Globalization and the convergence-divergence debate. A critical insight into David Murillo’s book “From Walmart to Al Qaeda”

Content Page

List of Abbreviations

List of Figures

List of Tables

I Introduction

II Concept of Globalization
2.1 Defining globalization
2.3 Globalization and its consequences
2.3.1 Homogenization / Convergence perspective
2.3.2 Heterogenization /Divergence perspective
2.3.3 Hybridization / Cross-vergence perspective

III Theoretical Framework
3.1 Institutional theory in international business
3.2 Institutions and the institutional environment vs. organizations
3.3 Old institutionalism
3.4 New institutionalism / Neo-institutionalism
3.4.1 Institutional theory and the three pillars
3.4.2 National differences and institutional distance
3.5 Institutional theory and the convergence - divergence debate

IV Institutional Theory: a Practical Application
4.1 Differences among nations - a critical view on globalization by David Murillo
4.2 Methodology - incorporating institutionalism
4.2.1 Social change, technology and collective identities
4.2.2 Economic globalization
4.2.3 Financial globalization
4.2.4 Contemporary corporate culture
4.2.5 State sovereignty and world governance
4.2.6 Values and challenges of global governance: Europeanizing the world

V Conclusion and Limitations

Abstract [English]

In recent years, significant transformations have shaped the world and the term “globalization” and its consequences have become one of the most controver­sial issues. In his book Murillo analyses the different unequal transformations brought about by globalization paying attention to both different fields (i.e. socie­ties, politics) and to different levels (i.e. individual, global). Due to the complexity of globalization any discussion requires various approaches. Building on the groundbreaking work by DiMaggio and Powell as well as Meyer and Rowan the institutional approach provides a refreshing new insight into how globalization in­fluences different fields on different levels and leads to convergence or divergence. The focus is on institutional diversity and processes of institutional homogeniza­tion. While considering the conditions and underlying mechanisms, support for both directions of change can be found. Thus, based on Murillo’s argumentation, institutional theory will be applied to each field and for this reason to each chapter in order to conclude -as far as possible- which direction we are heading towards.

Abstract [Deutsch]

Globalisierung hat in den letzten Jahren die Welt bedeutend verändert und der Begriff sowie dessen Auswirkungen sind eines der umstrittensten Themen. In sei­nem Buch analysiert Murillo die ungleichen Veränderungen, welche durch Globa­lisierung hervorgerufen werden. Dabei beachtet er die unterschiedlichen Bereiche (z.B. Gesellschaft, Politik) und Ebenen (z.B. Individuum, globale Ebene). Auf­grund der Komplexität von Globalisierung werden unterschiedliche Ansätze benö­tigt. Aufbauend auf den wegweisenden Ausführungen von DiMaggio and Powell sowie Meyer und Rowen unterbreitet die institutionelle Theorie eine neue Sicht auf die Auswirkungen von Globalisierung. Des Weiteren wird aufgezeigt, unter wel­chen Bedingungen und zugrundeliegenden Mechanismen Globalisierung in den un­terschiedlichen Dimensionen zu Konvergenz oder Divergenz führt. Unter Beach­tung dieser Mechanismen können beide Richtungen -Homogenisierung oder Diffe­renzierung- unterstützt werden. Basierend auf Murillo’s Ausführungen erfolgt eine kapitelweise Analyse aus Sicht der institutionellen Theorie. Abschließend wird, so­fern möglich,je Dimension die Richtung aufgezeigt, in welche wir uns begeben.

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: Levels of institutions

Figure 2: Cultural dimensions and social behavior

Figure 3: A typology of MNC host country strategies

Figure 4: The world as enactment of culture

List of Tables

Table 1: Three Pillars of Institutions

Table 2: Dimensions of Distance

Table 3: Four mechanisms supporting institutional convergence or divergence

I Introduction

Significant transformations have shaped the world in recent years and the con­cept of globalization has become one of the most controversial issues. Numerous stud­ies have put their focus on the consequences of globalization on our lives. However, no agreement yet exists among scholars (Guillén, 2001). Speaking of globalization means understanding all its diverse dimensions and actors as well as discussing their transformative power. In his recent book “From Walmart to Al Qaeda” Murillo (2015) offers a multidisciplinary approach considering all the structural elements such as cul­tural, technological, economic, financial, political and institutional ones that shape and at the same time are shaped by globalization. By discussing the concept of globaliza­tion and its impact on each dimension, various approaches are used for diagnosing the direction of change and perils as well as benefits. In addition to that, Murillo (2015:xiii) suggests that “the very complexity and scope of globalization means any discussion requires examination of the various schools of thought, theories and ap­proaches [...]” in order to gain a better understanding of the world. Even though insti­tutional theory is closely linked to the process of globalization and has been widely applied to diverse fields when analyzing the consequences of globalization, this ap­proach remains widely untouched in Murillo’s (2015) book.

Institutional theory has gained significant importance in sociological research and has become a leading theoretical foundation, as there is an increased importance of understanding that countries differ in terms of institutions (Diehl and McFarland, 2010:1740-1741). As “institutions are all around us“ (Cornelissen, Durand, Fiss and Vaara, 2015:10) they do not only form a stable framework for cultural, legal and moral behavior, but also empower and support actions and in turn, face revolutionary chang­es over time (Scott, 2014:56-58; Barley and Tolbert, 1997:94). Hence, institutional theorists attempt to explain how established rules define our social reality and thus govern shared understandings, beliefs, structures and behaviors that conform to expec­tations of the environment and become legitimate (cf. DiMaggio and Powell, 1983; Meyer and Rowan, 1977). Globalization makes the world shrink, bringing people closer to each other (Murillo, 2015:xv) and hence interacting with different institution­al forces, which leads towards diverse changes such as convergence, divergence or cross-vergence.

Detailed research was conducted on institutionalism and while some scholars argue for convergence others find reasons for diversity. The groundbreaking works by Meyer and Rowan (1977) and by DiMaggio and Powell (1983) have shaped subse­quent research on the new sociological institutionalism, yet their focus is rather on homogenization and isomorphism. Isomorphic processes are coercive, mimetic and normative and lead towards reproduction (DiMaggio and Powell, 1983:153). On the contrary, Beckert (2010:150, 152) discusses similar forces such as power, attraction, mimesis and competition, arguing that depending on the conditions arguments for both convergence and divergence can be supported. Hence, in a more nuanced view these mechanisms can lead in both directions of institutional change. By exemplifying the convergence - divergence debate through examining how globalization might interact with different shapes of institutional forces and including the phenomenon of institu­tional theory an alternative view of the world and possible directions of institutional change are given. However, this approach also has its limitations and will not provide a definite answer, but rather emphasize the variety of possibilities of analyzing the impacts of globalization. While financial institutions and the national state rather tend to stay diverse, multinational corporations operating across borders face pressures for both convergence and divergence at the same time. The strategy they are following influences the direction of change and thus under specific conditions a particular direc­tion is taken. In addition to that, not only convergence, divergence and cross-vergence are possible directions of institutional change, but also rejection, which is considered a result of the influence and power of the West and a negative side of globalization.

This paper is structured as follows. Before examining the particular book by Murillo (2015) in more detail, the attention will be first turned to globalization, its main concepts, consequences and possible directions of change. Secondly, the atten­tion is turned to the prominence of institutional theory in academic journals. Thus, the institutional approach is introduced including its main concepts such as the pillar framework, institutional distance and isomorphism. Drawing primarily on Beckert (2010), this section is concluded by the contrastingjuxtaposition of the possible direc­tions of institutional change that are generated by isomorphic pressures and forces. The third part includes the adoption of institutional theory to the book by Murillo (2015). Going through the book chapter-by-chapter for each part a short summary of the most important points is provided. Subsequently, keeping in mind the research question if we are moving towards convergence or divergence, deriving from institu- tional theory implications will be developed. The different dimensions (i.e. economic, political, cultural) as well as the different actors (i.e. individual, group, organization, state) are considered and analyzed separately. Finally, a conclusion as well as limita­tions are provided.

II Concept of Globalization

2.1 Defining globalization

Globalization is one of the most controversial issues and has been the subject of thorough academic research during the past two decades. However, there is no sharp and definitive global understanding concerning the exact meaning and implica­tions of this blurry and complex process. The term “globalism” appeared already in the 1940s and since the 1980s the concept of globalization has equally experienced a rise of attention across various academic fields (Reiser and Davies, 1944:219; Scholte, 2008:1472). Globalization leads to widening and intensifying as well as to growing and speeding up of worldwide social relations and interconnectedness between indi­viduals, cultures, and societies (McGrew, 2010:16). On a large scale it is a process of economic integration that quickly enhances the interdependences among the econo­mies of various countries. This in turn leads to the removal of restrictive regulations, international markets, a high degree of knowledge flow, high mobility of production factors, goods and services (Popa, 2014:486-488). Additionally, Pieterse (1995:52) holds a broader view and states that “globalization [...] refers to the formation of a world-wide historical field and involves the development of global memory, arising from shared global experiences. Such shared global experiences range from various intercivilization encounters such as long-distance trade and migration to slavery, con­quest, war, imperialism, colonialism”. Barriers are further reduced and thus people increasingly have the opportunity -physically, psychologically, linguistically, legally and culturally- to engage with each other regardless of their location (Scholte, 2008:1478).

Some authors like Adams (2007:127) ask if various parts of the world are in­creasingly interconnected through this contemporary phenomenon called globalization or if transportation and modern telecommunications are speeding up what would have happened anyway. Murillo (2015:xiii-xv) agrees that the world is shrinking and be- coming one, yet sees globalization not only as a concept, but also as a cliché. It can only be completely understood by developing a nuanced view of the different dimen­sions in which it has been covered, including economic, social and political aspects (cf. Dreher, 2006:1091; Murillo, 2015:xiv). By doing so barriers are broken down and shards of knowledge are pierced together (Murillo, 2015:xiv), which enables a better global view on the complexity of globalization and its consequences.

Globalization does not only refer to the complex interconnections between in­dividuals, cultures and societies. Additionally, the rapidly developing process between institutions world-wide is considered (Tomlinson, 1996:22) and the relationship be­tween institutional change and globalization is a frequently debated issue as well as the impact of globalization on institutions (Dutt and Mukhopadhyay, 2009:323-325). In­ternational institutions that exist today and that are still growing, such as the United Nations (UN), the European Union (EU), the International Monetary Fund (IMF), the World Bank (WB) and the World Trade Organization (WTO) are of crucial im­portance to the world economy. Just as international agreements they support free trade and global market liberalization (Dutt and Mukhopadhyay, 2009:323). Moreo­ver, Murillo (2015:161-190) also debates on the wide range of new international agreements and states that change is gradually happening parallel to globalization and that these organizations are of a diverse composition, nature and purpose. There is still a considerable debate not only about the economic aspect, but also about the political and cultural aspects of globalization. Even though there is no final definition of global­ization, there are conceptions which are closely related and with which it is associated. These will be explained in the following.

2.2 Core concepts

Globalization leads to various changes and transformations, for instance in terms of relations between countries. According to Scholte (2008:1473-1478) there are five main conceptions that are mostly used to describe globalization: internationaliza­tion, liberalization, universalization and westernization. These will be explained in the following, but should be considered critically, though.

When countries become more interdependent and cross-border activities be­tween them are increasing globalization can be seen as internationalization. This first concept describes that borders are crossed more frequently not only in terms of territo­rial movements, but also in terms of ideas, investments and people. There is a growth of transactions between countries and “the new can be wholly understood in terms of the familiar” (Scholte, 2008:1473-1474). Apart from this globalization can be inter­preted as liberalization, meaning that restrictions that were officially imposed are removed so that countries can move resources between each other openly and without any border. Additionally, globalization is equated with universalization, which de­scribes a process in which various experiences and objects are dispersed worldwide. Globalization defined as westernization is one specific type of universalization. It means that social and cultural structures are transformed towards Western-base cultur­al structures (cf. Scholte, 2008:1473-1478, Tomlinson, 1996:25). The influence comes from a particular direction such as “the West”, mostly from the United States (Carr, 2004:1). According to Scholte (2008:1477-1478) there can be interconnections, but the equation is questioned as globalization can take non-western directions as well. These concepts should help to understand globalization, but should not be seen as being equivalent. Due to the transformative potential and novelty of globalization one cannot only use one or several of these concepts and preexistent vocabulary in order to gain a complete overview. Thus, a fifth concept, namely deterritorialization, should be tak­en into consideration. Globalization is seen as the spread of transplanetary and su­praterritorial connections between transworld social contacts. Social space is shifted in nature, territorial borders and distances lose their importance and people’s relations become supraterritorial, which in turn leads to social change. However, connecting people somewhere does not mean connecting them everywhere or to the same degree as this supraterritorial connectivity is not accessible to everyone to the same extent (Scholte, 2001; 2008). Even though globalization is strongly connected to the ideas of the five main conceptions, it still differs and they cannot be stated as being equivalent (Scholte, 2008:1496). Additionally notions of deterritorialization are considered.

2.3 Globalization and its consequences

As there is a controversial discussion concerning a basic definition of globali­zation there are also different interpretations of its consequences and no definite agreement exists, even though various studies have been conducted. Depending on the perspective and on which dimension is considered (i.e. economic, political, cultural) it is barely possible to even describe an overall real impact of globalization. There are various theoretical researches on globalization where authors debate on its effects. One of the controversial questions is which group of people globalization harms and which it helps (Murillo, 2015:8). Further key issues are if, as a result of globalization, social, political and organizational patterns are converging, if we are moving towards a global culture and if the authority of nation states is undermined orjust the opposite (Guillén, 2001:235).

According to Murillo (2015:3) globalization describes a mesh of transfor­mations while societies and ways of living and understanding the world are altered by both small and large transformations. Furthermore, some researchers claim that global­ization is the consequence of these changes and some see it rather as the cause (Muril­lo, 2015:xiii). Considering globalization as a term, a central difficulty is that its mean­ings vary within different disciplines. Accordingly, as globalization is a multidimen­sional process there are several disciplinary approaches as there are also various con­ceptualizations of globalization such as international relations, sociology, economics and cultural studies (Pieterse, 1995:45-46). For economists globalization means growth in trade and market relations, quicker transactions and increased economic integration across borders, while to political scientists it rather means challenges to national authority and the transfer of nation state functions (Whalley, 2007:1512­1513). For international relations global politics and increasing interstate relations play an important role, while from the cultural perspective standardization and global communications are of crucial importance (Pieterse, 1995:45). In any case, what kind of changes are these? Are societies increasingly converging towards a uniform pattern of cultural, political and economic standards?

Speaking of globalization, its impacts have been analyzed and documented by numerous studies. Three different predictions or theses are associated with the impacts of globalization including homogenization, heterogenization (sometimes also de­scribed as polarization) and hybridization (Holton, 2000:140). According to the multi­dimensional nature of globalization, these theses cannot only be referred to the cultural dimension, but also to the economic or political one (Ritzer, 2011:154).

2.3.1 Homogenization / Convergence perspective

In a number of aspects globalization integrates economies of today. According to Pieterse (1995:45) one of the most common views on the impacts of globalization is that it leads to an increasingly standardized and uniform world. Globalization is con­nected to modernity, which in turn is related to the synchronization of commercial, cultural and technological patterns across countries. Furthermore, the homogenization thesis emphasizes the belief that globalization is leading towards cultural convergence and thus culture is increasingly standardized around an American or Western pattern. Therefore, globalization is equivalent to Americanization or westernization (Holton, 2000:140-142).

Globalization makes the world shrink and become one, thus bringing different people ever closer to each other. As barriers are weak and global flows are strong dif­ferences between countries decrease while similarities increase (Ritzer, 2011:154, 163). One of the controversial debates is whether this transformation will lead to a greater global homogeneity especially in terms of global culture (Ritzer, 2011:154). Ritzer (1993; 1998) is in favor of the thesis that there is an increasing global homoge­nization. Following the work of Max Weber on rationalization, he calls this process the “McDonaldization of society”, named after the fast-food restaurant. This process of McDonaldization is based on the thesis that the contemporary paradigm of the ra­tionalization process is a fast-food restaurant such as that of the McDonalds chain, which is dominating the market. Due to the expansion of McDonaldization this pro­cess is also associated or linked to that of Americanization (Ritzer, 1998:71). Homog­enization means that society is getting more alike than ever and a global consumer culture is developing due to “new” global information and communication technolo­gies (Holton, 2000:142), while calculability, efficiency, control and predictability are increased(Ritzer, 1998:vii).

Marginal differences have to be kept in mind meaning that there is rather a de­gree of homogenization than complete homogeneity that can be measured (Ritzer, 2011:171). Apart from this, the theory of McDonaldization is focused only on the realm of culture although various dimensions are influenced. Not only the cultural aspect, but the full range of globalization should be considered as its impacts are broader among many other dimensions such as political, environmental, religious, so­cial, organizational ones, etc. (Ritzer, 2011:154). Moreover, products, clothing and lifestyles are the most visible ones, but besides, this process of uniformization also progresses through the transference of the environment protection, democracy, the economic system and human rights, which are part of the norms and values of a coun­try (Cesari, 2002:5). In a series of empirical studies, for instance Meyer (1977) ob­serves that there is a similar organization of newly independent states that have differ­ent backgrounds and needs from origin. This theory is called the World Social Theory (also World Polity Theory) which focuses its analysis on structures, practices and global relations among countries and comes to the conclusion that the world exists of interrelated independent actors such as individuals, governments and organizations that interact transnationally. By observing and copying particular patterns they increas­ingly start to behave in similar ways. Thus, their structure, behavior, identity and norms are shaped by the environment and embedded in a cultural context and there is a great emphasis on homogenous patterns.

Some economists state that the conformity has its origin in domestic groups following the consensus and in the world-culture of rationalized modernity. Thus, the convergence of societies is caused by modernization (Guillén, 2001:244-245). Moreo­ver, as this framework again refers to the cultural side of globalization it can be seen, on the most superficial way, in patterns such as standardized incentive structure at work, labor dynamics, uniform trends and dressing among countries (Murillo, 2015:15). In terms of management, best practices are observed and defined as being universally valid and efficient and thus they are adopted. Due to the increasing com­petitive environment companies are forced to perform well and thus apply to best prac­tices not paying too much attention to national and cultural differences (Pudelko and Harzig, 2007:535). Therefore, companies operating across borders copy observed suc­cessful behavior and thus convergence increases. While the homogenization scenario states that diverse cultures around the world are converging, the heterogenization or divergence perspective describes something different or quite the opposite.

2.3.2 Heterogenization /Divergence perspective

Researchers disagree that technological growth or the spread of markets are leading toward uniform patterns, such as cultural, political and economic ones, in soci­eties. For instance, according to Hofstede (1980) values, beliefs and attitudes are shaped by national culture rather than by new technologies or economic identity. Thus, different cultural patterns can be seen as a barrier to convergence and if they change, they change slowly. Furthermore, there are good reasons and evidence for divergence. As corporate governance systems are unlikely to converge, they rather strive for ad­vantages and differentiated positions by leveraging differences in today’s borderless world. Instead of converging on a best model, countries and firms rather try to be dif­ferent to be compatible in the international context (Guillén, 1999:22-24). Additional­ly, empirical evidence supports the case for diversity in cross-national patterns and perceives total homogeneity as unlikely (Guillén, 2001:244). Divergent outcomes have been produced due to the complex interaction between international states and multi­nationals (Strange, 1996:1-2). Scholars supporting the divergence theses hold the view that management methods cannot be just transferred as cultural and institutional pat­terns differ across countries (Pudelko and Harzig, 2007:537). Therefore, adopting from best practices, even though they might be successful, is not always recommended.

In addition to the previously mentioned heterogenization perspective, the polar­ization theory is linked and emphasizes the rejection between different countries and their range of cultural elements (Holton, 2000:146). According to Barber (1995) espe­cially homogenization of cultures can lead to intense conflicts and serious threats among different countries. He describes this battle between “McWorld” (sterile cultur­al monism) and “Jihad” (raging cultural fundamentalism) and states that convergence would lead to a clash of cultures. In this case McWorld describes a combination of fast computers, music and food, promising to bring us closer while jihad states cultural fundamentalism and tribalism, claiming moral liberation (Holton, 2000:146-147). Ad­ditionally, this direction of change has gained increased attention especially after Sep­tember 11th and the subsequent war in Afghanistan. The cultural clash and the differ­ences between Islamic and Western values are perceived to be the reason for these events (Ritzer, 2011:155). Hence, not only divergence, but also complete rejection might result as a reaction when different societies and cultures are brought together and experience a clash.

2.3.3 Hybridization / Cross-vergence perspective

Another perspective describes the processes of globalization as being the agent of hybridization as it is a source of diversification combined with invention and crea­tivity (Brosius and Hitchner, 2010:145). Hybridity or cross-vergence refers to a cross­category process where different phenomena are mixed up (Pieterse, 1995:55-56) and a variety of local identities is integrated, in turn building a new hybrid form (Ritzer, 2011:159). By recognizing the strength of the individual cultures (cf. Hofstede, 1980) various scholars try to understand the impact of globalization on cultures by using the concept of hybridization or cross-vergence (Holton, 2000). Similarly, Pieterse (1995:55-65) states that hybridization plays an important part in the reorganization of social spaces and offers a basis for the assumption of different beliefs and categories that form the mixture. However, cultural experiences have shown that the movement is not as simple as standardization and uniformity and hybridity does not only describe the crossing of cultures, but also the transition from the origin of culture 1 and culture 2 (Pieterse, 1995:64). Accordingly, the criticism of the perspective of homogenization is that scholars supporting this perspective overlook the countercurrents and the possi­bilities for intercontinental crossover culture. For instance, from the hybridization per­spective there is a “global mélange” that consists of both the European and Western culture (Pieterse, 1995:60), forming a unique cultural hybrid (Ritzer, 2011:155). Even though there are barriers to external flows, they are not strong enough to block flows entirely and thus entry combines different cultures (Ritzer, 2011:155). As the institu­tional perspective is closely linked to globalization and its consequences, applying it as a theoretical framework in the third chapter of the present paper will provide a better understanding of globalization’s effects, positive and negative ones. While the three perspectives - convergence, divergence and cross-vergence- are mostly related to cul­ture, a broader applicability to various dimensions will be covered in this paper.

III Theoretical Framework

3.1 Institutional theory in international business

“[Globalization of our world] is about the rules of the game in which econom­ic and social activity are embedded and about the profound transformation of those rules in a world where order-creating capacities are not coinciding anymore with na­tion-state power” (Djelic and Quack, 2008:299). What are institutions? According to North (1991:97) they are constraints formulated by humans to regulate political, social and economic interaction and to minimize uncertainty in behavior. In turn, this social reality is defined by conventions and rules that are influencing our behavior, thoughts and intentions (Diehl and McFarland, 2010:1740-1741). Nowadays there are different major schools of institutionalism for instance the sociological, historical and political one. These three types, as their name already states, have different origins in their the­orizing and research (Amenta and Ramsey, 2010:15-16). As Murillo (2015:xv) states that “we are interested in the global view afforded by Sociology” this paper will main­ly focus on sociological institutionalism and therefore on the deeper aspects of social structure and on organizations which can be political actors or states (Amenta and Ramsey, 2010:15). There is a range of studies within institutional theory and diverse approaches exist. Following Scott (2005:460) institutional theory is rooted in social sciences and started with a range of work by scholars, such as Marx and Weber, at the end of the nineteenth and beginning of the twentieth century. Furthermore, since the 1970s research in management and organizational theory has not simply increased, but institutional theory has become the dominant frame guiding these studies (cf. DiMag­gio and Powell, 1991:1; Scott, 2014:xi).

In recent years institutional theory has experienced a remarkable transfor­mation and has become a leading theoretical foundation, as there is an increased im­portance of understanding that countries differ in terms of institutions (Diehl and McFarland, 2010:1740-1741). Especially the focus on institutional microfoundations, such as social and cognitive ones, has become of crucial importance, as well as on why institutional structures change than on the diffusion or success of these (Powell and Colyvas, 2008:295; Cornelissen et al., 2015:23). However, according to DiMaggio and Powell (1991:1) the theory represents a paradox as its meanings are different from discipline to discipline and micro and macro features vary as well. Moreover, organi­zations are confronted by regulatory, technological and political changes, thus leading to a central research on organizational fields and change since the 1990s (Greenwood andHinings, 1996:1022).

Giving a brief review of current and past applications of institutional theory, the differences as well as similarities between old and new institutionalism will be emphasized. In terms of the differences, applications vary with regard to analytical focus, views of conflict and change, individual action and approach to the environment (DiMaggio and Powell, 1991:15). From a broader perspective institutional theory re­fers to the deeper aspects of social structure such as rules, norms, beliefs, routines and schemes and analyses the processes by which they become guidelines for social be­havior (Scott, 2005:460). Accordingly, recent scholars have put their focus on the im­pact of these social structures on organizational forms as the importance of institutions is increasing (Scott, 2005:471). As old and new institutionalism converge, this theory is often called “neo-institutionalism” (Greenwood and Hinings, 1996:1023) and both should be applied together in the study of multinational corporations (MNCs) (Kos- tova, Roth and Dacin, 2008:1002). Other scholars use new institutional theory as a synonym for neo-institutionalism. There are several variants and concepts of institu­tions and institutional theory, which vary among diverse approaches. While some are specific, detailed and more explicit in terms of definitions, others are less careful re- garding their conceptualization. Even though there is an underlying similarity between the recognized approaches, little agreement on specified details exists (Scott, 1987:493). As institutional theory is based on institutions, it is of crucial importance firstly to understand what institutions are and secondly to differentiate them from or­ganizations.

3.2 Institutions and the institutional environment vs. organizations

Even though there is no unique or overall definition for institutions some defi­nitions are given in order to provide an in-depth overview of old and new institutional theory. Institutions are templates or rules of a game, originally constructed by society, that guide and organize behavior and are maintained by further interactions between individuals, organizations or states (cf. Barley and Tolbert, 1997:93; Meyer and Ro­wan, 1977:340-346; North, 1991:97). According to Greenwood, Oliver, Sahlin and Suddaby (2008:4) it is basically about a “more-or-less taken-for-granted repetitive social behaviour that is underpinned by normative systems and cognitive understand­ings that give meaning to social exchange and thus enable self-reproducing social or­der”. These shared understandings of proper behavior as well as generalized expecta­tions can be created over a large timeframe and a history of negotiations. They have a great influence on future interactions and even though actors’ behavior can vary in the ballpark, they have to stick to those taken-for-granted rules (Barley and Tolbert, 1997:94, 97). Furthermore, institutions are multidimensional and are the central build­ing blocks guiding, constraining and distinguishing between acceptable and unac­ceptable behavior. Thus, by forming humans’ social, political and economic interac­tion with the aim to increase the likelihood of a particular kind of desirable behavior, they can be also interpreted as restrictions (Barley and Tolbert, 1997:94).

Formal and informal institutions as well as different levels of institutions can be distinguished from each other. The following figure 1 illustrates these different lev­els of institutions, their main purpose and the likelihood of institutional change. The first level embeddedness considers informal institutions such as codes of conduct, norms, traditions and religion, which are socially embedded and change unlikely or slowly. Many of these informal institutions have an evolutionary origin (Williamson, 2000:596-597) and they predefine a framework for behavior in order to prevent situa­tions of uncertainty (North, 1991:97). Most institutional economists take this level as given (Williamson, 2000:596).

Figure 1: Levels of institutions

illustration not visible in this excerpt

Source: adopted from Williamson, 2000:595-600; Söllner, 2008:39.

Formal rules, such as laws and rights (especially property rights) are part of the institutional environment (second level), which have partly spontaneous and partly evolutionary origins. The legislative, executivejudicial and bureaucratic functions are embedded here (Williamson, 2000:596-598). Together they define a framework for how the game is played. It is possible to further differentiate as formal rules such as laws and constitutions can be valid on the national, subnational or/and supranational level (North, 1991:97) and hence organizational fields should be considered (Phillips, Tracey and Karra, 2009:343). Especially for MNCs this institutional context matters and defines their activities (Phillips et al., 2009:343). In addition to the formal institu­tions, informal ones such as culture, religion and norms influence MNCs behavior and actions (Söllner, 2008:vii). Changes in the rules of the game are possible, but only in the long term. An example is the EU that “has been “in progress” for fifty years and is still in early stages” (Williamson, 2000:598).

Furthermore, it is possible to distinguish between an internal and external view on institutions. In terms of the latter one “institutions are shared behavioral regularities or shared routines within a population. From an internal point of view, they are noth­ing more than shared mental models or shared solutions to recurrent problems of social interaction” (Mantzavinos, North and Shariq, 2004:77). This approach would then assist in determining whether institutions become behaviorally relevant over time. In­stitutions do not only build a stable framework for cultural, legal and moral behavior, but also empower and support actions and, in turn, face revolutionary changes over time. While informal institutions are difficult to change, formal rules are easier to im­plement and offer opportunities to be redesigned (cf. Barley and Tolbert, 1997:94; Scott, 2014:56-58; Williamson, 2000:597). Apart from this, the levels are fully inter­connected, with higher levels having a constraining power and influence on the level immediately below (solid arrow) and lower levels signaling feedback to higher levels (reverse arrow) (Williamson, 2000:596). The different schools of institutional theory differ from each other in terms of on which level of institutions they lay their focus (Söllner, 2008:40).

Research on organizations has shown that not only individuals, but also organi­zations are influenced by the institutional context they are part of. Therefore, it is im­portant to distinguish between institutions and organizations, as they are not equiva­lent. While institutions present guidelines for behavior and constraints, organizations are (groups of) individuals that strive for a particular objective (North, 1990:3-5). Fig­uratively this means that “if institutions are the rules of the game, organizations are the players” (North, 1990:3). Additionally, organizational structures reflect internalized institutional rules and the way an organization is built, run and understood, is influ­enced by practices and processes, which are defined by institutions as being legitimate (cf. DiMaggio and Powell, 1983:148; Meyer and Rowan, 1977:340). In this case legit­imacy means, that an action conforms to appropriate values, beliefs and norms, which were previously constructed by society and which are perceived as being desirable (Suchman, 1995). Consequently, North (1993a:14) views organizations as initiators of institutional change: “Entrepreneurs and members of organizations invest in the skills and knowledge, which lead to revised evaluations of opportunities, which in turn in­duce alteration of the rules or the gradual revision of informal constraints”.

Why is it important to constrain behavior by using institutions? North (1991:97) explains it by using the example of a game theoretic context and describes that “wealth-maximizing individuals will usually find it worthwhile to cooperate with other players when the play is repeated, when they process complete information about the other player’s past performance, and when there are small numbers of players”. Therefore, problems of human interaction should be bend forward by developing insti- tutions that in turn permit low cost transactions and division of labor (North, 1991:98). However, there are two main reasons why the institutional environment exists. Firstly, in order to solve problems in human cooperation and secondly, to lower the undesira­ble external effects on third parties (Söllner, 2008:66).

3.3 Old institutionalism

After social science scholars such as Marx and Weber, early institutional econ­omists like Selznick (1948) worked further on institutional theory. His version became one of the most influential ones on institutional theory, yet it still differs from new institutionalism in various ways. He views organizational systems from two perspec­tives: as an economy (system of relationships, may be manipulated) and as an adaptive structure. Thus, the organizational structure is shaped by the behavior of participants as well as by the constraints and impact from the external environment (Selznick, 1948:25-28; Scott, 1987:493-494). Selznick (1948:26) differentiates between institu­tions and organizations, describing the latter one as formal cooperative systems with participants that act functionally in relation to their roles and who raise problems due to needs, habits and commitments to groups. Furthermore, the term institutionalization describes stability and hence highly stable and taken-for-granted social arrangements (David and Bitektine, 2009:163). According to DiMaggio and Powell (1991:12-13), the old institutionalism focuses on the relationship between institutions and organiza­tions, considering the effect of culture on organizational reality. This organizational rationality is constraint by institutionalization and vested interests, which result from political tradeoffs, and are the sources of inertia. Furthermore, the focus is on the con­ceptualization of environments where organizations are embedded in the local com­munity and environments co-opted by organizations. Accordingly, the key forms of cognition are values, norms and attitudes. Even though new institutionalism is rooted in the old one and both analyze the relation between organizations and the institutional environment (DiMaggio and Powell, 1991:12), it is not simply the same old approach in a prettier packaging

3.4 New institutionalism / Neo-institutionalism

New institutionalism offers a wider intellectual endeavor that differs in funda­mental ways from past sociology in terms of organizations and the constellation of institutions. It is change as well as great progress (cf. DiMaggio and Powell, 1991:11; Scott, 2014:19) and centers on organizations-in-sectors as well as on their relation to social institutions (Greenwood and Hinings, 1996:1032). The notion of the actor is a main concept in the new institutionalism. They can be individuals, groups, organiza­tions or the nation state (Meyer, 2008:789). Retrospectively, the beginning of new institutionalism can be assigned to the year 1977, when Meyer and Rowan published their work, which includes fundamental components of neo-institutional thought. In­stead of only including a cognitive dimension, researchers put the emphasis on the multidimensionality of institutional theory (DiMaggio and Powell, 1991:11,27). The cognitive focus on microfoundations of institutions has largely differentiated the new institutionalism from the old one (Cornelissen et al., 2015:23) and nowadays the key forms are not only values and norms, but also classifications, routines, scripts and schema (DiMaggio and Powell, 1991:13). In addition to the greater cognitive and cul­tural focus, the fundamental advances are that the new institutional theory views insti­tutions as independent variables and rejects rational-actor models (DiMaggio and Powell, 1991:8).

Recent research in institutional theory has put its emphasis on social sciences, examining the range from interactions on a micro interpersonal level to global frame­works that are based on the macro level (Scott, 2005:460-461). According to Söllner (2008:30-31) on both levels, it is the aim of new institutional theory to enable desira­ble transactions and at the same time to avoid undesirable ones. Transactions take place, for instance, when organizations decide for a cooperation relationship (i.e. divi­sion of labor). In turn, desirable transactions are legitimate. As organizations operate in competitive and simultaneously institutional environments it is preferred to avoid unnecessary transaction costs and to prevent the appearance of market failures. Trans­action costs are one of the main characteristics of new institutionalism. They arise and increase as problems in interaction persist, for instance between stakeholders of two different organizations. In turn, problems in interaction can result due to incentive problems (i.e. opposed motives, interests) or information problems (perceived uncer­tainty). In order to solve these, appropriate institutions need to be developed, such as a legal system and consequently a written contract. Therefore, some institutions are de­veloped as standards for repeated problems in human cooperation while others exist independently (cf. Suchanek, 2003; Söllner, 2008:34, 63). By combining transaction cost theory to institutional theory, the institutional environment is broadened and a better understanding of organizational change is guaranteed (Roberts and Greenwood, 1997:353).

The combination of the old and new institutionalism is named neo­institutionalism by Greenwood and Hinings (1996:1023). Following Meyer (2008:790) “the new institutionalisms see the social environment as affecting the behaviors and practices and ideas of people and groups now conceived as bounded, purposive and sovereign actors. Many different lines of thought are involved, varying in their con­ception of what an actor is, and what properties of which environments are relevant”. Since the early 1960s the wider environment with its various and multiple facets has been recognized as being of crucial importance for organizations and their structures and functions (Scott, 2005). Thus, new institutionalism has put a greater focus on wid­er, nonlocal environments as well as on a network of organizations rather than the in­dividual organization and therefore differs from the old institutionalism in terms of the conceptualization of the environment (cf. DiMaggio and Powell, 1991:13; Greenwood and Hinings, 1996:1026). There is an increased research focus on country-level ef­fects, explaining the variance in organizational behavior by analyzing cross-country differences of national environments such as rules, regulations, norms and culture. International scholars have identified the latter one as the key characteristic of the en­vironment (Kostova, 1997:180). Including exclusively culture as an influencing factor is described by Kostova (1997:180) as a “case of simplification” since other aspects such as political, linguistic, economic and institutional ones have an influence on or­ganizational behavior (Barkema, Bell and Pennings, 1996:153). Thus, the multidimen­sionality should be taken under consideration.

Nowadays, organizations are confronted with diverse changes, such as techno­logical or political ones and multiple and diverse messages thrill the environment as a reaction to increased mobility in terms of capital, beliefs, preferences, ideologies, etc. Therefore, organizational change has become one of the central research topics using the perspective of neo-institutional theory. Even though the approach is used to ex­plain the similarities and stability of organizational arrangements, it is not used as a theory of organizational change (Greenwood and Hinings, 1996:1022). Accordingly, Meyer and Rowan (1977) give insight into the real complexity and influence of institu­tional processes. Organizations are surrounded by a broader institutional environment (industrywide, national or international), where institutions have a great impact on organizations’ behavior, structures and policies.

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