Development of Institutional Theory in International Business

This report provides a detailed insight into the overview of institutional theory in international business, highlighting the importance of organizations cooperating with their surroundings and dealing with societal pressures. It discusses the impact of institutional theory on organizational strategies, the role of institutions in corporate social responsibility, and the influence of NGOs on government policy making.

An overview of the Development of
Institutional Theory in International
Business
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Executive Summary
This report has provided a detailed insight into the overview of institutional theory in
international business. It has highlighted the Institutional theory and its important elements,
which include that organizations need to cooperate with its surrounding and the way
organizations deal with tremendous demands or pressures from the society. The fact that
incorporating institutionalized prescriptions would lead organizations gain legitimacy, reduce
uncertainty along with increase in transparency related to its activities and actions has been
highlighted. Corporate Social Responsibility needs to be incorporated by the organizations in
accordance with the social reality. Organizations in particular countries attach tremendous
importance to CSR policies in order to get support from external constituent, which has been
provided in this report as well. The importance of NGOs in the formation of public policies
has been highlighted in this report as well.
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Table of Contents
Introduction................................................................................................................................4
Institutional Theory....................................................................................................................5
Impact on institutional theory on organizational strategies.......................................................5
Institutions and their effect on strategies of business: the case of Corporate Social
Responsibility.............................................................................................................................8
Institutions, Business and Government Policy Making.............................................................8
Conclusion..................................................................................................................................9
Reference List..........................................................................................................................10
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Introduction
This assignment aims to provide a detailed insight into the overview of institutional theory in
international business. It would gain insight into the Institutional theory and its important
elements, which include that organizations need to cooperate with its surrounding and the
way organizations deal with tremendous demands or pressures from the society (Lund-
Thomsen et al., 2016). In accordance with the Institutional Theory organizations are
considered as the local manifestation of extensive institutions. The fact that incorporating
institutionalized prescriptions would lead organizations gain legitimacy, reduce uncertainty
along with increase in transparency related to its activities and actions would be highlighted.
Besides, in this assignment the impact on institutional theory on organizational strategies
would also be highlighted. Moreover, institutions and their effect on strategies of business
highlighting the case of Corporate Social Responsibility would also be provided (Scherer et
al., 2016). Lastly, how institutional differences affect government policy would be
highlighted in this assignment as well.
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Institutional Theory
The institutional theory of organizations places institution at the centre of the study of design
and conduct of organization. According to Morschett et al. (2015), in accordance with this
view, organizations can be considered as the local manifestation of extensive institutions.
Institutions are perceived as taken for granted convictions, rules as well as norms shaping the
formation and distribution of organizational forms, exercises and design aspects.
Incorporating institutionalized prescriptions would lead organizations gain legitimacy, reduce
uncertainty along with increase in transparency related to its activities and actions (Visnjic et
al., 2016). Institutions are considered as those convictions, responsibilities, regulations as
well as emblematic elements, which have the capability of influencing the forms of
organizations free from resource flows and technical prerequisites. Institutions revolve
around two aspects, which include:
 Organizations need to cooperate with its surrounding.
 The way organizations deal with tremendous demands or pressures from the society.
Impact on institutional theory on organizational strategies
As stated by Zhao et al. (2017), organizations seem to confront with various pressures
emanating from the social surroundings along with the task environment. In order to cope up
with the pressure from the task social surrounding and task environment, strategies, structures
as well as practices are used by them the organizations that are socially acceptable and are
expected from them. For instance- accounting organizations are seen to be organizing
themselves as proficient affiliations and are dynamic in terms of social anticipated ways,
which include, supporting university education, commenting sincerely on tax policies of
government and projecting accounting as a precise science having strong ethical foundations.
Taking resort to such exercises and structures would enable the organization in eliciting
social approval, which means that legitimacy would be conferred upon the organization.
Besides, it would also enable the organization in getting assistance from the external
constituents in the form of grants and resources, praises in front of public and a lot more.
These pressures have been defined of social expectations as those, which arise from the
“institutional environment” (Epifanova et al., 2015). Professional institutions, important
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interest groups, media and agencies of states would be incorporated by the institutional
environment in accordance with the case of accounting.
In one hand, it has been emphasized that managers need to navigate through a set of pressure.
However, on the other hand, they have also emphasized on the fact that often institutional
pressures are taken for granted as the managers are left with no other alternative and as a
result have to work through the pressure given from the external environment (Torkkeli et al.,
2019). The Henceforth, accounting organizations are formed as partnerships and certain
services are performed, for instance, assurance services are provided by large organizations,
support activities of particular communities and act on the basis of the prescriptions of the
behaviours of the professionals (Visnjic et al., 2016). They act in this way because this is the
way they are expected to behave. Similarly, a business school cannot be thought of not
providing MBA degree to students along with teaching strategy, marketing and accounting.
In few cases, social expectations may be seen to be contradicting the quest of efficiency. This
indicates to the fact that an organization might be not that efficient in meeting institutional
expectations. Providing universities with support or through spending time on serving
community or committees of government would lead to the increase in costs and reduction of
efficiency potentially (Scherer et al., 2016). The fact that institutional as well as task
environment encompass all organizations has been stretched. It has also been emphasized that
empirical observations do not validate the model of managers as independent actors. On the
other hand, socially derived norms and expectations containing assumptions regarding the
organizational world and of proper conduct constraint the managers.
Social expectations regarding proper organizational conduct tightly constraint some
industries. For instance, people in some societies expect physicians not to pursue profit and
efficiency blindly and act in accordance with the expectations of the patients. In a similar
way, it is expected that law and accounting organizations should temper commercial pursuits
considering the welfare of the public. Economic factors appear dominant in other industries
including transport industry or restaurants (Morschett et al., 2015). It is pointed out by
institutionalists, there is a context of institutional rules, within which, organizations exist and
a “real objective market” is a myth since markets are constructed socially. Besides, there is a
context of social expectations constraining ‘acceptable’ actions within which, all
organizations are set. Moreover, it has also been pointed out by the institutionalists that
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managers are trained to see the world in particular ways, which constrain their understanding
regarding opportunities.
As stated by Ioannou et al. (2015), organizations are led to engage in the ‘decoupling’
regarding formal structures from concrete work practices by organizational efficiency. This
means that structures as well as practices aligned with prescriptions of institutions however
are purposely distanced from the actual execution of the work are adopted by organizations.
Hence, it can be said that rather being ‘substantive’ conformity seems to be ceremonial. For
instance- accounting work is projected as a thorough science, which conceals the important
occurring subjectivity (Grayson et al., 2017). Senior executives may be seen to debate their
organizational strategy in meetings in an energetic way without feeling the need of translation
of rhetoric into action.
It has been emphasized that for the organizations to look for competitive advantage through
building as well as exploiting competencies. On the contrary, it has been seen that
organizations have incorporated similar organizational practices. The social pressure
occurring at the industry level or organizational field as preferred by the institutionalists and
how it is equally applicable for organizations within an industry, due to which, all
organizations formulate similar structures and strategies has been focused. The role of
organizational actors in working in accordance with the expectations of the setting of the
institutions has been emphasized. This is a homogenisation of practices of organizations,
which is referred to as institutional isomorphism, according to which, organizations, which
are facing similar pressures seem to be the same to pursue legitimacy.
Social constructionist account of reality is heavily drawn. Repeated interactions among
organizations seem to form the primary factor behind the emergence of collective beliefs.
Categorizations of exchanges achieving the status of objectification are developed by
organizations and as a result social reality is constituted (Hutzschenreuter et al., 2016). The
behaviour of organization or the conduct of its procedure is based on the socially constructed
reality in order to reduce uncertainty and ambiguity. Ordered exchanges are permitted by
shared understandings of accurate exercises. Regulatory processes, which involve state
agencies and professional bodies, reinforce these shared understandings through which
conformity upon constituent communities is pressed coercively. The coded prescriptions of
social reality is disseminated and reproduced by the regulatory processes. As opined by
Epstein (2018), it has been seen that organizations not following the norms of social reality or
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showcase acceptable behaviour fails to garner external support. Collective beliefs, which is
concerned with the dynamics of industry circumstances and the strategic responses to
compete within them successfully is developed by the notion communicating organization
and seems not be unique to institutional thinking.
Institutions and their effect on strategies of business: the case of Corporate Social
Responsibility
Organizations in order to get support from external environment need to act in accordance
with the social reality. According to Morschett et al. (2015), corporate Social Responsibility
needs to be incorporated by the organizations in accordance with the social reality.
Organizations in particular countries attach tremendous importance to CSR policies in order
to get support from external environment. For instance- Organizations in the US are seen to
be putting CSR activities on their respective websites explicitly. Besides, various
organizations in the US put have formed codes of conduct in the global coffee sector.
Moreover, there are various organizations within the US, which are seen to have
philanthropic contributions in order to get support. Majority organizations within the US
industry focus on the formation of effective explicit CSR policies and work in accordance
considering the interests of society. They are seen to be forming voluntary corporate policies
including environment policies as well as labour policies considering various ethical issues of
the society (Rao et al., 2016). Moreover, they are focused on providing incentives which
would motivate various stakeholders in working more effectively. Organizations are seen to
work in accordance with their set norms, values as well as rules resulting in the prerequisites
for corporations.
Institutions, Business and Government Policy Making
The cases of Europe and USA have been drawn for exploring the institutional differences
affecting decision making by Government, corporations and NGOs. Societal views of public
policy issues are influenced by NGOs, through which, the policy making processes and
decision making of corporations are influenced. Henceforth, it can be said that NGOs
influence in the formation of public policy making in areas including trade in GMOs, global
warming and so on in European countries (Kolk, 2016). On the other hand, in USA, NGOs or
the interest groups do not seem to influence the public policy making process much. In
Europe, A formal place in the policy making process is occupied by the interest groups. In
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the policy making processes in Europe, interest groups, business and labour are involved by
majority of the West European Governments.
Conclusion
It can be concluded that Institutions are perceived as taken for granted convictions, rules as
well as norms shaping the formation and distribution of organizational forms, exercises and
design aspects. Incorporating institutionalized prescriptions would lead organizations gain
legitimacy, reduce uncertainty along with increase in transparency related to its activities and
actions. Organizations seem to confront with various pressures emanating from the social
surroundings along with the task environment. In order to cope up with the pressure from the
task social surrounding and task environment, strategies, structures as well as practices are
used by them the organizations that are socially acceptable and are expected from them.
Organizations in order to get support from external constituent need to act in accordance with
the way; they are expected to perform by the society.
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