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Institutional theory in organization studies.

• Robert J. David , Robert J. David Department of Management, McGill University
• Pamela S. Tolbert Pamela S. Tolbert Department of Organizational Behavior, Cornell University
•  and  Johnny Boghossian Johnny Boghossian Department of Management, Laval University
• https://doi.org/10.1093/acrefore/9780190224851.013.158
• Published online: 23 December 2019

Institutional theory is a prominent perspective in contemporary organizational research. It encompasses a large, diverse body of theoretical and empirical work connected by a common emphasis on cultural understandings and shared expectations. Institutional theory is often used to explain the adoption and spread of formal organizational structures, including written policies, standard practices, and new forms of organization. Tracing its roots to the writings of Max Weber on legitimacy and authority, the perspective originated in the 1950s and 1960s with the work of Talcott Parsons, Philip Selznick, and Alvin Gouldner on organization–environment relations. It subsequently underwent a “cognitive turn” in the 1970s, with an emphasis on taken-for-granted habits and assumptions, and became commonly known as “neo-institutionalism” in organizational studies. Recently, work based on the perspective has shifted from a focus on processes involved in producing isomorphism to a focus on institutional change, exemplified by studies of the emergence of new laws and regulations, products, services, and occupations. The expansion of the theoretical framework has contributed to its long-term vitality, though a number of challenges to its development remain, including resolving inconsistencies in the different models of decision-making and action ( homo economicus vs. homo sociologicus ) that underpin institutional analysis and improving our understanding of the intersection of socio-cultural forces and entrepreneurial agency.

• institutional theory
• institutional entrepreneurship
• institutional logics
• institutional change
• market categories
• organizational forms
• organizational structure

In contemporary organization studies, research under the banner of institutional theory encompasses a large body of theoretical and empirical work connected by a common emphasis on social norms and shared expectations as key sources of organizations’ structures, actions, and outcomes. While institutional theory is widely recognized as one of the most prominent approaches to organizational research today (David & Bitektine, 2009 ; Greenwood, Oliver, Sahlin, & Suddaby, 2008 ), substantial differences exist among scholars about both the referents of key concepts and the core assumptions regarding how social norms and expectations affect organizations. For example, some use “institution” to denote a specific organizational practice or requirement (Meyer & Rowan, 1977 ), while others use the term to refer to whole organizations (Selznick, 1949 ) or to broad systems of norms and values that characterize a given sector of society (Friedland & Alford, 1991 ). Likewise, classic formulations have been criticized as providing little or no room for individual agency (DiMaggio, 1988 ), while others assert that key arguments (e.g., about decoupling) imply highly strategic actors (Tolbert & Zucker, 1996 ).

This overview of institutional theory in organization studies begins with a general summary of key ideas and arguments from foundational work in this tradition. 1 This is followed by a discussion of two research streams that arose from the critiques and controversies that developed around the concepts and implicit theoretical assumptions contained in foundational work: one on institutional entrepreneurship and the other on institutional logics. Two areas of inquiry garnering increasing attention within the tradition—the emergence of new market categories and the role of the state in institutional change—are then discussed. Some thoughts about the continued promise and attractiveness of the perspective and suggestions for further theoretical and empirical development are offered in conclusion.

Foundations

Early analyses of organizations by sociologists used the term “institutional” to refer broadly to aspects of organizations involved in mediating relations with external constituencies, and more specifically to securing favorable perceptions of an organization by constituents as a way, ultimately, of ensuring flows of necessary resources. This is exemplified in an early statement by a key proponent of structural-functionalist theory, Talcott Parsons ( 1956 ), who elaborated a “cultural-institutional” view of organizations in the first issue of the Administrative Science Quarterly . Parsons ( 1956 , p. 67) argued that, as components of a larger social system (society), organizations need to demonstrate “basic acceptance of the more generalized values of the superordinate system.” In this context, he distinguished three broad organizational levels, each with distinctive functions: technical (production activities), managerial (coordination and control), and institutional (managing external relations) (Parsons, 1960 ). In Parsons’s view, the institutional level was critical to articulating the connection between an organization’s espoused goals and the functioning of the larger society, thus providing the organization with general legitimacy—a process that would become a central theme in institutional research on organizations.

Philip Selznick ( 1957 ), drawing on both Parsons’s work and Barnard’s ( 1938 ) earlier analysis of the functions of top management, amplified this argument by identifying institutionalization as a key task of organizational leaders. In his exposition, institutionalization entailed linking an organization to larger societal values in the public’s mind, thus enhancing its long-run survival. “Organizations become infused with value as they come to symbolize the community’s aspirations, its sense of identity … An organization that does take on this symbolic meaning has some claim on the community to avoid liquidation or transformation on purely technical or economic grounds” (Selznick, 1957 , p. 19). Thus, Selznick equates “institution” to an organization that has come to be seen as embodying key societal values (Kraatz & Flores, 2015 ). His emphasis on leaders’ role in this process reflects his earlier research (Selznick, 1949 ) on the highly contentious founding of an organization by the U.S. government in the 1930s, the Tennessee Valley Authority (TVA). Characterized as the country’s only serious flirtation with socialism (Perrow, 1972 ), at the outset the TVA faced strong criticism from political opponents, leading it to focus on one element of its mandate, embodying grassroots democracy in its governance structure, thus tying itself to a basic societal value.

This approach to organizational analysis was largely eclipsed from the late 1950s through the 1970s by the rise of what came to be known as contingency theory (Donaldson, 2001 ). Scholars in this tradition focused on explaining variations in different aspects of organizations’ formal structure, relying (at least implicitly) on a few key theoretical assumptions (Schoonhoven, 1981 ). One was that elements of formal structure in an organization, such as average job specialization, codification of work procedures, and the relative proportion of supervisors to line workers, resulted from efforts to maximize the efficiency of production activities. A second assumption was that the efficiency of particular structures depended on (i.e., was contingent on) organizational attributes such as the size and dominant technology of an organization (see Scott, 1975 ). By the 1970s, an increasing number of studies in this tradition had begun to shift focus from internal organizational attributes to environmental relations as important contingencies, but the underlying theoretical assumptions of earlier work were retained (e.g., Lawrence & Lorsch, 1967 ): formal structure was treated as the outcome of decisions by autonomous actors, driven primarily by concerns of efficient production.

In the late 1970s, a now-classic paper by Meyer and Rowan ( 1977 ) significantly challenged this view, marking the beginning of contemporary institutional theory, sometimes denoted as “neo-institutional theory.” A key insight underpinned their analysis, namely that formal structures have symbolic properties as well as action-generating ones. Thus, specific structures—for example, formalized hiring requirements (Tolbert & Zucker, 1983 ), a human resources office (Baron, Dobbin, & Jennings, 1986 ), or a chief financial officer (Zorn, 2004 )—can be invested with cultural meaning, signifying values such as rationality, equal opportunity, or the importance of shareholders as a constituency. Under this condition, organizations may adopt such structures as a way of signaling a commitment to the associated values. Importantly, and in contrast to Selznick’s ( 1957 ) older conception of “institutions” as specific organizations that had acquired the patina of broad social values, post-Meyer and Rowan, the term came to be identified with particular sub-organizational elements of formal structure (policies, practices, job titles, etc.) that had such a patina. Such elements could diffuse across communities of organizations, a process that attracted considerable empirical attention within institutional theory. The diffusion of elements was equated with their “institutionalization,” now used to refer to increasing acceptance of an element as an appropriate component of well-managed, legitimate organizations. Thus, diffusion and institutionalization were theorized to be reinforcing: as more organizations adopted a particular structural element, it gained greater social acceptance (became progressively institutionalized). This, in turn, led to increasing conformity pressures on organizations that had not yet adopted it to do so, accelerating its diffusion (Tolbert & Zucker, 1983 ). These arguments were reflected in a spate of studies examining the diffusion of various practices across organizations (e.g., Baron et al., 1986 ; Zorn, 2004 ; Okhmatovskiy & David, 2012 ) but were soon to be challenged as insufficiently nuanced because they neglected consideration of forces mitigating against such pressures for increased diffusion (Abrahamson, 1996 ; Ahmadjian & Robinson, 2001 ; David & Strang, 2006 ; Oliver, 1991 , 1992 ).

In sharp contrast to the then-dominant approach of contingency theory, this approach implied that the creation of formal structures in an organization may be independent of any concern related to quality or costs of production. It also challenged the assumption, common to economics-based explanations of organizational behavior, that efficiency and quality of output are necessarily the most important determinants of organizational survival (see Meyer & Zucker, 1989 ; Sine, David, & Mitsuhashi, 2007 ; Zucker, 1983 ).

Similarly, it directed organizational scholars’ attention to external factors unrelated to production processes, such as the passage of legislation, political pressure by social movement activists, and the development of strong norms within an organizational network, in explaining formal structure. In this context, DiMaggio and Powell ( 1983 ) argued for more attention by researchers to forces producing high levels of homogeneity among organizations rather than those producing variation. Elaborating on Meyer and Rowan ( 1977 , pp. 347–348), they identified three key forces. One was coercive pressures, often created by government-sponsored mandates that affect organizations, but also by the demands of powerful, resource-controlling organizations. A second was imitative pressures, resulting from decision-makers’ reliance on other organizations’ observed behavior as a guide for their own organization. The third was normative pressure, social expectations generated through the implicit or explicit lobbying efforts of professionals and other actors for the adoption of particular policies and practices. In fact, as Zucker ( 1977 ) showed in a lab experiment using the autokinetic effect, conformity pressures of this kind could be produced in organizations with relative ease. Scott ( 1995 ) expanded further on these pressures for homogenization, describing three “pillars” of institutions, which he labeled regulatory, cultural-cognitive, and normative. Notably, DiMaggio and Powell’s ( 1983 , p. 148) theory of organizational homogeneity directed attention to the “organizational field” as both a construct and a unit of analysis. Fields, defined as the “totality of relevant actors” surrounding any focal organization or constituting any sphere of organizational life, thus became a potential object of study for institutional theorists.

This approach to thinking about organizations fit well with the growing interest of scholars in exploring environmental relations as sources of organizations’ actions, and meshed with a cumulating body of work on organizational decision-making that stressed inherent limits on decision-makers’ ability to make highly rational choices (Cyert & March, 1963 ; March & Simon, 1958 ; Simon, 1947 ; Weick, 1969 ). In this context, the rapid acceptance and spread of institutional theory as a framework for organizational analysis is perhaps unsurprising. Its continued dominance in the field of organizational studies is evinced in a variety of ways. For example, three foundational studies in this tradition—by Meyer and Rowan ( 1977 ), Zucker ( 1977 ), and DiMaggio and Powell ( 1983 )—have garnered over 70,000 citations to date, according to Google Scholar. Likewise, a steady stream of special journal issues and edited volumes dedicated to the tradition attests to its continued vitality (e.g., Dacin, Goodstein, & Scott, 2002 ; Greenwood et al., 2008 ; Greenwood, Oliver, Lawrence, & Meyer, 2017 ; Powell & DiMaggio, 1991 ; Zucker, 1988 ).

In part, institutional theory’s continued prominence reflects extensions of the framework over time, aimed at addressing perceived problems and limitations of early theoretical formulations. These generated a number of different streams of work, most notably work on institutional entrepreneurship and institutional logics.

Institutional Entrepreneurship

One of the earliest critiques of foundational work was offered by DiMaggio ( 1988 , p. 4), concerning institutional theory’s inattention to the problem of “agency.” In his words, “institutional theory has no explicit or formal theory of the role that interests play in institutionalization and … [thus] distracts attention from the ways in which variations in the strategies and practices of goal-directed actors may be related to variation in organizational structures, practices and forms.” As he noted, in part, this problem reflects the incorporation of a phenomenological perspective on social interaction (e.g., Berger & Luckmann, 1967 ; Garfinkel, 1967 ) into theoretical arguments. For phenomenologists, a key issue is to explain how social interaction can be sustained over time. Explanations typically emphasize processes through which individuals develop shared interpretations of particular behaviors, and the way in which such shared meanings serve to constrain behavior. The constraining effects occur in part because the behaviors become habitual (taken for granted), and in part because actors seek to avoid anticipated negative social reactions to nonconformity. Foundational work in institutional theory often referenced phenomenological arguments in explaining why organizations adopted practices once they had reached some threshold of institutionalization (see DiMaggio & Powell, 1983 ; Meyer & Rowan, 1977 ; Tolbert & Zucker, 1983 ; Zucker, 1977 ).

It is worth noting that Meyer and Rowan’s ( 1977 , pp. 356–357) discussion of decoupling, suggesting that organizations are apt to segregate or minimize the impact of institutionalized structures on day-to-day organizational activities and operations (thus treating them as largely ceremonial), implies a high degree of strategic behavior by organizational decision-makers. How this strategic view could be reconciled with a phenomenological emphasis is not made clear in their work, however, as Tolbert and Zucker ( 1996 ) observed.

To rectify this limitation, DiMaggio proposed a focus on studying institutionalization processes (rather than consequences). He urged that such processes be treated as a “product of the political efforts of actors to accomplish their ends” ( 1988 , p. 13) and called on researchers to recognize that “the success of the institutionalization project and the form that the resulting institution takes depend on the relative power of the actors who support, oppose, or otherwise strive to influence it.” This call to arms laid the foundation for a line of work on “institutional entrepreneurship,” typically concerned with the purposeful activities of individuals and groups that lead (directly or indirectly) to the adoption of various policies and practices by organizational targets, or even the founding of entirely new forms of organizations.

Empirical work on institutional entrepreneurship began in earnest only in the 2000s, however, starting with a notable special issue on institutional change in the Academy of Management Journal (Dacin et al., 2002 ). In that special issue, Zilber ( 2002 ) conceptualized institutionalization as “an interplay between actions, meanings, and actors” and showed how times of crisis provide opportunities for agency and institutional change. In a now well-cited paper, Greenwood, Suddaby, and Hinings ( 2002 ) developed a process model for institutional change driven by institutional entrepreneurs, using the case of field-level change in the accounting profession in Canada. Building on the conceptual work of Strang and Meyer ( 1993 ) and Tolbert and Zucker ( 1996 ), they argued that the core activity of institutional entrepreneurs is theorization, or “the rendering of ideas into understandable and compelling formats” (Greenwood et al., 2002 , p. 75). In their study, large accounting firms (the institutional entrepreneurs) justified changes in the structures and activities of accounting firms in general by exposing contradictions in the accounting field’s rationales for existing practices and emphasizing how those changes were aligned with the profession’s prevailing values. In a similar way, Maguire, Hardy, and Lawrence ( 2004 , pp. 669, 671) described how institutional entrepreneurs in the emerging HIV/AIDS treatment field theorized new practices of consultation and information exchange between community organizations and pharmaceutical firms by “assembling a wide array of arguments that translate the interests of diverse stakeholders” and by building coalitions of these stakeholders through “bargaining, negotiation, and compromise.”

More recently, David, Sine, and Haveman ( 2013 ) developed a model of institutional entrepreneurship directed at legitimating new forms of organization in emerging fields. Significantly, these authors argued that institutional entrepreneurship involves more than persuasive discourse and includes building affiliations and engaging in collective action. Empirically, they showed how the proponents of early management consulting organizations affiliated with prestigious universities, scientific communities, and social elites to gain legitimacy. These proponents of “professional” management consulting also created an association to “collectively define a social code of prescribed and proscribed behaviors” that contrasted with those of competing forms and provided a template for replication (David et al., 2013 , p. 370). Building on these ideas, Canales ( 2016 , p. 1548) explained how actors promoting the small and medium enterprise credit market in Mexico engaged in “work to suspend existing institutions” and “recruit allies, find resources, experiment with new practices, coordinate strategies of action, and build political toolkits.” In summary, institutional entrepreneurship has become closely associated with institutional change projects driven by actors exercising agency in the pursuit of their interests. As a vibrant area of research (see Hardy & Maguire [ 2017 ] for a full review), it has largely overcome the critique that agency is underexplored within institutional theory. 2

Institutional Logics

In their generative paper, Friedland and Alford ( 1991 ) questioned institutional theory’s importation of an assumption made by structural-functionalists about the general congruence of social values. Foundational papers by Zucker ( 1977 ) and by Meyer and Rowan ( 1977 ) had implied a shared commitment to a particular social value—rationality—as an underlying precondition of the institutionalization of organizational practices, but Friedland and Alford argued that institutionalized practices could rest on a variety of values, which could in fact conflict with one another. This provided a key point of departure for a growing literature on institutional logics.

Similar to structural-functionalist theorists, Friedland and Alford proposed a view of society as constituted by different sectors (e.g., economic, political, familial, etc.), each characterized by a distinctive “institutional logic,” in their words. Comprising both material practices and symbolic constructions, logics provide organizing principles, or broad guidelines for action (Friedland & Alford, 1991 , p. 248). In contrast to previous work, however, they suggested that not all logics were necessarily compatible ( 1991 , p. 248): “The institutional logic of capitalism is accumulation and the commodification of human activity. That of the state is rationalization … That of democracy is participation … That of the family is community …” Such competing logics offer a basis for individuals to perceive and justify resistance to a prevailing structural arrangement, and to propose alternatives that reflect a different institutional logic.

These arguments provided a foundation for a large stream of organizational studies that illuminate the existence of multiple logics within different communities, and examine tensions stemming from the coexistence of competing logics within a given organization (Greenwood et al., 2011 ; Kraatz & Block, 2008 ). Early research in this area focused on how one logic replaces another. In a landmark paper, Thornton and Ocasio ( 1999 , p. 804) explained how the dominant logic in the U.S. higher education publishing field changed from an editorial to a market focus, and how this affected changes in executive succession. Rao, Monin, and Durand ( 2003 ) described how a logic of “nouvelle cuisine” replaced one of “haute cuisine” in French gastronomy, while Sine and David ( 2003 ) explained how a natural monopoly logic was replaced by an entrepreneurial logic in the field of electricity generation.

Other notable research has focused not on logic replacement but instead on logic coexistence. In his study of mutual funds, Lounsbury ( 2007 , p. 302) showed how the “trustee logic” (originating in Boston) and the “performance logic” (originating in New York) provided “distinct forms of rationality that informed the behavior of different kinds of mutual funds” and “facilitated the creation of variation in the subpopulation of professional money management firms” (i.e., growth versus non-growth funds). Also highlighting geographic differences in logics, Greenwood, Díaz, Li, and Lorente ( 2010 ) described how regional logics and family logics impact organizational responses to an overarching market logic. Specifically, in their study of Spanish manufacturing firms, they concluded that poorer-performing organizations downsize more readily than more successful firms, indicating the significance of the market logic, but that at the same time the state and family logics temper the influence of the market logic.

In their study of state offices of dispute resolution, Purdy and Gray ( 2009 ) identified conditions that enabled multiple practices supported by conflicting logics (judicial logic, social services logic) to be institutionalized, including the presence of multiple resource pools associated with different institutional actors and the lack of a dominant, overarching regulatory or professional framework that could impose field-level standards. Reay and Hinings ( 2009 ) elaborated on the “mechanisms of collaboration” in Alberta health care that allowed the conflicting logics of business-like health care and medical professionalism to coexist. Also focusing on the medical field, Dunn and Jones ( 2010 , p. 114) found that the “plural logics of care and science in medical education are supported by distinct groups and interests, fluctuate over time, and create dynamic tensions about how to educate future professionals.” They concluded that in fields where distinct logics are needed yet advocated by different groups, these logics may oscillate over time rather than reach a state of dominance.

Finally, a more recent but burgeoning stream of research at the intra-organizational level has examined the presence of multiple logics within organizations. In a theory piece, Besharov and Smith ( 2014 ) proposed a framework for categorizing types of logic multiplicity within firms based on two key dimensions: (1) the degree of consistency in the logics’ prescriptions for actions (“compatibility”) and (2) the extent to which practices tied to different logics are central to organizational functioning (“centrality”). Organizations that comprise logics with low compatibility but high centrality are often dubbed “hybrid” organizations (Battilana & Dorado, 2010 ; Besharov & Smith, 2014 ; Jay, 2012 ; Pache & Santos, 2013 ) and have been the subject of recent research on how tensions arising from logic conflict are managed. One approach focuses on integrating logics (Battilana & Dorado, 2010 ), for example by developing performance metrics (Mair, Mayer, & Lutz, 2015 ), incentive systems (Battilana & Lee, 2014 ; Ebrahim, Battilana, & Mair, 2014 ), product designs (Dalpiaz, Rindova, & Ravasi, 2016 ), and organizational identities (Battilana & Dorado, 2010 ) that do not reflect any one of the prevailing logics but rather combine logics in ways unique to the organization. Another approach focuses on structural differentiation (Greenwood, Raynard, Kodeih, Micelotta, & Lounsbury, 2011 ), whereby organizations segregate logics into different organizational elements, but find unique and creative ways to assure mutual understanding and collaboration across the elements (Battilana & Lee, 2014 ; Battilana, Sengul, Pache, & Model, 2015 ; Smets, Jarzabkowski, Burke, & Spee, 2015 ). For example, Pache and Santos ( 2013 , p. 972) found that “organizations selectively coupled intact elements prescribed by each logic … allow[ing] them to project legitimacy to external stakeholders without having to engage in costly deceptions or negotiations.”

Building on this research, Ramus, Vaccaro, and Brusoni ( 2017 ) suggested that it is the combination of collaboration and formalization that allows organizations to successfully reconcile the conflicting demands arising from multiple logics; specifically, logic integration can be enabled by an initial phase of formalizing and separating each competing logic, followed by building collaboration (Ramus et al., 2017 , p. 1254). More recently, Smith and Besharov ( 2019 ) explained how logic hybridity within organizations can be sustained over time through a combination of continually developing novel approaches to ongoing tensions while at the same time maintaining stable features that act to bound these adaptive processes.

New Market Categories

While the research streams on institutional entrepreneurship and institutional logics are now large and well developed, institutional theorists have more recently turned their attention to the question of how new market categories emerge. Defined as “economic exchange structure[s] among producers and consumers” (Navis & Glynn, 2010 , p. 441), market categories represent consensus over labels and meanings among the actors and audiences involved (Durand & Paolella, 2013 ; Kennedy, 2008 ). In studying new market categories, institutional theorists often invoke research from the two former streams on institutional logics and institutional entrepreneurship, as well as theory on social movements. In this research, new market categories are seen as emerging through a process of social construction, whereby collections of objects—products or services—come to be perceived as being “of the same type” or close substitutes for each other (Durand & Boulogne, 2017 ; Glynn & Navis, 2013 ; Navis & Glynn, 2010 , p. 440).

Social movements have been seen as generative of new market categories. In an early elucidation of this process, Swaminathan and Wade ( 2001 ) argued that social movements help create new markets by providing collective action frames and by facilitating resource mobilization by entrepreneurs. Building on this idea, Lounsbury, Ventresca, and Hirsch ( 2003 ) described how the social movement promoting recycling practices contributed to changes in interorganizational relations and discourse that altered the existing U.S. solid waste management field, thereby enabling the emergence of a for-profit recycling industry. Weber, Heinze, and DeSoucey ( 2008 , p. 543) showed how the social movement for grass-fed beef motivated entrepreneurs to produce this product and increased their commitment in the face of obstacles because they “obtained emotional energy from connecting their work to a sense of self and moral values” represented by the movement. Hiatt, Sine, and Tolbert ( 2009 ) described how the Temperance Movement in the United States at once deinstitutionalized breweries, created demand for a new category of “soft” drinks, and increased the availability of resources for entrepreneurs in the nascent category. Sine and Lee ( 2009 ) showed how the environmental movement mobilized members and non-members alike to support the emerging wind power sector.

In sum, institutional theory suggests social movement actors can promote shared notions of the kinds of organizational activities that are “right” through proselytizing and other techniques of moral suasion; this can motivate entrepreneurs who are sympathetic to the values of a given movement, persuade consumers to accept certain products and services as valuable (thus creating market opportunities that even non-sympathizing entrepreneurs may pursue), and affect policies and create infrastructures that facilitate certain entrepreneurial activities (Tolbert, David, & Sine, 2011 ).

A related thread of research takes a more actively social-constructivist view of new market categories and sees the emergence of a new category as the purposeful creation of common meanings and identities (Glynn & Navis, 2013 ; Jones, Maoret, Massa, & Svejenova, 2012 ; Pontikes & Kim, 2017 ). In this vein, Wry, Lounsbury, and Glynn ( 2011 , p. 450) focus on the “collective identity stories” employed by entrepreneurial actors to help project an image of themselves “as a coherent category with a meaningful label and identity.” The identity claims of entrepreneurs are evaluated by other field actors, who then accord (or not) resources and legitimacy to the new category. As such, entrepreneurs in new market categories who elaborate identities that are both distinct from those of existing categories yet aligned with prevalent “institutional understandings” are more likely to receive favorable judgments from investors (Hargadon & Douglas, 2001 ; Navis & Glynn, 2011 ). For example, in their research on the emergence of satellite radio as a new market category, Glynn and Navis ( 2010 ; see also Navis & Glynn, 2010 ) analyzed the public statements of executives from start-up firms XM and Sirius, and found these statements helped construct a distinctive identity for new ventures, and, in the process, lent credibility to the nascent market category. Khaire and Wadhwani ( 2010 , p. 1281) explained how art historians and critics shaped the construction of meaning in the Modern Indian Art category by “reinterpreting historical constructs in ways that enhanced commensurability and enabled aesthetic comparisons and valuation.”

It is important to note, however, that identity building and legitimation in new market categories can involve more than persuasive discourse from producers. David et al. ( 2013 ) identified a number of symbolic elements deployed by entrepreneurs in the early management consulting industry to legitimate their identity as “professionals,” such as ties to prestigious universities and scientific associations. Similarly, Khaire ( 2014 ) found that entrepreneurs in the emergent high-end fashion industry in India incorporated traditional textiles and clothing styles to signal that their activities were consistent with “ancient skills and traditions,” thereby increasing acceptance among a population skeptical of elitist fashion. And sometimes, “empty” categories are created by actors other than producers, only to be filled (or not) by the latter. Sine and David ( 2003 ) showed how regulators in the United States created the category of “alternative electricity producer” through legislation, a category that was later filled with thousands of small producers. Edman and Ahmadjian ( 2017 ) described how external actors—including the media, think tanks, local prefectural governments, consultants, and tourism companies—created the “ji-biru” (local beer) market category in Japan. This category, however, failed to develop a clear meaning, and was eventually eclipsed by the craft beer category.

The Role of the State in Institutional Change

The state figured prominently in early institutional accounts of organizations, dating back to Selznick’s ( 1949 ) discussion of the pivotal role of the state in the founding and development of the TVA. Building on Weber ( 1978 ), neo-institutionalists subsequently conceptualized the state as the primary rationalizer of social life, particularly in disseminating the bureaucratic organizational form. In their seminal paper, Meyer and Rowan ( 1977 , p. 342) explained that “one of the central problems in organization theory is to describe the conditions that give rise to rationalized formal structure,” and proposed the quest for legitimacy as the cause of rationalization, of which the centralized state was the primary vehicle. In a similar vein, DiMaggio and Powell argued that through the enactment and enforcement of laws and regulations, the state is among the “great rationalizers of the second half of the twentieth century” (DiMaggio & Powell, 1983 , p. 147). In their discussion of institutional logics, Friedland and Alford ( 1991 , p. 248) included the state logic among the central logics of Western societies and defined it as the “rationalization and the regulation of human activity by legal and bureaucratic hierarchies.”

The role of the state has received renewed attention in recent years, and contemporary research has discussed its capacity to act on all three “pillars” of institutionalization identified by (Scott, 1995 ): regulative, normative, and cognitive. From the standpoint of the regulative pillar, the state has the capacity to define the rules of the game by enacting laws and regulations. State policies and regulations have been credited with the development of a wide variety of industries, including railroads (Dobbin & Dowd, 1997 ), farm wineries (Swaminathan, 1995 ), and wind power (Sine & Lee, 2009 ). Anti-trust laws and interventionist policies affect firms’ cooperative and competitive behaviors (Fligstein, 1990 , 1996 ; Haveman, Russo, & Meyer, 2001 ; Mezias & Boyle, 2005 ). The state can dictate the scope of firm activity by codifying industry boundaries, which affect inter-industry competition (Amburgey, Dacin, & Kelly, 1994 ; Dobbin & Dowd, 2000 ; Haveman, 1993 ; Haveman et al., 2001 ). Changes in laws or regulations can also lead to changes in the distribution of organizational forms: Sine, Haveman, and Tolbert ( 2005 ) showed that a law requiring electric utilities to purchase and distribute power from independent power plants in the heavily regulated U.S. power industry increased founding of independent power plants, especially those using novel technologies. Dowell and David ( 2011 ) found that the number of private liquor stores in Alberta increased dramatically in the wake of an abrupt regulatory change. Closer to the internal functioning of organizations, the state may demand the adoption of specific organizational practices (Tolbert & Zucker, 1983 ) or codes of behavior (Okhmatovskiy & David, 2012 ), or may require particular outcomes without specifying the means by which they are to be achieved (Chuang, Church, & Ophir, 2011 ; Dobbin & Sutton, 1998 ; Kelly, 2003 ).

In terms of the normative pillar, the state has the capacity to confer sociopolitical legitimacy, which represents an evaluation of fit with prevailing norms and values (Aldrich & Fiol, 1994 ; Bitektine, 2011 ). This may take the form of state-sponsored certifications (Baum & Oliver, 1991 , 1992 ; Sine et al., 2005 ). For example, Sine et al. ( 2007 ) found that in the emergent independent power sector, projects having a government-issued certification—which was purely symbolic and could have been obtained by any qualified firm for a nominal fee—were more likely to reach the start-up phase. The state may even legitimate by its own patterns of consumption, as was the case for management consulting during the early years of that profession, when the state represented an important client for consultants (David, 2012 ).

Finally, in terms of the cognitive pillar, the state can influence the classification schemes by which we apprehend and organize the social world. This is most evident in the context of nascent markets, where entrepreneurs may lack even the basic vocabularies to define the contours of their markets and convey the value of their novel products, to hesitant investors, partners, and employees alike (Aldrich & Fiol, 1994 ). If, as discussed previously, new market categories rely on some degree of consensus among market participants, by virtue of its powerful position the state can promote such consensus and allow market construction to proceed. For example, during the emergence of the market for cochlear implants, there were two competing approaches to the technology, each informed by different sets of values and beliefs with regard to deafness (Garud, 2008 ). Ultimately, the National Institutes of Health in the United States played a central role in shaping the market that later developed, including through conferences that led to the dominance of one technology and the marginalization of the other (Garud, 2008 ). When states regulate and codify nascent spheres of organizational activity as distinct market categories, the organizations that comprise them enjoy greater audience attention and access to resources (Sine & David, 2003 ). Returning to the independent power example cited previously, in their selection of the projects that would qualify under a government program, government administrators drew the boundaries of the “independent power” category by defining the types of technologies the new category would come to encompass (Sine et al., 2007 ).

Conclusion and Suggestions for Future Research

While the substantive foci of studies drawing upon institutional theory are wide-ranging, there are common assumptions and preoccupations reflected in the work we have described. One key connecting theme is the importance of understanding ideational or cultural sources of existing organizational arrangements and of organizational change. This theme ties work in this tradition to a Weberian approach ( 1978 ) to studying social phenomena, and distinguishes it from more economic-based approaches that emphasize constraining market demands for efficiently produced goods and services as critical influences. As we noted, the relative neglect of the influence of social norms and interpretations in organizational analyses from the late 1950s onward (when organizational studies began to evolve as a distinctive area of social sciences) helps to account for the receptivity of researchers to institutional theory in the late 1970s, and for its continued popularity today as an alternative to more materialist approaches.

While both approaches offer valid insights into organizational phenomena, they have yet to be integrated or reconciled and are rarely, if ever, adopted simultaneously in a given analysis. This may be due to differences in underlying assumptions about the nature of individual decision-making and action on which each approach rests, differences captured by the (satirically offered) distinction between homo economicus and homo sociologicus (Dahrendorf, 1968 ). The former term denotes a view of individuals as continually calculating, interest-maximizing actors, while the latter rests on an opposing view, non-optimizing, habit-following actors who are driven largely by commitments to internalized values.

Critiques and extensions of institutional theory often reflect concerns that original formulations rested too much on the latter view (DiMaggio, 1988 ; Oliver, 1991 ). (One could quibble about whether conformity to social expectations is not agentic, though it is an unlikely response of powerful actors who are pursuing arrangements that enhance their own interests.) The streams of work we have described on institutional entrepreneurship and institutional logics have sought to address this concern. Work on institutional entrepreneurship has provided a much more elaborate answer to a critical question for the institutional perspective: how are institutions created and changed? Likewise, studies based on the notion of competing logics provide an explanation for variation in structural arrangements and forms of organization within the general framework of institutional theory. Thus, both streams have added substantially to the general theoretical perspective.

But important questions, ones relating to the role of agency within the perspective (i.e., the integration of homo economicus and homo sociologicus models of action), remain. Work on institutional entrepreneurship struggles to identify the key conditions under which individuals are most likely to transcend the constraints of cultural prescriptions and envision alternative arrangements, and the conditions under which others are likely to embrace such alternative visions (rather than sanctioning such entrepreneurs as wild-eyed deviants). (For notable exceptions, see Seo & Creed [ 2002 ] and Lawrence & Suddaby [ 2006 ].) Similarly, the conditions under which actors can successfully promote a given logic as a viable competitor to an existing logic, or when actors might subscribe to a logic that is not aligned with their interests (per Marx’s notion of false consciousness), remain to be addressed.

We suggest that progress in answering these questions may come from explicit theorizing across (as opposed to within) the four streams we have outlined here. For example, elucidating the strength of prevailing institutional logics and the presence of conflicting logics in studies of institutional entrepreneurship would contextualize such activities and avoid accounts of unbridled agency. Conversely, a better understanding of the agency that occurs during logic conflict can provide a fuller account of how institutional logics evolve at the field level. In brief, studies that offer full accounts of agency (institutional entrepreneurship) while at the same time accounting for institutional context (logics and their interaction) may be best positioned to avoid the caricatures of homo economicus and homo sociologicus .

Similarly, work that bridges research on the state, or more broadly on political processes, and research on institutional entrepreneurship seems potentially fruitful. Currently, reassertions of national sovereignty, such as Brexit, are challenging previously unquestioned institutions involving globalized trade, immigration, and long-standing international relations. This opens interesting avenues of inquiry for institutional theorists. How might such political changes cascade down to the organizational level? For example, because market categories can become vehicles for national identity, as is the case for many foods in Europe (DeSoucey, 2010 ) and country music in the United States (Peterson, 1997 ), we may find corporate and political interests collaborating to strategically activate patriotic sentiment, as in the case of NASCAR (Newman & Giardina, 2010 ). The formulation of international strategies may be influenced by perceived historical ties between nations (Cooper, Greenwood, Hinings, & Brown, 1998 ), opposition to acquisitions by foreign firms may mount if nationalist sentiment is stirred (Riad & Vaara, 2011 ; Tienari, Vaara, & Björkman, 2003 ; Vaara & Tienari, 2002 ), and post-acquisition success may depend on overcoming nationalistic biases among international employees (Ailon-Souday & Kunda, 2003 ; Vaara & Tienari, 2011 ). As such, beliefs about the role of the state and the “nation” it represents can have far-reaching implications that have largely gone understudied. And more generally, in a context of increasing interest in corporate political activity (Mellahi, Frynas, Sun, & Siegel, 2016 ), future scholarly work may investigate how market actors attempt to influence state policies, or the diverse ways the state may then favor some sets of market actors over others.

As neo-institutional theory enters its fifth decade since Meyer and Rowan ( 1977 ), we marvel at its growth and resilience as a perspective while at the same time wondering how it might continue to thrive. As other prominent approaches within organization theory—contingency theory and population ecology come to mind—have lost vigor, how might institutional theory remain vibrant? The following three pieces of advice may help.

First, clarity (and possibly restraint) is needed in the use of the terms “institution” and “institutional.” Studies should be clear about what the focal institution is, its basis for institutionalization, and the social setting in which it is institutionalized. This should include clarity about level of analysis—is the institution under study an organization, organization form, sub-organizational element, or inter-organizational structure? And of course, scholars should resist using the label institutional when doing so provides little theoretical traction.

Second, institutional scholars must not lose sight of the tangible impact of institutions and institutionalization. Often enthralled by rich descriptions of historical processes, institutionalists should emphasize the practical relevance of their studies, whether for managers, policymakers, or societal outcomes. For example, if new market categories require consensus on meanings and labels, the state can promote such consensus through regulated certification systems, or alternatively, emergent industries may pursue consensus through self-regulation.

Finally, institutional theory must maintain its unifying focus on cultural forces as key drivers of organizational behaviors and outcomes. Indeed, institutional theorists are often alone in schools of business/management in their cultural approach to organizations, while their colleagues in functional areas—finance, marketing, strategy, operations management, and so forth—emphasize organizational efficiency as both an independent and a dependent variable. Institutional theory’s prominence, and we believe its future, lie in serving as a compelling and coherent counterpoint to this “cult of efficiency.” 3

Further Reading

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1. The label “institutional theory” is used here while recognizing that the large body of research under this label shares an orienting perspective rather than a formal set of causal propositions, per most definitions of “theory.” Further, the label is used to denote only research within organization studies, and thus does not include institutional research in the fields of economics, political science, or law (for a discussion of how these relate to institutional theory in organization studies, see Scott [ 1995 ]).

2. Institutional entrepreneurship is frequently used synonymously with “institutional work,” a construct originally proposed by Lawrence and Suddaby ( 2006 ). Like institutional entrepreneurship, institutional work has come to be used in practice to describe all agentic activities directed towards creating, maintaining, or changing institutions.

3. The first use of this term is often credited to Callahan ( 1962 ).

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Journal of Organizational Change Management

ISSN : 0953-4814

Article publication date: 29 June 2020

Issue publication date: 7 December 2020

This essay raises a concern about the trajectory that new institutionalism has been following during the last decades, namely an emphasis on heterogeneity, change and agentic behavior instead of isomorphism and conformist behavior. This is a crucial issue from the perspective of the philosophy and methodology of science since a theory that admits both change and stability as a norm has less scientific weight then a theory that predicts a prevalence of passivity and isomorphism over change and strategic behavior. The former provides explanations and predictions while the latter does not.

Design/methodology/approach

The paper offers an analysis of the nature, characteristics, functions and boundaries of institutional theories in the spirit of philosophy and methodology of science literature.

The power of the former institutional theory developed by Meyer, Rowan, DiMaggio and Powell lies in its generalization, explanation and prediction of observable and unobservable phenomena: as a typical organizational theory that puts forward directional predictions, it explains and predicts the tendency for organizations to become more similar to each other over time and express less strategic and interest-driven behavior, conforming to ever-increasing institutional pressures. A theory of isomorphism makes scientific predictions while its modern advancements do not. Drawing on Popper's idea of the limit of domains of explanation and limited domains of theories we present two propositions that may direct our attention towards the strength or weakness of institutional theories with regard to their explanations of organizational processes and behavior.

Practical implications

The paper draws implications for further theory building in institutional analysis by suggesting the nature of institutional explanations and the place of institutional change in the theoretical apparatus. Once institutional theory explains the tendency of the system towards equilibrium, there is no need to explain the origins and causes of radical change per se . Institutional isomorphism theory explains and predicts how even after radical changes organizational fields will move towards isomorphism, that is, institutional equilibrium. The task is, therefore, not to explain agency and change but to show that it is natural and inevitable processes that organizational field will return to isomorphic dynamics and move towards homogenization no matter how much radical change occurred in this field.

Originality/value

The paper discusses the practical problems with instrumental utility of institutional theories. In order to be useful any theory must clearly delineate its boundaries and offer explanations and predictions and it is only the former 1977/1983 institutional theory that satisfies these requirements while modern advancements merely offer ambiguous theoretical umbrellas that escape empirical tests. For researchers therefore it is important to recognize which theory can be applied in a given limited domain of research and which one has little or no value.

• Explanation
• Institutional theory
• Philosophy of science
• Homogeneity

Acknowledgements

The authors are grateful to the anonymous reviewers for their helpful comments. Earlier versions of this paper have been presented at the departmental research seminar of Economic Faculty, Taras Shevchenko National University of Kyiv, Ukraine (2017) and the 15th annual New Institutionalism Workshop in Uppsala, Sweden (2019).

Aksom, H. and Tymchenko, I. (2020), "How institutional theories explain and fail to explain organizations", Journal of Organizational Change Management , Vol. 33 No. 7, pp. 1223-1252. https://doi.org/10.1108/JOCM-05-2019-0130

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A Review of Institutional Theory and Entrepreneurship

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Institutional theory is one of the major theories underpinning not only organization and management research, but also entrepreneurship studies. In this paper, we will review the existing literatures that employ institutional perspective to understand entrepreneurship and those applying entrepreneurial perspective to address the “paradox of embedded agency” which impedes the endogenous development of the institutional theory to understand the current status of the field and future research possibilities.

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Chen, Hz. (2013). A Review of Institutional Theory and Entrepreneurship. In: Qi, E., Shen, J., Dou, R. (eds) The 19th International Conference on Industrial Engineering and Engineering Management. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-38442-4_77

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