Institution Based view Flashcards
What is the institutional based view of strategy and what does it tell us?
It analyses the “dynamic interaction between institutions and firms and considers strategic choices as the outcome of such interaction” (Peng 2014:102).
It argues that the ‘strategic choices made by firms are the outcomes are a reflection of, the formal and informal constraint posed by an institutional framework’ (Peng, 2014: 102).
2 Core Propositions on how institutions matter
(1) “Managers and firms rationally make strategic choices within institutional constraints” (Peng, 2014:102).
(2) “While formal and informal institutions combine to govern firm behaviour, in situations where formal constraints are unclear or fail, informal constraints will play a larger role in reducing uncertainty and providing constancy to managers and firms” (Peng, 2014:103).
Institutions are context specific
The institutional based view considers the influence of the environment.
Therefore, “it turns out that when viewed as a “big picture” firms within one institutional environment tend to be similar but firms different across institutional frameworks.
E.g. Chinese growth is attributable to the underdeveloped informal institutions; the interpersonal networks, ‘guanxi’, cultivated by managers, may serve as informal substitutes for formal institutional support (link to proposition 2)
How firms behave
“The institution based-view argues that in addition to industry and firm-level conditions, firms also need to take into account the influences of formal and informal rules of the game”
E.g. Japanese pharmaceutical companies are constrained by fixed drug prices that are not allowed to rise during drugs prescribed shelf life. Therefore, being rational, such firms find little incentive to invest in R&D.
What determines the scope of the firm?
As eluded with proposition 1, managers and firms behave rationally given the formal institutional constraints.
What determines the success and failures of firms around the globe?
Failure can occur where firms “fail to do their homework, by getting to know the various formal and informal rules of the game in overseas markets”.
