Legal Framework for International Business

I. Theory

International relations scholars who view themselves as institutionalists have developed a rational actor, functionalist approach to the development of international law or institutions that is consistent with both realist and liberal tenets. Scholars such as Robert Keohane have argued that states create institutions out of self-interest in order to facilitate cooperation, to help them to achieve goals and aims which they could not do singly. Institutions, then, are not created so much to bind and limit states as to enable them to pursue their interests. Institutionalists combine realist and liberal perspectives on international law by focusing on the rational self-interest of states. The perspective taken by most institutionalists has become known as rationalism, which can be contrasted with social constructivism.

II. Actors

For institutionalists, states are still key actors in the international system, but so too are the institutions which they can create, which can come to have an autonomous agency of their own. Institutionalists recognize that states often create organizations and regimes in large part for self-interested reason: states create institutions that facilitate activities in which they wish to engage, such as trade, or that ease the risks of interstate negotiations, such as those over arms control. Informal institutions and regimes can become more deeply institutionalized and formalized over time, eventually resulting in a formal international organization. Classic examples of this are the General Agreement on Tariffs and Trade (GATT), which developed into the more formalized World Trade Organization (WTO) in 1995, or the Conference for Security and Cooperation in Europe (CSCE) which eventually became the Organization for Security and Cooperation in Europe (OSCE).

Institutionalists argue that because institutions or regimes facilitate transparency, reduce transactions costs, and reduce the risks of cheating, states will create rules and abide by them. International institutions foster iterated interactions among states, thus increasing what game theorists refer to as the shadow of the future. This simply means that, when states interact repeatedly with one another in institutions, they begin to take a long-term rather than short-term perspective on their relationships. This encourages greater levels of reciprocity, leading to higher levels of cooperation and stability.
Many institutionalists will also argue that once created, institutions develop an identity and power of their own, constraining state behavior even where states may wish to deviate from agreed rules. Path dependency ensures that institutions are easier to maintain than they are to create. Institutions and regimes, once created, may have more enduring power than states initially anticipate. They may be set up initially because of the self-interested concerns of states, but because of their ability to reduce transaction cost, increase transparency, and enable regularity and stability, they can come to constrain state behavior even well after they cease to serve state interests. Regimes therefore serve not just the needs of the powerful but also the rational calculations of all states. Institutionalists argue that states are usually more concerned with achieving absolute gains than relative gains, and thus will value the role that institutions play in facilitating collective action and cooperation, leading all states to be better off over time.