers are essential to the creation of a stockexchange, the process involves other agencies andinterest groups and thus requires private and stateactors to work in concert (e.g., Lindblom & Wood-house, 1993). These actors create political impetusand a legal basis and also supply private capitaland develop market infrastructure for the operationof an exchange. We thus treat having a stock ex-change as an attribute of a country that emergesfrom a distributed policy making and implementa-tion process involving a wide set of participants.We use the term “policy makers” to refer to thislarger group.

An assumption of our theoretical model is thatdistributed policy making at the country level isbroadly analogous to distributed decision makingin organizations. The rationale for this assumptionfollows from how institutional theorists have de-picted collective decision-making processes. Statesare a particular type of organization. Their policiesreflect a resolution of conflicts among the diverseinterests of their constituents inside and out. In-deed, some foundational works on organizationswere written by political scientists drawing explic-itly on models of coalitional politics (Cyert &March, 1963; March & Simon, 1958), and a widelyread account of the Cuban missile crisis built di-rectly on this model of organizations (Allison,1971). Dozens of subsequent studies in politicalscience followed Allison in applying organizationtheory to the operations of states (see Davis andPowell [1990] for a review). Insights from open-systems models of organizations also apply. Statesand other organizations face an environment ofother organizations with which they are more orless interdependent, as well as internal and exter-nal pressures for legitimacy. States learn from theexperiences of other states that have dealt withsimilar problems, and their leadership may drawon successful “alters.” Thus, there is reason to ex-pect that findings at the organization level willprovide insight into country-level policy.

Policy Adoption

Creating a new stock market requires that policymakers have the motivation to pursue this changeand the skill to realize it. The many potential trig-gers for creating a stock exchange broadly relate tothe attributes of a country and to conditions ex-ternal to it. Internal country attributes include acountry’s level of economic development, politi-cal system and ideology, and prior institutionalendowment, all of which are believed to motivateand enable internally focused policy makers to

adopt solutions consistent with these factors. Re-cent research has shown a number of such internalfeatures to be associated with more vibrant stockmarkets and thus suggests several prompts to adop-tion. One study directly examined the correlates ofhaving an exchange in December 1998 (Clayton,Jorgenson, & Kavajecz, 2006). Countries with acommon law tradition, as opposed to those with acivil law tradition, tend to have superior protec-tions for minority shareholders and were thus morelikely to have markets in the first place (cf. La Porta,Lopez-de-Silanes, Shleifer, & Vishny, 1998, 1999a,1999b). Countries with bigger economies and thosewith greater openness to trade and investmentflows were more likely to have exchanges thanthose with smaller and more closed economies.

Such cross-sectional findings are subject to anumber of limitations. Many of the exchanges ex-amined had been in operation for decades, if notcenturies, and there was great potential for reversecausality, with the creation of markets precedingopenness to trade and investment as well as, pre-sumably, economic growth. Moreover, many fea-tures associated with larger stock markets are fixedor, at the minimum, slow to change. We do notobserve widespread shifts from civil law to com-mon law, from Protestantism to Catholicism, orfrom being a former French colony to being aformer British colony. To explain the recent surgeof adoptions requires a more dynamic and morecontextual account of the policy process.

A number of country-level practices and policiesrooted in economic and political liberalism spreadrapidly during roughly the same time period asstock exchanges, and research has documented thatdiffusion—relying on the prior experiences of otheradopters—is behind much of this dynamic. Anec-dotes and systematic evidence suggest that policymakers consciously assess the expectations andprior policy choices of other countries and of globalelites when contemplating policy changes (Sim-mons, Dobbin, & Garrett, 2006). When consideringthe implementation of reforms, such as privatiza-tion of government-owned industries, or publicsector downsizing, policy makers rely on templatesobtained from the international professional policyelite, site visits, bilateral meetings, membership incommon associations, benchmarking of “best prac-tices,” and explicit emulation of the strategies ofsuccessful and prestigious predecessors. Othercountries, professional communities, and promi-nent international agencies, such as the IMF andWorld Bank, influence the motivation for and skill-fulness of policy implementation: Policy makersare concerned about the legitimacy of their deci-sions in the eyes of international as much as local


audiences, and they draw on knowledge and re-sources outside as well as inside their countries.Recent sociological work has distinguished a num-ber of mechanisms at work behind diffusion (Lee &Strang, 2006). Each highlights different rationalesfor policy adoption and different prospects for suc-cess based on the international context of policymaking.

Simmons, Dobbin, and Garrett (2006) describedfour mechanisms of international diffusion: coer-cion, competition, learning, and emulation. Coer-cion occurs when powerful outsiders (states orother actors) impose their models on the policymakers of dependent countries. Both the motiva-tion and the knowledge for adopting a policy comefrom outside the country. In the case of economicpolicy, the IMF is particularly implicated in more-or-less coercive efforts at policy reform. This mech-anism suggests that states are more likely to adopt apolicy to the extent that they are dependent oncoercive actors favoring that policy and that theirinternal motivation and skill for adoption are lim-ited. Competition occurs when states adopt a policythought to provide an advantage relative to compet-itors, or to avoid a disadvantage. The motive foradoption is social comparison coupled with rivalry;rivalry to some extent impedes the direct transfer ofknowledge and resources. This mechanism sug-gests that states are prone to adopting practices thattheir economic competitors have previously imple-mented. Learning implies that policy makers learnnot only from their own experience but also fromthat of others. They attend particularly to theactions of proximate alters, such as peers withwhom they enjoy close contact. This proximity en-ables the transfer of ideas and knowledge, whichinternalizes the motivation and skill for policychange into a country’s policy-making process.Learning is indicated when adoption follows fromprior adoptions by those in closest proximity (e.g.,geographic, cultural, or economic). Although theconcept of learning is sometimes more narrowlyapplied to mimicking practices that have alreadyproven successful (vicarious learning), most learn-ing theorists have pointed out that this is overlyrestrictive and ignores adaptive learning from prox-imate others prior to observable successes or whensuccess is ambiguous and causally complex (Levitt& March, 1996; Levy, 1994). Finally, emulation oc-curs when states adopt policies because they arenormatively appropriate and have less regard forexpected benefits. In emulation, policy makers lookto prestigious others and follow the advice of eliteprofessional communities in order to maintaintheir own status, even in the absence of detailedinsight and resources for implementation. These

four mechanisms are notably similar to the threemechanisms of isomorphism identified in neoinsti-tutional accounts as existing at the organizationlevel: coercive, mimetic (including competitionand learning), and normative forces (DiMaggio &Powell, 1983).

Policy Implementation

The neoinstitutional literature further suggeststhat different reasons for adoption imply differentlevels of success at implementation, if success isdefined as creating the results officially intended.Broadly, coercion should be followed by the leasteffective implementation, and learning should leadto the most effective implementation, with compe-tition and emulation prompting more mixed levelsof success. These differences derive from the extentto which motivations and skills for developing anadopted practice are internalized and embedded ina local setting. This internalization is needed forthe ongoing activities that are required for success-ful implementation of a practice beyond its mostformal elements. Early institutional research indi-cated that early adopters of a practice were in somesense sincere, but late adopters were motivated byunreflective mimicry; thus, earlier adopters mightimplement practices more forcefully than the mim-ics (e.g., Tolbert & Zucker, 1983). But the success oflate adopters can be quite variable. On the onehand, late adopters may be mere mimics, adoptingan innovation because everyone else has and it hasbecome taken for granted. On the other hand, lateradopters can learn from the skill and experiences ofearly and contemporary adopters and implementpolicies more successfully.

Research on the spread of innovations amongorganizations supports the notion that both can betrue. In a study of hospitals, Westphal, Gulati, andShortell (1997) found that late adopters of TQMtended to implement the set of elements that hadbecome most prevalent and that such conformitywas associated with reduced efficiency but in-creased legitimacy. Kostova and Roth (2002) foundthat among international subsidiaries of a multina-tional, units located in places where quality prac-tices were widespread implemented such practicesmore fully, but units more dependent on the parentcompany showed weaker implementation. Theyalso found ceremonial adoption—adopting thepractices without believing in their value—wasprevalent in units facing regulatory pressures, in-dicating that coercion might lead to behavior with-out commitment. And Lounsbury (2001) showedthat the majority of recycling programs adopted byuniversities were symbolic efforts that were under-


resourced and staffed with ecologically ambivalentcustodians, but that where local student move-ments had been mobilized, substantive recyclingprograms were created and staffed with full-time,ecologically committed managers. In the context ofdiffusion across countries, Zelner, Henisz, and Hol-burn (2009) argued that the implementation of theprivate ownership of electricity generation requireseffort subsequent to the initial adoption stage andthat partial renegotiations can be linked to localpolitics.

Policy Adoption and Implementation

Although institutional theorists have mostly fo-cused on the formal adoption of practices, the morelimited literature on implementation conveys thekey insight that the success of policies and prac-tices in terms of their implementation, mainte-nance, and ongoing development is intrinsicallyliked to the conditions of initial adoption. Initialconditions—the different motivations and skillsthat exist at adoption—provide a form of imprint-ing that shapes subsequent development andperformance (Lounsbury & Ventresca, 2002;Stinchcombe, 1965). Coercion is likely to lead toceremonial adoption, because neither motivationsnor skills are locally embedded in the process;learning, particularly through ties to prior adopters,is likely to lead to more substantive adoption, asmotivations are internal and continuing flows ofknowledge and experience allow the further devel-opment and refinement of a practice; and moreequivocal levels of implementation will followcompetition and emulation, as both are based onstrong internal motivations for adoption but lim-ited access to fine-grained skill and know-how.

In the case of post–World War II stock exchanges,all adopters are effectively late adopters. Stock ex-changes have existed since the 17th century andwere quite widespread among Western economiesby the early years of the 20th. Almost by definition,then, countries that remained without exchangeswere on the periphery or semiperiphery of theglobal economy. And by definition, the basic suc-cess of the practice was already proven. The cre-ation of an exchange, like other national policychanges, can occur for diverse reasons and underdiverse circumstances. The subsequent vibrancy ofthe market depends on a country’s ability to fullyimplement, refine, and develop the market, andthis subsequent success can be expected to varyaccording to the motivations and skills existing atthe time of adoption. Adoption may be part of apackage of reforms aimed at attracting foreign in-vestment, and thus motivated and informed by the

experience of neighbors or competitors, or it maybe a perfunctory response to external pressures—one reform among several on a checklist aimed atdocumenting compliance with demands from thirdparties. In the first instance, we expect the ex-change to receive ongoing support, but in the sec-ond, support may be perfunctory.

There are two boundary conditions to note aboutthis account. First, the motivations of various pol-icy makers are not directly observable. However, byobserving both the antecedents of adoption and itsconsequences, one can infer the distinction be-tween “sincere” and “ceremonial” adoption thathas been central to the neoinstitutional perspec-tive. Second, the success of a stock market is notentirely under the control of policy makers. Eventrue believers in the efficacy of markets cannotcommand a stock exchange to grow (although, con-versely, it is possible to sabotage a market).

HYPOTHESES: THE CREATION ANDVIBRANCY OF STOCK MARKETS

In the sections that follow, we focus first on theintranational factors promoting the creation andvibrancy of exchanges after 1980 and then focuson the international factors. We pair hypothesesabout the antecedents of adoption with hypothesesabout the effects of these antecedents on marketgrowth.

Prior Economic Development andInstitutional Endowment

Stock exchanges require a minimum level of na-tional economic development to be feasible andeconomically useful. Both the size of an economyand the development of financial and economicinfrastructure are relevant. Clayton et al. (2006)found that gross domestic product (GDP) per capitawas significantly related to the presence of an ex-change in 1998, and we anticipate that, althougheconomic growth is potentially both a cause and aconsequence of having an exchange, larger andwealthier economies are more likely to create ex-changes than smaller and poorer ones. Countrieswith greater prior financial development are alsomore likely to create exchanges, as the develop-ment of banking sectors both supports and comple-ments the operation of stock markets (Levine &Zervos, 1998). Thus, countries with more expan-sive domestic credit are more likely to create ex-changes. And economies that are already moreopen to trade are more likely to create exchanges.Clayton et al. (2006) found that measures of “eco-nomic freedom” compiled by the Heritage Founda-


tion—particularly openness to trade and foreigninvestment—were correlated with the presence ofan exchange. We therefore expected prior eco-nomic openness to be related to subsequent cre-ation of exchanges. Although we did not deriveformal hypotheses on these factors, we do includethem as essential control measures.

The extent to which an exchange, once opened,becomes economically significant has also receivedattention in recent years (see La Porta, Lopez-de-Silanes, Shleifer, and Vishny [2000] for a review).Some of the exchanges created since 1980 haveremained miniscule relative to the sizes of theeconomies in which they are nested (for example,the market capitalization of all of Kazakhstan’spublic companies was roughly 0.2 percent of GDPin 1998), but others have become quite significant(the equivalent figure for Trinidad and Tobago was61.5 percent). Given the varying motivations foradoption, it is then important from a policy per-spective to investigate whether differences in theconditions of adoption relate to differences in ex-change performance.

Scholars in the international comparative re-search tradition have emphasized the importanceof a country’s existing institutional background forits subsequent economic development. A histori-cally evolved institutional matrix of cultural andpolitical arrangements enables some but constrainsother development directions (North, 1990). Re-searchers in corporate finance have identified a setof institutions particularly relevant in the contextof financial markets, including a country’s predom-inant religion; colonial legacies such as laws, lan-guage, and the education of national elites; andpolitical system (La Porta & Lopez-de-Silanes,1998; La Porta et al., 1998, 2000). The commonrationale behind these factors is that stock marketsare more compatible with domestic institutionsthat support open participation and arms-lengtheconomic relationships.

A commercial culture derived from Protestant-ism, a democratic political system, and the legaland cultural protection of investors is therefore ex-pected to foster the creation of market institutions(La Porta et al., 2000). The link between economicorganization and religion goes back to Weber(1904/1958), who argued that particular strains ofProtestantism facilitated the development of capi-talism in the West following the Reformation. Prot-estantism has been positively associated with theviability of existing capital markets within nations,arguably because the relatively less hierarchical na-ture of Protestant tradition facilitates the horizontalties useful for market transactions (La Porta et al.,1999b). The comprehensive influence of colonial

powers exports institutional factors from metropol-itan countries to former colonies. Note that coloniallegacies encompass but go beyond legal systems (LaPorta et al., 1999b). Not only laws, but also thetraining of local elites in metropolitan countries,administrative structures, and traditions shaped inthe transition to statehood shape a country’s sub-sequent policy orientation toward markets and pri-vate investment.

Given the rather different economic policy orien-tations of Britain and France in the colonial area(Dobbin, 1994), we would expect former Britishcolonies to be more prone to create stock market–based economic systems and former French colo-nies to be less inclined to do so and more likely topursue more statist paths to development. Finally,financial markets are thought to be less amenable todirect influence by political authorities than alter-native institutions. Rulers whose ideology isfounded on authoritarian or socialist ideas shouldbe suspicious of uncontrolled flows of capital inprivate hands and use their power to create differ-ent governance structures. Conversely, more dem-ocratic and less left-leaning regimes are expected tosupport the transparency and the potential disper-sion of economic participation of public trading, asa check against the concentration of economicpower and information. Because of their pervasive-ness and relative permanence, we expected thesefactors to have a parallel influence on adoption andperformance.

Hypothesis 1a. A country’s historical conditionsfavoring investor-based systems (Protestantism,British colonial influence, political democracy,and nonsocialist ideology) increase the likeli-hood of stock exchange adoption.

Hypothesis 1b. Stock exchanges in countriesfavoring investor-based systems (characterizedby Protestantism, British colonial influence,political democracy, and nonsocialist ideol-ogy) are larger than those in countries not fa-voring investor-based systems.

Mechanisms of Diffusion

Although internal conditions of economic andfinancial development, as well as an existing insti-tutional endowment, are implicated in the creationand vibrancy of stock exchanges, they are not them-selves sufficient to explain the dynamics of adop-tion. The spread of new exchanges, like the spreadsof privatization, financial openness, and democ-racy, have all followed a classic S-shaped diffusioncurve characteristic of contagion processes (Sim-mons et al., 2006). Whether through coercion, ob-


servation, or direct contact, it is evident that each ofthese practices was adopted as part of an interde-pendent process among countries, not as the prod-uct of isolated decision making by national policymakers. In view of prior research at the organiza-tional level, we also expected exchanges to con-tinue to be marked in their performance by theinitial external conditions prevailing at the time ofadoption (Lounsbury & Ventresca, 2002; Stinch-combe, 1965). Below, we derive hypotheses fromeach of four mechanisms of global diffusion iden-tified by Simmons et al. (2006): coercion, competi-tion, learning, and emulation. We hypothesize firstthe antecedents to exchange adoption and then theexpected effect of these initial conditions on sub-sequent exchange performance. As we noted previ-ously, although motivations and skills existing atthe time of adoption may be impossible to measuredirectly, observation of subsequent success canserve as indicators about a key claim of neoinstitu-tional theory: whether symbolic or perfunctoryadoption is likely to lead to weak implementation,as market success cannot be mandated; andwhether “sincere” adoption is more likely to befollowed by strong implementation.

Coercion. Coercion occurs when dependentstates adopt practices because of pressures emanat-ing from the center of the global economy (the“global core”) and its agencies (Chase-Dunn,Kawano, & Brewer, 2000; Strang, 1990). With theascent of a neoliberal approach to economic gover-nance, the creation of local stock markets is in linewith the belief system of powerful actors at the coreof the global economic system. Company sharestraded on an exchange can be bought and sold in amanner that is swift and inexpensive, compared tomaking foreign direct investments. This ease of in-vestment is particularly attractive to the growingnumber of institutional investors in core countries,especially the United States, that need market in-frastructures to access assets and “rents” in periph-eral countries (Useem, 1996). Stock markets alsopromise to reduce the direct influence of local po-litical elites over choice of investments, degree ofcontrol, and ease of exit.

A country’s immediate financial dependency oninternational agencies and core countries providesthe structural linkage for coercive power and isexpected to increase the influence of the globalelite over local policies. Financial aid and creditsdisbursed and administered by international devel-opment agencies such as the World Bank and theIMF are particularly potent in this regard (Interna-tional Monetary Fund, 1997; McMichael, 1996).The World Bank and the IMF provide not onlymoney but also economic policy advice and pro-

gram assistance. They do so as instruments of corestates and global elites who define the agencies’goals and policies and supply the resources neces-sary for their operation (Brune, Garrett, & Kogut,2004; Gowan, 1999). Lending at concessional ratesplays a particular role in the transfer of policyagendas. Concessional aid involves loans that aredisbursed at discounted interest rates but are tied tothe implementation of specific development pro-grams and policies stipulated by the IMF or WorldBank, such as structural adjustment programsaimed at changing a country’s financial and fiscalsystems. The dependency on international agenciesfor aid has been shown to have a significant impacton the adoption of organizations and policies inline with the institutional paradigms of the globalcore (Henisz et al., 2005; Polillo & Guillen, 2005).

Hypothesis 2a. The more financially depen-dent a country is on concessional aid from theIMF and the World Bank, the more likely it is tocreate a stock exchange.

But it is also clear that practices resulting fromcoercive pressures are more likely to reflect cere-monial compliance because motivations, skills,and resources for making the practices thrive donot become distributed in a local setting (cf. Kos-tova & Roth, 2002). Agencies such as the IMF can-not demand that a market grow big. The sustainedvibrancy of exchanges requires more comprehen-sive institutional alignments that are beyond thescope of the policy interventions under the controlof international policy makers. Notably, IMF pro-grams are project-based, with a specified scopeusually centered on legal and governmental actionand with monitoring mechanisms limited to com-pliance with the formal conditions attached to ep-isodic concessional lending (Vreeland, 2003). IMFprograms may thus be successfully implemented,but continued growth of markets requires sustainedchanges in the beliefs and motivations of multiplemarket stakeholders. Just as corporations createweak equal employment offices to visibly signalcompliance with coercive pressures (Edelman,1992), so states dependent on aid may signal theircompliance with the adoption of structures that aremore symbolic than substantive and relatively de-coupled from other elements of the countries’ in-stitutions. This scenario makes the creation of “per-functory” exchanges more likely.

Hypothesis 2b. Stock exchanges adopted in thewake of IMF/World Bank aid are smaller thanthose adopted without such aid.

Competition. A second mechanism of diffusionis competition. Policy makers are driven in part by


the actions of other states with which they competein the global economy. Consider, for instance, theglobal garment industry: although Mauritius, Cam-bodia, and Honduras may share little in terms oflanguage, history, and culture, policy makers areacutely aware that these countries are competitorswhen it comes to providing finished garments forthe branded clothing industry, and each may attendto its competitive position relative to the others.(Cambodia, for instance, competes on the basis ofits high level of compliance to labor standards.)Burt (1987) cast competition as (structural) equiv-alence in network terms: adopting the actions ofthose sharing similar relations with third parties.The underlying mechanism is one of seeking an edgein contests between rivals that could replace eachother in performing a role (Mizruchi, 1993). In thecase of economic infrastructure, competition is oftenover trade relationships. Thus, the most relevantcompetitors are those that trade with the same thirdparties. Prior research has supported this argument;for instance, Polillo and Guillen (2005) found thatstates were more likely to adopt central bank inde-pendence to the extent that trade competitors hadpreviously done so. If the creation of an exchangemakes a country a more attractive partner for tradeand investment, then moves by states are likely to befollowed by countermoves by their competitors.

Hypothesis 3a. The more a country’s competi-tors in trade have adopted stock exchanges,the more likely the country is to create a stockexchange.

Policy adoption due to competition is more am-biguous in its effects than adoption through coer-cion. If practices and policies are simply designedto reflexively keep up with rival countries and tomatch their moves, their implementers may lackthe insight and capabilities for effective implemen-tation. And to the extent that rivals refrain fromsharing knowledge, insights from competitors’adoptions may be limited to easily observable fea-tures. Adoption may be mostly symbolic, and theresulting exchanges are likely to be relatively small.On the other hand, if adoption is central to ongoingcompetitive rivalry and rival countries are effectivein their implementation, the ongoing monitoring ofcompetitors and rivalry can be expected to pull afocal country toward enlarging its exchange as amore sustained activity. Given this ambivalenttreatment of competitive mimicry in institutionaltheory, we alternatively hypothesize:

Hypothesis 3b. Stock exchanges adopted throughmimicry of competitors are smaller than thoseadopted for other motivations.

Hypothesis 3c. Stock exchanges adopted throughmimicry of competitors are bigger than thoseadopted for other motivations.

Learning. A third mechanism of diffusion islearning—that is, drawing on the experiences ofothers, particularly those seen to be successful pio-neers and relevant peers. In contrast to competition-driven adoption, which typically occurs through ex-ternal observation, learning relies on proximity anddirect channels of communication. Proximate oth-ers are more salient, more observable, and moretrusted sources of information about appropriateconduct (Davis & Greve, 1997; Greve, 1998). Itshould be noted that knowledge contagion andlearning can occur from both the successful andunsuccessful experiences of others. As a result,ideas and policies are likely to diffuse through net-works of proximate countries. The relevant mea-sure of proximity is of course context specific. Inthe international economic policy sphere, sharedregional identities and trade ties particularlyheighten learning processes. Regional proximitysubsumes several drivers of contagion, includingthe information effect of geographic proximity;similar historical and cultural experiences thatincrease the relevance and attention to commu-nication of experiences; and routine policy con-sultations in regional intergovernmental treatyorganizations. The adoption of stock exchanges bygeographically proximate states can therefore beexpected to increase a focal country’s likelihood ofadoption. Trade ties similarly are a conduit for thespread of information and practices (Henisz et al.,2005; Waters, 1995).1

1 We note here that proximity is intended as an observ-able proxy for the degree of communication among pol-icy makers in a country and its alters. It is impossible toobserve the actual relevant communication among policymakers, but our expectation is that closer proximity (ingeopolitical space or through trade) is associated with agreater volume of relevant communication. Note that Po-lillo and Guillen (2005) and Henisz et al. (2005) usedtrade ties to prior adopters as a proxy for normativerather than informational learning influence. However,their rationale was based on group cohesion leading tonormative consensus pressures and consequently theirmeasure used cumulative adoption by trade partners. Incontrast, our interest is in the effect of recent adoptionevents among late adopters, so arguments at the aggregatelevel are less salient. Moreover, normative emulation isbased on seeking credibility in the eyes of actors withnormative authority, and it is unclear that such norma-tive authority can be attributed to every trade partner.Hence, any interpretation of trade cohesion as only aboutemulation confounds normative influence with more ge-


Hypothesis 4a. The more a country’s regionalneighbors and trade partners have adoptedstock exchanges, the more likely the country isto create a stock exchange.

Exchanges adopted out of learning are likely tobe those implemented most successfully. The mo-tivation for adoption is based on interest in andengagement with the practice rather than externallyinduced compliance. Ongoing contact with prioradopters allows for ongoing vicarious learning andexchange of useful information. Moreover, country-level ties based on direct trade and regional prox-imity foster a multiplexity of ties between the var-ious government, investor, business, and policycommunities that are critical for effective imple-mentation and exchange performance. Thus, to theextent that learning was the mechanism at play inproximity-based adoption, we expected successfuland sustained implementation and performance.

Hypothesis 4b. Stock exchanges adopted in thewake of adoptions by regional neighbors andtrade partners are larger than those adoptedwithout such prior adoptions.

Emulation. A final explanation for the purpose-ful creation of new institutions in states is centralto the world society perspective (Meyer et al.,1997). Just as organizations may adopt practices forceremonial purposes rather than to meet technicalrequirements (Meyer & Rowan, 1977), developingcountries might adopt policies and correspondingorganizations for reasons of global legitimacy. Thetechnical functionality of policies is secondary inthis perspective, and a symbolic function of emu-lating the prescriptions of high-status elites re-places it. The motivation for adoption is to appealto the normative expectations of prominent exter-nal audiences, not to solve local problems, andknowledge is based more on general broad ideolo-gies than on deep insight. A considerable numberof studies have documented such processes in theglobal diffusion of policies, institutions, and organ-izations, from environmental protection (Frank,Hironaka, & Schofer, 2000) and democracy (Wej-nert, 2005) to policy orientations such as eco-nomic liberalism (Simmons & Elkins, 2004) andthe specific practices of deregulation (Henisz etal., 2005), intergovernmental investment treaties

(Elkins, Guzman, & Simmons, 2006), and centralbank independence (Polillo & Guillen, 2005). Towit, countries may create exchanges because theyare seen as generally appropriate by high-statusevaluators that represent the membership of the“society of nations.”

The transnational world stage around the issuesof economic development is akin to an increasinglystructured organizational field at the national level,and this increasing “structuration” gives rise to iso-morphic processes (DiMaggio & Powell, 1983). Inthe field of economic development policy, a nexusof actors develops fieldwide norms for institutionaldesign and development policies with limited re-gard to local conditions. Development discourseshaped in dominant Western countries at the coreof the global political economy serves as a templatefor how nations should manage their economies.Professional development consultants and econo-mists in transnational “epistemic communities”frame the debate and rationalize institutional solu-tions (Fourcade-Gourinchas, 2001; Haas, 1992).Policy makers in developing countries are periph-eral and less prestigious participants in this worldcommunity. Faced with the society of nations andglobal elites as arbiters of their conduct, they man-age legitimacy by implementing templates theo-rized by global professional elites and used byhigh-status countries.

If more peripheral countries create financial mar-kets in an effort to maintain legitimacy and gainprestige, two factors can be expected to explainuneven adoption through emulation on the part ofmore peripheral countries. First, a country’s close-ness to the core of the world economic systemincreases its visibility and hence global elites’ scru-tiny of its policies. Moreover, closeness to the coreincreases a country’s desire to conform with coreactors’ institutional norms in an effort to attain thestatus of a member of the core. Greater integrationinto the core of the capitalist system, in terms of acountry’s position in international economic andpolitical networks, has been shown to further thediffusion of other policies emanating from the core(Polillo & Guillen, 2005; van Rossem, 1996; We-jnert, 2005). It is noteworthy that almost all capi-talist countries conventionally designated as core,and many designated as semiperipheral, createdexchanges well before the 1980s, so that the furtherspread of exchanges in the 1980s and 1990samounts to an expansion of a core institution tomore peripheral countries, with a parallel creationof more advanced financial institutions, such asoptions exchanges, at the core. The process of nor-mative emulation among late adopters therefore re-sembles middle-status conformity processes (Phil-

neric information flows between countries. FollowingWaters (1995), we treat trade-based proximity more ag-nostically as facilitating interaction, information ex-change, and learning, and we reserve emulation argu-ments for a country’s connectedness to specific actorsthat more clearly possess normative authority.


lips & Zuckerman, 2001)—countries closer to thecore and in the middle of the world system distri-bution face higher expectations to live up to theirposition and have stronger desires to associate withthe core through symbolic actions.

A second fulcrum of normative exposure is theextent to which local participants in policy makingare part of global professional networks. Profes-sional epistemic communities play a key role innormative institutional pressures (DiMaggio &Powell, 1983; Haas, 1992). For example, an epis-temic community of U.S.-trained economists is of-ten credited with having promoted economic liber-alization in Latin America when they gained localfootholds (Murillo, 2002; Simmons et al., 2006).Variation in countries’ policy adoption results fromvarying exposure of countries to these profession-als and from varying structural access of globalprofessionals to local policy makers.

Hypothesis 5a. Given controls for other inter-nal, coercive, and mimetic factors, countriesare more likely to create stock exchanges to theextent that they are subject to normative pres-sures through greater centrality in the worldeconomic system and ties to the global finan-cial community.

Institutional research portrays adoption out ofemulation as prone to being decoupled from imple-mentation for several reasons. First, the legitimacybenefits of adoption are likely to accrue to statesregardless of the vigor of their subsequent imple-mentation (cf. Westphal & Zajac, 1998). Second, thepractices developed by high-status actors may notbe workable or functional for emulators that oc-cupy a different structural position. They may lackthe requisite skill to move beyond ritualistic emu-lation because knowledge, for example, is based ongeneric ideologies rather than fine-grained insight.“Whereas conventional logic-of-development argu-ments suggest that countries will adopt certain pro-grams when they are developmentally ready forthem, world polity theorists have found that coun-tries embrace new norms for symbolic reasons evenwhen they cannot begin to put them into prac-tice. . . . Even in the realm of economic policy,countries may adopt new global norms before theyare really ready” (Simmons et al., 2006: 800–801).The policy makers proximate to prior adopters arelikely to have continued direct communication rel-evant to locally successful implementation, yetthose that adopt out of emulation of high-statusothers are more prone to adoption without knowl-edge relevant to their local setting and with a pri-mary motivation of symbolic legitimacy.

Hypothesis 5b. Given controls for geographicand trade proximity to prior adopters, stockexchanges adopted by more central countriesand those tied into the epistemic financialcommunity are smaller than those adopted byother countries.

Although it may seem counterintuitive that theexchanges of more central countries are smaller,it is important to emphasize that the populationcontemplated here is only those nations that didnot have exchanges prior to 1980. Obviously,core economies, such as members of the Organi-sation for Economic Cooperation and Develop-ment (OECD), and some countries on the semipe-riphery, had already created exchanges by then.Our argument is that exchanges will be smalleramong those countries that are more central isrelative to other late adopters, who according toneoinstitutional theory are particularly prone tolegitimacy-based adoption of practices (Tolbert &Zucker, 1983).

METHODS

Population and Sample

The “at risk” population of our study was anycountry that existed in 1980 or subsequently anddid not have a stock exchange as of 1980. We ex-cluded Communist countries in the Soviet blocfrom the risk set prior to 1989. The list of countrieswas compiled from the United Nations (UN) direc-tory of countries and the U.S. Central IntelligenceAgency (CIA) World Factbook. By 1980, 59 coun-tries had established one or more exchanges, whichexcluded these countries from the risk set. Addi-tional countries entered the risk set when they be-came formally independent and exited the risk setwhen they were dissolved or created exchanges.Excluding exchanges created prior to 1980 raisedissues of “left censoring.” However, restricting thestudy period was justified for theoretical and em-pirical reasons. It was only with the shift to eco-nomic liberalism the early 1980s that stock marketscame to play the role for economic policy that is atthe heart of our arguments. Not surprisingly then,the 1980s and 1990s capture a rapid increase inadoption events (see Figure 1). Only 14 exchangeswere created in the 20 years from 1960 to 1980,despite the fact that numerous countries gainedindependence during this period. By contrast, 54countries opened exchanges in the 20 years from1980 to 2000, nearly doubling the number of coun-tries with exchanges. The period from 1980 to 2005therefore captures the phenomenon of theoreticalinterest: temporal processes of global policy diffu-


sion. To assess whether our results were affected byleft censoring, we also tested a two-stage selectionmodel (Heckman, 1979). The first-stage model esti-mated the chance that a country already had anexchange in 1980,2 and we then inserted the in-verse Mills ratio from this model as a control intothe adoption model. The control variable itself wasnot statistically significant, and all substantive ef-fects remained unchanged.

Dependent Variables

Stock market creation. Our first dependent vari-able was the time of establishment of a country’sfirst stock exchange. We ignored the subsequentcreation of additional exchanges as well as the ex-istence of commodity exchanges.3 If an exchangeexisted on a country’s territory prior to indepen-dence, the country was excluded from the risk set.The date of establishment of an exchange was thefirst trading day reported in the Handbook of WorldStock Derivatives and Commodity Exchanges. Wechecked entries in this book for each year of itspublication and cross-referenced exchange web pagesand regional associations to verify complete coverageand to obtain the exact dates. This was done becausefounding events are sometimes reported only withsome delay in the Handbook and because new ex-changes could potentially close or merge shortly aftertheir founding. None of the exchanges in our sampleclosed or was moved as part of regional consolida-tion. The Appendix describes this variable and all ourother variables in greater detail.

Stock market vibrancy. Our second set of de-pendent variables addressed the vibrancy of thestock markets created between 1980 and 2005.These data came from the 2007 World Develop-ment Indicator (WDI), a compilation of informationfrom various sources published by the World Bank.We measured the number of domestic companieslisted on an exchange and their combined marketcapitalization as a percentage of country GDP. Mar-ket capitalization was the share price of all listedfirms times the number of their shares outstanding.The two measures captured different aspects of

market performance. The number of traded compa-nies indicated the attractiveness of listing shares onthe exchange for companies as well as the invest-ment choices available to investors. If the goal ofmarket creation is to stimulate indigenous entre-preneurship and promote market governance ofeconomic assets, then the number of companieslisting on an exchange is an apt indicator of vibran-cy.4 Market capitalization, on the other hand, cap-tures what overall portion of a country’s economyis governed by financial markets. A country canhave many small companies listed on an exchangewhile large sectors of the economy remain closelyheld or under state control. If the intention of themarket is to link the real economy to the world’sfinancial system, then market capitalization rela-tive to GDP is a good measure of vibrancy, and it isthe most commonly used metric in the studies fol-lowing LaPorta et al. (La Porta & Lopez-de-Silanes,1998; La Porta et al., 1999a).5

Independent Variables

National institutional endowment. We used sev-eral indicators of the compatibility of historicaldomestic institutions with stock exchanges: thepercentage of a country’s population of Protestantreligionists in 1980 (La Porta et al., 1999b), adummy variable for countries that were French col-onies or protectorates prior to independence(coded from the World Factbook), a country’s levelof political democracy, and whether the ideology of acountry’s government was left-leaning (data for boththe latter were from the Polity IV database). We alsotested an opposite coding for British colonial history,and a coding for the origin of a country’s legal system

2 We included population, GDP per capita, years sinceindependence, and dummy variables for world systemposition (van Rossem, 1996) and region (UN classifica-tion) in this estimation. The pseudo-R2 of this selectionequation was .63.

3 In almost every case, the first stock exchange re-mained the only one during the study period. The mostnotable exceptions are Ukraine (with 5 exchanges, one ofwhich accounts for 95 percent of turnover) and Russia,with 60 registered stock exchanges.

4 Factors other than institutional processes affect thesupply of companies that could potentially list on anexchange, most prominently their country’s size andstage of economic development. In the reported models,we control for country size and economic and financialdevelopment, effectively scaling the variable by thesevariables. As a robustness check, we also replicated thereported models with a dependent variable of the num-ber of companies listed normalized by a country’s GDPand omitting the GDP/capita control. This specificationyielded consistent results.

5 Trading volume, another potential indicator of vi-brancy, was not reported consistently enough by theexchanges in our sample and could not be used as anoutcome measure. Foreign portfolio investments in equi-ties, which could be construed as a less immediate indi-cator of an exchange’s success in attracting foreign capi-tal, was also not reported consistently enough forcountries in this sample.


(British common law or French civil law; see La Portaet al. [1998]). As expected, countries that were formerBritish colonies consistently showed a pattern oppo-site to that of former French colonies. Legal traditionsfollowed a similar pattern but produced weaker ef-fects. Colonial history and legal tradition were sohighly correlated that we could not include both inour analysis at the same time.

Dependence on international aid. We measuredaid dependency as the concessional aid a countryhad received from the IMF and World Bank dividedby the country’s GDP (source: WDI database). Con-cessional aid is disbursed at a discounted interestrate but is tied to the implementation of specificdevelopment programs and policies stipulated bythe IMF or World Bank. We treated concessionalaid as a proximate channel of influence for globalpolicy making communities located in interna-tional financial institutions. As concessional aid ismainly available to poor and highly indebted coun-tries, we did, however, also explore whether thefactors that qualify a country to receive this form ofaid fully explain the creation and performance ofstock markets, net of receiving aid. We imple-mented a selection model for receiving aid thatincluded economic development, balance of pay-ments, credit, and regional variables and enteredthe selection term in the main diffusion and per-formance models.6 The selection term was margin-ally significant, but the coefficient and significanceof the aid variable remained unchanged relative tothe models reported. This result supported ourview that the actual receipt of aid constitute a spe-cific channel of influence for international policydiffusion beyond the general economic conditionsof countries.

Intercountry competition. We measured the de-gree to which countries were influenced by theircompetitors’ adoption behavior using countries’positions in the international trade network. Wemeasured intercountry competition on the basis ofa country pair’s similarities in patterns of trade.Conceptually, the variable reflected competitionowing to countries’ structural equivalence in theworld trade system and was calculated as the nor-malized correlation between the import and exportshares of two countries across trade partners, asused by Lee and Strang (2006). Intercountry com-

petition served as the weight for the influence thata prior adoption event in the other country exertedon a focal country. Annual trade data came fromthe United Nations COMTRADE database. We up-dated the measure of trade competition every fiveyears and updated prior adoption events annually,thus obtaining an annually updated variable.

Our measure of competition differs from others,developed by Guler, Guillen, and Macpherson(2002) and Polillo and Guillen (2005), that arebased on the concept of role equivalence, in that weused trade data at the country aggregate level in-stead of the product category level. (For a generaldiscussion of structural versus role equivalencesee, e.g., Mizruchi [1993].) Guler et al. (2002) sug-gested that their measure provides a more preciseapproximation of intercountry competition than dostructural equivalence measures, because it com-bines information about product categories and thedirection of trade, while structural equivalencemeasures only take into account competition foraccess to aggregate country-level markets. Thetrade-off is that reliable product-level reporting oftrade is relatively uncommon for many low-incomecountries, especially during the early years in-cluded in our study. Although our measure istherefore coarser-grained, it allowed us to include alarger number of the many less developed countriesin our risk set.

Intercountry learning. We measured two sourcesof contagion processes that map onto different di-mensions of proximity among countries. The firstmeasure is the number of recent adoption events ina country’s region; regions were as defined by theWorld Bank. These regional groupings are widelyused in reporting and analyses in the internationaleconomic policy community and approximate re-gional reference groups and data reporting as wellas geographic proximity. We focused on recentadopters because recent events have been shown tobe most salient and relevant in diffusion processes(Strang & Tuma, 1993).7 We controlled for the cu-mulative percentage of prior adopters in a region

6 We included population, GDP/capita, financial re-serves in months of exports, total debt/GDP, total domes-tic credit/GDP, trade/GDP, and dummies for world sys-tem position (van Rossem, 1996) and region (UN regions)in the selection equation. The pseudo-R2 of the selectionequation was .52.

7 We used a count of regional adoption events in pastyears in the reported analyses, performing several robust-ness checks on this specification. We tested alternativevariables with 3-, 5-, 10-, and 15-year windows. Using the3- and 5-year windows yielded the same pattern of re-sults as reported here. The direction of the coefficientremained consistent, but its statistical significancedropped for the 10- and 15-year windows. We also tested3-, 5-, 10-, and 15-year window variables in which theweight of adoption events exponentially decreased withtime. All four of these “time fade” variables yieldedresults highly consistent with the variable reported here,


and the total size of the regional risk set. The sec-ond measure used proximity in trade networks toweigh adoption events. Following the “cohesion intrade” measure developed by Guillen and col-leagues (Guler et al., 2002; Polillo & Guillen, 2005:1784), we captured intercountry learning processesby using bilateral trade data to measure the ratio ofimports and exports from the influencing countryto all imports and exports received by the influ-enced country annually. Annual trade data werefrom COMTRADE. Our measure weighted previousadoptions of a stock exchange by trade ties withadopters.

Normative emulation. We tested three indica-tors of normative world society mechanisms. First,we created a binary variable for a country beinghome to the headquarters of one or more interna-tional professional financial associations, whichare associations of public and private finance pro-fessionals and organizations, as listed in the Year-book of International Associations. Headquarterslocated in one of the generally more peripheralcountries in the risk set suggested that this countryhad greater exposure to international financial ex-pert communities and their normative discourse.We treated international professional financial as-sociations as providing proximate channels of in-fluence, similarly to how we treated concessionalaid. A host country’s economic and financial de-velopment and the global spread of developmentfinance as a field are likely to influence the localpresence of an international financial organization,and hence that presence cannot be treated as fullyexogenous. We therefore interpret our findings forthis variable strictly in terms of a proximate diffu-sion mechanism rather than as a broad causal fac-tor. Second, we used a country’s overall position inthe world system in 1993, as reported by van Ros-sem (1996). Van Rossem used a block-modelingapproach to collapse five types of intercountry ties(imports, exports, diplomatic, arms trade, troops)into four categories: core, semiperiphery, periphery1, and periphery 2. We used core as the base cate-gory and collapsed both periphery clusters into onebecause many periphery 2 members were depen-dent territories that were excluded from our analy-sis. Although world system position is likely tochange slowly, and 1993 fell in the middle of oursampling period, we also created an annual vari-able for a country’s position. We focused on theglobal trade network as the most relevant tie foreconomic policy and calculated a country’s “close-

ness centrality” in the world trade system fromannual input-output matrices of imports and ex-ports. Closeness centrality reflects an establishedpattern whereby countries closer to the core areconnected more directly to more others. Followingvan Rossem (1996: 512), we counted bilateral tradeas a tie if either exports to or imports from the othercountry amounted to at least 1 percent of a focalcountry’s GDP. We used annually standardizedcentrality measures to control for changes in thenumber of countries participating in global trade.

Control Variables

We controlled for the absolute size of a countrywith the natural logarithm of its population. Wealso controlled for gross national product (GNP) percapita (at current international prices) as a measureof a country’s wealth and availability of capital. Weused the natural logarithm of GNP per capita. Weused GDP growth to control for economic dyna-mism. Several measures of a country’s prior finan-cial development, balance of payments position,and economic openness were also included. Thenatural logarithm of domestic credit over GDP wasour proxy for financial development. Capital ac-count balance scaled by GDP can be seen as indic-ative of a country’s role in international capitalflows, and total trade over GDP (logged) captureshow integrated a country is in the global economy.We also included dummy variables for former So-viet countries and a time dummy for the 1990s tocontrol for potentially unique dynamics in thesecountries and this time period.8 In the models forexchange vibrancy, we additionally controlled forliberalization of access for foreign investors, usingthe data on the “official equity market liberaliza-tion date” collected by Bekaert et al. (2005).

Analyses

We used semiparametric Cox proportional haz-ards models with robust standard errors to estimate

supporting the importance attached to recent events inthe diffusion literature.

8 We performed robustness checks for alternative con-trols: urbanization as a proxy for industrial development,bank lending as an alternative proxy for financial devel-opment, gross capital formation as a proxy for develop-ment progress, inward FDI as a proxy for economic open-ness, and status as an “offshore financial center” asdesignated by the IMF (www.imf.org/external/np/ofca/ofca.asp) or the BIS (www.fsforum.org/publications/r_0004b.htm). The coefficient pattern and significance ofall substantive variables remained consistent with anyone of those variables. To maximize degrees of freedom,we did not include these potential controls in the esti-mations shown in this study.


countries’ “transition rates”—that is, the rates atwhich they moved from nonadopter to adopter.The unit of observation was the country-year. Timeto adoption was measured from January 1, 1980(the beginning of our sample period), or from thepoint at which a country first became independent,if this was after 1980. We replicated the analysesreported here using Cox models with two alterna-tive specifications for correlated errors within-country: clustering by country and shared frailtymodels. All substantive results were robust acrossthese specifications.

We used population-averaged generalized esti-mating equations (GEE; Zeger & Liang, 1986) withrobust standard errors to predict exchange vibrancyand specified all models with AR(1) temporal au-tocorrelation. We specified a logarithmic link func-tion (family negative binomial) for the number ofcompanies listed on an exchange and replicatedthis analysis using a measure that normalized thenumber of companies by country GDP. We speci-fied a logarithmic link function (family Gaussian)for market capitalization. We measured global in-stitutional variables at the time an exchange wascreated to account for conditions at the time ofadoption. We measured nation-level control vari-ables concurrently to account for changing nationalconditions for exchange vibrancy. The number ofobservations for our analyses of vibrancy was lim-ited to the 58 adopters. These analyses allowedinferences only about the vibrancy of exchangescreated between 1980 and 2005 and did not speakto broader economic performance differences be-tween adopters and nonadopters.

One methodological challenge in internationaldiffusion research, known as “Galton’s problem,” isto distinguish true cross-national influence causedby interdependence between countries from com-mon exogenous shocks or correlated country-levelfactors. Inadequate modeling of simultaneous inter-dependence tends to misestimate the relative im-portance of common shocks and between-countryprocesses (Anselin, 2006; Franzese & Hays, 2007,2008). This is a matter of both relative measure-ment and proper specification of spatial autocorre-lation. To address the common problem of under-estimating interdependence, Franzese and Hays(2007, 2008) proposed the use of spatial autoregres-sive (SAR) models based on specifying a proximitymatrix W (N � N countries in our case) on theoret-ical grounds and taking into account systematicand stochastic spatial components. We presentSAR models that replicate the analyses for ex-change performance using the Franzese and Haysapproach in addition to the GEE implementation.We note that our data structure is more complex

than the basic SAR case. Our data contain multiplespatial dimensions (region, trade cohesion, tradecompetition), and the two trade-based measures ofproximity are also time-varying. Although the gen-eral SAR approach has very recently been general-ized to this data structure in the form of multipa-rametric spatiotemporal autoregressive (m-STAR)models (Franzese, Hays, & Kachi, 2008), the reli-ability of this approach has not been evaluated.Spatial lag models may also generalize, but to ourknowledge they have not been tested for hazardrate models (Franzese, 2008 personal communica-tion), which would be desirable for reporting fullyparallel analyses of adoption and performance assuggested by our hypotheses. In light of these is-sues, we present separate spatial lag models of ex-change performance as a validation for the mainanalysis, estimating separate models for each spa-tial dimension. We used time-varying proximitymatrices for the two trade variables. The spatialautocorrelation parameter in these models repre-sents ongoing intercountry influence at time t, andthe coefficients of the context conditions at thetime of exchange creation can be interpreted as theeffect of founding conditions at t0. In an exploratorym-STAR replication of these analyses, we foundthat the three spatial dimensions were consis-tently jointly significant and the main substan-tive findings were confirmed. However, the mag-nitude of each dimension’s spatial lag coefficientvaried across specifications, and maximum-likeli-hood estimates for exchange liberalization couldnot be obtained without the omission of some vari-ables. This result points to limitations in our data(sample size, correlation among spatial dimen-sions) that are such that SAR models cannot wellattribute concurrent interdependence to the dimen-sions of region, trade cohesion, and trade competi-tion (Franzese & Hays, 2008: 40). Hence, we presentsingle-parameter SAR models as robustness checks.

RESULTS

Table 2 reports pooled summary descriptive sta-tistics and correlations for countries in the risk set.As Table 2 shows, correlations are generally low tomoderate. Table 3 shows estimates of adoptionmodels. We report models for only control vari-ables; variables corresponding to each hypothesis;and combined models with all predictors included.The estimates shown are based on a consistentsample of 75 at-risk countries for which data on allincluded variables were available. We replicatedthis analysis with varying numbers of countriesdepending on data availability (75–113 countries,869–1916 country-years). These analyses con-


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firmed the results shown in Table 3 and suggestedthat the findings were robust for different countrysets. Table 4 shows the results of analyses of thevibrancy of the exchange for the different modelingframeworks. Panel 4a shows models for the numberof companies listed on an exchange, and panel 4bshows models for market capitalization. We againshow models for a set of 52 adopting countries forwhich most variables were available and for 34countries for which we could obtain data for allvariables. Panel 4c shows an additional analysis ofequity market liberalization (that is, granting for-eigners unrestricted access to a market [Bekaert etal., 2005]). Only 4 of the 56 exchanges were for-mally liberalized from their inception (Lebanon,Namibia, Poland, and Romania), so that their sub-sequent opening to foreign investors can be seen asa proxy for the extent of implementation—full im-plementation of the neoliberal economic policylogic behind the global diffusion of exchanges inthe study period. Model 4c was specified as a GEEwith a probit link function (family binary) withAR(1) temporal autocorrelation. We used LeSage’s(1999) Baysean probit to implement the probit anal-ysis in a spatial autocorrelation framework.

Table 3 shows that a French colonial legacy re-duces the likelihood that a country creates an ex-change, and Table 4 suggests that exchanges cre-ated by these countries tend to have fewer listedcompanies. We found no link between the level ofProtestantism, the level of democracy, or the ideologyof a country’s rulers and the propensity to create anexchange. We did, however, find a tentative negativeassociation between Protestant religion and numberof companies listed, and conversely there were indi-cations of a positive relationship between Protestant-ism and subsequent market size. The pattern of re-sults for colonial legacy and to a lesser extent forProtestantism are consistent with Hypotheses 1a and1b, stating that a country’s prior institutional legacyinfluences both its likelihood of creating an exchangeand the exchange’s performance. In robustnesschecks not reported here, we found a mirror patternfor exchanges created by former British colonies, asexpected in view of prior research on historical insti-tutions. Note that even a more complete implemen-tation of a neoliberal policy through formal marketliberalization does not eradicate this effect of com-mon history.

Hypotheses 2a and 2b led us to expect that coer-cive policy diffusion, in the form of dependence onconcessional IMF and World Bank aid, would bepositively associated with the creation of an ex-change but negatively associated with the ex-change’s vibrancy. Table 3 confirms Hypothesis 2a,showing a robust, positive effect of aid on adoption.

Panel 4a shows support for Hypothesis 2b, espe-cially once spatial autocorrelation is taken into ac-count. The negative effect on the number of com-panies listed is consistent over all statisticallysignificant specifications. The receipt of conces-sional aid at the time of exchange creation alsoreduces market capitalization once spatial autocor-relation is modeled, at least in the smaller sampleof countries with complete data (panel 4b, models6, 9, 12).9 It does not affect liberalization, whichmay indicate that the coercive influence of interna-tional agencies is limited to the adoption of a spe-cific formal program. Overall, this pattern showsgood support for predictions associated with coer-cive mechanisms of diffusion.

Hypothesis 3a, relating to competitive diffusionmechanisms, is supported: the creation of ex-changes by role-equivalent others increases thechance of adoption (Table 3). Hypotheses 3b and 3cpresent alternative rationales that link competitivediffusion to vibrancy. We found a marginally positiveeffect of trade competition at the point of founding onmarket capitalization in the SAR implementation(panel 4b, models 6, 9, 12) and observed a moreconsistent effect of autocorrelation based on contem-porary trade competition in the models of marketcapitalization and liberalization. This pattern sug-gests that competitive adoption fosters policy imple-mentation more through continued rivalry thanthrough the initial imprinting process.

Table 3 shows that regional contagion processespromote the creation of exchanges, but trade ties donot. Table 4 further suggests that adoption influ-enced by regional contagion or the behavior oftrade partners at the outset increases the chance ofmore complete implementation of the policy logic(liberalization) and is associated with higher mar-ket capitalization and more listed companies insubsequent years. In addition, the significant auto-correlation parameter in all models using regionalor trade-cohesion-based proximity weights sup-ports the notion of ongoing influence betweencountries tied through either dimension. This patternlends general support to the learning view of peerdiffusion articulated in Hypotheses 4a and 4b.Contagion through regional and trade ties mayfacilitate substantive implementation of the inno-vation, counter to much of the received wisdom inneoinstitutional theory. The strong spatial autocor-relation effects suggest that this is a result of focal

9 In additional exploratory analyses, we also foundconcessional aid to reduce subsequent foreign portfolioinvestment flows. These analyses are available from theauthors upon request.


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adopters continuing to learn from nearby adoptersas much as of imprinting at founding (Davis &Greve, 1997; Greve, 1998). Proximate adopters mayalso enhance the performance of a focal country viainvestment spillovers (Henderson & Cockburn,1996).10

Hypotheses 5a and 5b predict that normative andstatus-based emulation processes, as a result ofworld system position and exposure to professionalcommunities, prompt policy adoption but hindersubsequent vibrancy. We found support for Hy-pothesis 5a: countries with international profes-sional finance associations and more central posi-tions in the world trade network were more likelyto create stock markets. However, contrary to Hy-pothesis 5b, adoption influenced by the presence offinance associations is positively associated withthe number of companies listed, market capitaliza-tion, and market liberalization, all of which associ-ations suggest that exposure to global professionalcommunities enhances policy implementation. Itappears that professional communities not onlyplay the normative function so clearly emphasizedin the neoinstitutional literature (DiMaggio & Pow-ell, 1983; Simmons et al., 2006), but also, in theinternational realm, provide non-state-based chan-nels for ongoing diffusion of practical knowledgeabout institutions that conform to their ideology.

Semiperipheral countries are less likely to createexchanges (compared to the baseline category ofthose at the core), but when they do, they tend tohave larger numbers of listed companies and to bemore likely to liberalize their exchanges. Peripheralcountries that adopt exchanges show a similar ef-fect. More generally, normative emulation by coun-

tries more connected to the core global elite ap-pears to go beyond purely ceremonial adoption andtoward more complete conformity with high-statusactors, because adoption is based on a deeperinternalization of normative policy logics diffus-ing from the core. As a result, policy makersneither seek to decouple formal practices fromcontrasting internal beliefs nor lack the capabil-ity to implement them.

DISCUSSION AND CONCLUSION

Two questions motivated this study: First, whatis the role of international institutional diffusionprocesses in the adoption of economic policies andthe organizational infrastructures associated withthem? And second, does institutionally triggeredadoption make for bad policy? That is, does interna-tional diffusion generally lead to “merely ceremo-nial” adoption of a policy? Most international insti-tutional research has thus far only studied adoptionand paid little attention to questions of operationalperformance. We studied the creation and vibrancy ofnational stock markets since the 1980s as a criticalcomponent of the organizational infrastructure formarket-based approaches to economic policy.

The answer to the first question is that institu-tional processes at the global level did indeed playan important role in diffusing stock markets tocountries at the periphery of the capitalist “worldsociety” during this period. We found evidence forinternational coercive, competitive, learning, and em-ulation processes. The answer to the second questionis perhaps more provocative. Only international de-velopment aid seemed to match the pattern expectedfor ceremonial adoption: IMF and World Bank aidwas a conduit for the creation of stock markets andwas associated with these markets being less vibrant.However, linkages to international finance expertsand regional and trade-based contagion appeared toenhance the robustness of exchange implementationand performance. These findings have implicationsfor international policy implementation and for insti-tutional research.

Implications for Policy Research

This study addresses two pragmatic policy-re-lated questions. The first is, Does it matter—are thestatistical effects we found of sufficient magnitudeto inform policy decisions? The second is, What isthe practical implication; what advice, howevertentative, would one give to those concerned withnational and international economic development?In regard to the first question, it should be notedthat our study was designed to draw inferences

10 From our high-level data, we cannot conclusivelyattribute regional and trade contagion to learning mech-anisms. The rationale for attributing learning processesto regional and trade cohesion is mainly based on theexisting literature reviewed above. A narrower testwould be to examine whether learning-based imitationtakes into account the performance of the observed prac-tice. The limitation for this approach in our sample oflate adopters is that the policy itself is already proven tobe successful, so that the relevant dimension of learningis not so much the generic success of the practice butaccess to proximate and fine-grained information. In ad-dition, learning can occur from the success or failure ofothers when it comes to implementation. Empirically,with our use of one-year time lags in our models, theperformance of another country’s exchange cannot beobserved by an adopter at the time of a its own decision.We tested if perhaps a prior adopter’s general economicperformance (growth in GDP or GDP/capita) improvedthe adoption or performance models, but like Lee andStrang (2006), we found no simple effect.


about the implementation effectiveness of formallyadopted practices. Hence, we are reluctant to spec-ulate about the counterfactual of whether, for ex-ample, countries that created more ceremonial ex-changes would be worse or better off economicallyhad they not created an exchange at all or pursuedalternative paths toward financial development.We performed one exploratory analysis of the dif-ference in foreign direct investment (FDI) inflowsbetween adopters and nonadopters in our risk setbut found no statistically significant difference netof the control variables included in this study. Thisis clearly an area for ongoing research (see, e.g.,Filer et al., 1999; Levine & Zervos, 1998).

As to the magnitude of differences within coun-tries that created exchanges, a 1 percent of GDPincrease in concessional aid increased the adoptionrate by 21 percent (Table 3, panel 3a, model 11) andreduced the expected number of firms listed byabout 4 per year over the following years (Table 4,panel 4a, model 3). It is important to bear in mind,though, that only 18 countries received conces-sional aid amounting to more than 5 percent of GDPat any time (6 of which created an exchange in theaftermath). The substantive significance of this effectcan also be understood in comparison to other pre-dictors. The adoption rate of former French colonieswas 92 percent lower, and each prior regional adop-tion event increased the adoption rate by 165 percentand subsequent market capitalization by 2 percent ofGDP per year. The presence of an international pro-fessional financial association increased the adoptionrate by 155 percent and the number of companieslisted by 5 and subsequent market capitalization by 3percent of GDP per year. We emphasize the relativesizes of these effects because of two caveats for a moreliteral interpretation: the size of each effect variesdepending on the specification and countries in-cluded in our models, and the interpretation of coef-ficients in time series models of exchange vibrancy isless straightforward than is interpretation in standardregression models.

What can national policy makers do to enhancethe effectiveness of formally adopted developmentpolicies? One implication of our findings is that itis difficult for countries to overcome historicalpath-dependent development paths, and the mostpromising path to development may lead throughthe selective adoption of policy innovations that fitan existing system (e.g., Biggart & Guillen, 1999). Asecond implication is that in order to reap expectedbenefits, local policy makers should address infor-mal as well as formal policy aspects, for example bysupporting the development of internationally con-nected professional elites and by engaging in mul-tilateral and regional initiatives. What can interna-

tional policy makers do to build more effectiveinstitutional frameworks in countries away fromthe core of the global political economy? Our anal-yses suggest that (1) efforts should be directed atbuilding indigenous expertise and linkages to poolsof international expert communities, because nor-mative acceptance and continued access to knowl-edge and resources after initial adoption are neces-sary for further development of markets and that (2)coercive mechanisms, such as program-contingentaid from international development agencies, maybe more successful when these external policy in-terventions are “robust”: where acceptance and im-plementation of the desired practice involves abroader set of actors domestically and within acountry’s peer group so that a self-sustaining dy-namic is more likely. The successful adoption ofspecific practices, such as financial markets, re-quires supporting changes throughout a country’sentire institutional matrix and its external web ofrelationships. It is because of these informal anddistributed parts of policy processes, that program-based and externally monitored interventions bydevelopment agencies may lead to ceremonialrather than expansive implementation. It is infor-mative in this regard to contrast our findings withthose of Brune, Garrett, and Kogut (2004), whofound that IMF concessional aid was associatedwith more extensive privatization programs interms of volume and valuation. The difference be-tween our largely negative findings and the studyby Brune et al. suggests that the “Washington con-sensus” approach to financial development is lim-ited by its focus on episodic formal state programs(privatization, exchange liberalization, exchangecreation) and fails to effectively foster the develop-ment of informal and distributed institutions thatinvolve the private sector (fewer companies listed,portion of economy governed by market). Buildinga robust institutional matrix requires the creation ofless formal and diverse structural linkages, as wellas attention from policy makers extending beyondconcessional lending episodes.

Implications for Neoinstitutional Research

This study sheds light on how institutionalmechanisms of diffusion relate to the subsequentperformance of a formally adopted practice or pol-icy. In crude neoinstitutional accounts, it has oftenbeen assumed that innovations adopted as a resultof institutional pressures are only symbolic andhence automatically less substantive, yet recent re-search has begun more nuanced examinations of theconditions under which formally adopted practicesremain solely ceremonial or are also substantively


implemented (Lounsbury, 2001; Westphal & Zajac,2001; Zelner et al., 2009). This line of research hasoften pointed to postadoption factors, such as ongo-ing monitoring of compliance, changing interests ofthe adopters, and degree of structural inertia. Ourstudy suggests that institutional mechanisms at thepoint of adoption may also influence subsequent vi-brancy. We found that coercive institutional pres-sures that trigger adoption are associated with moreceremonial, poorly performing exchanges, while peerinfluence and normative emulation enable more vi-brant exchange activity.

The pattern we observed at the country level isakin to imprinting at the time of founding for organ-izations (Stinchcombe, 1965). If new organizationsare influenced by the social context of their founding,new national practices and policies are influenced bytheir world society context. Subsequent developmentis partly path-dependent. The specifics of institu-tional diffusion processes, far from being only aboutimmediate legitimation, may be more relevant forlonger-term and substantive outcomes than is oftenpresumed. Our study is one of the first to examineand refine conventional expectations around institu-tional adoption in the global sphere. Our findingssuggest that more “microinstitutional” studies ofthe process of international policy diffusion andthe formal adoption of national policies and prac-tices are needed to further disentangle variousmechanism (see, e.g., Woods [2006] for a recentexample). In combination with high-level studiessuch as ours, such research may enhance the prac-tical relevance of neoinstitutional theory for inter-national policy makers.

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Klaus Weber ([email protected]) is an assis-tant professor in management and organizations at theKellogg School of Management at Northwestern Univer-sity. He received his Ph.D. from the University of Mich-igan, Ann Arbor. His research uses cultural, institutionaland sensemaking approaches to understand the intersec-tion between social movements and the economy, glob-alization, and environmental sustainability.

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APPENDIXVariable Descriptions

Variables Measurement Data Sources

Years since creation The date of adoption is the first day of trading ona new exchange. Excluded: options exchanges,exchanges without legal provision for tradingequities, countries where exchanges existedprior to independence.

Handbook of World Stock, Derivatives andCommodity Exchanges, 1992–2006,1992: Blackwell; 1998–99: InternationalFinancial Publishers; 2000 on:MondoVisione, online.

Companies listed Domestically incorporated companies listed onthe country’s stock exchanges at year end.Excludes bonds, investment companies, mutualfunds, and other collective investment vehicles.Excludes foreign companies.

World Development Indicators, 2007.Primary sources: Standard & Poor’s,Emerging Stock Markets Factbook.

Market capitalization Share price times the number of sharesoutstanding for all listed domestic companies,as percentage of GDP, at market prices incurrent $US.

World Development Indicators, 2007.Primary sources: Standard & Poor’s,Emerging Stock Markets Factbook; GNP:World Bank and OECD GDP estimates.

Exchange liberalized Formal (regulative) liberalization of equitymarkets, defined as “[giving] foreign investorsthe [unrestricted] opportunity to invest indomestic equity securities” (Baekert et al., 2005:4). Binary variable.

Dates as reported in Appendix A ofBaekert et al. (2005), supplemented foradditional countries from countrychronologies available online at http://www.duke.edu/�charvey/Country_risk/couindex.htm.

Population Natural logarithm of a country’s population. World Development Indicators, 2007.

GDP/capita GNP at current $US prices divided by midyearpopulation.

World Development Indicators, 2007.

GDP growth Percentage of annual growth in GDP. World Development Indicators, 2007.

Years 1990–99 Dummy variable coded 1 if year � 1990 and �2001, 0 otherwise.

Former Soviet bloc Countries include newly independent states of theformer Soviet Union, and its sphere ofinfluence, including members of the WarsawPact, Cuba, Mongolia, North Korea, andVietnam.

CIA World Factbook, own coding.

Trade openness Ratio is the sum of exports and imports of goodsand services measured as a share of GDP.


Capital account balance Total credits less debits for capital transfers andnonproduced nonfinancial assets divided byGDP. IMF balance of payments definition.


Domestic credit/GDP Domestic credit provided to the private sectordivided by GDP. Credit to private sectorincludes loans, purchases of nonequitysecurities, trade credits, and other repayableaccounts receivable.


Protestant population Percentage of total population in 1980 belongingto a Protestant church.

LaPorta et al. (1999), data appendix(primary sources: U.N., CIA).

French colony Country was part of the French colonial empire ora French protectorate prior to independence. Ifseveral colonial powers occupied a territory, wecoded the latest before full independence.

CIA World Factbook, 2006, own coding.

Level of democracy Country score on the democracy scale minus itsscore on the authoritarian scale in Polity IV.The ten-point scales are composites taking intoaccount constitutional and actual checks andbalances and access to political participation.

Polity IV 2004, database, University ofMaryland’s Center for InternationalDevelopment and Conflict Management:http://www.cidcm.umd.edu/polity/.

Left government Ideology (left, center, right) of country’s largestparty in government and its executive leader.Left ideology coded 1, right ideology �1, bothscales added.

Polity IV 2004.

IMF/WB concessional aid Disbursements of loans and credits at a concessionalrate by the IMF or World Bank. Concessionalloans are commonly linked to structural andpolicy reforms, unlike nonconcessional finance,which principally meets balance of paymentneeds. Divided by GDP, as above.

World Development Indicators (WorldBank global development finance data).


APPENDIXContinued

Variables Measurement Data Sources

Adoptions, competitionweights

Competition is the correlation between theaggregate import and export shares of each pairof countries computed for all trade partners.Country-level data; see Lee and Strang (2006).

COMTRADE, U.N. database.

Adoptions, region weights Number of adoption events in the region in thepast three years. Regions coded as defined bythe World Bank. Adoption events as above.


Regional cumulativeadoption

Percentage of countries with a stock exchange in aregion. Regions coded as defined by the WorldBank. Adoption events as above.


Regional risk set Number of countries in the regional risk set.Countries enter with independence and exitthrough dissolution or the creation of anexchange.


Adoptions, cohesion weights Trade cohesion is the ratio of imports from aninfluencing country to all imports received byan influenced country; see Polillo and Guillen(2005).

COMTRADE.

World system: [Position] Binary coding as core, semiperiphery, orperiphery based on van Rossem’s (1996: 515)categorization of trade and political ties. Latterincluded “periphery 1” and “periphery 2” invan Rossem. Cross-sectional variable for 1993.

Van Rossem (1996).

International professionalfinance association

Presence of one or more international professionalfinancial associations headquartered in acountry, e.g., World Federation of Exchanges,Association of Arab Finance Professionals, andFinancial Executives International.

Yearbook of International Associations,annual, 1980–2005, Union ofInternational Associations.

World system: Centrality Standardized closeness centrality in network ofinternational trade flows. Trade ties � volumeof imports � exports with another country as apercentage of focal country GDP if is � 1% ofGDP.

Trade Analysis System, “webstract”database, World Bank and IMF data,1980–2004.


policy as myth and ceremony? the global spread of stock...

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