Institutional Theory
Institutional Theory explores how social and historical contexts shape the behavior of organizations, professions, and other entities within society. It emphasizes the impact of external and internal influences on institutions, considering how social norms and structures guide individual and collective actions. Drawing from various social science disciplines, this theory posits two main frameworks: the "environment as institution," which focuses on conformity to external pressures, and the "organization as institution," which examines internal routines and practices. Institutionalization occurs when individual actions become formalized into established routines that significantly influence interactions and operations within institutions.
A key concept within this theory is isomorphism, where institutions in similar fields tend to adopt common practices and norms over time, leading to greater similarity among them. This can shape decision-making processes and influence proposals for change, as institutions may look to reputable peers for validation of new practices. Additionally, the theory highlights the role of "rationalized myths," which are beliefs or norms that institutions adopt for legitimacy, often influenced by broader social and cultural factors. Finally, globalization has been shown to affect local practices by introducing new discourses that reshape institutional operations, such as the global adoption of Western marketing strategies.
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Institutional Theory
Institutional theory is a rich set of theories that inquire into and describe the ongoing social and historical structuring of corporations, professions, markets, religions, states, schools, and families. It attends to the effects of the context on the functioning of institutions in society and on the behavior of individuals within institutions. Drawing from across disciplines in the social sciences—including economics, political science, sociology, and social psychology—institutional theory has advanced concepts that account for how the behavior of individuals is influenced by the social and cultural context and has applied this perspective to the behavior of institutions. Different theoretical approaches, some of which emphasize institutional functions as related to external pressures (reproductive) or as related to internal routines (productive), have advanced a number of concepts through which the effect of the environment on the behavior of the institution is explained.
Background
An organization or a social grouping becomes institutionalized when individual performances become formal routines, embedded in an impersonal structure. These formalized routines become social facts, or powerful factors in shaping the behavior of and the interaction between individuals. They also shape the interactions between institutions. For example, in an institutionalized social structure, a firm does not borrow money from another corporation. Instead, it borrows money from a bank that lends funds that were deposited as savings by other corporations. The bank acts as an intermediary, attending to and enabling the transaction. As a result, interpersonal qualities like trust become impersonal commodities that are marketed by banks as institutions.
By shaping the interaction between organizations and social groupings, institutionalization creates contexts that are structured by external norms and processes that regulate the functioning of people and institutions. For example, the grading practices of high schools are partly regulated by the admission policies of universities because the grading format followed by high schools must be organized in relation to university entrance requirements and recognized by the universities’ admission offices in order to enable the admission of students after the completion of high school.
Overview
Two distinct theoretical frameworks exist within institutional theory: (1) environment as institution focuses on institutions’ conformity to external pressures, from state requirements to professional standards, and (2) organization as institution focuses on the formalized routines generated within institutions, rather than external pressures. In the environment-as-institution framework, the motif of institutions is reproductive and the processes that regulate institutions are coercive: conformity and meeting state and/or other external requirements. In the organization-as-institution framework, the motif of institutions is productive and the processes that regulate institutions are imitative: imitating other organizations, adopting formalized routines.
Whether institutions are regulated by coercive or imitative processes, the consequences of institutionalization are similar: the organization becomes guided by formalized impersonal elements that tend to direct attention away from the goals and tasks of the institution. Meeting the requirements or norms of the institutional context does not always coincide with improving performance in the tasks for which the organization is responsible.
Social psychology has demonstrated that when individuals become members of groups, norms are quickly established, and individuals begin to conform to these norms even when the norms conflict with their individual beliefs. Institutional theory has found that the same rule applies to the behavior of institutions. Institutions that have similar purposes form industries, and industries have their own norms. Conformity to these norms becomes one of the factors that shape the decisions made by the institution and the direction it takes. The norms established by industries are often called "industry standards," and the tendency of institutions to follow these standards leads to isomorphism, a phenomenon whereby institutions become more similar over time.
Isomorphism may be used as a resource by individuals who are lobbying for change within their institutions. Individuals who propose changes to the direction of their institutions are more likely to gather support for their proposal if the changes that they are proposing have been applied by more reputable institutions within their industries. For example, a faculty member at a university will have a greater chance of gathering support for a proposal to change the curriculum if the proposed changes have been already implemented by more reputable universities.
Richard Scott has argued that institutions have a tendency to adopt norms and models that are considered "rational," however, what is considered rational is based in part on cultural systems and the social and historical context. Institutions follow rationalized myths in order to gain legitimacy, and the processes by which rationalized myths are produced and reproduced often depend on factors external to institutions, like the state and other social structures. For example, schools that adopt evidence-based policies in their delivery of curriculum. The rationalized myth is that the adoption of practices established as effective under experimental, randomized controlled conditions is a rational choice and that the adoption of practices established as effective under quasi-experimental or qualitative research conditions is not. This rationalized myth is based on and maintained by the state. Those who conduct educational research have highlighted the limitations of experimental research in education and argued against the validity of randomized controlled trials for educational research questions.
Rationalized myths are shaped by local social processes and by global social processes as well. Lancaster University linguistics and English professor Norman Fairclough has argued that one way by which globalization impacts the day-to-day lives of individuals is through its impact on the social practices formalized in institutions. Changes to social practices are often preceded by changes to discourse: the introduction of new ways of talking, thinking, and deliberating about practices. For example, one of the effects of globalization was the adoption of the Western marketing discourse in business institutions around the globe. This adoption was facilitated by the introduction and circulation of such discourse through mass media and local business schools. Once adopted, local institutions formalized Western marketing practices as models for the operation of businesses.
Institutional theory research in the first decades of the twenty-first century emphasized the social and institutional drivers of corporate social responsibility (CSR), industry adaptation, and innovation. CSR behaviors are complex and influenced by a variety of pressures, including stakeholder expectations and the CSR behaviors typical in specific industries. Researchers also investigated the impact technology had on industries and the mechanisms institutions utilized to adapt to the increasingly digital workplace. The adoption of distance education and remote work rose exponentially in the early 2020s, and with this, new social norms were established.
Bibliography
Croce, Mariano, and Andrea Salvatore. Carl Schmitt’s Institutional Theory: The Political Power of Normality. Cambridge UP, 2022
Eitrem, Anna, et al. “The Use of Institutional Theory in Social and Environmental Accounting Research: A Critical Review.” Accounting and Business Research, vol. 54, no. 7, 2024, pp. 775–810, doi:10.1080/00014788.2024.2328934. Accessed 5 Jan. 2025.
Fairclough, Norman. Language and Globalization. Routledge, 2006.
Peters, B. Guy. Institutional Theory in Political Science: The New Institutionalism. 4th ed., Continuum, 2019.
Scott, W. Richard. "Institutional Theory: Contributing to a Theoretical Research Program." Great Minds in Management: The Process of Theory Development, edited by Ken G. Smith and Michael A. Hitt, Oxford UP, 2005, pp. 460–85.
Scott, W. Richard. Institutions and Organizations: Ideas, Interests, and Identities. 4th ed., Sage, 2014.
Suddaby, Roy, et al. “Strategy-as-Practice Meets Neo-Institutional Theory.” Strategic Organization, vol. 11, no. 3, 2013, pp. 329–44, doi:10.1177/1476127013497618. Accessed 5 Jan. 2025.
Sweet, Stephen, et al. "The Coordinated Curriculum: How Institutional Theory Can Be Used to Catalyze Revision of the Sociology Major." Teaching Sociology, vol. 42, no. 4, 2014, pp. 287–97, doi:10.1177/0092055X14541551. Accessed 5 Jan. 2025.
Thornton, Patricia H., et al. The Institutional Logics Perspective: A New Approach to Culture, Structure, and Process. Oxford UP, 2012.