Institutional Theory and Entrepreneurship
Institutional Theory in Entrepreneurship: The Three Pillars and Legitimacy
Institutional theory examines the "rules of the game" in a given context (Scott, 2001). In a business environment, these rules dictate how organizations form, behave, and survive.
The main proposition of institutional theory, when applied to entrepreneurship, is that context-varying social forces often shape entrepreneurial success more than economic efficiency does.
What are the Three Pillars of Institutions?
The "rules of the game" extend beyond written laws. Sociologist W. Richard Scott (2001) categorized these pressures into three distinct pillars. Entrepreneurs must align their strategies with these pillars to gain acceptance.
| Pillar | Type of Pressure | Examples |
|---|---|---|
| Formal (Regulative) | Coercive | Laws, regulations, and government policies. |
| Informal (Normative) | Social Obligation | Social norms, values, and what we "should" do within a specific industry. |
| Cognitive (Cultural) | Taken-for-granted | Shared beliefs, symbols, and the unquestioned "way things are done." |
Institutional Entrepreneurship: Changing the Rules
While most business owners follow the rules, some attempt to rewrite them. This is known as Institutional Entrepreneurship.
Levy and Scully (2007) describe the Institutional Entrepreneur as a "collective agent who organizes and strategizes counter-hegemonic challenges." Simply put: Whereas most follow the rules, Institutional Entrepreneurs change the game to fit their innovation.
Case Study: The Struggle of Uber
Institutional theory is frequently applied to the modern "gig economy" and platform businesses.
- Failed Attempt (Uber in the Netherlands): According to Pelzer et al. (2019), Uber failed to change Dutch taxi law in its favor. This serves as a prime example of a failed attempt at institutional entrepreneurship due to a lack of normative alignment.
- Government as Entrepreneur: In a contrasting example, Xing et al. (2018) demonstrate how municipal governments can act as institutional entrepreneurs, actively fostering innovation within their cities.
The Role of Legitimacy and the Liability of Newness
Institutions set forth expectations. Economic actors (businesses) seek to conform to these expectations to be treated as legitimate.
This concept is strictly tied to the Liability of Newness. This theory suggests that the risk of failure is significantly higher in the early years of an organization. Why? Because young organizations lack legitimacy.
"When young organizations lack legitimacy, they may not receive the vital support of their stakeholders, including investors, customers, and employees."
By extension, entrepreneurs who ignore the institutional logic of their social contexts risk failure because they are viewed as illegitimate and unworthy of support.
Video Overview: Institutional Theory Explained
Watch the video below for a visual breakdown of Scott's pillars and organizational theory.
Academic Sources and References
- 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). Institutions and Organizations. Thousand Oaks: Sage.
- Xing, Y., Liu, Y., & Cooper, S. C. L. (2018). Local government as institutional entrepreneur. British Journal of Management, 29(4), 670-690.
