Hollingsworth.J.rogers.doing Institutional Analysis-Implications for the Study of Innovations

8/11/2019 Hollingsworth.J.rogers.doing Institutional Analysis-Implications for the Study of Innovations

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Theme Section

Doing institutional analysis:implications for the study of

innovations

J. Rogers Hollingsworth

University of Wisconsin

ABSTRACTThe study of institutions and innovativeness is presently high on theagenda of the social sciences. There is increasing concern with how asocietys innovativeness is associated with its international competitive-ness. And as scholars study why the innovative styles of societies vary

there has been increasing concern with how the institutional makeupof a society inuences its particular style of innovativeness. However,

before there can be signicant advance in the study of this problem, it isimportant that we have a better understanding of what constitutes insti-tutional analysis. Every social science discipline with the exception ofpsychology has at least one distinctive strategy for doing institutionalanalysis. And it is because of the lack of consensus as to the appropriate

boundaries and content of institutional analysis that we have limitedability to make theoretical advances in understanding how the institutionalmakeup of a society impacts on its innovativeness. Recognizing that this

is a serious problem for the social sciences, this article attempts to struc-ture the eld of institutional analysis and takes the rst steps in relatingit to the study of a societys style of innovativeness.

KEYWORDS

Incremental and radical innovations; institutional arrangements; institu-tions; organizations; path-dependency; social system of production.

Review of International Political Economy 7:4 Winter 2000: 595644

Review of International Political EconomyISSN 0969-2290 print/ISSN 1466-4526 online 2000 Taylor & Francis Ltdhttp://www.tandf.co.uk
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INTRODUCTION

This article addresses two issues which are currently high on theagenda of the social sciences: (l) why do societies vary in their style ofinnovativeness? and (2) how should we go about doing institutional

analysis? While these are often treated as separate issues, this articlemakes some effort to relate the two subject areas to one another.

For some years, the economics literature has argued that a countrysinnovative capacity is linked to its international competitiveness (Landes,1969, 1998; Nelson, 1993). Yet we are greatly lacking a theoretical under-standing of why countries vary in their innovative styles. Why, forexample, do some advanced industrial countries, time and time again,make radical breakthroughs in basic and applied science and develop

radically new products and even new industries? And why do othercountries rarely make any radical breakthroughs in basic and appliedscience or in product development, but continuously make incrementaladvances in knowledge, improve upon newly developed products, andeven become the dominant producers in these market segments?

Why the innovative styles of countries vary is a complex problem. Butmuch of the variation in innovative styles across societies is due to theirinstitutional conguration. Institutions may either constrain or facilitate

innovativeness (Hage and Hollingsworth, 2000; Edquist, 1997; Langloisand Robertson, 1995), but at present we do not have a good under-standing of how the institutional makeup of a society is associated withits style of innovativeness. This is due to the fact that the comprehen-sion of the institutional structures of societies is in a state of confusion.Hence a major argument of this article is that before we can understandhow the institutional conguration of a society inuences its style ofinnovativeness, we must rst identify the various components of the

institutional makeup of a society and understand how these componentsare related to each other. The latter part of the article explains how theinstitutional makeup of a society is related to its style of innovativeness.

At present, it is difcult to relate institutional analysis to innovative-ness because our theories of both areas are poorly developed. Even so,we are now at a strategic moment, because we can build on a rich bodyof literature on institutionalism and innovativeness in order to advanceour theory of each and to integrate the two elds.

For some years, much of the literature on technological innovation hasemerged from a focus on the rm (Dosi, 1988; Fransman, 1994; Langloisand Robertson, 1995; Whitley, 2000). For example, Alfred Chandlersgreat corpus of work (1962, 1977, 1990) has tended to emphasize howthe success of a rms technological innovativeness both across coun-tries and over time has been inuenced primarily by whether it hasthe right strategy and structure. For Chandler, rms which have had theright strategy and structure have ended up having the organizational

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capabilities which permitted them to have the economies of scale andscope to develop cost advantages over their competitors (Teece, 1993).Chandlers work has had a profound inuence on the management liter-ature of the past couple of decades. Hence, in the Chandlerian tradition,

much of that literature has suggested that the key to understanding thecompetitive advantage of rms is to identify their strategies and orga-nizational structures.

Over time, another literature has emerged which emphasizes theimportance of the institutional environment of rms for understandingwhy rms in some countries excel in some industries but not in others,and why the rms in a specic country may excel in a particular industryat one time but may eventually lose that advantage (Landes, 1969, 1998;

North, 1981, 1990). More recently, Richard Nelson and his co-workershave been advancing this literature by working at the frontiers of inte-grating the literature on institutions, rm strategy, and technologicalinnovation (Nelson, 1994, 1995a, 1995b, 1996; Mowery and Nelson, 1999;Murmann, 1998; Arora et al., 1998).

The Nelson school correctly assumes that since we do not presentlyhave an adequate theory on how institutions, rms and technologiesco-evolve, we are not at a stage to test a set of formal hypotheses which

ow from some well-dened model. Hence the Nelson school have collec-tively been developing descriptive studies of how institutions, rmcapabilities and technologies co-evolve so that particular societies andrms at specic moments in time excel in particular kinds of innova-tions. The goal of this kind of work has been to develop, by workinginductively, a better understanding of the processes of how technolo-gies, rms and institutions co-evolve across a number of industries andcountries.

A variety of endowments in the institutional environment provideeconomic actors/rms with initial advantages or disadvantages forparticular types of technological activity (Murmann, 1988: ch. 7). Butover time everything is dynamic, and the larger global and institutionalenvironments, the capabilities of rms, and the performance of rms allco-evolve and feed back onto one another. However, institutional envi-ronments differ widely from one society to another, and the successfulrms and organizations are those which can best adapt their activitiesto the institutional environment within which they are embedded. Oncea number of rms in a particular industry are successful, however, theymay be able to engage in collective action to modify their institutionalenvironment in order to enhance their innovativeness and their techno-logical competitiveness. The studies of the Nelson group have beenparticularly important in advancing the argument that the interactionamong actors and their institutional environment is a multi-facetedprocess and that successful actors over time must not simply respond

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to the institutional environment in which they are embedded but mustmodify their environment in order to maintain competitive advantages.

As these comments suggest, the work of Nelson and his colleagues isvery promising for understanding why societies vary in their capacityto excel in different industries. However, to extend and complement

their work, we need a greater understanding of and consensus on themeaning of institutions and the institutional environment of rms. Hence,this article is written in the spirit of complementing the agenda of Nelsonand his colleagues. One of its goals is to develop a map of what can becalled the terrain of institutional analysis. It assumes that until we havea map of this terrain, scholars working in the broad eld of institutionalanalysis will not comprehend how their work interrelates.

Institutional analysis is now rather high on the research agenda ofthe social sciences. However, we need to be aware of the obstaclesconfronting us as we attempt to advance an agenda of institutionalanalysis. There is no consensus as to what is meant by institutions orby institutional analysis. These terms are very widely used, but they areused with different conceptualizations, and the scholars who use themshare little common ground. Until scholars have some consensus aboutthe meaning of the concepts they use, their potential to bring about effec-tive advancement of knowledge is somewhat limited. Thus, thewidespread interest in several academic disciplines in the concepts insti-tutions and institutional analysis may well promise more than it candeliver, given the organizational and disciplinary fragmentation ofcontemporary universities.

There are many different approaches to the study of institutions(Nelson and Sampat, 1998): there are the new and the old institution-alisms (Stinchcombe, 1997; Hodgson, 1998; Langlois, 1986, 1989); thereis historical institutionalism (Steinmo et al., 1992; Zysman, 1994;


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ORGANIZATIONAL

CAPABILITIESINNOVATIVENESS

INSTITUTIONS, INSTITUTIONAL ARRANGEMENTS,

AND INSTITUTIONAL SECTORS

Figure 1 Institutional environments, organizations and innovativeness


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Immergut, 1998; Katznelson, 1998); and several of the social scienceshave their own distinctive approaches to the study of institutions (Halland Taylor, 1996; Hodgson, 1988; Eggertsson, 1990; Finnemore, 1996;Scott, 1994; Calvert, 1995; Hechter and Kanazawa, 1997).

The following comments reect some of the confusion in utilizing theconcept institution. Nobel laureate Douglass North in his bookInstitutions, Institutional Change, and Economic Performance (1990: 3) denesinstitutions as rules of the game in a society. To North, institutions areconstraints which shape human interaction and the way that societiesevolve through time. On the other hand, Andrew Schotter argues thatinstitutions are not rules of the game. Rather, institutions are thebehavior that follows from rules. Briey, he is concerned with what

actors do with rules, but not with what the rules are (Schotter, 1981:155). Many other examples might be given to illustrate the heterogeneityof approach to institutions and institutional analysis. Even if scholarswere to agree with North that rules and norms are institutions, theywould not necessarily agree on what a rule is. Shimanoff, for example,has identied more than 100 synonyms for the concept rule (Shimanoff,1980: 57; Ostrom, 1986: 5).

Another critical issue in the institutional literature is the relationship

between institutions and organizations. North (1990), following from hisdenition of institutions, argues that institutions and organizations aredistinct entities. Which organizations come into being and how theyevolve through time is inuenced by a societys rules and norms, thatis by its institutions. On the other hand, a number of recent organiza-tional sociologists see very little difference between institutions andorganizations. For them, rules and norms are institutions which unfoldin tandem with organizational structures and processes, and changes inorganizational forms internalize and reect changes in the societys rulesand norms. Using this perspective, a whole subdiscipline within soci-ology called the new institutionalism in organizational analysis hasemerged. The institutionalist perspective on organizations assumes thatthe kinds of organizations which actors create are dictated by the culturalnorms and rules in which they are embedded (Powell and DiMaggio,1991; Zucker, 1988, 1991).

The importance of this disagreement about institutions is obvious. Ifinstitutions are so critical for understanding our societies, it is impor-tant that we come to some systematic consensus as to what institutionsare, and how they inuence social actors and the organizations that theycreate. If we cannot do so, we risk talking past one another, and losingthe opportunities for cumulative knowledge based on articulation ofwidely shared theoretical understanding.

We need not only conceptual clarication as to what institutions are,but also greater consensus as to how to study institutions. No scientic


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eld can advance very far if the practitioners do not share a commonunderstanding of the key concepts used in their analysis (Ostrom, 1986:4). But with our universities and academic associations so fragmentedinto different disciplines and into various subspecialties within disci-

plines, it is difcult to advance the theoretical agenda of institutionalanalysis within the academy. Indeed, the disciplinary fragmentation ofthe modern university is a major barrier to the theoretical advancementof the study of institutions and innovations as well as most otherhybrid elds of research (Hollingsworth, 1984; Hollingsworth andHollingsworth, 2000). And it will be only as a result of effective commu-nication across diverse elds of knowledge that our study of institutionsand innovativeness will be effectively advanced.

MULTIPLE LEVELS OF INSTITUTIONAL ANALYSISAND INSTITUTIONAL CHANGE

There are innumerable signs that we are living in a time of great insti-tutional change: the demise of the Soviet empire; the processes ofEuropean political and economic integration; rapid transformation inparts of the global economy; the disintegration of the family structure;

the weakening of voluntary associations and the decline in politicalparticipation in a number of advanced capitalist societies; the weakeningof welfare states. European law is superseding national law and is evenchanging complete national legal systems. The list could go on and on.

Even though scholars discuss institutional change at length, theirability to measure the rate of institutional change is very limited. Andmore crucial than the limited ability of scholars to measure institutionalchange is their very limited understanding of how to build new insti-tutions. One of the reasons for these shortcomings is that the socialsciences are decient in a theory of institutions. The building of newinstitutions and redressing the decline of some of the most importantinstitutions of our societies are among the most important problems ofour time. If we are to advance in the development of a theory of insti-tutions, we need to work collaboratively across the social sciences, andwe need to dene the parameters of institutional analysis.

First level of analysisThis article attempts to make some modest contribution to outlining theparameters of institutional analysis. At the outset, we need to recognizethat when we engage in institutional analysis, we must be sensitiveto multiple levels of reality. As suggested above, most scholars whoengage in institutional analysis do not participate in any coordinatedactivity with each other, and their activity is fragmented into a variety


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of disciplines and subdisciplines. To establish some coherence to the eldof institutional analysis, we need a map of the eld so that those workingin one area can see where their research ts in relation to other areasand other practitioners on the map.

Table 1 presents such a map, with multiple levels at which institu-tional analysis occurs. Theoretically, each of these areas on the map isinterrelated with each other level. However, the various areas/compo-nents on the map are arranged in descending order of stability orpermanence. Those components at higher levels of reality are morepermanent and durable, while those at lower levels change more rapidly.

Were scholars doing institutional analysis able to reach some consensusabout where their own work ts in relation to all other practitioners in

the eld, there would be increased potential for all practitioners tocommunicate with each other. By analogy, once geneticists, crystallo-graphers, biochemists, etc. had a good understanding of how theirinvestigations were related to each area of molecular biology, the eldquickly was able to make theoretical advances (Judson, 1979).

At the rst level, there are the basic norms, rules, conventions, habits andvalues of a society. These are the most fundamental properties of insti-tutions and are the most enduring and resistant to change. Rules, norms,

conventions, etc. are institutions, but are only one component of whatconstitutes institutional analysis. As Burns and Dietz (2001 forthcoming)point out, most human activity is organized and regulated by normsand rules and systems of rules. These concepts are extremely importantfor institutional analysis, as they exert the greatest inuence on the natureof the components of institutional analysis at the next four levels which


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Table 1 Components of institutional analysis

1 Institutions = norms, rules, conventions, habits and values (see North,1990; Burns and Flam, 1987).

2 Institutional arrangements = markets, states, corporate hierarchies, networks,associations, communities (Hollingsworth and Lindberg, 1985; Campbellet al., 1991; Hollingsworth et al., 1994; Hollingsworth and Boyer, 1997).

3 Institutional sectors = nancial system, system of education, businesssystem, system of research (Hollingsworth, 1997).

4 Organizations (Powell and DiMaggio, 1991).5 Outputs and performance = statutes; administrative decisions, the nature,

quantity and the quality of industrial products (Hollingsworth, 1991, 1997);sectoral and societal performance (Hollingsworth and Streeck, 1994;Hollingsworth et al., 1990; Hollingsworth and Hanneman, 1982).

Note: The ve components in this table are arranged in descending order of permanenceand stability. That is, norms, conventions, etc. are more enduring and persistent than eachof the other components of institutional analysis. Each component is interrelated withevery other component, and changes in one are highly likely to have some effect in bringingabout change in each of the other components.


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are depicted in Table 1. In most forms of social analysis, it is extremelyimportant that we understand the social and cognitive conditions thatlead to compliance or non-compliance with rules, and the conditionswhich lead to changes in rules.

The approach to the study of institutions employed here argues thatnorms, rules, habits, conventions and values both reect and shape thepreferences of actors. Norms, rules, habits, conventions and values inu-ence who and what are included in different types of decision making,how information is processed and structured, what action is taken(Shepsle, 1986, 1989). It is through norms and rules that behavior isjudged to be democratic, fair or egalitarian.

Burns and Flam (1987) point out that in any society there are multiple

rule systems. Within a family there are rules for decision making, oftenquite different from rules and norms for decision making for a professorin a classroom, or for the customer in a bank. Despite the heterogeneityof rule systems, there are meta rules and norms which encompass lesserrule systems. Otherwise there would be such contradictory rule systemsthat a society would be paralyzed. The existence of meta rule systemspermits different rule systems to intersect with each other so that ambi-guities can be resolved. The greater the pluralism and complexity of a

society, the more ambiguity there is about meta rules and norms in asociety, and of course, all ambiguities never completely disappear.Overall, the degree to which separate rule systems are interlinked is anempirical problem. There are different sectors, groups and interestspursuing their own action logic, but through higher-order meta princi-ples and rules there can be order, consensus and coherence in a society.It is through a set of meta rules that class and ethnic conict in societiesare contained. (For elaboration, see Burns and Flam, 1987.)

In many respects, our understanding about norms, rules, habits, con-ventions and values inuences our perspective on how societies are con-structed and how they change. New institutionalists (Posner, 1992;Schotter, 1981; Williamson, 1975, 1985) tend to assume that at one timethere was a state of nature and that there was a movement from individ-uals to institutions an approach often called methodological individual-ism (Popper, 1961; Hodgson, 1998, 1999). And of course there areinnumerable instances which methodological individualists cite to demon-strate that individuals create new rules of behavior. For example, it is pos-sible for actors to change the rules of driving, so that instead of drivingon the left side of the road, drivers adopt a new rule and drive on the right.

This article, however, tends to equate social habits and institutions.As Hodgson and others remind us (Hodgson, 1988, 1989, 1997, 1999;Grafstein, 1992; Camic, 1986; Johnson, 1992; Nelson and Winter, 1982;Veblen, 1899), social habits are the results of earlier choices and are ameans of avoiding endless deliberation. Because cognitive frameworks


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are learned through habit, individuals rely on the acquisition of suchcognitive habits before reason, communication, choice or action arepossible.

Whereas Schotter (1981) and other game theorists take the individual

as an agent unencumbered by previous habits, Field (1984) and othershave stressed that there can be no games without prior norms and rules,and thus a set of norms and rules must be presumed at the start. Thosewho attempt to explain institutions from individual behavior alone areusing a bad strategy (Hodgson, 1998).

The position here heavily inuenced by Hodgson (1998, 1997, 1988) is that individuals are embedded in a complex institutional environ-ment and that institutions not only constrain but also shape individuals

(also see Hollingsworth and Boyer, 1997). It would be a mistake, however,to get involved in an innite regress in order to determine which camerst individuals or institutions. Of course, institutions are formed andchanged by individuals, just as individuals are shaped and constrainedby institutions. But at a macro level, it is institutions that provide acognitive framework whereby individuals can cope with their reality. Inthis sense, the micro and macro worlds are intertwined. At the macrolevel, there is considerable stability, but at the micro level, individuals

have a signicant level of autonomy, and there can be widespread diver-sity. As Hodgson (1988) reminds us, most institutions in a temporal senseexist prior to the individuals in any given society.

It would be a serious mistake to downplay the importance of indi-viduals and micro level analysis as we study institutions. In the nalanalysis, it is at the level of individuals that norms, rules, habits, conven-tions and values exist. An individual is born into and socialized intogroups and a society, and this is how one early in life acquires a senseof appropriate forms of behavior. Because of the way that individualsare socialized into a world of rules, norms, habits, conventions andvalues, it is unnecessary for individuals to restructure the world anewevery day (Douglas, 1987; Elster, 1989). Every action does not have tobe seriously reected upon. For this reason, institutions provide cogni-tive frameworks for individuals, make their environments predictable,provide the information for coping with complex problems and envi-ronments. In the words of Johnson (1992: 26), Institutions reduceuncertainty, coordinate the use of knowledge, mediate conicts, andprovide incentive systems. By serving these functions institutions providethe stability necessary for the reproduction of society. However, eachsociety has different forms of habits, rules and norms and hence differentincentives and disincentive systems for learning and forgetting, forprocessing information. But because individuals have varying degreesof autonomy, individuals and groups can deviate from the prescribedforms of behavior in a society. And of course, these changes at the level


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of individuals become important in understanding processes of societalchange.

These views are not meant to imply that the type of institutionalanalysis proposed herein approximates a general theory of society. This

is clearly not the case. However, it is intended to represent the rst stepsin a mapping exercise of the boundaries of institutional analysis and tosuggest a few methodological insights for studying institutions.

One should try to see norms and rules as continuous and not asdichotomous entities, to recognize that they come in varying strengths.Legro (1997) has suggested that we assess the robustness of norms andrules with three criteria: their simplicity, their durability and their concor-dance. Simplicity refers to how well actors understand norms and rules,

how well they can be applied within a specic situation. Some normsand rules can be so complex that actors can have considerable difcultyin applying them in specic cases. Durability addresses the issue of howlong norms and rules have been in effect in short, in order to assesstheir level of legitimacy. While the position of this article is that norms,rules and values are quite durable, they do vary in this respect.Concordance refers to how widely applied a norm or rule is. Thisaddresses the degree to which a rule is a meta rule, the degree to which

it incorporates the heterogeneity of other norms and rules. In sum, theclearer the norms and rules of a society, the longer they have been inexistence, and the more widely applicable they are, the greater theirimpact on a society. Hence, the more robust the norms and rules, thegreater their impact on a society, and the less their robustness, the greatertheir exibility and the less their effect on shaping a societys outcomesand performances.

Because norms, rules and values are quite durable, they play an impor-tant role in shaping the history of societies, thus contributing to a greatdeal of path-dependency. Actors attempt to adjust to their contempo-rary environment, but since they are products of the past, the historicallegacy of norms, rules and values inuences the decisions they make.Although actors have some capacity to alter the course of their history,they are constrained by their past, and the degree to which they canmove beyond their past is limited. As Lanzara (1998), Johnson (1992)and others have argued, societal inertia is a basic feature of institutions.They provide the basic stability necessary for change. Degrees of historyare continuously reproduced by the way in which the inhabitants ofsocieties are socialized. History matters, but at critical points in history,there is punctuated equilibrium (Somit and Peterson, 1992). During mostperiods of history, there is considerable stability in the norms, rules andvalues of a society, but at critical moments, norms, rules and values canquickly and dramatically be redened. At all times, norms, rules, habits,conventions and values are inuencing each of the other components in


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the institutional framework discussed below, but these other institutionalcomponents feed back and can modify rules, norms, conventions, etc.(Murmann, 1998).

Second level of analysis

The norms, rules, habits, conventions and values of a society lead to thenext level of analysis the institutional arrangements which are involvedin the coordination of various economic actors: producers and suppliersof raw materials, knowledge, etc.; processors of raw materials, infor-mation; workers; customers of raw materials, nished products,information, etc.; nanciers; governmental and other types of regulators.

These actors regularly engage in contests to resolve various economicproblems in virtually all sectors of society: how are prices to be set?What quantity of various products is to be produced? How are stan-dards of various products, processes, etc. to be set? How is the qualityof products and processes to be determined? How are various societalprocesses to be nanced? In order to confront these problems and toaddress the conicting positions of economic actors as they addressthese problems, societies develop various institutional (governance)

arrangements for coordinating different actors. These consist of markets,various types of hierarchies and networks, associations, the state, commu-nities and clans (see Hollingsworth and Boyer, 1997; Campbell et al.,1991: ch. 1).

Each of these particular kinds of coordinating mechanism has manydifferent types. For example, there are many types of states (e.g. theregulatory state, developmental state, authoritarian state, welfare state),on which there is an extensive literature (Kim, 1997). Similarly, there aredifferent types of markets, networks, different kinds of associations, etc.(Boyer, 1997; Hage and Alter, 1997; Schneiberg and Hollingsworth, 1990).When we do institutional analysis, we must engage in congurativeanalysis, recognizing that actors are not coordinated or governed by asingle type of institutional arrangement. Some of the literature discussesindustrial sectors as though they were coordinated or governed by asingle institutional arrangement, whereas in fact each sector of aneconomy is coordinated by a conguration of institutional arrangements.Some congurations coordinate actors in certain problem areas, whileother congurations of institutional arrangements coordinate actors inaddressing other problems. The types of congurations which are domi-nant in a society are somewhat stable and tend to persist over timewithin a society (Hodgson, 1999).

When one mode of coordination is dominant in a society, it willinuence the role which other coordinating modes will play. Hence, thestrong role of the state in the Soviet Union inuenced the role of markets,


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associations, etc. in the governance of the Soviet economy. Similarly, theprominence of particular modes of coordination in a society inuencesits style of innovation.

Much of the literature on institutional arrangements (e.g. forms of eco-

nomic coordination) remains fragmented and unintegrated. It is helpfulto array these various forms of coordination in a two-dimensional tax-onomy, as in Figure 2. On the vertical dimension, the economists viewof a self-interested agent is contrasted with a more sociological perspec-tive, according to which social rules, obligation and compliance shapehuman actions. On the horizontal dimension, there is another continuum(i.e. the distribution of power). At one extreme of the dimension, onends many and relatively equal agents interacting (e.g. as in a well-

organized spot market). At the other extreme, inequality in power resultsin a hierarchical form of coordination which structures the interactionbetween principals and agents or between leaders and followers. Wherea society falls along the distribution of power is inuenced by the rules,norms, values, etc. which are dominant in a society at a particular momentin time.

Institutional arrangements can be visualized on two dimensions: thenature of action motive on the one hand, and the distribution of power

on the other. Markets (cell 1) combine self-interest with horizontalcoordination transactors, and they reect sensitivity to concerns aboutsupply and demand, thus providing ex post an unintended equilibrium.Paradoxically, the more pure and perfect the market competition, thegreater the need for codied rules of the games for coordinating economictransactions. Thus, collective associations (cell 6) and/or various formsof state intervention (cell 4) are required to develop and enforce rulesfor transacting partners (Schneiberg and Hollingsworth, 1990; Streeckand Schmitter, 1985a). This is an example of how the norms and rulesand the institutional arrangements of a society are intertwined asreected in a conguration of institutional or governance arrangements.

Along the horizontal axis, actors can be joined in an organization ora rm: a hierarchy is the generic terms for this institutional arrangement(cell 2). Along the horizontal line, one recognizes the difference betweentransactions in a market and transactions within a rm. The well-knownworks of Coase (1960, 1981) and Williamson (1975, 1985) utilize theconcept of transaction costs in explaining the emergence of corporatehierarchies.

There are also various types of networks (cell 5) which exhibit mixesof self-interest and social obligation, with some actors being formallyindependent and equal. Yet in some networks (the large rms and theirsubcontractors), there is unequal power and initiative. Networks maycomprise all kinds of actors; some consist only of rms but others includeassociations and the state (Hage and Alter, 1997).


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DISTRIBUTION OF POWER

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Figure 2 A general taxonomy of institutional arrangements


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The vertical axis deals with action motives. Toward the upper part ofFigure 2, actors are engaged in individualistically oriented behavior,whereas toward the lower part, actors are more engaged in collectivebehavior and strive to cope with problems of common interest. Cell 3

communities and clans consists of institutional arrangements based ontrust, reciprocity or obligation, and thus not derived from the pure selshcomputation of pleasures and pains. This is an unconventional form ofcoordination for most neoclassical economists (however, see Arrow,1974), but not for many anthropologists, political scientists and sociolo-gists (Streeck and Schmitter, 1985a; Polanyi, 1944; Gambetta, 1988;Fukuyama, 1995; Sabel, 1992; Putnam, 1993).

In the neoclassical paradigm, theorists argue that actors engage in

forms of exchanges that best promote their individual interests. If somestructural conditions are fullled (absence of increasing returns to scale,the reversibility of transactions, absence of uncertainty, and completecontingent markets, with no collusion between actors), then the invis-ible hand theorem applies, and market-type activity functions quite welland also provides the optimum for society, thereby combining efciency,harmony and order. However, an excess of market activity may welllead to ruinous competition and excessive conict. There is variation in

the extent to which ruinous competition occurs, depending on the socialcontext in which transactions take place. Thus, it is important that webe sensitive to the institutional context in which transactions areembedded and that we understand the degree to which social bondsexist at both the micro and macro levels of analysis. Micro bonds facil-itate exchanges in a society, but at the societal level social bonds existat the level of the collective in the community or region, and amongmembers of racial, religious and ethnic groups. All other things beingequal, the more powerful the social bonds among transacting partners,the more economic competition is likely to be restrained. Thus, mosttransactions occur not simply in an impersonal, calculative system ofautonomous actors unrestrained by social ties as implied by theneoclassical paradigm but in the context of social ties, variation inthe strength of which leads to variation in levels of trust and transac-tion costs (Etzioni, 1988: 211; Granovetter, 1985; Streeck and Schmitter,1985a; Hollingsworth and Boyer, 1997; Hodgson, 1988, 1999; Schneibergand Hollingsworth, 1990).

Another form of multilateral institutional arrangement is varioustypes of associations (cell 6). Unlike networks, clans and communities,associations are more formal organizations. Whereas markets, corporatehierarchies and networks tend to coordinate economic activity amongdifferent types of actors (e.g. producers with suppliers, capital withlabor), associations typically coordinate actors engaged in the same orsimilar kinds of activities. Business associations and labor unions are


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some of the most common forms of associations for coordinatingeconomic activity in capitalist economies (Schneiberg and Hollingsworth,1990; Streeck and Schmitter, 1985a).

Finally, there is the state (cell 4), which is an institutional arrangement

quite unlike any of the others. It is the state that sanctions and regu-lates the various non-state coordinating mechanisms, that is the ultimateenforcer of rules of the various mechanisms, that denes and enforcesproperty rights, and that manipulates scal and monetary policy. Overall,it is the state that inuences the total incentive system of a society(Lindberg and Campbell, 1991; Johnson, 1992: 40). At the same time, thestate may also be an economic actor by engaging directly in productionand exchange relations.

The choices of institutional arrangements in Figure 2 are constrainedby the social context in which they are embedded. Depending on thenature of that embeddedness, there is variation in the collective formsof governance, some of which are specied in the lower part of thegure. Some modes of coordination in the bottom and upper levels ofthe typology are often mixed together, though one coordinating modeis likely to be more prominent than another. But actors are often engagedin complex congurations involving several kinds of institutional

arrangements.Each of these various institutional arrangements has its own logic its own rules, its own procedures for enforcing compliance, its ownnorms and ideologies which help to reduce the costs of enforcement.These are summarized in Table 2, which provides further elaborationabout the various coordinating mechanisms one nds in almost everycapitalist society. Table 2 lists the organizational arrangements and theirstructures, rules of exchange, and means of enforcing compliance asso-ciated with each type of coordinating mechanism. While each type ofinstitutional arrangement has various positive features, each institutionalarrangement also has failures, and these are featured in Table 3. It is thecontest between those who support and those who oppose these variousinstitutional arrangements that tends to lead to transformations in insti-tutional arrangements over time (Campbell et al., 1991; Campbell, 1997).

Again, it is difcult to conceive of pure institutional arrangements either exclusively markets or exclusively hierarchies since it has beenwell known since Adam Smiths Wealth of Nations that the division oflabor within the rm cannot be disentangled from the existence andextent of the market. Institutional arrangements have their own distinc-tive form of efciency (good static efciency for the market, dynamicefciency for rms) and inefciency, often leading to considerableinequality. Neither networks nor communities are panaceas for economiccoordination, without being congured with other types of institutionalarrangements. Networks and communities may solve certain issues, but


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Table2

Logicsofin

stitutionalarrangements

Coordination

Organizational

R

ulesof

Individualmeans

Collectivemeans

mechanisms

structu

re

e

xchange

ofcompliance

ofcompliance

Markets

Easyentryandexit

Voluntaryspotexchange

Legalenforcement

of

Normofpriv

ate

Bilateralexchangeor

control

property

mar

ketsite(WallStreet)

Regulationsto

Legitimacyofmarket

enforcecontracts

mentality

CommunitiesInform

almembership

Voluntaryexchangebased

Socialnormsandm

oral

Highlyinstitu

tionalized

evolvesoverlongperiod

onsocialsolidarityand

principlesimpose

normsand

rulesrequire

oftime

highdegreeoftrust

obligations

membersto

accept

Knowledgeofothe

rsand

corporateobligations

reciprocityovertime

Networks

Semi-formalmembership

Voluntaryexchangeovera

Contractualbonds

Personalrelations

Bilateralormultilateral

timeperiod

Resourcedependen

ce

Trustbuiltou

tsidethe

exch

ange

economica

rena

Associations

Forma

lmembership

Restrictedtomembers

Self-interest

Somedegree

of

Multil

ateralexchange

Emphasisoninsider/

Reputationeffects

compulsion

outsiderorwe/they

Privateinteresttypeof

mentality

governance

Private

Comp

lexorganizations

Restrictedtomembers,

Rewardstoindivid

uals

Highlyinstitu

tionalized

hierarchies

whichtendtobecome

exchangebasedon

Asymmetricpower

,threat

rules

bureaucratichierarchies

asymmetricpower,

ofsanctions

Memberssocializedinto

bureaucraticrules

corporateculture,useof

sanctions

State

Public

hierarchy

Unilateralaction

Exit,voice(vote,lo

bbying),Coercion

Dejureandimposed

Indirectpoliticaland

loyalty

Normsandp

ublicrules

mem

bership

economicexchange


17/50

Table3

Failuresofcoordinatingmechanism

s

Coordinatingmechanisms

TypeoffailureAssociations

Privatehierarchies

State

Market

Communities

Networks

Enforcement

Usuallyrelieson

Mightenhance

Needscontrol

NeedsaninternalN

eedstrustand

Needanexternal

thestateasan

opportun

istic

externaltosta

te

enforcement

loyalty,often

enfo

rcement

enfo

rcer

behavior

bureaucracy

authority

comingfrom

auth

ority

Resem

bles

Theidealo

f

(judges,

Facilitates

outside(family,Mayfacilitate

enfo

rcement

internalmarkets

parliament,

collusionand

religion,

cartelizationand

mec

hanism

mighthu

rt

market)to

imperfect

ethnicity)

mon

opoly

ofcartels

incumbent

correctstate

competition

C

ompatiblewith

workers

abuses

varioustypesof

Lobbiescan

competition

capturepublic

interestgoals

Publicgood

Usefulfor

Governancecosts

Canprovide

Cannotprovide

C

aninternalize

Usefulfor

and

establishing

mightex

ceed

publicgoods

collectivegoods

somecollective

enhancingquality

externality

stan

dardsand

thebenetsof

buthas

ordealwith

goods(quality,

and

trainingbut

quality,for

internaldivision

difcultiesin

externalities

training)butnot

not

verygoodin

settingrulesof

oflabor

providingthe

m

Inadequate

others(welfare,

providingfor

com

petitionin

Slowtorea

ctto

inprecise

monitoringof

generalpublic

societalgeneral

theindustry

changesinthe

amounts

technicalchange

goods)

welfare

Usefulfor

environm

ent

Mightfailin

andinnovationM

emberstightly

Weak

inthe

providing

inducing

integratedinto

provisionof

man

ygoods

technical

community,

collectivegoals

collectively

change

havelimited

that

individual

capacityfor

mem

berscannot

innovations

providefor

them

selves


18/50

Table3

continued

Coordinatingmechanisms

TypeoffailureAssociations

Privatehierarchies

State

Market

Communities

Networks

Efciency

Facilitates

Decientin

Canbehighly

SomebasicsocialS

omegoods

Slowtoenhance

cooperationand

cooperationand

bureaucratic

relationscannot

cannotbe

efc

iencyand

X-efciencybut

X-efcien

cy

andcannot

beprovidedby

deliveredat

speedof

not

allocative

easilydeliver

puremarket

sufciently

adaptiveness,

efc

iency*

goodsat

mechanisms

lowcosts

exce

ptin

lowcost

industrieswhere

tech

nologyis

com

plexand

rapidlychanging

Equity

Narrow

Excessive

Mightenhance

Facilitates

M

ightleadto

When

widely

encompassing

multiplic

ation

inequality

inequalityin

retarded

developedinto

asso

ciational

ofcontro

llers

(power

incomeand

development

industrial

stru

ctureslead

(frustrati

onand

andprivilege)

wealth

districts,

toincome

inequalit

y)

netw

orksmay

equality

facilitategreater

equalityand

inco

me

distribution;

whe

nweakly

developed,

netw

orkstendto

increasesocial

ineq

uality

*Note:ForallocativeefciencyandX-efciency,s

eeLeibenstein(1966,1976)


19/50

they raise other, no less severe problems. It is important to recognizethe imperfection of any single institutional arrangement in order tocomprehend the origin and transformation of any other institutionalarrangement (Hodgson, 1999: ch. 3).

As suggested above, each institutional arrangement is congured withother institutional arrangements. Usually, one particular institutionalarrangement is more dominant in a particular conguration, but becauseeach type of institutional arrangement has its own strengths andweaknesses, there is no simple structural logic in the governance or coor-dination of a society. Each institutional arrangement constrains the other,but the inherent tension among the various institutional arrangementswithin a conguration contributes to changes in the governance or

coordination of a society. The routines and logics of each of these cong-urations of institutional arrangements provide constraints and incentivesfor actors. The way that actors perceive the incentives and constraintsof these governance congurations leads to a particular market logic,and it is the specic market logic of a society which inuences its speciccapacities and weaknesses. The inherent strain among the different logicsin a conguration of coordination helps to provide the exibility for asociety to adapt to new circumstances.

If there were a society with pure markets or a society coordinatedonly by the state, there would be too much rigidity and too little diver-sity to cope with the vast uncertainty in the global environment. A societywith very little diversity in its coordination mechanisms would havelittle capacity to adapt to new circumstances. Congurations with consid-erable diversity of institutional arrangements provide for a certainamount of incoherence in governance, but they also provide for thecapacity to adapt to new circumstances. While the Soviet Union wasdominated by the state as a coordinating mechanism, there were alwaysfunctioning markets in the system. Moreover, the feudal society of thetwelfth and thirteenth centuries consisted not only of hierarchical rela-tionships between serfs and masters but also of urban guilds, clericalhierarchies and markets (Johnson, 1992: 38). In sum, the robustness ofinstitutions often depends on multiple and diverse principles and logicsof action, on the inconsistency of principles and procedures, on patternedforms of disorder (Lanzara, 1998; Orren and Skowronek, 1991: 320, 329).

Third level of analysis

The next level consists of the institutional sectors of a society. The rules,norms and values of a society inuence the array of institutional arrange-ments, and levels one and two inuence the nature of and the relation-ships among various institutional sectors, and all three levels areintricately linked together to form a social system of production. Together,


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all of these components inuence the performance of economic sectorswithin a society as well as the performance of the total society. A socialsystem of production is the way that a societys institutions (see rstlevel of analysis above), its institutional arrangements (see second level

of analysis above), and its institutional sectors are integrated into a socialconguration.

An institutional sector includes all organizations in a society whichsupply a given service or product, along with their associated focal orga-nizations (e.g. major suppliers, funding sources, regulators, and so forth(Scott et al., 1994: 108, 117; Campbell et al., 1991; Hollingsworth et al.,1994). Institutional sectors include but are not limited to the societyssystem of education, system of research, business system, nancial

markets, legal system and the state. The structure of the nancial markets,system of training and education, industrial relations system, system ofresearch, and state and legal systems are distinct and idiosyncratic ineach society. In short, they are system specic.

All of these institutional sectors tend to cohere with each other,although they vary in the degree to which they are tightly coupled intoa full-edged system. While each of the institutional sectors has someautonomy and may have some goals that are contradictory to the goals

of other institutional sectors with which it is linked, an institutional logicin each society leads institutions to coalesce into a complex social con-guration (Hollingsworth, 1991). This occurs because the institutionalsectors are embedded in a culture in which their logics are symbolicallygrounded, organizationally structured, technically and materially con-strained, and politically defended. The conguration of institutionalsectors usually exhibits some degree of adaptability to new challenges,but continues to evolve within an existing style. But under new circum-stances or unprecedented disturbances, these institutional congurationsare exposed to sharp historical limits as to what they may or may notdo (Schumpeter, 1983; David, 1988; Arthur, 1988a, 1988b; Hkanssen andLundgren, 1997).

Why do all of these different institutions coalesce into a complexsocial conguration, which is labeled here as a social system of pro-duction? The literature suggests two contrasting interpretations. Part ofthe answer indeed a controversial one is that these institutionalsectors are functionally determined by the requirements of the practiceof capitalism in each time and place (Habermas, 1975). Another expla-nation emphasizes the genesis of the actual conguration, via a trialand error process, according to which the survival of rms, regions orcountries is the outcome of complex evolutionary mechanisms (Maynard-Smith, 1982; Nelson and Winter, 1982). However, the problem is evenmore complex. Markets and other mechanisms for coordinating rela-tionships among economic actors place constraints on the means and


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ends of economic activity to be achieved in any society. The othercoordinating mechanisms include different kinds of hierarchies, varioustypes of networks and associations trade unions, employers and busi-ness associations (Hollingsworth and Lindberg, 1985; Campbell et al.,

1991). The logic of these various institutional arrangements providesactors with vocabularies and logics for pursuing their goals, for deningwhat is valued, and for shaping the norms and rules by which theyabide (see Tables 2 and 3). In short, in contrast to the logic of theneoclassical paradigm, the argument here is that the dominant type ofinstitutional arrangements places severe constraints on the denitionof needs, preferences and choices of economic actors. Whereas the neo-classical paradigm assumes that individuals and rms are sovereign, this

article is based on the assumption that rms are inuenced by thehold that the institutional congurations making up a social system ofproduction have on individual decision making (Campbell et al., 1991;Etzioni, 1988; Streeck and Schmitter, 1985a; Hollingsworth et al., 1994;Hollingsworth and Boyer, 1997; Magnusson and Ottosson, 1997; North,1990; Hodgson, 1999).

Standard neoclassical economic theory has tended to downplay therole of production and consequently of rms. Even transaction cost theo-

rists who are concerned with analyzing the rm as a coordinatingmechanism have been relatively unconcerned with the various compo-nents of a social system of production. Indeed, as long as there waswidespread optimism about the efcacy of Keynesian economics, therewas relatively little concern among neoclassical economists with thesupply side of the economy. Even in the opinion of most Keynesians, agroup of experts should ideally be able to shape the size of aggregatedemand while the supply side of the economy would be left to the twominimalist institutions of neoclassical economics markets and manage-rial hierarchies. For several decades, however, it has become increasinglyobvious that some of the most competitive and successful patterns ofindustrial output and industrial production in capitalist economies donot derive from the neoclassical prescription of unregulated markets andcorporate hierarchies complemented by a neoliberal democratic state.Indeed, it is now well understood that certain highly successful produc-tion patterns require for their emergence and survival institutionalarrangements and environments the very opposite of the prescriptionsfound in the neoclassical paradigm (see especially Streeck, 1992, but alsoHollingsworth and Streeck, 1994). Thus social scientists have come tounderstand that if they are to comprehend the behavior and performanceof contemporary economies, concerns about social systems of produc-tion must be brought into the picture.

Because production involves more than technology, a number of socialscientists have an increasing concern with social systems of production.


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The same equipment is frequently operated quite differently in the samesectors in different countries, even when rms are competing in thesame market (Maurice et al., 1980; Sorge and Streeck, 1988; Sorge, 1989;Hollingsworth et al., 1994). Variations in production and process tech-

nologies are inuenced, partly, by variations in the social environmentsin which they are embedded. In other words, rms are embedded intocomplex environments which, among other things, place constraints ontheir behavior. Thus, a social system of production is of major impor-tance in understanding the behavior and performance of an economy.How the state and other institutional arrangements (e.g. markets,networks, private hierarchies, associations) coalesce and are related toparticular social systems of production are important determinants of

economic performance.The congurations of institutional arrangements that coordinate orgovern the behavior of actors in one society and its structure of specicinstitutional sectors cannot easily be transferred to another society, forthey are embedded into a social system of production that is societallydistinct (Hollingsworth, 1997). Societies borrow selected principles offoreign management styles and work practices, but the effectiveness ofsuch borrowing is generally limited. Economic behavior and performance

are shaped by the entire social system of production in which actors areembedded and not simply by specic principles of particular manage-ment styles and work practices. Moreover, a societys social system ofproduction tends to limit the kind of goods that it can produce and withwhich it can compete successfully in international markets.

Some scholars (Kenney and Florida, 1993; Oliver and Wilkinson, 1988)have assumed that the diffusion of particular forms of management stylesand work practices across societies could lead to system convergence.Referring to the Japanese production system, Kenney and Florida haveargued that it consists of organizational practices whose fundamentalgenetic code can successfully be inserted into another society and beginsuccessfully to reproduce its behavior in the new environment (1993: 8).Their position is in the intellectual tradition of Antonio Gramsci (1971)who contended decades ago that the American system of mass produc-tion would most certainly diffuse to Europe over time.

However, the argument of this article is that even though British,French and American rms may adopt certain aspects of Japanesemanagement styles (e.g. just-in-time production, self-managing teams,quality circles, the use of statistical process controls) or some variant ofthe German vocational system, their social systems of production willnot converge. Moreover, the overall conguration of a societys socialsystem of production inuences its sectoral and overall national economicperformance. This helps to explain why societies have different systemsof innovation and why they vary in the clusters of industries in which


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they are highly competitive in the international markets (Nelson, 1993,1999; Hage and Hollingsworth, 2000; Berger and Dore, 1996).

In order to understand how and why a societys economy performsas it does, it is necessary to understand its entire social system of produc-

tion. If a society is to modify substantially the performance of itsinstitutional sectors and its entire economy, it cannot adapt only someof the management and work practices of its foreign competitors. Rather,it must alter its entire social system of production. Because a societysmodes of economic governance and coordination and its institutionalsectors develop according to particular logics and are system specic,there are serious limitations to the extent to which a society may mimicthe institutions (e.g. the rules and norms), institutional arrangements and

institutional sectors of other societies.In the history of modern societies, there are logics by which institu-tions coalesce into a social system of production (Hollingsworth, 1991).Though institutions are constantly changing, there are sharp limits tothe type and the direction of change that any particular institution canundergo because of its linkages with institutional arrangements and insti-tutional sectors. Thus, a societys business rms, educational system,nancial markets, industrial relations system, etc. can engage in serious

restructuring only if most of the other institutional sectors also change.In social systems of production, there are pressures toward consistencyin the norms, rules and values across institutional sectors, though in anycomplex society, social systems are obviously imperfectly integrated.Indeed, the degree to which the institutional norms and rules makingup a social system of production are loosely or tightly coupled is a vari-able of considerable importance. In general, the institutional sectorsmaking up a social system of production are interdependent, and changesin one generally result in changes in the others. Since each institutionallevel is dependent on the others for various types of resources, there isinterdependence among the differing institutional spheres. Moreover,each society has its norms, moral principles, rules and laws, and recipesfor action, as well as its own idiosyncratic customs, traditions and prin-ciples of justice (Burns and Flam, 1987).

There are also other inherent obstacles to convergence among socialsystems of production, for where a system is at any one point in timeis inuenced by its initial state. Systems with quite different initial statesare unlikely to converge with one anothers institutional practices.Existing institutional arrangements block certain institutional innova-tions and facilitate others (Roland, 1990). Thus, the institutions makingup a social system of production provide continuity, even though insti-tutional arrangements are always changing, but with a particular logic.While Williamson (1975, 1985) suggests that actors tend to choose theinstitutional arrangements which are most efcient, North (1990) is


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much closer to the mark in his argument that most societal institutionalarrangements exist as a result of custom and habit, and are thereforeinefcient. At any moment in time, the world often appears to its actorsas very complex and uncertain. For this reason, actors often engage in

contradictory forms of behavior pursuing different strategies as hedgesagainst a very uncertain world (Lanzara, 1998). And their hedging andcontradictory forms of behavior may lead in somewhat different soci-etal directions, all constrained by the institutional fabric within whichthe actors are embedded. This kind of contradictory behavior occurs inpart because of the contradictions inherent in the dominant congura-tions of institutional arrangements with their contradictory logics (seeSecond level of analysis above).

Despite the emphasis on the logic of institutional continuity, this isnot an argument that systems change along some predetermined path.There are critical turning points in the history of highly industrializedsocieties, but with the choices limited by the existing institutional terrain.Being path-dependent, a social system of production continues along aparticular logic until or unless a fundamental societal crisis intervenes(Milgrom et al., 1991; Krugman, 1991; Durlauf, 1991; Hollingsworth, 1991;Pred, 1966; David, 1988; Hodgson, 1998).

At this point it is important to confront the question of how socialsystems of production evolve. And this question gets to the heart of theproblem of building complex societal structures. Certainly, social systemsof production did not emerge from some process of social engineering.Moreover, the various component parts of each social system of produc-tion have often not been designed to be part of a social system ofproduction. The component parts of each social system of productionhave emerged more often than not as unintended by-products of goalswhich various actors had in mind at earlier moments in time. It is usually

the case that actors at time t fail to comprehend the long-term conse-quences of their actions. Wolfgang Streeck, the author of several brilliantpapers on social systems of production, argues that institutional sectordesigns created for one purpose generally address that goal, but overtime those designs have quite unintended consequences (Streeck, 1997a,1997b; Wright, 1998). Describing the conguration of the German socialsystem of production of the 1970s and 1980s, Streeck points out that itwas the unintended by-product of multiple points in history. Some

elements were pre-Wilhelmian, others were introduced by the Alliedpowers after 1945, and others emerged during the years of the GermanFederal Republic. All component parts of the German social system ofproduction

were and continue to be changing, for their own reasons, as wellas in reaction to each other, and certainly there can be no presump-tion of a pre-established t between them, even though one might


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want to allow for some reinforcement effects of the models histor-ically contingent, social and economic success.

(Streeck, 1997b: 54)

In sum, the emergence of social systems of production is a long-term,evolutionary process with each part interacting with its environment andresulting in a congurative whole but with no previous design by eithera single actor or a collectivity of actors. As suggested above, actorsdo not recreate their world anew. At any moment in history the totalinstitutional complex of a society necessarily contains the resourcesand legacies of its past. Preexisting institutional complexes are nevercompletely wiped out. Societies consist of multiple layers of history withtheir diverse logics of action. However, the cumulative effect of small,peripheral changes in altering particular institutional sectors and insti-tutional arrangements can be substantial (Murmann, 1998; Lanzara, 1998).Institution building is affected more by the ways in which people havecodied the past than by how they envision the future. There are manymore potential resources in pre-existing institutional arrangements thanit is usually assumed or suspected (Lanzara, 1998: 30).

Fourth level of analysisThe next level of institutional analysis, organizational structures, is some-what more controversial. As suggested above, Douglass North (1990)draws a sharp distinction between institutions and organizations. Morerecently, many organizational theorists (Powell, 1991; Powell andDiMaggio, 1991; DiMaggio and Powell, 1983; Baum and Oliver, 1992;Kondra and Hinings, 1998; Townley, 1997) argue that institutional rules,norms and conventions unfold in tandem with organizational structures,

and this is my position.The literature which focuses on how institutions inuence organiza-

tions is quite different from two other theoretical literatures which alsoare concerned with how organizational environments shape the behaviorof organizations. There are resource dependency theorists (Pfeffer andSalancik, 1978) who emphasize the role of environmental resources inshaping organizations, while Hannan and Freeman (1977, 1984) and otherpopulation ecologists emphasize the survival of organizations, given

certain kinds of organizational conditions (Orru et al., 1991).The institutionalist perspective, as implied above, emphasizes the

normative environment in which organizations are embedded. It isa perspective which focuses on the way in which organizations, intheir behavior, tend to conform to the institutional rules and normswhich are dominant in the organizational environment. However, allthree perspectives the institutionalist, the population ecology, and


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the resource dependency emphasize how the environment inuencesorganizations and how organizations which are subject to the sameenvironment tend to converge in their behavior, to have what DiMaggioand Powell have labeled organizational isomorphism (DiMaggio and

Powell, 1983).There has emerged a vast literature which demonstrates that within

each society there are scal, political, judicial and other regulatory normswhich limit and shape the culture and structure of organizationalbehavior. The normative institutional environment of organizationslimits the options of what organizations do in a particular societyand inuences the patterns of ownership, relations with suppliers, andcustomers. In short, it is the normative environment of organizations

which denes within a particular society what is socially acceptablebehavior for organizations (Hamilton and Biggart, 1988; Hollingsworthand Hollingsworth, 2000; Meyer and Rowan, 1991; Zucker, 1987, 1988,Orru et al., 1991; Townley, 1997).

Thus far, most of the analyses on isomorphic pressures operating onorganizations have been cross-sectional in nature. However, the entireconcept of isomorphism implies that there are strong environmental pres-sures exerted on organizations, and in order to observe this phenomenon

it is important that we have longitudinal studies which assess howchanges in an organizations institutional environment inuence changesin the structure and culture of organizations. Moreover, the expectationhere is that when one analyzes the patterns of organizational changeover time, the isomorphism will be holistic that is within a particularsociety there will be a tendency for the internal structure of particulartypes of organizations to converge, in large part because of the pres-sures to conform to the changes in the external norms, rules and values.A close reading of Aoki (1990) and Slack and Hinings (1994) nds thatchanges in the national institutional environment of organizations haveinuenced changes in the internal structure of organizations within aspecic industry of a particular society.

However, it is inappropriate to view organizations as changing onlyin relation to exogenous environmental change. There is a kind of co-evolution which occurs between organizations and their institutionalenvironments. Co-evolution implies nonlinear feedback between orga-nizations and their institutional environments. This is of course quitedifferent from the more common way of studying organizations bymodeling relations between independent and dependent variables. Ofcourse, the more common type of analysis is quite appropriate whenthere are simple relationships which do not involve complex feedbackprocesses. But in the strategy for institutional analysis which is proposedherein, it is less useful to separate independent from dependent vari-ables, and more useful to understand the interacting and co-evolutionary


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processes among all of the levels of institutional analysis discussed inthe various sections above (Baum and Singh, 1994a: 37980; Mowery andNelson, 1999; Murmann, 1998).

The logic of the perspective herein suggests that within every

society, there is variation in the structure and culture of business rms,universities and other complex organizations (Kondra and Hinings,1998). However, this variation takes place within parameters which aresystem specic. For example, every German rm and every Germanuniversity is different from every other German university and rm,but there are a set of cultural and structural characteristics which distin-guish German rms and universities from those in America. Similarly,each Japanese rm and university is unique, yet they have a set of

cultural and structural characteristics which are system specic andwhich differentiate them from business rms and universities in othercountries.

In all societies, each organization has its own distinctive organizationalrules, norms and conventions which are subordinate to the metanorms and rules of the larger society within which they are embedded.However, the strength of the institutional environment within whichorganizations are embedded varies from society to society. Some

societies have multiple institutional environments and there is hetero-geneity in terms of what constitutes appropriate behavior oforganizations. In such societies, there can be conict over whatinstitutional logics should regulate specic organizational functions(Friedland and Alford, 1991; Townley, 1997: 2623). In those societies inwhich the institutional norms, habits and rules are most developedand in which the institutional pressures to conform are greatest, thereis less variation in the structure and culture of business rms and variouskinds of research organizations. In such societies, the connectednessbetween research organizations and their institutional environmentsis sufciently strong for organizations to have low autonomy topursue independent strategies and goals; in these societies there isa great deal of organizational isomorphism. Conversely, the weakerthe institutional environment in which research organizations areembedded, the greater the variation in the structure and culture ofbusiness rms and research organizations. Moreover, where the institu-tional environments are more weakly developed, organizations havegreater autonomy and exibility to respond to the development ofnew knowledge and to be highly innovative. Hence, it is in thosesocieties where the institutional environments are most developedand most rigid, and when there is less organizational autonomyand exibility, that fewer radical innovations in basic and appliedscience as well as in totally new products and industrial sectors havebeen made.


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Fifth level of analysis

We come next to the outputs and performance of the various institutionalcomponents of a society. It is at this level that institutional componentsare more pragmatic and exible. For example, in the legal sector, thereare specic statutes and court rulings; in the state sector, there are specicpolicies; in the business sector, there are new products, new technolo-gies and market strategies. It is at this nal level of analysis thatinstitutional spheres are most open and susceptible to change, and cross-national mimicry is easiest and most common.

Through the outputs of the society we can obtain some assessment asto how well a society is performing. Moreover, we can assess how inno-vative it is, how egalitarian it is in the distribution of its resources, howegalitarian it is in terms of levels of health, education, etc. Just as it iscomplicated to measure how egalitarian a society is, similarly it is dif-cult to assess how innovative it is. For example, societies vary in makingincremental and radical breakthroughs in basic and applied science;in developing totally new products and new kinds of organizations; inincremental and process innovations in existing products and organiza-tions; in developing new and different forms of marketing bothdomestically and globally (Hage and Hollingsworth, 2000). Of course,societies vary in their rates of economic growth, in their rates of economicproductivity, in their quality of life (e.g. rates of crime, life expectancy,etc.). All of these performance criteria feed back and inuence each ofthe levels of institutional analysis discussed above rules, norms, values,etc.; institutional arrangements, institutional sectors; the structure andform of organizations. Moreover, performance measures may inuenceeach other. For example, if a society has very low rates of growth, itmay not be very innovative in some of the types of innovative activitiesmentioned above. Good or poor performances of certain kinds inuenceother performance indicators (Hollingsworth et al., 1990).

Different institutional arrangements and different social systems ofproduction result in different types of economic performance. Hence, solong as societies have different social systems of production, there areserious constraints on the degree to which they can converge in theirinnovative styles. Different social systems of production tend to maxi-mize in a more or less explicit manner different performance criteria,

usually mixing considerations about static and dynamic efciency, prot,security, social peace and economic and/or political power. In short, incontrast to the implications of neoclassical economic theory, in real-worldeconomies there are no universal standards all economically rationalactors attempt to maximize. Economic history provides numerous exam-ples of how a great variety of principles of rationality are implementedin different societies.


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A critical question in institutional analysis is whether an existing socialsystem of production which supports a set of routines for a particularkind of technology and industry can shift from old practices to newones. There are numerous historical accounts of how the social system

of production in a particular society which worked so well for a numberof years could not adapt to new technologies (Lazonick, 1990; Veblen,1915; Nelson, 1994). Schumpeter (1983) and Freeman (1991) have devel-oped the idea of a techno-economic paradigm which suggests thatdifferent technologies require specic forms of organizational arrange-ments or what I called social systems of production. Because ofinstitutional inertia, the social system of production of a society maynot be able to adapt to a new techno-economic paradigm (Nelson, 1994:

58; Lanzara, 1998).Whether a social system of production can sustain its performancestandards depends not only on its intrinsic economic rationality, but alsoon where it ts into a larger system. If a particular social system ofproduction is immune from the innovativeness and competition of analternative system, survival can be long lasting. But if different socialsystems of production, with diverging criteria of good economic perfor-mance, meet in the world arena, the arbitrariness of nationally imposed

constructed performance standards may be superseded by alternativeperformance criteria as a result of international competitiveness.The world economy is also socially constructed, just as are national

economies. Even if different social systems of production are competingin the international arena, it is not always possible to determine whichis more competitively effective at any moment in time. Hegemonicnation-states in the short run shape the rules of trade to favor their indus-trial sectors and rms. But the history of hegemonic powers suggeststhat in the longer run, such social systems of production, sustainedlargely by military and political power, eventually give way to moreinnovative and competitive social systems of production. In our ownday, as nation-states are increasingly integrated into a world economy,even hegemonic powers lose their innovative and competitive advan-tage, and their share of world output decreases. Such a country mayattempt to restructure its institutional arrangements and to readjust itsperformance preferences. But to restructure its system of innovationgenerally calls for a major redistribution of power within a society.Largely for this reason, societies have historically had limited capacityto reconstruct a system of innovation in the image of their major competi-tors. Each countrys social system of production is a conguration of ahost of norms, rules and values as well as of institutional arrangements.Each system is constantly changing and is open to inuence from othersystems. And indeed many technologies and practices diffuse from onesociety to another, but a societys capacity to be innovative is constrained


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by the existing social system of production. Thus the same technologymay exist in numerous countries, but how it is employed and how itinuences societal outcomes and performances varies from one institu-tional conguration or society to another (Hollingsworth, 1998).

PERSPECTIVES ON INSTITUTIONAL CHANGE

A fundamental problem which remains unresolved in institutionalanalysis involves the nature of institutional change. There is much confu-sion and miscommunication in the social sciences about institutionalchange, in large part because we do not even know how to measure therate of institutional change. Of course we know that there are both

external and internal focuses for change, and we have had a good bitof scholarship on this subject. What is not clearly understood is thatinstitutions and institutional arrangements within societies are histori-cally rooted, that there is a great deal of path-dependency to the waythat institutions evolve. Moreover, the more intricately linked each sectoris with each other sector and with a societys rules and norms, the lesschoice actors have to devise new institutions and institutional arrange-ments. On the other hand if a sector or actor is too isolated, it may be

too weak within a society to bring about any kind of effective change.These considerations are very critical to the problem of how muchfreedom actors have to create new institutions afresh, to what extentinstitutions diffuse from one society to another (Murmann, 1998; Lanzara,1998). This is a fundamental question for students of institutionalanalysis, as we attempt to understand how the different institutionallevels are linked together.

There are a variety of reasons why there is confusion in studying insti-tutional change. There is disagreement over the extent to which actorshave the freedom to build new institutional arrangements, and if theydo, to what extent the new arrangements and organizational patternsmay depart from past practices. Among some institutional economists(Williamson, 1985), there is a basic assumption that actors build efcientinstitutions by pursuing their self-interest and by promoting theirstrategic goals. Moreover, there is the assumption that a mixing of fullrationality with market competition tends to produce all of the optimalinstitutions that are needed in order to coordinate a complex capitalisteconomy (Hollingsworth and Boyer, 1997: ch. 14; Hodgson, 1999). Incontrast, the argument developed here is much more complex.

Social institutions are historically rooted, and there is a great deal ofpath-dependency in the way that various institutional componentsevolve. The shape of institutional congurations at any moment limitsthe type of options for change. Because there is a great deal of institu-tional inertia, radical change in the institutional components of a society


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is uncommon (Lanzara, 1998). Recognizing the constraints existinginstitutions exert on actors, we note that existing congurations of insti-tutional arrangements, institutional sectors and organizational propertiescan limit but also inuence the degree to which norms and rules can

change. Many scholars (North, 1990; Ostrom, 1990) have emphasized therole of norms, rules, ideologies and values in limiting the ability of actorsto develop new institutional arrangements which radically depart fromexisting ones. However, there is a two-way process of interaction, aprocess of co-evolution (Baum and Singh, 1994a; Nelson, 1994). Thus asFriedland and Alford (1991: 244) argue, actors develop new institutionalarrangements by recognizing organizational failures and low perfor-mance, but these new arrangements do not necessarily change a societys

norms, rules, habits, and its underlying value system.Campbell (1997) advances our understanding of how existing institu-tions enable actors to construct radically new institutions. He recognizesthat most institutions and institutional arrangements embody a degreeof inertia from which it is difcult for actors to depart. Moreover, thedifferential power relations among actors make it unlikely that lesspowerful actors can change the existing power structure of a society.Most change in the institutional components of a society evolves through

a process of constrained selection which reects to a considerable degreethe existing arrangements and power relations. This becomes the inter-pretative frame for social actors, with institutionalized scripts and ritualswhich tend to be taken for granted and appear to be quite ordinary andnatural. This institutionalized scripting of the social world is an extremelyimportant source of social stability and inertia.

Campbell has developed a very fruitful explanation of change in termsof the various institutional components outlined here. He distinguishesbetween incremental and radical institutional change and argues thatradical institutional change occurs when social actors with widelydiffering norms, cultural scripts and rituals for action engage in intenseinteraction with each other (see also Knight, 1992). The more diverse theinteractions, the greater the potential for institutional change. He arguesthat as shifts in the composition of interaction among social actors occur,changes in the interpretation of problems and interests will follow

Hollingsworth.J.rogers.doing Institutional Analysis-Implications for the Study of Innovations

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