The
New Institutionalism in Strategic Management
Advances in Strategic
Management, Vol. 17
The
recent collapse of the huge energy-trading company Enron has prompted a cry
rarely heard in the American economy: to increase regulation.
All the more rare, this call is coming from both consumers and
employees, who fear the power of large corporations, as well as from the
corporations themselves, who fear that an erosion in the trust and confidence
of employees, investors, customers and suppliers will cripple their capacity to
do business. The effect of the Enron
shock is to remind us of something that strategists, managers, and designers of
organizations frequently ignore—that the economy rests on an institutional
bedrock. Particularly in the United
States, where fundamental institutions have been so effective and so stable for
so long, it is easy to forget that the state, along with the various
organizations and social norms that promote trust and confidence in economic
transactions, have a critical influence on which organizations and strategies
will succeed.
This volume examines
new-institutional theory, which takes as its explicit focus the influences that
were hidden, or taken for granted, in the Enron debacle. The core claim of this theory is that actors
pursue their interests within institutional constraints, such as the
regulations that constrained (or were presumed to constrain) Enron. This idea is the basis of a growing,
pan-disciplinary literature that seeks to explain the conduct and performance
of individuals, organizations, and states. As the foundational theory about the
nature and operation of institutions has been established, and as evidence on
the operation and inter-relationship of alternative institutional forms has
grown, the tools available for constructing new institutional explanations have
been established. The accumulated research has reached a critical mass that
creates numerous theoretical and empirical opportunities.
We
begin this introductory chapter by addressing the question “why now?” for the
new institutionalism in strategy. We
identify a number of economic developments and scholarly advances that have
helped to make clear the significance of institutions for strategic management. We then explain just what we mean by
institutions, with a quick survey of the most relevant literature. In this survey we give explicit attention to
the fact that there are a number of variants of new-institutional theory, which
tend to emphasize different types of institutions. Our response to this variety is to present a classification of
institutional forms, and identify the literatures that have focused on
each. Our own view is that a complete
theory of institutions must be comprehensive in its definition of institutions,
but also explicit about differences among institutional forms and
interdependencies between them. In the
third section of this introduction we identify a number of pressing questions
for new-institutional theory. By
applying the chapters of this volume to those questions, we show that research
in strategic management can play an important role in the development of
new-institutional theory, particularly by helping to explain how organizations
affect institutions of other types. In
the fourth and final section, we make the literature on strategic management
the focus, and describe how new-institutional theory can help solve pressing
questions in that literature.
Why the Growing Interest
in the New Institutionalism in Strategy?
Until recently, the idea of
explicitly considering institutions to explain the content and effectiveness of
organizational strategies would have seemed a little like building theories of
strategy based on the fact that the human subjects of the organizations we
study breathe air. Institutions, like
air, probably make a difference, but why, given their constancy and
pervasiveness, should we invest in understanding that difference? The naiveté of this position has been made
clear by a number of recent developments in the international economy, and in
the scholarly field of strategy.
Transition from state socialism.
The most significant of these developments is the transition from state
socialism among countries of the former Soviet-bloc and China. The theme of the somewhat crude analysis of
the early days of this transition was that capitalist economies were more
productive than state-socialist ones; the prescription was for the latter
economies to adopt features of the former.
The result of these early changes was a range of unintended consequences
(Murphy, Shleifer & Vishny, 1992;
Nee, 1992; Stark, 1996). These
surprise outcomes of piecemeal changes indicated something under-appreciated
about the economies in question—laws, organizations, and norms operated
together in a complex fashion.
Economies that were made to be similar on a subset of these might yet
exhibit very different performance outcomes.
As
Spicer and Pyle (this volume) show, attempts to create western-style markets in
formerly state-socialist economies have been crippled by malfeasance on the
part of some organizations, and the corresponding distrust that developed among
the public. Simply, these problems
arose because the designers of new institutions and organizations paid insufficient
attention to the complex interdependence of the institutions that facilitate
exchange in “free” markets. For
example, Spicer and Pyle document the failure of the market for household
savings in Russia. On the surface, that
market looks something like markets in the United States—indeed some of the
most prominent American financial organizations tried to extend their
operations to Russia. However,
important institutional constraints that in the U.S. are provided by the state
(regulation), organizations (auditing and rating of investments) and civil
society (public awareness of the operation and risks of financial markets) were
missing in Russia. The patchwork
institutional framework that resulted enabled some organizational strategies
and frustrated others.
Internationalization of business. Another development that points to the
strategic significance of institutions is the recent increase in international
trade, as well as the multinational operations of specific organizations. To be fair, international business is the
one area where there is a long intellectual history of considering the impact
of institutions on strategy. For
example, concerns surrounding differences in national cultures (Hofstede 1980),
and the risk of expropriation of capital by a host nation (Teece 1981), enter
into prescriptions for operating a business internationally. Even in this area, however, there is rapid
growth in attention to institutions.
The significance of the international context for highlighting the role
of institutions is that cross-national comparisons highlight institutional
differences that may be taken for granted within a country.
Henisz and Delios (this volume)
consider how multinational organizations can learn, and exploit their knowledge
of institutions in the countries in which they operate. This is an integration of institutional
forms that have been considered separately.
There is a substantial literature that measures the legal and social
environment for doing business in a given country (e.g. Henisz, 2000). And multinational organization has been
characterized as an institutional mechanism for overcoming business risks, or
other institutional shortcomings that exist in some countries. The learning theory that Henisz and Delios
present forges a strategic link between those two literatures. Their arguments suggest patterns of design
and expansion that can help multinationals succeed across a range of
institutional environments.
Technological development. The interdependence between institutions
and technology has been prominent in the new institutionalism. For example, North (1993) claims that
technological advance by organizations forms the impetus for changing
institutions—as new technologies develop, new institutions are required to
effectively exploit them. Sometimes,
changing technology highlights the significance of institutions because it
exposes gaps in the institutional structure.
For example, advances in medical transplant technology have created a
market for the exchange of human organs, and exposed the unpreparedness of the
law, the medical profession, and even the value-system of our culture, to
govern that market (Healy, 2002).
In
other instances, technological development makes institutions salient by
setting off an episode of institutional creation or change. This is illustrated by Dowell, Swaminathan
and Wade (this volume). They examine
the role of social movements to create institutions around the technology of
high definition television (HDTV). The
development of HDTV created an interest in changing institutions—for example
the rights over the spectrum related to television broadcasts, and the standard
that HDTV would follow in the U.S.
Further, organizations that had previously been unsuccessful in their
campaign to influence spectrum allocation were able to harness the interest
associated with HDTV to affect institutional change in their favor. Dowell, Swaminathan and Wade’s account of
this campaign highlights the strategic use of cultural concepts (framing) by
the champions of various HDTV schemes.
Compromise and manipulation of existing
institutions. The attention generated by the Enron collapse
is not the result of new technology, internationalization, or the shift of
political regimes. Instead, it emerges
because institutions which were assumed to be stable and reliable were
undermined, or otherwise shown to be lacking.
For example, the failure of Enron’s auditors, Arthur Andersen, to
identify questionable financial reporting practices is a violation of the role
that auditors are expected to play in the institutional framework of western
capitalism. Audit firms are in the
business of selling surety. They vouch
for the compliance by the auditee to familiar and accepted accounting
principles, and thus allow investors to more reliably value the company
(Strange, 1996). The objectivity of the
auditor is key to providing this surety, and many of the professional policies
of accountants—which include rules against accepting gifts from clients, and
rules prohibiting over-reliance by the auditor on the fees of any single
client--are designed to maintain objectivity.
The very necessity of these rules points to a weak spot in the
institutional framework. If an auditor
could be influenced by the auditee, and convinced or deceived into
inappropriately validating improper accounting practices, then stakeholders of
many types—banks, shareholders, employees, customers—might be convinced to
over-invest in the auditee.
The point of this is not to
criticize a particular corporation, or auditor, but to illustrate that
sometimes institutions, even those that are as venerable as auditing, are
malleable and at risk of influence by their subject organizations. This malleability creates strategic
opportunities for organizations. And although
collusion with or deception of an auditor is illegitimate (although potentially
profitable), other forms of institutional influence are more acceptable. Specifically, there is a growing attention
to the possibility that organizations may influence for good or ill the
institutions provided by the state, such as laws and regulations (Baron, 2001;
Murphy, Shleifer & Vishny, 1993). In this volume, Holburn and Vanden Bergh,
as well as De Figueiredo and de Figueiredo, build on this idea, using strikingly
different methodologies. Holburn and
Vanden Bergh present a formal model that helps to identify where organizations
should aim their lobbying efforts. De
Figueiredo and de Figueiredo use an experimental methodology to examine the
question “how good are strategists at recognizing the opportunity to influence
the state?” The clear significance of
these questions, and the diversity of the research methods employed, point to
the great opportunities for the organizations that make institutions the focus
of their strategies, and the scholars that study them.
Collapse of the tyranny of the here
and now. The new institutionalism has always
emphasized historical research.
Classics in the field examine economic and organizational outcomes from
the deep past (North & Weingast, 1989; Greif, 1994). The willingness to embrace history derives
from two core precepts of new-institutional theory. The first is that core elements of the theory are timeless. The behavioral assumptions of the new
institutionalism amount to bounded rationality. Institutions, as we will describe, are simply the rules that
constrain the interest-seeking behavior of actors. The manner in which institutions operate is basically the same,
whether the institutions are the self-policing policies of 11th
century traders on the Mediterranean, or 21st century tax laws in
Munich. Therefore, old institutions are understood to be as valuable as new
ones for understanding economic performance—perhaps even more valuable, because
historical institutions can sometimes be studied with fuller information and
more objectivity. The second element of
new-institutional theory that leads to historical research is the path
dependence of institutions. We don’t
have complete theories of institutional change, but one thing that seems
certain is that the options for new institutions derive in a large way from
pre-existing institutions (North, 1990).
So, even forward-looking analysts must understand old institutions, as
they are the roots of future institutions.
The treatment of history in the new
institutionalism stands in sharp contrast to the normal practice in research on
business strategy. Strategy often
suffers from a tyranny of the here and now, a desire to celebrate contemporary
phenomena and slight historical ones.1 This ahistoricism is one reason why research in strategy
struggles for social-scientific legitimacy.
By reveling in current affairs, and de-emphasizing their underpinnings in
the past, strategy scholarship often undermines its own claims to develop
explanations that transcend their contemporary context. In other words, the field of strategy
struggles to develop good theory, because it downplays temporal transitivity
and generalizability.
Clay
and Strauss (this volume) illustrate these arguments. They provide a new institutional analysis of the phenomenon of
Internet commerce. The treatment of
this phenomenon in strategic management is a classic example of the cost of
ahistoricism. The fashion (fortunately,
not universal) in strategy has been to approach Internet commerce as “new”—it
was a new economy, operated by new organizational forms, requiring new
strategies.2 This approach
has yielded a set of thoroughly forgettable scholarship, which has not endured
even the recent downturn in the technology sector, let alone provided a
theoretical basis to guide organizations that attempt to transact in evolving
internet-related markets. In contrast,
Clay and Strauss begin by identifying the historical precedents for the
contemporary struggles of those who transact over the Internet. They identify an analog to the challenges of
Internet commerce in Richard Sears’ attempts to conduct business by mail in the
late nineteenth century. Sears and his
customers had the problem of building trust with strangers—for their
transaction to be successful the customers needed to be confident that Sears
would deliver high-quality goods, and Sears had to be confident that the
customers would pay what they owed.
Similar challenges arose for credit card providers and users in the
mid-twentieth century. These problems
are strikingly similar to those faced by sellers and buyers over the
internet. As Clay and Strauss argue,
potential solutions for contemporary internet businesses are similar to those
employed by nineteenth century mail-order businesses and 1950s credit card
issuers—institutions can modify the transaction so that both parties can
approach it with confidence.
There are a number of variants of
“new-institutional theory” (Fligstein, 1997), so it is important to be clear
just what we mean by institutions, and how we understand them to operate. We’ll begin with this statement, which for
us explains action in the new institutionalism: Actors pursue their interests by
making choices within institutional constraints. This simple statement contains three elements that must be
explained: who are the actors, how do they make choices, and what are the
institutional constraints?
The actors in the new institutionalism
are individuals, organizations, or states.
Each of these classes contains components that pursue interests, are
subject to institutional constraints, and which supply institutional
constraints that affect other actors.
For researchers of strategic management, the idea that an organization
can be, like an individual, an actor that pursues an interest, is
uncontroversial. Without trivializing
the fact that organizations have numerous and diverse stakeholders, the field
of strategic management has shown repeatedly that there is utility in the
simplification of organizations as actors.
For example, in game theoretic treatments of entry deterrence, or models
of competitive dynamics, an organization is an actor that can make “moves.”
Likewise, it is central to the field that organizations have interests
(otherwise, to what end would they have strategies?). New institutional arguments tend to be agnostic as to what the
interests of individuals or organizations are, so the familiar candidates from
strategic management—profit, market share, growth of employment, survival—are
all feasible.
It may be more of a stretch to think
of states as actors. This position
reflects a recent trend in political science to characterize states as sets of
organizations (ministries and agencies), which are like other organizations in
that they are populated with individuals (bureaucrats and politicians) who use
the state to achieve their goals (a paycheck, re-election; control over many
subordinates, furtherance of an ideological value). This is not to say that the state is just another organization—it
has capabilities that other organizations can’t match, such as the legitimate
right to employ violence. The key,
however, is that states represent interests, and take action to achieve those
interests. We’ll employ the typical
definition of the state in the new institutionalism, as an organizational actor
which, at a minimum, attempts to maintain its authority by exchanging justice
and order for revenue and power (North, 1981; Skocpol, 1985).
Each class of actors produces its
own form of institutional constraint: individuals produce norms
(private-decentralized institutions in the classification we present below),
organizations produce their rules (private-centralized institutions), and
states produce laws and regulations (public-centralized institutions). In this sense, it can be said that actors
lead a double life in the new institutionalism, pursuing their own interests
within constraints, while producing constraints for other actors. The interplay between the actors can best be
understood as a three-layered hierarchy, with states superordinate to
organizations, which are superordinate to individuals (Williamson, 1994; Nee
& Ingram 1998). States constrain
organizations and individuals that are their subjects, and organizations
constrain the individuals that are their participants. There is also upward influence in the
hierarchy, as actors try to affect the institutions that constrain them.
Finally, we introduce a fourth
relevant class, which we’ll call civil society. It would be incorrect to call civil society an actor—it doesn’t
have identifiable interests, and it is incapable of forming or pursuing a
strategy. Yet, in the catholic version
of new institutionalism that we are developing, civil society has a role as the
source of a fourth type of institution—culture (public-decentralized). As we describe below, culture constrains
action in a manner that is comparable to other institutional forms. Culture also influences those forms, as when
it is used to create favor for one legal option or governance form over another
(Dowell, Swaminathan and Wade, this volume; Henisz and Delios, this volume).
The
new institutionalism treats actors as rational in the basic sense of making
choices that further their interests, but distinguishes itself from
neo-classical assumptions of rationality by attending to “cognitive costs” of
decision making. The pursuit of
benefits is limited by individuals’ capacity to retain and process information;
in other words, individuals are boundedly rational (Coase 1937, Simon
1957). Further, information is often
costly (Barzel 1989). These two factors
create transactions costs – the costs of writing and enforcing contracts –
because individuals cannot foresee at the time of writing all contingencies
that might be relevant nor can they observe all of the actions of their
partners. And transaction costs give
rise to the possibility of opportunism (Williamson 1975, 1985).
In
the new institutionalism, a key implication of opportunism is the problem of
credible commitment. It is illustrated
by the dilemma faced by a kidnap victim whose kidnapper has a change of heart
and decides to set her free (Schelling, 1960).
The victim gladly promises not to reveal the kidnapper to the
authorities in exchange for her freedom.
However, the kidnapper realizes that once the victim is free she will
have no incentive to keep her promise, and reluctantly decides the victim must
be killed. More generally, the problem
of credible commitment is faced by any party to an exchange that wants to
promise in the present to do something in the future that may not be in their
interests to do when the future actually arrives. The problem is endemic because in almost every exchange there is
at least a moment where one of the parties has control over all or most of the
goods, and must decide whether to follow through on the agreed upon bargain, or
make a grab for more. It is clearly
present, for example, in Richard Sears’ attempt to get farmers to send him
money for goods that he promised to subsequently send to them (Clay and
Strauss, this volume).
The
problem of credible commitment illustrates the positive role that institutions
can play to smooth exchange (and by extension, to resolve all sorts of
collective-action problems). Ideally,
an institution can re-arrange the incentives of the parties of an exchange to
allow them to make credible commitments.
For example, what if it was possible for the kidnapper’s victim to
somehow post a bond that she would forfeit if she revealed the kidnapper’s
identity? And what if the farmer’s
friends maintained a norm to punish any vendor that mistreated any one of them,
such that it was in Sears’ interest to follow through on the bargain once he
had the farmer’s money? As we’ll see, these examples do not describe all of the
ways that institutions can affect economic performance of individuals,
organizations and states. However,
solving problems of credible commitment is one of the most positive functions
of institutions, and one of the most significant for business strategy.
We employ an
extension of the classification system for institutions that was first
introduced in Ingram and Clay (2000).
That system classifies institutions based on their scope (public or
private), and how are they made and enforced (in centralized or decentralized
fashion). The scope dimension defines
which actors are subject to the institution.
Public institutions apply without discrimination to all actors of a
type. It is impossible to opt in or out
of a public institution. Private
institutions apply only to actors that are part of some group or organization,
so actors have some influence over the institutions that affect them as long as
they can choose which associations they are part of. The centralized-decentralized dimension refers to whether or not
there are designated functionaries charged with creating and enforcing the
institution. Centralized institutions
rely on such functionaries, for example, laws may be made by legislatures and
enforced by the police. The legislature
and police are “third parties” in that they make and enforce the laws, even if
they are not directly affected by their violation. Decentralized institutions, on the other hand, emerge from
unorganized social interaction, and really on diffuse individuals (often those
directly affected) to punish institutional violations. These two dimensions create four
institutional forms. We describe each
form, as well as research on the form that is relevant for strategic
management. Figure 1 portrays these
basic institutional forms, and summarizes key information about each.
|
|
Decentralized |
Centralized |
|
Private |
Archetypal
form:
norms
|
Archetypal
form:
rules
|
|
Public |
Archetypal
form:
culture
|
Archetypal
form:
laws
|
Public-Centralized Institutions
There are at least
five ways that the public institutions provided by the state can be understood
to affect its choices, and those of organizations and individuals. The first is
particularly relevant to strategic management.
The state may smooth exchange between its subjects by providing
institutions that allow them to make credible commitments. This can be achieved
if the state provides a legal system to protect property rights, decrease
transaction costs, and enforce contracts (North, 1990). This function is
particularly vital in modern economies, in which specialization and the
division of labor give rise to the need for sustaining complex exchanges over
time, across space, and between strangers, creating the need for trust between
disconnected actors. An effective institutional
framework facilitates this trust by penalizing actors who break the rules of
exchange, for example, by applying legal sanctions to actors who violate
contracts.
There
is quantitative evidence of the role of public-centralized institutions for
enabling credible commitments. Some
studies exploit changes in laws governing specific industries to show that
increased legal constraint on organizations causes them to flourish. Studies of populations as diverse as U.S.
health maintenance organizations and telephone companies, Toronto day-care centers,
Niagara Falls hotels, and Singapore banks have demonstrated that their failure
is reduced by increasing government involvement in monitoring, certifying,
authorizing and endorsing their activities (Wholey et al 1992, Barnett &
Carroll 1993, Baum & Oliver 1992, Ingram & Inman 1996, Carroll &
Teo 1998). Such government involvement
can also affect the pattern of competition between incumbent firms and
potential entrants, as demonstrated in Calabrese et al’s (2000) study of the
Canadian biotechnology industry. In the
human therapeutics/diagnostics sectors, where FDA regulation is most strict,
new products take a decade to come to market and short technological leads can
become entrenched as regulators demand evidence of superior efficacy for
later-to-market drugs. Incumbent firms’ innovative activity suppresses new
entry significantly more in human subsectors than in subsectors characterized
by less onerous regulatory scrutiny. The effects of broader changes in public
institutions are seen in Ingram & Simons’ (2000) analysis of the effect of
the formation of the Israeli State on the failure rates of workers’
cooperatives in many industries. The
transition from the weak British Mandate for Palestine to the strong Israeli
State caused a radical improvement in the institutional support for credible
commitment, and a corresponding sixty-percent decrease in organizational
failure rates.
The
second key feature of public-centralized institutions is whether or not the
state can credibly commit to not subsidize subject organizations when they
struggle. The recent transitions from
state socialism have demonstrated that absent such a commitment, entrepreneurs
will direct their energies towards “holding up” the state treasury rather than
to producing economic value. As Stark
& Bruszt (1998:119) put it, when the state hears organizations’ “siren cry,
‘Give me a hand, give me your hand,’ it must be bound to respond not simply
that it should not, or that it will not, but that it cannot.”
The
third key feature of public institutions is an outgrowth of the first two. A state strong enough to guarantee the
property rights of its subjects, and to resist their calls for subsidies, is
also strong enough to appropriate their wealth. Unless the state can credibly commit against such appropriations,
its subjects’ incentives for productive economic activity will be greatly
curtailed. Evans (1995) uses the term “predatory” to describe states that
exploit their subjects for short-term gain.
He cites Zaire of the Mobutu regime (1965 to the present) as an
archetype. Mobutu and his state cronies
“systematically looted Zaire’s vast deposits of copper, cobalt, and diamonds,
extracting vast personal fortunes…In return for their taxes, Zairians could not
even count on their government to provide minimal infrastructure (43).” The gains from this strategy to the state,
and those who dominate it, are, however, short lived. Predation on the part of the state has the effect of discouraging
productive activities by organizations of all types—why invest capital or labor
if the state is likely to appropriate the rewards of this activity? This effect
is apparent in the deceleration of the Zairian economy—GNP per capita declined
2 percent per year over the first twenty-five years of Mobutu’s rule. Eventually, there will be little left to
plunder.
A
classic illustration of the cost of a predatory state, and the institutional
solution that eliminated that cost, is North & Weingast’s (1989) account of
the Stuarts’ impact on the economy of 17th century England. After coming to the Crown in 1612, the
Stuarts exploited their subjects in numerous ways: they sold monopolies (at the
expense of industry incumbents and potential entrants), they sold special dispensations
from laws, and even committed outright theft, as in 1640 when they seized
£130,000 that private merchants had placed in the Tower of London for
safekeeping. These abuses led
eventually to the Glorious Revolution of 1688, which resulted in numerous
institutional changes to reduce the Crown’s capacity to act independently of
Parliament and the courts. This loss of
Crown autonomy had, however, positive implications in that it enabled the Crown
to make a credible commitment not to appropriate subjects’ wealth. The value of this commitment can be seen,
for example, in the dramatic increase in the Stuarts’ capacity to borrow
funds. More generally, a national
constitution, with its delineation of enduring limits to government power, may
be interpreted as an attempt by a state to commit not to become predatory over
time (Weingast 1993).
Public-centralized
institutions provided by the state are not always part of a grand effort to
facilitate the credible commitments of actors.
Sometimes they influence distributional battles over zero-sum interests,
which is their fourth role (Knight 1992).
These may be the battles between suppliers and consumers, as shown in
analyses of the effects of regulatory policy on railroad foundings in early
Massachussetts (Dobbin & Dowd 1997) or interstate trucking firm failures in
the 1980s (Silverman, Nickerson & Freeman 1997). Or they may be the battles between rival organizational forms
without apparent efficiency differences, as in the case of thrift-savings
organizations that fought as much in the legislative arena as in the market
(Haveman & Rao 1997), or national coffee roasters in the U.S., that derived
a competitive advantage over regional roasters through an international treaty
(Bates 1997). Evans (1995) detailed numerous ways that states act to create
economic transformations, for example, by lending money or taking
responsibility for high-risk activities such as research and development. Such
efforts are overwhelmingly selective, aimed at promoting particular sectors
over others. Even efforts that are
Private-Centralized Institutions
The most ubiquitous
role of private-centralized institutions is to internalize transactions in an
organization. In his seminal paper,
Coase (1937) addressed the question of why organizations exist. His central insight was that the governance
of exchange within organizations as opposed to markets depended on the cost of
transacting in each type of institution.
In more recent work, Williamson (1985) and others have systematically
investigated the effect of information, opportunism, and asset specificity on
the governance of exchange, concluding that in some transaction environments,
exchange is more efficient within an organization than the market. Further, the prevailing public-centralized
institutions influence the attractiveness of various governance arrangements
(Nee 1992). Ficker (1999) illustrates
the relationship between the environment of public-centralized institutions and
other factors, and the market/organization trade-off in the evolution of the
Mexican Central Railroad (MCR). The MCR
was founded in 1880 into “a country characterized by economic backwardness and
an incipient and precarious institutional framework.” The company initially pursued a strategy of building main lines
and depending on market transactions with railroads and other types of
transportation organizations to supply freight. These market transactions did not materialize, however, due to
the weak Mexican infrastructure, and the difficulties of organizational and
technological coordination. In response
to this failing of the market, the MCR switched to a strategy of
internalization, extending its trunk lines and building branch lines to supply
itself with freight.
Private-centralized
institutions can also facilitate exchange between organizations. This can occur when organizations are part
of a “super-organization” with its own rules and policies. An example is the diamond industry. Bernstein
(1992) examines the rules that govern transactions in that industry, which rely
on private-centralized institutions, and not the law. Members of a diamond bourse are governed by formal written rules
that represent the codification of and are supported by industry norms. Bernstein finds that use of arbitration
panels and mandatory pre-arbitration conciliation is a response to members’
need for speed, secrecy, and specialized knowledge of the industry. The industry enforces arbitration decisions
with the threat of suspension of membership in the diamond bourse. In the case of noncompliance, a bourse faxes
the individual’s picture to all other diamond bourses worldwide. Informed of noncompliance, members then
refuse to trade with the individual in question because of the risk that they
will be cheated. Through this
reputation mechanism, the institution creates incentives for members to adhere
to industry rules and norms in their transactions with other members.
Ingram
& Simons (2000) describe a private-centralized institution that is even
more comprehensive than the diamond bourse.
They explain that in Palestine under the British Mandate (1922-1948),
the state failed to provide public-centralized institutions to support economic
exchange. A large group of cooperative
organizations created a private-centralized substitute for these missing
institutions, in the form of a comprehensive federation, called the
Histadrut. The Histadrut has had as
members, at various times, agricultural cooperatives (the kibbutzim and
moshavim), workers’ cooperatives (in services, manufacturing and
transportation), Israel’s largest conglomerate, a bank, credit cooperatives,
housing cooperatives and consumer cooperatives. The Histadrut did a number of things to smooth transactions
between these members. For example, the
Histadrut directed its affiliated bank and its major marketing cooperative to
give preferential service to other Histadrut members. It also arbitrated disputes for members, provided auditing
services, gave seminars in accounting and management, arranged bulk purchases
of raw materials, and maintained a pension fund. The institutional framework provided by the Histadrut was a major
benefit to its members—they had a failure rate one-fifth that of non-members
during the period of the British Mandate.
The archetype of
the private-decentralized institution is the norm. Although norms are often unwritten and unspoken, the real
contrast to centralized institutions is in enforcement. Norms rely on social relationships for their
enforcement—the ultimate penalty for violating a norm is the cessation of a
relationship, or in the extreme, ostracism from a group. Penalizing violations of norms typically
falls to the affected parties rather than third parties, and it is the value of
the relationship itself that provides the motivation to maintain the norms that
surround it. As Homans ([1961] 1974:
76) puts it, “the great bulk of controls over social behavior are not external
but built into the relationship themselves, in the sense that either party is
worse off if he changes his behavior toward the other.”
The operation of norms among
individuals within organizations is familiar.
An illustrative case is Homans (1950) re-analysis of the bank-wiring
room from the Hawthorne studies. That
study documents the norms of the workers, governing how much to produce on a
shift. Normative enforcement through relationships
is clear—workers who did not work hard enough were insulted, and excluded from
games, gambling, and the sharing of candy.
Although such group processes may at first seem tangential to the
organization’s strategy and performance, the truth is that norms interact with
the rules of the organization, and that interaction has a fundamental influence
on organizational success (Nee & Ingram, 1998; Zenger, Lazzarini &
Poppo, this volume). It was General
Electric’s group piece-rate incentive system that set the background for the development
of the norms in the bank-wiring room, which generally acted to encourage
productivity. In other instances,
sub-organizational norms undermine the control system of the organization, and
inhibit its pursuit of its goals (Shibutani, 1978).
Norms, or their analogs, also
operate in the inter-organizational context.
There is important historical research that illustrates the function of
private-decentralized institutions in long-distance trade. With this type of trade, merchants can often
profit from using other merchants as agents to sell goods, collect debts, and
so forth. This agency relationship,
however, raises the possibility that the agent will act opportunistically,
keeping some or all of the monies owed.
The Maghribi traders in the 11th century Western Mediterranean (Greif
1994), and American merchants on the 19th century California coast (Clay 1997)
overcame this problem by forming coalitions, which allowed exchange to
flourish. In both cases, merchants in
the coalition conditioned future use of other merchants as agents on those merchants’
having acted in accordance with group norms in the past. For instance, when a Maghribi merchant was
accused of cheating in 1041-42, he found that “people became agitated and
hostile and whoever owed [me money] conspired to keep it from me (Greif 1994:
925).” By tying future economic gains
to past behavior as an agent, merchants were able to ensure that the future
gains to membership in the coalition were greater than the gains to cheating
and being punished.
Additionally, there is a rapidly expanding
body of empirical research on the relational governance of inter-organizational
exchange. Uzzi (1996) describes the
embeddedness of exchange in the Manhattan garment industry. As in the examples above, participants in
that industry followed norms that encouraged them to deal fairly and flexibly
with each other. Zaheer, McEvily &
Perrone (1998) apply related arguments to explain the purchasing practices of
large organizations. They find that
even among large corporations, trust between buyers and sellers is an important
input to reducing transaction costs.
There is also a developing literature in strategic management that
focuses on the role of relationships for the interorganizational transfer of
knowledge (e.g., Darr, Argote & Epple, 1995).
We have left
public-decentralized institutions for last because they are different from the
previous three institutional forms. The
difference is in terms of intentionality.
Laws, organizational rules, and norms are provided consciously and even
strategically by states, organizations and individuals. These institutions don’t always have the
effects that their designers and enforcers intend, but none the less, they
emerge from some intent. In contrast,
public-decentralized institutions might be called “pre-conscious”. As we have described, they are provided by
amorphous civil society, and not by a specific actor. Public-decentralized institutions amount to culture—they are
ideas about what practices and social designs are acceptable and
desirable.
So why include public-decentralized
institutions in the same theory as other institutional forms? The best reason is that despite their
origins, public-decentralized institutions are comparable to other institutional
forms in their operation (Scott, 1995).
Cultural values structure the choices of actors, partly determining the
alternatives that are considered and the attractiveness of each alternative. For example, a manager’s evaluation of an
alternative for an organization’s strategy might be influenced by the
alternative’s propriety and legitimacy in much the same way that it might be
affected by its legality (DiMaggio & Powell, 1983; Carroll & Hannan,
2000). Indeed, work on the cognitive
processes by which public-decentralized institutions operate indicate that they
influence the value of alternatives—for example, the stock of a company may be
discounted because the company’s activities do not fit legitimate categories
(Zuckerman, 1999).
Additionally, although public-decentralized
institutions are not controlled by any specific actor, actors may still be
strategic in the face of them (DiMaggio, 1988; Roberts & Greenwood,
1997). All of this is not to
oversimplify this institutional form.
It is particular among the institutional classes in the pre-conscious
manner in which it may emerge, and operate to affect action. Still, public-decentralized institutions fit
the description of new-institutional action that we began with. The influence of propriety and legitimacy on
the effectiveness of organizational designs and strategies is undeniable. Likewise, as we describe below,
public-decentralized institutions have a critical affect on the development of
other institutional forms, and thereby present important strategic opportunities
for organizations.
So far, we’ve explained what the new
institutionalism is, and why scholars in strategic management are paying more
attention to it. But what is to be
gained by the whole enterprise? Of
course, the subsequent chapters will provide the answer to that question. But before we turn you loose on them, we’ll
give you our own interpretation. From
the inception of this volume, we were convinced that there was a real promise
of “gains from trade” by bringing together new institutional and strategy
research. We see the benefits flowing
both ways—strategy research can help solve some of the core problems of the new
institutionalism, and vice versa.
The potential contribution of strategy
to the new institutionalism comes from its sophisticated conceptualization of
the action of organizations.
Organizations are obviously key to new-institutional theory, not only as
a source of private-centralized institutions, but even more importantly as the
vehicles for the pursuit of the most important human interests, both economic
and social (Hannan & Freeman, 1977).
Yet, the treatment of organizations in the various institutional
theories has been soundly criticized.
DiMaggio (1988) charged theories of public-decentralized institutions
with suffering from a “metaphysical pathos”, denying the capacity of
organizations and individuals for self-interested, and strategic, action. Similarly, Granovetter (1985) claimed the
same theories presented an “oversocialized” view of organizations and other
actors, underestimating their autonomy from cultural influence. Institutional economists on the other hand,
have erred in the opposite direction in their treatment of organizations. North (1993), for example, identifies
organizations as the chief vehicles of institutional change. Yet, his characterization of organizations
as malleable, rational and decisive entities is in contrast to what we know
about organizational change and strategy making.
Without a doubt one of the prime
contributions of the chapters in this book is to develop more informed theories
of the role of organizations in institutional change. Indeed, many of the chapters represent great leaps forward for
this critical but understudied topic.
Jaffee and Freeman, for example, offer a thrilling account of
institutional change in real time. They
courageously make predictions about the evolution of German taxation of stock options
as the institutions are unfolding.
Their analysis highlights the role of interest-seeking organizations in
institutional change. German tax law
forms the background for competition among established organizational forms and
their challengers. The authors
challenge and refine existing ideas (e.g., North, 1993) by identifying
organizational inertia as a key determinant of the strategies that
organizations pursue to maintain or change specific institutions.
The idea that legal institutions can
be the object of organizational strategies is also prominent in other chapters. Holburn & Vanden Bergh present a formal
model of lobbying. Their model
explicitly reflects a key challenge to any organizational attempt to influence
the law—that there are multiple options as to where lobbying efforts should be
targeted. Should an organization lobby
a state’s executive, or its legislators?
Or perhaps the organization should bypass the law makers and go directly
to the agencies that enforce laws and regulations? The model presented in this paper yields prescriptions that
organizations can apply to their lobbying strategies.
De
Figueiredo and De Figueiredo address a different stage of the same problem,
using a radically different methodology.
They follow on the under-developed literature on strategic decision
making (e.g., Schwenk, 1984; Zajac & Bazerman, 1991). Implicit in their approach is a
sophisticated idea that has been slighted in the new institutionalism, that the
influence of institutions depends on the perception of those institutions by
the relevant actors. Their experiments
yield insights into the very practical problem of how to help strategists to
correctly analyze the institutional environment, and recognize the
opportunities and challenges that it presents.
Their results are cause for optimism, evidencing the utility of
business-school courses on the strategy of dealing with institutions.
Two other papers in the volume
examine organizations’ role in institutional change, but focus on culture,
rather than the law, as the context for organizations’ strategies. In other words, they venture bravely into
the void between established institutional theories. Dowell, Swaminathan and Wade examine a fascinating instance of
institutional entrepreneurship, the effort to establish standards for HDTV in
the U.S. This chapter provides a uniquely lucid explanation of the sociology
and psychology of “framing.” Framing is
a conscious attempt to use cultural values to support a given action, or in
this case, a direction for institutional change. Framing therefore represents a vast set of strategic
opportunities for institutional entrepreneurs.
The clear and compelling treatment of the topic in this chapter will
encourage its application to other strategies and studies.
Rao’s chapter is similar in that it
considers organizations’ influence on public-decentralized institutions, but it
considers taken-for-grantedness, rather than a technological standard. Taken-for-grantedness presents a dilemma for
strategy—it has been convincingly shown to influence organizational
performance, but what can be done with that knowledge? How can organizations affect what others
take for granted? Rao’s answer is that
they can do so through demonstration.
Specifically, he examines the demonstrations of reliability and quality
that seeded the taken-for-grantedness of the automobile. In doing so, he gives fair treatment to the
many other influences on the perception of the automobile. The result is a necessarily complex, but
original and very promising set of ideas about the interdependence of organizations
and public-decentralized institutions.
The interdependence between
institutional forms demonstrated in Rao’s paper (and in most of the papers in
this volume) is itself a substantial contribution to the new
institutionalism. Research has so far been
mainly within the quadrants of figure 1, with interdependencies between the
quadrants going unexamined to the detriment of the theory. While the multi-form emphasis of so many of
this volume’s papers redresses that theoretical neglect, it also has implications
for the field of strategy. Unpacking
the simultaneous influence of different types of institutions is necessary for
effective strategizing. In many ways
the theoretical and applied contributions of these papers are intertwined, as
the next section demonstrates.
The
previous section described the benefits that new institutional scholars can
gain from taking strategy research seriously.
But this is by no means a one-way street. Our rationale for including a volume on new institutionalism in
the Advances in Strategic Management series
is predicated on the idea that the new institutionalism can help surmount some
of the core challenges in strategy research.
The
potential contribution of new institutional research to strategy comes from its
highlighting of the interactive role that institutions play in both
constraining and enabling organizational action. Institutions are frequently
seen as background conditions or “shift parameters” that contour the expected
payoffs associated with particular strategic actions (Williamson 1991). But more than that, institutions directly
determine what arrows a firm has in its quiver as it struggles to formulate and
implement strategy, and to create competitive advantage. Given the importance of institutions for
determining the success or failure of specific strategies or actors,
consideration of ways to influence the creation and maintenance of favorable
institutions is fundamental to any organization’s strategy. Hence, an understanding of institutional
change, and the ways that firms can influence such change, becomes central to
the study and practice of strategy.
Consider
the taxonomy of institutions in Figure 1.
The vast majority of strategy research focuses on private-centralized
institutions such as firms and the formal actions that they undertake. Strategy research has generated a
post-adolescent, if not quite mature, body of literature that offers strong
predictions and prescriptions for firms’ boundaries and competitive
activity. Yet direct application of
traditional strategy prescriptions to managing other types of institutions
offers far less utility. How can a firm
deal with private-decentralized institutions such as norms? Use of traditional strategic levers without
consideration of variance in underlying norms of organization members can be
ineffective, or can even backfire, as in Simon’s (1957) “unintended
consequences.” As for altering norms
themselves, this is frequently perceived as an organizational behavior or human
resource management issue, and consequently outside the purview of strategy.
Similarly, how can a firm deal with public-centralized institutions? With the
exception of what is sometimes called the “non-market strategy” literature
(Baron 2001), these are largely seen as exogenous institutions that influence
strategic and organizational choices in much the same way as production
technology. Finally, the link between
strategy research and public-decentralized institutions has generally been
limited to the use of cultural distance measures (Hofstede 1980) to predict the
rate and mode of entry of multinational firms into specific host markets (Kogut
& Singh 1988; Hennart & Park 1993).
The
chapters in this book contribute to the development of deep insights into the
influence of all four types of institutions on firm strategy, and vice
versa. Even more exciting, many of the
chapters set forth into new terrain regarding the interactions across types of institutions as well as their
relationship to strategy. For example,
Zenger, Lazzarini and Poppo propose a novel and compelling extension to the
theory of the firm by considering interactions between private-centralized and
private-decentralized (or “formal” and “informal”) institutions. Starting from a few basic assumptions about
differences in the characteristics of each of these types of institutions, they
develop a series of bold propositions that potentially resolve several puzzles
in the strategy and organization literature.
The authors argue that although an organization cannot quickly alter
private-decentralized institutions through the usual methods of changing formal
organization structures, such formal changes can spark gradual changes in such
norms. Coupling this argument with the
common assumption that formal organizational structures are discrete (and hence
can not be incrementally tweaked to achieve an optimal form), they provide a
rationale for the seemingly constant oscillation of structures that many organizations
demonstrate (Nickerson & Zenger 2002).
But
the best way for us to convey what the new institutionalism can do for strategy
research is to describe in detail the layout of this volume.
SPECIFIC
RESEARCH QUESTIONS, AND THE LAYOUT OF THIS VOLUME
The above discussion noted general
insights that can be fruitfully drawn from the new institutionalism into
strategy research. We have organized
the volume so as to highlight insights related to specific research questions
in strategy. In their manifesto for the
strategy field, Rumelt, Schendel & Teece (1994) suggest four fundamental
questions in strategy research: 1) How do firms behave? 2) Why are firms different? 3) What limits
the scope of the firm? 4) What determines success or failure in international
competition? New institutional
research, and in particular the research in this volume, speaks to each of
these questions.
How do
firms behave? Or, do firms really behave like rational actors, and, if not,
what models of their behavior should be used by researchers and policy makers?
In “Policy and process: A game-theoretic
framework for the design of non-market strategy,” Guy Holburn and Richard
Vanden Bergh adopt a far-sighted rational action lens to explore interactions
among agents of the state and their effect on how firms should try to influence
legal/institutional framework.
Expanding on positive political theory models of lobbying in the U.S.,
they demonstrate that different agents – regulatory agency officials,
legislators, other elected officials – become the pivotal actors depending on
the distribution of preferences across these actors. Thus, a firm that wishes to influence a specific regulation
should not necessarily lobby the regulator directly, but in many cases will
need to direct its lobbying efforts towards other political actors.
In
“Managerial decision-making in non-market environments: A survey experiment,”
John de Figueiredo and Rui de Figueiredo test the assumption that managers are
able to pursue far-sighted rational action.
Noting that a large body of experimental literature raises questions
about the rationality of managers, they conduct a series of experiments
designed to test the ability of managers to make “optimal” decisions about
activities designed to influence legal institutions, such as investing in
lobbying activity. Their results
indicate that although managers are competent at making optimal decisions when
confronted with simple, single-stage problems, managerial decisions deviate
significantly from optimal choices as problems become more complex.
In
“Pretty pictures and ugly scenes: Political and technological maneuvers in high
definition television,” Glen Dowell, Anand Swaminathan, and Jim Wade study
institutional change regarding the allocation of broadcasting spectrum in the
U.S. They provide a case study of the
various attempts by television broadcasters to fight FCC regulations in the
mid-1980s that would take away unused spectrum from broadcasters and allocate
it to other uses such as cellular communication. Initial attempts to get Congress to overturn this regulation
foundered, due both to the difficulty of overcoming a “collective action”
problem among the diverse broadcasters and to the lack of a resonant “frame” to
motivate Congress. Yet subsequent
attempts succeeded, once the broadcasters found a way to frame their need for
spectrum in terms of U.S. manufacturing competitiveness vis-à-vis Japan, a
particularly resonant frame in the late 1980s.
Dowell et al. explain these outcomes through the lens of social movement
theory, and particularly the role of framing problems in ways that motivate
desired action. Rather than far-sighted
rational actors, the managers and policymakers in this lens are characterized
by subjective perception, and the institutional outcome is determined during
the battle to socially construct the frame of the institutional change.
In
“The evolution of university patenting and licensing procedures: An empirical
study of institutional change,” Bhaven Sampat and Richard Nelson take a still
different view of actors’ behavior and motivation. Drawing on a routine-based view of organizational action, they
argue that actors develop “social technologies” to manage their various
activities. As these social
technologies diffuse and harden into standardized patterns of behavior, they
become institutions. Hence, institutions arise through the boundedly rational
attempts of actors to solve problems, notably problems associated with
production and exchange. Sampat and Nelson study the diffusion of different
social technologies used by universities to manage their patenting and
licensing activities, culminating in the technology transfer office commonly
found at research universities today.
Interestingly, they note that the diffusion of this institution was
facilitated by the passage of the Bayh-Dole Act of 1980, for which universities
actively lobbied – and the motivation for which seems to have been based on
erroneous and inaccurate evidence of a university-industry technology transfer
“market failure.”
Thus
the four chapters in this section all focus on firms’ efforts to influence
public and/or private institutions, and each takes a slightly different
perspective on the fundamental strategic question: How do firms behave? It is interesting to note that this
difference mirrors the differences in strategy literature writ large. But the consecutive presentation of these
perspectives in this volume is informative in a way that heterogeneity in the
broader literature is not. The papers
here point to the fact that styles of choice depend on their context. The types of institutions that most
constrain an actor greatly affect the appearance of the actor’s decisions. Actors attempting to influence the complex,
but well-defined institutional structure represented by the U.S. government may
seem intentional and calculative, but occasionally confused. When culture is the object or key
constraint, decisions follow different styles because the rules of
decision-making are different. For
example, the symbolic value of behavior may become more important.
Why
are firms different? Or, what sustains the heterogeneity in resources and
performance among close competitors despite competition and imitative attempts?
In
“Competition, contingency, and the external structure of markets,” Ron Burt,
Miguel Guilarte, Holly Raider, and Yuki Yasuda explore the implicit
institutional foundation of market structure among industry competitors. They propose and demonstrate a network-based
measurement of “effective competition” among rivals. They find that an apparent puzzle in prior literature can be
explained by incorporating effective competition. Specifically, prior research
has found that strong corporate culture is only erratically associated with
firm performance. Burt et al.
demonstrate that the relationship between corporate culture and firm
performance is contingent on the level of effective competition faced by the
firm – in highly competitive markets, strong culture enhances performance,
while in low-competition markets culture has no impact on performance.
In “Institutional change in ‘real-time’: The
development of employee stock options in German venture capital contracts, 1997
to 2000,” Jonathan Jaffee and John Freeman analyze the attempt by several young
German law firms to gain legal clearance to implement “American-style” employee
stock ownership plans for their clients who were start-up and venture capital
firms, and the opposition to this from several large, well-established law
firms who did less work with start-ups.
Conceptually, their study shows how firms can influence the
institutional framework – in this case, concerning the legality of certain
stock compensation policies – to further entrench their relative advantages
over competitors. Institutions (and the
ability to enact institutional change) thus become central features explaining
sustainable performance differences among firms.
In “Institutional barriers to electronic
commerce: An historical perspective,” Karen Clay and Robert Strauss study
several historical precedents to Internet commerce. They note that Richard Sears, and later various credit card
companies, faced challenges of opportunism associated with remote commerce that
sound very familiar today, and they analyze the emergence of several institutions
that ameliorated such opportunism in the past.
In addition to pointing us toward institution-based solutions to the
challenges facing current Internet businesses, Clay and Strauss underscore the
competitive advantage that can accrue to a firm, or a group of firms, that
successfully undertakes institutional innovation. By “solving” the remote commerce problem, Sears was able to grow
quickly to dominate the mail order business in the late nineteenth century;
thus, Sears’s institutional innovation provided the firm with a first-mover
advantage that endured for nearly a century.
Those businesses that establish private institutions to solve current
challenges to Internet commerce may similarly enjoy enduring performance
benefits. And, as in the preceding
chapter, Clay and Strauss argue that performance differences between Internet-
and brick-and-mortar businesses will turn largely on the outcome of battles
over broad institutional issues such as taxation of Internet commerce.
These papers illustrate that sound
new-institutional arguments are in the spirit of Henderson & Mitchell’s
(1997) call for research that explores interactions between market effects and
internal capabilities, Burt et al.’s study demonstrates how the competitive
environment influences the value of a organization-specific institution
(culture). Similarly, Jaffee &
Freeman emphasize the significance of compliance between organizational form
and the institutional environment. This
valuable compliance creates strategic opportunities for organizations to
manipulate the institutions that surround them. Finally, Clay and Strauss
remind us that, given the appropriate market structure, a firm’s institutional
innovations can potentially provide a source of sustained competitive advantage.
What
limits the scope of the firm? Or, what is the function of or value added by the
headquarters unit in a diversified firm?
In “Informal
and formal organization in new institutional economics,” Todd Zenger, Sergio
Lazzarini, and Laura Poppo note that prior scholarship on the theory of the
firm has largely focused on either formal institutions such as contracts, or on
informal institutions such as norms, and rarely on the interactions between the
two. Beginning with a few basic
assumptions about the characteristics of each type of institution, they
explicitly analyze interactions between formal and informal institutions.
Zenger et al. derive a series of startling propositions that potentially
resolve a number of puzzles that have challenged the theory of the firm over
the last thirty years. Chief among these are 1) when will formal and informal
institutions act as substitutes, and when as complements; 2) what explains some
organizations’ apparent predilection for cycling (and recycling) through
organization structures frequently; and 3) what precisely limits the size of
the firm? The chapter suggests a number
of fruitful directions for empirical testing as well.
In “’Tests
tell:’ Constitutive legitimacy and consumer acceptance of the automobile,
1895-1912,” Hayagreeva Rao explores the growth in consumer acceptance of the
automobile in the years following its initial commercialization. In particular, he examines the role of several
activities – both those managed by the firm, such as advertising, and those
propelled by actors outside the firm, such as auto demonstration races
sponsored by social movement-like organizations of car enthusiasts – on auto
sales. This study contributes a novel
look at the way that social movement theory may explain the effectiveness of
particular public-decentralized institutions, such as auto clubs. It also demonstrates how advertising and
social movement things are differentially effective at different times, and
also work as substitutes. As such, the
chapter provokes consideration of the conditions under which a firm should
strategically consider mobilizing forces outside its formal boundaries to
enhance its competitive strategy.
These papers suggest a reframing of the definition, often used in
strategy, of the firm as a nexus of contracts.
It may be more useful to consider the firm as a nexus of
institutions. This broader
characterization takes explicit account of the multiple institutional forms
that affect behavior or and within organizations. A more strategically tractable understanding emerges by
recognizing the multiple institutional forms that constitute
organizations--law, culture, norms, and rules.
As Zenger et al. show, an organization is not merely the agency-theory
driven rules of employment, but also the norms that are associated, but not
completely coupled to them. As Rao
shows, organizations have cultural identities that are separate from their
product profiles, but fundamental to their effectiveness.
What determines success and failure in
international competition? Or, what are the origins of success and what are
their particular manifestations in international settings of global
competition?
In “Learning about the institutional
environment,” Witold Henisz and Andrew Delios note that prior literature on FDI
typically treats firms as homogeneous while examining the relationship between
FDI and national variation, or treats national institutions as homogeneous
while examining the firm variation-FDI relationship. They explore the joint roles of heterogeneous firm experience
and heterogeneous institutional environments in explaining the direction and
mode of foreign direct investment. In
their framework, a firm’s experience provides firm-specific knowledge that
moderates the influence of variation in institutional environment, thus leading
multinational corporations with different patterns of experience to pursue
different entry strategies and expect different performance outcomes in
international competition. By recognizing variation in both firm experience and
institutional environments, they are able to propose a wide range of
empirically refutable implications that significantly extend current strategy
research on international business.
In “Institutions and the vicious circle of
distrust in the Russian market for household deposits, 1992-1999,” Andrew
Spicer and William Pyle explore the apparent failure of public and private
institutions in Russia to support the development of a private market for
household savings deposits. They analyze the events associated with these
development attempts, and argue that the initial “institutional backdrop” at
the birth of this sector contributed to a self-reinforcing cycle in which
private commercial banks were unable, either individually or collectively, to
win the trust of potential depositors.
Of particular interest to strategy researchers, their research
demonstrates how several traditional strategic prescriptions are implicitly
predicated on deep assumptions about the institutional backdrop. For example, although advertising is often
seen as an investment to demonstrate high quality, Spicer and Pyle suggest that
in Russia, where consumers had a low level of market savvy and where regulatory
institutions were not set up to enforce certain behaviors among banks,
advertising apparently had either no relationship, or even an inverse
relationship, with bank quality. Their
analysis reinforces our understanding of the difficulty of simply “porting”
from one nation to another successful businesses, or even successful
institutions, without the appropriate supporting institutional backdrop.
These papers
point the way towards a theoretically-informed refinement of the international
business environment. They illustrate
that every country represents a complex web of characteristics. Traditional ideas of “foreign and local” or
one dimensional characterizations of a country (e.g., collectivist of
individualist; common-law or Napoleonic Code) are insufficient. But beyond that point, which should be
uncontroversial, new-institutional theory can pave the way for a rigorous
analysis of the multi-faceted institutional environment that each country
represents. Indexes of institutional
stability or the environment for investing (e.g., Henisz, 2000) present a real
opportunity for both researchers and strategists to incorporate institutional
sophistication into their country-characterizations.
THE LAST WORD
We hope that
this volume will inspire scholars of both the new institutionalism and of
strategy to explore the exciting research opportunities lying at the juncture
of these fields. To the extent that it
does, we are convinced that the methodological approaches demonstrated in this
volume provide brilliant guideposts for such work. Let’s do this again in ten years and see what we have wrought!
NOTES
1 For example, at the Columbia Business
School, the active policy is that the required strategy course in the MBA
curriculum should not use any teaching case that is more than two years
old. Other required courses do not
have this policy.
2 Some seemed even to believe that the topic
required new forms of scholarship. We
are aware of one unfortunate full professor at a top-twenty U.S. business
school who changed his title from “Professor of Strategy” to “Professor of New
Economy.”
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