Institutional Theory and Entrepreneurship

Institutional theory is about the rules of the game in a given context (Scott, 2001), such as a business environment. The rules of the game may be formal, informal, or cognitive (taken-for-granted assumptions) about the nature of the business environment. 

 

The main proposition of institutional theory when applied to entrepreneurship may be that: Context-varying social forces shape entrepreneurial success more than does economic efficiency, therefore, entrepreneurs should seek to align their strategies with the norms, beliefs and regulations of their host societies' institutions or change the rules of the game in their favour.

 

Institutional Entrepreneurship

 

Levy and Scully (2007) use the idea of the institutional entrepreneur as a "collective agent who organizes and strategizes counter-hegemonic challenges". In other words, whereas for many, the rules of the game are to be followed, institutional entrepreneurs change the rules of the game. 

 

The theory has started to be applied widely. For example, according to Pelzer et al. (2019), when Uber failed to change Dutch law in its favour, it was an example of a corporation's failed attempt at institutional entrepreneurship. In a very different example, Xing et al. (2018) show how municipal governments can play a role as institutional entrepreneurs to help their cities and towns. 

The role of legitimacy

Institutions set forth expectations that economic actors seek to conform to in order to be treated as legitimate actors in economic society. This is related to the "liability of newness", where risk of exit or failure is higher in the earlier years of an organization. When young organizations lack legitimacy, they may not receive the vital support of their stakeholders.

 

By extension, entrepreneurs that do not heed the institutional logic of their social contexts risk failure because they may be seen as illegitimate and unworthy of support. See Bruton, Ahlstrom and Li (2010) for a nice review of institutional theory in entrepreneurship research that inspired us here.

 

Sources:

Bruton, G. D., Ahlstrom, D., and Li, H. L. (2010). Institutional theory and entrepreneurship: where are we now and where do we need to move in the future? Entrepreneurship theory and practice, 34(3), 421-440. 

 

Levy, D., & Scully, M. (2007). The institutional entrepreneur as modern prince: The strategic face of power in contested fields. Organization studies, 28(7), 971-991.

 

Pelzer, P., Frenken, K., & Boon, W. (2019). Institutional entrepreneurship in the platform economy: How Uber tried (and failed) to change the Dutch taxi law. Environmental Innovation and Societal Transitions, 33, 1-12.

Scott, W. R. (2001). Instituitions and organizations. Thousande Oakes: Sage.
 
Xing, Y., Liu, Y., & Cooper, S. C. L. (2018). Local government as institutional entrepreneur: Public–private collaborative partnerships in fostering regional entrepreneurship. British Journal of Management, 29(4), 670-690.