In sociology and organizational studies, institutional theory is a theory on the deeper and more resilient aspects of social structure. It considers the processes by which structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior. Different components of institutional theory explain how these elements are created, diffused, adopted, and adapted over space and time; and how they fall into decline and disuse.
Overview
In defining institutions, according to William Richard Scott, there is "no single and universally agreed definition of an 'institution' in the institutional school of thought." Scott asserts that: According to Scott, institutional theory is "a widely accepted theoretical posture that emphasizes rational myths, isomorphism, and legitimacy." Researchers building on this perspective emphasize that a key insight of institutional theory is imitation: rather than necessarily optimizing their decisions, practices, and structures, organizations look to their peers for cues to appropriate behavior. According to Kraft's Public Policy : Institutional Theory is "Policy-making that emphasizes the formal and legal aspects of government structures."
Schools of institutional theory
There are two dominant trends in institutional theory:
Powell and DiMaggio define an emerging perspective in sociology and organizational studies, which they term the 'new institutionalism', as rejecting the rational-actor models of Classical economics. Instead, it seeks cognitive and cultural explanations of social and organizational phenomena by considering the properties of supra-individual units of analysis that cannot be reduced to aggregations or direct consequences of individuals’ attributes or motives. Scott indicates that, in order to survive, organisations must conform to the rules and belief systems prevailing in the environment, because institutional isomorphism, both structural and procedural, will earn the organisation legitimacy. For instance, multinational corporations operating in different countries with varying institutional environments will face diverse pressures. Some of those pressures in host and home institutional environments are testified to exert fundamental influences on competitive strategy and human resource management practices. Corporations also face institutional pressures from their most important peers: peers in their industry and peers in their local community; for example, Marquis and Tilcsik show that corporate philanthropic donations are largely driven by isomorphic pressures that companies experience from their industry peers and local peers. Non-governmental organisations and social organizations can also be susceptible to isomorphic pressures.
Challenges in different types of economies
There is substantial evidence that firms in different types of economies react differently to similar challenges. Social, economic, and political factors constitute an institutional structure of a particular environment which provides firms with advantages for engaging in specific types of activities there. Businesses tend to perform more efficiently if they receive the institutional support.
