Institutional theory in the social sciences
This chapter provides a broad introduction to the disciplinary foundations of institutional theory in the social sciences and its relevance to tourism studies. It is divided into five main sections. The first four are primarily disciplinary based and discuss institutional theory from the literature in sociology, political science, economics, and international business and management. The relevance for tourism and examples from the tourism literature are noted throughout. The final section concludes that the chapter provides an integrative perspective on institutional theory within the different disciplinary fields.
Institutional theory in sociology
From an institutional perspective, sociology examines the links between institution-organisation interactions (e.g. Meyer, 2008; Scott, 2005), institutional and organisation change (e.g. D’Aunno et al., 2000), and organisational responses to institutional complexity (e.g. Ahmadjian, 2016; Greenwood et al., 2011). One of the key institutional theory perspectives that arises from sociology is the fact that institutional development is driven by individuals, organisations, and national systems (Meyer, 2008). The national system consists of institutions that evolve because of the institutional environment’s historical development (Ahmadjian, 2016). The process of institutional development prescribes how different actors, including organisations and governments, behave (Meyer, 2008).
From a sociological perspective, one of the most popular theoretical lenses used to examine the institutional environment is based on the three institutional pillars: regulative, normative, and cultural-cognitive (Scott, 1995, 2001, 2008). The three pillars provide a foundation for analysing institutional environments (Palthe, 2014), and they are often used to study organisational behaviours and institutional effects on society (e.g. Child & Tsai, 2005; Hoffman, 1999). In a tourism context, for example, Suharko et al. (2018) use the three pillars approach to study the halal tourism industry. They argue that halal tourism
can be understood as an institution, in which a set of norms and rules are to be conformed [to] by various organisations within it. Generally, wide-ranging organisations considered in the study of tourism include the government, public authorities, travel agencies, hotels, restaurants, and other interest groups, such as mass media and local communities.
(Suharko et al., 2018, p. 337; see also Box 2.4)
The three pillars should work together to create a stable institutional environment (Scott, 2005). Scott’s (1995) framework of the three pillars is an important platform from which to investigate the institutional enviromnent and how it shapes organisational operations, because it enables the examination of organisational behaviour and operations.
The regulative pillar consists of formal rules, laws, and regulations; the logic behind it is that individuals create rules and regulations that best represent their own interests. The regulative pillar helps evaluate regulatory processes and their capability for establishing and managing rules and laws. The regulative system is viewed as a formal environment (Palthe, 2014), and organisations are obliged to obey the rules and laws within this scene (Meyer & Scott, 1983; Scott, 1995). The government often adjusts rules and regulations to make the regulative environment more stable (Alexander, 2012). This has been done, for example, in response to the COVID-19 pandemic by many of the world's governments and often specifically directed at the travel and tourism industries, given that they were among some of the most affected sectors (Loi et al., 2020; see Box 2.1). Organisations can be resilient to these changes because it is time-consuming to integrate them into the internal organisational structure (Palthe, 2014). If an organisation does not comply with the changes, the government can impose punishments in the form of sanctions (Scott, 2008). The regulative pillar includes sanctioning activities, such as rewards and punishments, to explain the behaviours of different actors (Scott, 2008). Depending on organisational responses to regulative changes, organisational behaviours and sanction outcomes can vary.
Although the regulative pillar is popular among rational choice scholars (e.g. Coase, 1937; North, 1990; Williamson, 1991), social scientists
Disciplinary foundations 13 emphasise that rale-making and human behaviour are driven by individuals’ emotions (Scott, 1995, 2008; Selznick, 1957; Suchman, 1995). To understand how the regulative pillar operates, it is important to study its interaction with the other two pillars, as regulations do not exist in isolation, and their development is socially embedded (Scott, 1995; Palthe, 2014).
BOX 2.1 THE REACTIONS OF GOVERNMENT AND GAMING CONCESSIONAIRES TO COVID-19 IN MACAO
COVID-19 posed a major challenge to the tourism industry and governments throughout the world. Loi et al. (2020) examined the government’s measures with respect to COVID-19 and their impact on the hospitality industry in Macao, the world’s most densely populated city and a major international gaming and hospitality destination. They found that the effective and successful use of regulative institutions by the Macao government stimulated autonomous actions that led to the development of new ideas and innovations, beyond compliance practice and boosted CSR among Macao’s major integrated resorts. As they observed,
All those autonomous actions taken by the gaming concessionaires (operators of the integrated resorts in Macao) may not be easily comprehensible and possible in their current scale and speed (from the outside world) if Macau government does not regulate the industry.
With the authors concluding “The Macao government has executed successfully the institutionalisation process where conception such as norms, values, social roles, behaviour, or beliefs are embedded in society and organisations. This institutionalisation process has adjusted the institutional logic of individuals and organisations”.
The normative pillar includes professional societal bodies that outline rales and expectations for certain groups, including organisations (Scott, 1995). It covers values and norms.
Values are conceptions of the preferred or the desirable together with the construction of standards to which existing structures or behaviours can be compared and assessed. Norins specify how things should be done; they define legitimate means to pursue valued ends.
(Scott, 2008, p. 64)
These values and norms are benchmarks for how actors are supposed to behave. Values and norms change because actor expectations may differ and are situation- and context-specific. These changes can present external pressures for organisations as they must conform or decouple from them (Oliver, 1991).
The cultural-cognitive pillar refers to accepted beliefs shared among individuals through social interactions that guide behaviour. DiMaggio and Powell (1983) and Scott (1995) contend that this pillar constitutes the nature of social reality, and is instrumental to creating institutional meaning. Meaning is the subjective interpretation of an object, emerging as a result of interactions between actors, and is driven by cultural elements. Behavioural patterns and actions are guided to some extent by cognitive frameworks where culture plays a substantial role. The cultural-cognitive pillar examines cultural frameworks that shape internal interpretive processes (Scott, 1995). This is applicable to the formation of internal business activities and their interpretation by different actors.
Table 2.1 depicts some of the key perspectives of sociology. Selznick (1957) coined the concept of institutionalisation, defining it as a process of organisational adaptation to the challenges of the external environment. He treated institutionalisation as a process of instilling values into organisations, and as something that changes over time. Berger and Luckmann (1967, p. 54) contributed to Selznick’s (1957) definition of institutionalisation by noting that, “institutionalization occurs whenever there is a reciprocal typification of habitualised action by types of actors”. This implies that actors such as governments and organisations can create institutionalised rules, leading to their habitual behaviour (Berger & Luckmann, 1967). However, the problem with organisations’ habitual behaviour is that institutions such as rules and regulations evolve, meaning that habitual behaviours and practices can stagnate as formal institutions change (Suchman, 1995).
Meyer and Rowan (1977) suggest that institutionalised rules or shared beliefs are incorporated into society (Table 2.1). Institutionalised rules are defined as “classifications built into society as reciprocated typifications or interpretations” (Berger & Luckmann, 1967, p. 54). Although some
Disciplinary foundations 15
Table 2.1 Institutional theory in sociology - key perspectives and their descriptions
institutionalised rules can also be deeply embedded into organisational stnicnires, their interpretations can be subject to the differing beliefs and values of external actors, such as governments and administrative authorities (Ahlstrom et al., 2008). External support from the actors involved can be maximised if organisations comply with existing rules, treating institutionalised rales as myths. However, complying with the rales can be ceremonial when organisations engage in decoupling. This can lead to an increasing gap between an organisation’s formal structures and business activities (Meyer & Rowan, 1977).
To deal with the institutional pressures that formal structures may present, organisations employ strategic responses, including acquiescence, compromise, avoidance, defiance, and manipulation (Oliver, 1991). Acquiescence occurs when organisations accept institutional pressures by taking existing rales for granted, imitating already established strategies, or complying with the rales. Compromise is found through balancing or pacifying institutional pressures, and by engaging in negotiations with the actors involved. Organisations can also avoid institutional pressures by concealing the fact that they do not conform to the rales, or by detaching the organisation from the institutional environment, which may lead to escaping the unstable environment. When organisational goals and interests differ completely from those of other actors, including the government,
organisations tend to employ a defiance strategy. In this situation, organisations can ignore or challenge the rules by opposing the existing institutional pressures. If, by engaging in defiance, organisations are unable to overcome institutional pressures, they turn to manipulating other organisations’ influence and changing the formation of regulations. Manipulation is defined as “the purposefill and opportunistic attempt to co-opt, influence or control institutional pressures and evaluations” (Oliver, 1991, p. 157), and is considered the most active strategic response, because it can help organisations shift the norms and beliefs of the appropriate actors by opportunistically forming relations with them (Oliver, 1991).
Institutional pressures arise from the external environment, the formation of which is influenced by the government (Boddewyn, 2016; Wang et al., 2013). When organisations choose which strategic response to take, their decision is usually influenced by the government because of its rulemaking authoritative power (Delios, 2010). Given that organisations exist as part of a larger institutional ecology, they must deal with economic, political, and socio-cultural changes (Suchman, 1995), which makes responding to institutional pressures even more complex (Greenwood et al., 2011).
Multi-national enterprises (MNEs), such as international airlines, hotel chains, and tour operators, operate in multiple institutional environments, making it extremely challenging for them to manage their operations (Kostova et al., 2008). MNEs must handle different actors, including governments, in several countries, which can be difficult because of the various actors’ different interests. National, regional, and local governments form a countiy's regulatory system, which MNEs must navigate (Wang et al., 2013). Consequently, they need to build and manage relationships with home and host governments to facilitate their international activities (Boddewyn, 2016; Kostova et al., 2008). In addition, there is a further set of supranational and international regulatory and governance structures that have been put in place as a result of multilateral and bilateral international agreements, which also impact the institutional environments of firms and NGOs.
Institutional theory enhances understanding of the more complex aspects of social structure (Scott, 2005), where formal and informal institutions are used to enable organisations to operate within such multi-faceted environments (North, 1990). Informal institutions are widely deployed in business activities, and are often perceived as having a positive effect on MNEs’ operations (Dau, 2016; Peng et al., 2008).
The development of a country’s business environment is largely related to the changes that occur in the institutional environment (DiMaggio & Powell, 1983; Oliver, 1991; Scott, 2005; Suchman, 1995), what Roth and Kostova (2003) refer to as “institutional baggage”. Since MNEs must
Disciplinary foundations 17 navigate various institutional environments, this intensifies the complexity of institutional processes (Greenwood et al., 2011; Roth & Kostova, 2003). For example, many emerging economies (EEs), especially in Eastern Europe, have experienced dramatic institutional changes since the early 1990s (Puffer et al., 2016). MNEs from EEs have therefore had to learn to operate in unstable institutional environments, although this may be an advantage when expanding into foreign markets with similar environments (Luo et al., 2017). However, it can also be a disadvantage, because MNEs from EEs can be seen as lacking legitimacy in developed markets, which may affect their reputation and internationalisation process.