Institutional theory is a theory on the deeper and more resilient aspects of social structure. It considers the processes by which structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior. Different components of institutional theory explain how these elements are created, diffused, adopted, and adapted over space and time; and how they fall into decline and disuse.
In defining institutions, according to William Richard Scott (1995, 235), there is "no single and universally agreed definition of an ’institution’ in the institutional school of thought." Scott (1995:33, 2001:48) asserts that:
Institutions are social structures that have attained a high degree of resilience. [They] are composed of cultural-cognitive, normative, and regulative elements that, together with associated activities and resources, provide stability and meaning to social life. Institutions are transmitted by various types of carriers, including symbolic systems, relational systems, routines, and artifacts. Institutions operate at different levels of jurisdiction, from the world system to localized interpersonal relationships. Institutions by definition connote stability but are subject to change processes, both incremental and discontinuous.
According to Kraft's Public Policy (2007): Institutional Theory is "Policy-making that emphasizes the formal and legal aspects of government structures."
Institutional theory, topics
Trends in institutional theory
There are two dominant trends in institutional theory:
- Old Institutionalism
- New institutionalism
Powell and DiMaggio (1991) define an emerging perspective in organization theory and sociology, which they term the 'new institutionalism', as rejecting the rational-actor models of Classical economics. Instead, it seeks cognitive and cultural explanations of social and organizational phenomena by considering the properties of supra-individual units of analysis that cannot be reduced to aggregations or direct consequences of individuals’ attributes or motives.
Scott (1995) indicates that, in order to survive, organisations must conform to the rules and belief systems prevailing in the environment (DiMaggio and Powell, 1983; Meyer and Rowan, 1977), because institutional isomorphism, both structural and procedural, will earn the organisation legitimacy (Dacin, 1997; Deephouse, 1996; Suchman, 1995). For instance, multinational corporations (MNCs) operating in different countries with varying institutional environments will face diverse pressures. Some of those pressures in host and home institutional environments are testified to exert fundamental influences on competitive strategy (Martinsons, 1993; Porter, 1990) and human resource management (HRM) practices (Rosenzweig and Singh, 1991; Zaheer, 1995). Non-governmental organisations (NGOs) and social organizations can also be susceptible to isomorphic pressures.
Challenges in different types of economies
There is substantial evidence that firms in different types of economies react differently to similar challenges (Knetter, 1989). Social, economic, and political factors constitute an institutional structure of a particular environment which provides firms with advantages for engaging in specific types of activities there. Businesses tend to perform more efficiently if they receive the institutional support.
Theory of institutional deficiencies
Martinsons (1998) developed a theory of institutional deficiencies (TIDE) suggesting that relationship-based commerce will prevail where rule-based markets can not flourish due to institutional deficiencies. Martinsons (2008) extends TIDE to show how the development of relationship-based e-commerce in China has resulted from that country's lack of trustworthy and enforceable set of rules for doing business. His theory suggests that factors such as personal connections (networking in the United States, guanxi in China, blat in Russia, etc.), informal information, and blurred business-government relations (which also encourage corruption) will constrain the transition from the physical marketplace to online marketspaces.
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- Scott, W. Richard 2004. “Institutional theory.” in Encyclopedia of Social Theory, George Ritzer, ed. Thousand Oaks, CA: Sage. Pp. 408-14
- Scott, W. Richard (2008) Institutions and Organizations: Ideas and Interests. Los Angeles, CA: Sage Publications.
- Kraft's Public Policy: Kraft, Micahel E & Furlong, Scott R Public Policy: politics, analysis, and alternatives (2nd ed). CQ; London : Eurospan [distributor], Washington, D.C, 2007.
- DiMaggio, Paul J. and Powell, Walter W. (1991)‘Introduction’. In P. J. DiMaggio and W. Powell (eds.) ‘The New Institutionalism and Organizational Analysis’, pp. 1–38. Chicago: University of Chicago Press.
- Scott, W. Richard 1995. Institutions and Organizations. Thousand Oaks, CA: Sage.
- DiMaggio, Paul J., and Walter W. Powell 1983. “The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields,” American Sociological Review 48:147-60.
- Meyer, John W. and Rowan, Brian (1977) ‘Institutionalized organizations: Formal structure as myth and ceremony’. American journal of sociology 83: 340–363.
- Suchman, Mark C. 1995. “Localism and globalism in institutional analysis: The emergence of contractual norms in venture finance.” In The Institutional Construction of Organizations: International and Longitudinal Studies, 39-63, W. Richard Scott, and Søren Christensen, ed. Thousand Oaks, CA: Sage.
- Rosenzweig, P . and J. Singh. 1991. Organizational environments and the multinational enterprise. Academy of Management Review,16(2):340-361