L 5 Introduction to Institutions

Question 1

What are Institutions?

Definition by Douglas North

Answer 1

“Institutions are the humanly devised constraints that structure political, economic and social interaction”

Question 2

was does constraints mean in this definition of institutions?

Answer 2

facilitating or making certain behavior inappropriate

Question 3

Formal constraints

Answer 3

laws, regulations, prescribed (vorgeschrieben) agreements.

They attempt to regulate behavior.

Question 4

Informal constraints

Answer 4

sanctions, taboos, generally accepted ways, traditions, patterns of behavior

Question 5

According to Elinor Ostrom

Answer 5

Institutions are a wide variety of rules that determine:

• who makes the decisions
• which actions are tolerated
• which procedures need to be followed
• which information needs to be provided
• which reward/penalty people can expect from their acts

Question 6

What does the understanding of institutions do?

Answer 6

it reduced uncertainty

Question 7

Richard Scott defines the elements of institutions

Answer 7

Regulative institutions
Cognitive Institutions
Normative Instituions

Question 8

Regulative Instituions

Answer 8

formal rules

Question 9

Normative Institutions

Answer 9

informal expectations

Question 10

Cognitive institutions

Answer 10

“frames of reference” how we see the world

Question 11

Who makes institutions?

Answer 11

People create and maintain institutions

Question 12

Path-dependency

Answer 12

new institutions are constrained by preceding institutions that were in place

Question 13

three main influential factors

Answer 13

society, state and markets

Question 14

What do institutions lead to?

Answer 14

They do not lead to full rationality but to bounded rationality

Question 15

Functional perspective (economic perspectives)

Answer 15

Institutions reduce uncertainty

Institutions give purpose and meaning

Question 16

How can the functional perspective be explained?

Answer 16

By the game theory

Question 17

game theory and functional perspective

Answer 17

cooperation between players depends on

repeated
complete information
small number of players

Question 18

endgame

Answer 18

when game is not repeated

Question 19

from a functional perspective institutions make:

Answer 19

make complex transactions possible and increase cooperation

Question 20

Neo-institutionalism perspective

Answer 20

focuses on the sociological perspective and not on the economic one like the functional perspective

focuses how institutions influence the behavior of people and firms

institutions are there because they give legitimacy. Institutions define what is accepted, expected, allowed

Question 21

Institutional isomorphism

Answer 21

refers to the processes that force a unit within a population to become more similar to others with a similar institutional context

Question 22

forms of institutional isomorphism

Answer 22

• coercive isomorphism
• mimetic isomorphism
• normative isomorphism

Question 23

coersive isomorphism

Answer 23

refers to the pressures organizations receive from the state and government mandate. Also corrective societal pressure plays a role.

For example, all public firms have to stick to financial reporting requirements, and restaurants have to comply with specific health and safety regulations, set by local and EU legislators.

Question 24

mimetic isomorphism

Answer 24

imitation. Uncertainty encourages imitation
Three types:
- frequency imitation
- trait imitation
- outcome imitation

Question 25

normative isomorphism

Answer 25

firms become more homogeneous because they experience the same normative professional pressures.

Certain accreditation agencies, professional
certification boards, training qualifications may set the standards for all firms (e.g., AACSB
for business schools, CPA for accountants, long-term medical training for hospital staff). In
addition, firms may become very similar because they use the same “experts” (who set the
norm), such as consultants or management gurus.

Question 26

Why is it important for managers to know about institutions?

Answer 26

• Industry based view
• Resource-based view
• Institutions-based view

Question 27

Industry based view

Answer 27

refers to the role of 5 forces in the industry and the position as low-cost leader or differentiator

Question 28

Resource-based view

Answer 28

refers to the role of unique resource characteristics of firms that are valuable, rare and difficult to imitate or substitute

Question 29

Institutions-based view

Answer 29

refers to the influence of the broader context on firms and their behaviour (e.g. politics)

Question 30

Why do firms differ?

Answer 30

Industry based view: The IBV takes unique industry positions in account and therefore focuses on relations

Resource-based view: focuses on unique resources

Institutions-based view: firms differ due to differences between institutional contexts ( countries differ with respect to institutional development; institutional capabilities)

Institutions-based view on why firms do not differ:

Isomorphism; similarities within institutional frames

Question 31

How do firms behave

Answer 31

Industry based view and resource-based view are prescriptive:

• Industry based view: firms behave in order to find industry position
• Resource-based view: firms focus on exploiting and exploring knowledge and other resources

Institutions-based view is descriptive:
- firms behave according to formal and informal rules of the game

Question 32

What determines a firms’s scope?

Answer 32

Industry based view
- there is a focus on spreading risks to different industries (unrelated differentiation; new market penetration)

Resource-based view
- explores/exploits synergies which relate to diversification

Institutions-based view:

• Rules, regulations concerning diversification
• Norms about diversification
• Because it is fashion (cognitive)

Question 33

What determines the success or failure of firms in the world?

Answer 33

• determined by formal and informal constraints
• by bridging institutional differences
• influencing the rules

also success is related to legitimacy. This refers to the level of fit with institutional context.