Institutional theory in business studies

Marketing

Since the call for addressing institutional analysis more rigorously was made by Yang and Su (2014), the examination of institutional theory in business marketing has grown significantly (Theingi et al., 2017). Institutional theoryhas been applied to marketing in several ways. The application of Scott’s (1987) framework of the three pillars of institutions has been a popular theoretical tool to examine the role of the institutional environment in marketing channels (Grewal & Dharwadkar, 2002). Theingi et al. (2017) found that several institutional constraints, such as poor communication channels and lack of rural and regional infrastructure, influence the use of formal and informal marketing channels. Fonnal marketing channels should help to build stronger networks with domestic institutions such as banks. However, these fonnal channels present intense competition for informal channel members (Theingi et al., 2017). The two different channel stmctures can seriously jeopardise the legitimacy of regulative, normative, and cognitive pillars. As a result, the institutional environment becomes more complex for host organisations to operate.

Several studies applied the three institutional pillars perspective to examine differences between business networks in various markets (Jansson et al., 2007). Jansson et al. (2007) found that business networks in China, Russia, and Western Europe play a different role and are managed in different ways because of the contextual differences in the insthutional environments in these markets. Furthermore, the overlap between personal and business networks influence the changes in institutional environments as well as network structures (Mattsson & Salmi, 2013). Accounting for contextual factors is crucial when studying institutional environments and networks and marketing discipline allows to examine the link between the two concepts.

Institutionalism has also been a focus in marketing with regards to the associations between different actors. Arndt ( 1981, p. 37) defined institutions as “sets of conditions and rules for transactions and other interactions” and where culture is often considered as an informal structure of a wider social setting. Arndt (1981) argues that institutionalisation can provide an exciting platform for the interplay between markets, politics, and hierarchies. Their interplay in fact contributes to the development of the idiosyncratic features of the institutional environment, which in fact influences marketing practices and enhances entrepreneurial processes that are embedded in this environment (Webb et al., 2011). These studies illustrate the importance of examining the link between different constructs. However, when applying institutional theory to relationship networks, it is crucial to account for situational factors (Yang & Su, 2014) because relationships, networks, and institutional environments are not static (Morrish & Earl, 2020).

International business and management - dealing with institutional complexity

Institutional complexity has been documented in numerous international business and management studies (Meyer & Hôllerer, 2016; Meyer &

Disciplinary foundations 29 Rowan, 1977; Raaijmakers et al., 2015; Ramus et al., 2016; Raynard, 2016) and has been referred to as a ‘third wave’ of institutional theory (Johansen & Waldorff, 2015). Institutional complexity arises when organisations face “incompatible perspectives from multiple institutional logics” (Greenwood et al., 2011, p. 318). The international business literature focuses on conflicting institutional logics, primarily in relation to inter-institutional complexity, where institutional logics are examined in different institutional environments (Greenwood et al., 2011). Understanding conflicting institutional logics is important for studying institutional complexity as an aggregate (Saka-Helmhout et al., 2016). However, these conflicting elements, especially between different levels of governments, can be a strategic advantage in MNEs' internationalisation process (Luo et al., 2017). MNEs can use their relationship with government officials to gain resources and access networks, which enhances their operations. Further, conflicting institutions can act as learning mechanisms that MNEs can employ to manage institutional complexity (Desai, 2016; Marano & Kostova, 2016; Ramus et al., 2016). Therefore, there is a need to examine the nuances of institutional complexity.

When institutional complexity has been examined previously, the focus has been on field structure and organisational attributes, including position in the field, ownership (Greenwood et al., 2011), and knowledge about institutional infrastructure (Dau, 2016). The nature of institutional complexity is significantly influenced by the structure of the field in which organisations operate. The structure within the field is driven by institutional logics that shape the behaviours of relevant actors (Scott, 2008). Because actors use logics flexibly to enhance outcomes, the structure of the field becomes less transparent, thus increasing institutional complexity (McPherson & Sauder, 2013). An example of such behaviour is evident in EEs, where flexible logics are used purposefully as tools to influence court decisions in favour of MNEs or governments (McPherson & Sauder, 2013). For example, Russia’s federal government uses logics flexibly to form formal institutions, which allows them to adapt and interpret laws and regulations in their favour (Black & Tarassova, 2003). In China, Chen et al. (2016) argue that there are multiple logics associated with tourism development, including the logic of pursuing political legitimacy (discussed further below), the logic of fiscal income maximisation, the dual logics of the market and politics, and the logic of pursuing economic benefits. Significantly, with respect to the complexity of the environment within which businesses operate, they note that these logics also operate at multiple scales: national, regional, and local.

This flexibility of applying institutional logics to interpreting formal rules fragments the structure of the field, thus increasing institutional complexity

(Greenwood et al., 2011; McPherson & Sander, 2013). In less fragmented markets, the regulations are more unified, which should decrease institutional complexity (Meyer, et al., 1987). While this does apply in some industries, such as education (Meyer et al., 1987), fragmentation can lead to increased institutional complexity in other industries because of conflicting institutional logics (Greenwood et al., 2011). In the case of tourism in Macau, for example, Fong et al. (2018) suggest that tourism actors responded to changes in institutional factors by adopting an institutional logic of coopetition, which included five key processes: exploiting, exploring, bridging, sharing, and boundary spanning, as part of the co-evolution between the multi-stakeholders’ changing logics of practice and the surrounding institutional environment.

MNEs being positioned in a strategic sector can be an organisational attribute, whereby MNEs use their position in the field to deal with institutional complexity (Marano & Kostova, 2016). This is possible when organisations engage in learning and become catalysts for identifying strategies for managing institutional complexity, especially where the institutional environment is weak (Desai, 2016; Marano & Kostova, 2016). Organisations that are not in strategic sectors are less likely to obey established institutional practices because they are not bound by institutionalised relationships with different actors. Conversely, organisations operating in strategic sectors are often the centre of media, government, and society attention. This means that many MNEs are more likely to follow institutionalised practices (Ahmadjian & Robinson, 2001). MNEs may follow the existing practices on the surface, but in reality, how they handle institutional complexity can be less visible because of their desire to protect their actor-specific relationships (Kostova et al., 2008).

Studies have focused on the organisational response to institutional complexity based on competing or incompatible institutions (Bertels & Lawrence, 2016; Faulconbridge & Muzio, 2016; Saka-Helmhout et al., 2016). The responses are influenced by institutions and their enforcement mechanisms that exist in a particular market. Ahmadjian (2016, p. 13) proposes that “national systems, the specific institutions that define and distinguish these systems, and the mechanisms by which institutions combine into distinctive configurations, they share a fundamental assertion that national institutional systems shape the strategy, structure, and fundamental assumptions of firms”. How MNEs create these configurations is influenced by existing institutions and their enforcement mechanisms, which are developed by the govenunent (Peters, 2012). Therefore, before examining MNEs’ responses to intra-institutional complexity, we must understand what institutional complexity actually comprises.

Managing intra-institutional complexity is a crucial step in the internationalisation process, yet it has been largely neglected in the international business literature (Meyer & Hóllerer, 2014, 2016) and is clearly also crucial for international tourism businesses. Intra-institutional complexity is a vital part of MNEs’ development and internationalisation because they must first navigate the domestic institutional environment (Kraatz & Block, 2008; Meyer & Hóllerer, 2016). Meyer and Hóllerer (2016, p. 2) refer to intra-institutional complexity as “conflicting institutional demands that arise within the same institutional order”. One area where this has been particularly important in a tourism context is with respect to the development of public-private partnerships, which are often marked by considerable tensions between the different logics of the public and private good (Saz-Carranza & Longo, 2012). This clearly implies that institutional logics can be in conflict with one another (Thornton, 2002). Intra-institutional complexity is therefore strongly influenced by the institutional environment of a particular context.

Legitimacy

Legitimacy has gained substantial attention in institutional theory, particularly in relation to MNEs and how they gain and manage legitimacy (Bitektine & Haack, 2015; Deephouse et al., 2017; Kostova & Zaheer, 1999; Suchman, 1995; Suddaby et al., 2017). However, it is a topic that is surprisingly little discussed in a tourism setting. With the work of Ruhanen and Whitford (2018) on racism as an inhibitor to the organisational legitimacy of indigenous tourism businesses in Australia and Zapata and Hall (2012) on balancing legitimacy and effectiveness in local public-private tourism partnerships in Spain being notable exceptions.

Table 2.4 summarises some of the key studies that define and/or describe legitimacy in a business and organisational context. The importance of legitimacy has been recognised as a key element in social life, and in political and governance regimes (Weber, 1947). Originally, legitimacy was analysed at the macro level, by examining its influence on social life. Weber (1947) further extended this and examined legitimacy in relation to a process of change in values and beliefs and organisational reliance on rational or legal structures. Organisations are considered legitimate if they conform to these structures. However, social functions must be considered when determining organisational behaviour, because organisations sometimes base their actions on broader social beliefs (Parsons, 1960).

Maurer (1971, p. 361) ascribed hierarchical connotations to legitimacy, contending that "legitimation is the process whereby an organisation justifies to a peer or superordinate system its right to exist”. Based on this

Table 2.4 Legitimacy - definitions and descriptions

Sources

Defin itions/descriptions Emphasis

Weber (1947)

A process of change in The emphasis is on the legal

values and beliefs and system, where organisations

organisational reliance on make a rational choice to

rational or legal structures conform to rules.

Maurer (1971)

Legitimation: the process Organisations have the right

whereby an organisation to justify their legitimate

justifies its right to exist existence in a hierarchical

to a peer or superordinate system,

system

Dowling & Pfeffer

(1975)

Congruence between the social Organisational legitimacy is values associated with or driven by their involvement in

implied by activities and social and political activities,

the norms of acceptable behaviour in the larger social system

Meyer & Scott

(1983)

The degree of cultural support Cultural aspects affect the for an organisation - the existence and functioning of

extent to which the array organisations. Cultural aspects

of established cultural influence organisational

accounts provides legitimacy.

explanations for an organisation’s existence and functioning

Suclunan

(1995)

A generalised perception or Organisational legitimacy is assumption that an entity’s influenced by the stability of

actions are desirable, proper an institutional environment, or appropriate within some socially constructed system of norms, values, and beliefs

Deephouse

(1996)

Social actors’ endorsement of Organisations do not have to an organisation satisfy all the actors. The

most important actors are government regulators and public opinion.

Establishing legitimacy in foreign markets depends on the size, age, performance and reputation of an MNE as a whole.

Kostova & Zaheer (1999)

An organisation’s acceptance Cultural adaptations and the by its environment nature of the product and

regulatory environment also affect legitimacy.

(Continued)

Table 2.4 Continued

Sources

Defin itions/desci iptions Emphasis

Zimmerman &

Zeitz (2002)

A relationship between the A social judgement of

practices and utterances of acceptance, appropriateness

the organisation and those and/or desirability,

that are contained within, approved of and enforced by the social system in which the organisation exists

Kostova et al.

(2008)

It is impossible to achieve An alternative mechanism that

legitimacy through multi-national corporations

isomorphism because of the employ in negotiating their multiplicity and complexity status with relevant actors,

of the institutional environment

Bitektine & Haack (2015)

The degree of an organisation’s Organisational legitimacy collective approval consists of two components:

individual-level propriety and collective-level validity.

Legitimacy process under conditions of institutional stability and change is affected differently.

definition, organisations have the right to justify their operations to the superior actor and be judged by this actor. Dowling and Pfeffer (1975) further developed Parsons' (1960) idea of conformity to social beliefs, referring to it as cultural conformity, but not to the hierarchical system or self-justification. They viewed legitimacy as accepted behaviour in a larger social system (Dowling & Pfeffer, 1975). This acceptance is determined by similar values between an organisation and political and social systems. These values are culturally embedded - therefore, the acceptance of organisational behaviour is influenced by cultural aspects in a particular context (Meyer & Scott, 1983). Cultural factors can explain organisational legitimacy and the extent of its existence and functioning, as culture is part of the larger social environment in which organisations operate (Meyer & Scott, 1983). The legitimation process for organisations becomes complex because they must comply with cultural and regulatory norms that influence different actors’ perceptions of their actions (Bitektine, 2011; Xu & Shenkar, 2002). In the case of Ruhanen and Whitford’s (2018) research on Aboriginal tourism businesses in Australia, such a perspective was critical because the culmrally dominant norms of racism and discrimination in Australian society were seen to directly impact the extent to which indigenous businesses were perceived and regarded as "legitimate” businesses.

Suchman (1995, p. 574) states that organisational legitimacy is “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values and beliefs”. Whether the actions are perceived as desirable, proper, or appropriate depends on the actors who judge the organisation’s behaviour. These actors form certain norms and rules that organisations follow to act properly. However, organisations need only satisfy actors whose perceptions will affect their operations (Elsbach & Sutton, 1992). Deephouse (1996) states that the government and public are the most important actors, because the government develops the regulatory framework and the public influences the social norms that form the environment in which organisations operate. The challenge organisations face is that they cannot satisfy the interests of all actors - therefore, the legitimation process becomes more complex, as organisations must prioritise whose acceptance is more desirable (Deephouse, 1996).

An organisation’s acceptance by its environment is an important part of organisational legitimacy (Kostova & Zaheer, 1999). The environment consists of cultural norms and regulations, which affect whether the organisation is accepted within it. From this perspective, organisational legitimacy is socially constructed and dependent on the collective beliefs of specific social groups, including the government and the public (Bitektine & Haack, 2015; Scott, 1995; Suchman, 1995). Therefore, legitimacy can be described as a relationship between the practices and regulations of approved organisations and enforced by a larger social environment in which organisations operate (Zimmerman & Zeitz, 2002). An organisation’s practices and regulations both influence organisational legitimacy and its enforcement. Such an observation is extremely important in the case of tourism businesses, CSR policies, behaviours, and actions, for example, which have become an increasingly important element of demands for more sustainable forms of tourism (Aureli et al., 2017; Remondino et al., 2019; see Box 2.2). Although, arguably, from a tourism perspective, issues of legitimacy can also be extended from specific businesses to also include the broader destination context with respect to branding; for example, in terms of how green or sustainable a destination may be. Therefore, there is also potential to use an institutional lens to investigate the legitimacy of destination brand narratives as well as of the destination management/mar-keting organisations and other public agencies that support them (Samkin & Schneider, 2010).

BOX 2.2 CORPORATE SOCIAL RESPONSIBILITY (CSR) AND SUSTAINABILITY INITIATIVES OF MULTI-NATIONAL HOTEL CORPORATIONS

Ng and Tavitiyaman (2020) undertook a study of the disclosures by multi-national hotel corporations on CSR and sustainability matters. They found that Western hotel corporations had an emphasis on integrated innovation management (IIMs) and utilised global measurement approaches and standards such as GRI standard and ISO 14001 certification. In contrast, and potentially reflecting different institutional environments, Asian hotel corporations were found to have diverse CSR and sustainability initiatives in terms of public relation management (PRMs) (e.g. staff development, staff remuneration and welfare, and good stewards of the environment) and enterprise risk management (ERMs) (e.g. operational risks management, use of solar energy, and new energy conservation) approaches, but a low implementation of IIMs.

The existing regulations and actual practices that organisations undertake to gain legitimacy are related (Tost, 2011). Organisations may view legitimacy purely as a resource owned by that organisation, independent of the perceptions of different actors (Zimmerman & Zeitz, 2002). Organisations may not obey regulations if they interfere with achieving the main organisational objectives and may instead engage in illegitimate activities to acquire legitimacy (Elsbach & Sutton, 1992; Suchman, 1995). In an environment where regulations diverge from practice, organisations engage in negotiations with relevant stakeholders to attain legitimacy (Kostova et al., 2008) because existing institutions are not suited to meet the objectives of these organisations (Thornton et al., 2012). However, it is important to recognise that it is the government that has the power to set and enforce the rules and regulations (Boddewyn, 2016). Therefore, organisations must negotiate with the government, which implies that legitimacy can also be enforced via regulatory actions or other governmental measures, such as threats of action. This means that organisations and governments can both influence the enforcement of organisational legitimacy (Cuervo-Cazurra et al., 2014), with the relationships between the two influencing how various actors perceive and enforce legitimacy.

Negotiation and enforcement imply that an organisation’s legitimacy is approved collectively (Bitektine & Haack, 2015). Different actors, including the government, determine the approval and evaluation of legitimacy (Diez-Martin et al., 2013; Scott, 1995). However, organisations can use legitimacy as a resource to gain access to other resources, such as networks, financial and human capital, and technology (Zimmerman & Zeitz, 2002). Although legitimacy can be viewed as a resource, individuals approve an organisation’s practices as appropriate, and then collective actors, including the government and organisation, make a collective judgement or reach a consensus about the organisation’s legitimacy (Bitektine & Haack, 2015). The notion of collective judgement becomes interesting in the case of an MNE, because the collective judgement occurs in home and host countries (Cuervo-Cazurra et al., 2014). For example, perceptions of animal and even human rights may be different in source countries and at destinations creating significant issues for outbound tour companies to manage as although behaviours may be acceptable at the destination, governmental and public pressures to change activities provided to tourists (Font et al., 2019; Yang, 2020; Zapata Campos et al., 2018). While the process of judgement and approval can be driven by home and host governments (Rottig, 2016), MNEs can engage in silenced legitimation of judgement, where the government and MNEs may conceal the undesirable legitimacy outcome from the public (Bitektine & Haack, 2015). In this case, organisational legitimacy can be generalised (Tost, 2011). MNEs can therefore use their relationships with the government to orchestrate perceptions of their actions, and hence establish and maintain legitimacy in various markets.

 
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