Institutions, Evolutionary Economics & Population Ecology

Question 1

Nelson & Winter (1989)

Answer 1

BOOK: An Evolutionary Theory of Economic Change

• critique of previous forms of economic models of firms (classical economics), and offers instead an approach to the modeling the evolution of industries and organizations
• Formalizes Schumpeter’s story of innovation and monopoly. Evolutionary models are said not to be standard neoclassical models.
• Also draw off Simon (a lot)
• Classic models have optimizing agents, perfect information, total and unbounded rationality, and static equilibria. In their evolutionary theory, there are instead patterns of survival in the population of firms based on “organizational genetics.”
• In the real world, adapting to surprises take time. In classic theory, adaptation is presumed to move to equilibrium (very quickly).
• In reality, moves my also overshoot equilibrium.

Question 2

Institutional School Key Ideas

Answer 2

• Firms change as a result of social pressures to conform and to gain legitimacy, not as a result of economic or technical pressures
o Infusion of Value: Firms develop a sense of meaning/value/history that leads to sometimes irrational actions
o Diffusion of Innovations: sometimes innovations are adopted for social reasons (subjective perceptions of the practices often determines adoption)
o Rational myths: Meyer & Rowan 1977 firm behavior may be based on assumptions about what a successful organization should be/have (e.g., a personnel system) and that orgs can survive by becoming isomorphic with their environment
o Loose coupling: firms may only ceremonially adopt certain practices
o Legitimacy: orgs improve their odds of survival by conforming to the expectations of what a successful organization looks like
o Isomorphism: firms in a common field are subject to similar institutional pressures and over time will become more similar

Question 3

DiMaggio & Powell (1983)

Answer 3

“New school”

Categorized the types of isomorphic pressures
o Coercive: political/laws that require firms to conform
o Normative: need to adopt practices assumed to be right or proper by significant actors (i.e., professions)
o Mimetic: tendency to copy other leading organizations in times of uncertainty

Capitalistic forces have led to structuration of organizational fields
• Professionalization of fields reinforces the homogenization of firms b/c the same professionals filter in and out of firms and the same types of individuals (holding similar beliefs and having similar values) rise to the top of these firms

Question 4

How does DiMaggio & Powell relate to Weber’s theory of bureaucracy?

Answer 4

Two ways this connects to Weber’s (2007) view of bureaucracy
o Legitimacy
Legitimate authority and legitimacy are related…firms desired legitimate authority and thus developed bureaucracies. Per institutional theory, firms desire legitimacy for survival
 Socially constructed norms that defined Weber’s rational-legal authority also relate to the socially derived norms coming from professions and broader society…legitimacy is a function of cultural acceptance
o Professionalization
 Weber’s division of labor ideas about creating specialists who are promoted based on their technical expertise relates to DiMaggio & Powell’s idea of the professionalization of organizational fields

Question 5

Old school vs. New School

Answer 5

Old school:
o Selznick (1949) case study of Tennessee Valley Authority
o Focused within the firm whereas new school looked across firms

Question 6

In institutional theory, who can facilitate and prevent adaptation (i.e., change)

Answer 6

o Professions, Governments, Management Consultants, Networks of corporate executives

Question 7

Sherer & Lee (2002)

Answer 7

• Integrates resource dependency theory and institutional theory
• Studied large law firms and their partnership model (i.e., up or out)

Endogenous forces:
o B/c large, prestigious law firms selected only the top law school graduates (making those resource scarce) and put them on the partner track, many were fired after 6 years and the firms lost all of the knowledge and costs they bared to bring those lawyers up in the firm

Exogenous forces: the corporatization of law firms led to the publishing of financial results and external pressures to grow larger

Outcomes? Prestigious firms led the changes

• Created a senior attorney track and a staff attorney position (changed the institutional field)
• Early adopters create legitimacy for others to follow
• Managers of prestigious firms used agency through the media to influence the changes

Question 8

Hitt et al. (2004)

Answer 8

Applies institutional theory to the strategic choice of alliance partners in two emerging economies (i.e., Russia & China)

Institutional arrangements influence the development of national economics, organizational forms, and managerial actions

Natural Experiment

Key takeaway: firms’ strategic choices (e.g., partner selection) are heavily influenced by (hindered (i.e., Russia) or helped (i.e., China)) by the institutional environments they operate within.

Question 9

Greenwood & Suddaby (2006)

Answer 9

Institutional Entrepreneurship

• Address the “paradox of embedded agency” whereby actors within an institution can change the institutional environments they are shaped by

• Looked at the Big 5 accounting firms change in organizational form to a multidisciplinary
• Boundary Bridging: because of the Big 5’s spanning of structural holes, they were able to see where there were gaps to be filled (i.e., services to be provided to audit clients)
• Boundary Misalignment: as firms moved more towards one global firm and away from provincial firms, the regulatory bodies couldn’t keep up with this new structure
• Resource asymmetries: by working together, the Big 5 resisted the coercive pressures of regulators trying to restrict the move towards incorporating consulting and legal services into the accounting firms
• Embeddedness is weakened by awareness (boundary bridging) and resource asymmetries reduce coercive power (boundary misalignment)

Question 10

Trends in institutional theory

Answer 10

• Institutional Entrepreneurs may enable institutions to resist pressures, they can discern and influence collectives’ social beliefs (in contrast to the early idea that institutional change could only occur exogenously (i.e., a shock to the industry)
• Network theory suggests those in bridging positions can initiate change b/c they are less susceptible to institutional pressures
• Trend is towards a more agentic approach to institutional theory
• Seems there is a connection to this idea of firms straddling technical and social worlds and sociomateriality (humans and technology are inextricably linked)
• Managers today are working to change the institutional environment (i.e., CSR, political donations, corporate museums, etc.)

Question 11

Hannan & Freeman (1977)

Answer 11

Population Ecology

• Organizational survival is dependent upon fit

• organizational change is determined by the environment optimizing and selecting the best organizational structure
• firms are constrained by structural inertia (i.e., path dependence, organizational routines, sunk costs, etc.) that make it difficult to respond to a changing environment

Specialist firms: more vulnerable to shifts in technological environment
• Specialists: maximize exploitation and accept risks
Generalists: accepts lower exploitation for greater security (they have slack resources)

• The environment has the power (it selects) and then firms become isomorphic to the legitimate players
• Inertia is a byproduct of success (in contrast to theories that assume the best organizations adapt to their environments through agency)

Theory predicts that in times of environmental change, the generalist strategy will prevail over the long term