Institutional Theory

Institutional theory is "A widely accepted theoretical posture that emphasizes rational myths, isomorphism, and legitimacy."

There are two dominant trends in institutional theory:
 * Old Institutionalism sometimes associated with Historical institutionalism
 * New institutionalism

Institutional theory
Institutional theory focuses on the deeper and more resilient aspects of social structure. It considers the processes by which structures, including schemas, rules, norms, and routines, become established as authoritative guidelines for social and organizational behavior  (Scott, 2004). Different components of institutional theory explain how these elements are created, diffused, adopted, and adapted over space and time; and how they fall into decline and disuse.

Powell and DiMaggio (1991) define an emerging perspective in organizational theory and sociology, which they term the 'new institutionalism', as rejecting the rational-actor models of classical economics. Instead, it seeks cognitive and cultural explanations of social and organizational phenomena by considering the properties of supra-individual units of analysis that cannot be reduced to aggregations or direct consequences of individuals’ attributes or motives.

Scott (1995) indicates that, in order to survive, organisations must conform to the rules and belief systems prevailing in the environment (DiMaggio and Powell, 1983; Meyer and Rowan, 1977), because institutional isomorphism, both structural and procedural, will earn the organisation legitimacy (Dacin, 1997; Deephouse, 1996; Suchman, 1995). Multinational corporations (MNCs) operating in different countries with varying institutional environments will face diverse pressures. Some of those pressures in host and home institutional environments are testified to exert fundamental influences on competitive strategy (Martinsons, 1993; Porter, 1990) and human resource management (HRM) practices (Rosenzweig and Singh, 1991; Zaheer, 1995).

There is substantial evidence that firms in different types of economies react differently to similar challenges (Knetter, 1989). Social, economic, and political factors constitute an institutional structure of a particular environment which provides firms with advantages for engaging in specific types of activities there. Businesses tend to perform more efficiently if they receive the institutional support.

Martinsons (1998) developed a theory of institutional deficiencies (TIDE) suggesting that relationship-based commerce will prevail where rule-based markets can not flourish due to institutional deficiencies. Martinsons (2008) extends TIDE to show how the development of relationship-based e-commerce in China has resulted from that country's lack of trustworthy and enforceable set of rules for doing business. His theory suggests that factors such as personal connections (guanxi in China, blat in Russia, etc.), informal information, and blurred business-government relations (which also encourage corruption) will constrain the transition from the physical marketplace to online marketspaces.