Multinational companies require a framework that will enable them to assess the business potential of countries from an institutional perspective, and this paper seeks to provide such a paradigm.
It identifies and disentangles various strands of institutional theory by analyzing their coded content, while simultaneously exploring current trends in international business research through an examination of coding categories.
People
Institutional theory investigates how social choices are shaped, moderated, and channeled through institutional environments. Its central tenet is that pressure from this environment prompts firms to adopt (or transfer) certain practices in order to gain and retain legitimacy – this occurs via three isomorphic processes – coercion, mimeticity, and normativity.
Institutional theory, an expanding subfield of sociology, investigates the underlying logics that inform managerial decision-making processes. Thus it has close ties with behavioral theory research.
Institutional theory has been utilized in international business through various approaches, including neo-institutionalism, new institutional economics, comparative capitalism and the institution-based view. This article delves further into these four fields to provide a more in-depth analysis of their contributions to literature while also outlining major gaps and future directions within this research field.
Power
One of the primary questions surrounding power is whether or not businesses exert structural influences over governments and other societal institutions. Some scholars maintain that companies with strong competitive advantages may abuse relationships by employing coercive tactics in pursuit of their goals (Ireland and Webb 2007). Furthermore, exercising power over weaker partners may undermine long-term benefits by inducing polarization instead of collaboration (Cousins 2002).
More recently, scholars have begun exploring the role of informal institutions in international business. One subfield of this research involves institutional logics – broadly defined sets of assumptions and action patterns which facilitate managerial decision-making – with these efforts having close ties to behavioral theory research with direct dialogue between both perspectives.
Researchers have also studied why and how organizational structures and practices evolve over time, using approaches such as comparative institutionalism (which views national institutional environments as constellations of interdependent arrangements that vary by country; see Jackson & Deeg 2008 for more detail) This perspective has proven particularly useful when studying drivers and barriers of practice transfer.
Performance
Students of organizational culture have long noted the broader institutional environment’s ability to shape and restrict how companies conduct business. According to this view, its rules and requirements impose pressures upon firms in order to meet legitimacy requirements for legitimacy (whether direct through regulatory penalties or indirect through social dependencies – see DiMaggio and Powell 1983 and Meyer and Rowan 1977 for examples).
Institutional theory provides us with a better understanding of how the context surrounding a firm’s decision-making influences long-term performance, particularly its decision-making processes and decision makers’ relationships to its institution environment (which may include formal and informal arrangements embedded in culture or ideology). Institutional theory captures more logical systems through computer science logic developments; this expansion has real-life ramifications for international business as it will impact decisions about subsidiary locations as well as employee effectiveness in that locale.
Pathways to International Expansion
Although companies may wish to expand internationally, they should proceed carefully in order to avoid costly errors and mistakes. They must assess each new market’s culture, language and competitors thoroughly in order to ascertain if it fits with them; although this process requires significant time and energy input from business leaders, ultimately saving both money and effort by preventing failure in those new markets.
Institutional theory examines how structures – such as schemes, rules, norms, and routines – become established as authoritative guides for social behavior. Different components of this theory describe how such elements are created, diffused, adopted, adapted over time and space, or eventually fade away or disuse occurs.
Numerous theories have been developed to understand how institutional environments influence the internationalization process of multinational enterprises (MNEs). These theories include Neo-institutionalism, New Institutional Economics (NIE), and Comparative Capitalism – each offering its own set of analytical levels; for example in NIE NIE analyses begin at country level while Neo Institutionalism’s analytical levels start with company specific characteristics.
