_____ refers to the system of behavioral rules and norms that emerge in a company.

Institutional Theory

Institutional theory is a research tradition that traces its origins back to foundational articles that discussed how organizational founding and change were driven less by functional considerations and more by symbolic actions and external influences than the theory at the time assumed (Meyer and Rowan, 1977). These articles drew on concepts of bounded rationality that are central to behavioral theories and sketched a broad range of potential research questions, but much subsequent research drew away from the firm focus on behavioral theories of organization by emphasizing environmental influences such as the diffusion of new institutionalized practices among firms.

As institutional theory has grown, some branches have moved closer to behavioral theory. Direct dialogue between the perspectives has been started by researchers who have noted that the organizational change processes examined by behavioral theory are influenced by the institutional context (Wezel and Saka-Helmhout, 2006). A growing subfield of institutional theory concerns institutional logics, which are broadly (but not universally) shared assumptions and action patterns (Thornton, 1995). At the organization level, institutional logics can be seen as sources of managerial decision-making rules, and hence institutional logics research is related to research on the BTOF and evolutionary theory.

Institutional theory has also moved into examining the founding conditions for new firms (Tolbert et al., 2011). This work questions the conventional assumption that entrepreneurs are rationally able to locate opportunities, and it instead posits that key sources of organization founding activities are institutional features of the social group to which entrepreneurs belong or the symbolic environment they face. Like population ecology, this work moves the concerns for decision-making processes and bounded rationality to the stage of organizational founding.

9.2.1 Institutional Theory in Entrepreneurship Research

Institutional theory introduces a unique approach regarding the study of social, economic, and political dynamics (DiMaggio & Powell, 2000). Institutions form the rules of the game within society (North, 1991). Formal as well as informal institutions, for example, the extended family, the private sector and the government, are part of those rules. New institutional insights are building on sociological traditional theories (DiMaggio & Powell, 1983; Scott, 1995). These new insights emphasize the role of the operating institutional context, which are considered to shape enterprises and the behavior of entrepreneurs (Scott, 1995).

When the institutional structure is operating appropriately, it can reduce transaction costs, uncertainty, and risk for entrepreneurs. Legal structures also determine the ease of entering markets and influence bankruptcy laws. Contrarily, a weak or unsatisfactory legal structure may constrain development. Particularly, where institutional gaps leave room for arbitrary behavior, this may lead to corruption and objective behavior of entrepreneurs (Puffer, McCarthy, & Boisot, 2010; Smallbone & Welter, 2001). In addition, informal relationships, such as local networks, arise as a result of institutional constraints (Khanna & Palepu, 1997). As a result, entrepreneurship can appear while not being legally recognized (Klapper, Laeven, & Rajan, 2006).

Institutional theory has received increased attention in entrepreneurship research; however, most of them taking place in developed countries. Conversely, emerging contexts are gaining stage regarding institutional theory-led research. Most of this type of research has shed light on the aspects of the market and government failure of countries, therefore, providing room for different types of entrepreneurs to operate (Littlewood & Holt, 2018; Rivera-Santos, Holt, Littlewood, & Kolk, 2015). Examples of aspects are the aging infrastructure; static-centric systems; retained government control in the private sector and land ownership; limited access to information; and bureaucratic procedures to start new enterprises (Central Intelligence Agency, 2019; Saini & Bhatia, 1996; World Bank, 2019a). Although interviewing every entrepreneur in a country is unrealistic, attempts have been made to hear personal stories of them about operating enterprises in emerging contexts (cf. Abdallah & Eijdenberg, 2019; Eijdenberg et al., 2019; Khavul, Bruton, & Wood, 2009; Littlewood & Holt, 2018). By hearing these stories the link between macro and micro is made, making entrepreneurial activities in the world’s underrepresented research areas come alive.

7.1 Introduction and development of hypotheses

Institutional theory not only explains why organisational structures and practices become entrenched, but also how and why change occurs. Jennings (1994) describes two types of institutional pressure that can be instrumental in promoting change. First, when new rules are introduced backed by enforcement, coercive pressures can stimulate organisational change either directly or indirectly via institutional dependencies. For example, when new listing rules are introduced setting new standards for the composition of company board membership, the rate and extent of actual change in listed company board composition can depend just as much on indirect pressures from stock exchange authorities as on the actual institutional penalties applied for non-compliance. Second, mimetic pressures to copy successful forms during periods of (economic or political) change or high uncertainty can stimulate change. As new standards or practices become more widely accepted and adopted, they become gradually more legitimised in the environment. Ultimately, these standards and/or practices reach a level of legitimisation where failure to adopt them is seen as irrational. For example, a rule that women employees must resign upon marriage was once common in certain professions, but would now be seen as discriminatory and archaic, as would a dress code forbidding women employees to wear trousers.

Meyer and Rowan (1977) distinguish between a genuinely accepted and entrenched institutional practice or standard, on the one hand, and institutional myths, on the other. Institutional myths are those standards or practices that are merely accepted ceremoniously in order for the organisation to gain or maintain legitimacy in the institutional environment. Organisations adopt the vocabularies of structure prevalent in their environment such as specific job titles, organisational roles, procedures and policies (such as gender diversity policies). The adoption and prominent display of these institutionally acceptable trappings of legitimacy help preserve an aura of organisational action based on good faith. Legitimacy in the institutional environment helps ensure organisational survival. When acceptance of a policy or practice (such as a gender diversity target) is merely ceremonial and superficial rather than an indication of a genuine desire for change, this can be seen as a form of organisational resistance to change. Organisational resistance to change may arise at the individual level (including senior leadership resistance), the sub-organisational level (such as departmental) or at the level of the whole organisation.

Despite DiMaggio and Powell’s idea that institutional pressures increase the homogeneity of organisational structures, it remains true that not all organisations respond to or experience institutional pressures for change in the same ways (Goodstein, 1994; Ingram & Simons, 1995; Oliver, 1991). Across national boundaries cultural variations can also help to explain why organisations respond to institutional pressures for change in different ways (Maurice, Arndt, & Warner, 1980). Societal level values and beliefs can influence how new standards and practices are adopted and adapted. Likewise, cultural values and attitudes can influence the extent and manner of institutional resistance to change. In strongly hierarchical societies, for example, there may be a reluctance to overtly contradict, criticise or oppose new policies and practices introduced by authority (Gladwell, 2008; Hofstede, 1980, 1991Hofstede, 1980Hofstede, 1991). Instead, resistance may arise more passively through simple neglect of the new policy or practice (Scott, 1995; Smith, 2010; Tsai, Tsai, & Wang, 2011; Van Knippenberg, Martin, & Tyler, 2006).

Hofstede, Schwartz and other comparative scholars have demonstrated that cultural factors, while difficult to observe and measure, are important and need to be taken into account when applying insights from institutional theory to different cultures such as those of China and India. Similarly, comparative law scholars, at least since Watson’s 1993 seminal work on legal transplants, have understood that regulatory pressures for change from one political–legal jurisdiction cannot simply be transposed to a different cultural context and expected to operate in the same way or with the same degree of effectiveness (Legrand, 1997; Mattei, 1994; Watson, 1993). Law is a social phenomenon and, particularly in democratic societies, legislative change typically follows rather than leads social change. Likewise, the attitudes and beliefs of organisations and individuals affected by regulatory change are shaped by social forces, and it is these attitudes and beliefs that then determine organisational responses to new rules and standards.

Institutional theory, cross-cultural scholarship and legal transplant theory each provide valuable perspectives on the question of how and why organisational resistance to regulatory change occurs in different cultural and institutional contexts (Bovey & Hede, 2001; Greenwood, Suddaby, & Hinings, 2002; Hall & Thelen, 2009; Neck, 1996; Schiele, 2011; Yilmaz & Kılıçoğlu, 2013). In Study 2, I utilise the insights provided by these scholars to examine attitudes of company leaders towards a variety of different possible regulatory reforms aimed at enhancing the gender diversity of company boards in China and India. The conceptual framework utilised to analyse survey responses begins by recognising that attitudes towards gender diversity and towards regulatory/organisational change generally are themselves formed by, and help to form, a combination of individual, organisational, social/cultural and institutional/regulatory forces. This conceptual framework can be illustrated in the form of a diagram (Figure 7.1).

The key to understanding this conceptual framework is that it is not meant to be causal in any unidirectional sense, but its aim is to illustrate relationships in a bidirectional and multidirectional sense. In other words, individual, cultural/social, organisational and institutional/regulatory factors are all formed by, and help to form, each other. Individual attitudes both influence and are influenced by the social and organisational environment within which the individual operates. The organisational environment, in turn, is partly modelled by and also helps to shape regulatory forces – rules about how the organisation is formed and how it operates. Institutional cultures help to shape and are also shaped by the beliefs, attitudes, behaviour and preferences of the individuals who operate within the organisation. Furthermore, individuals, organisations and regulatory institutions are all both part of and operate within the context of wider social/cultural forces. The value of this conceptual framework is that by recognising the overlap between insights from different disciplines (law and management), it draws from the strongest aspects of different perspectives on the problem under examination.

The broad conceptual framework described above was used to develop a survey questionnaire to be sent to senior company leaders in China and India. Senior company leaders were identified as an epistemic community most directly affected by any regulatory change designed to increase the number of women on corporate boards. The aim of the survey was to explore their attitudes and beliefs in relation to affirmative action policies at company and/or state level. The results of the survey were supplemented by conducting a small number of in-depth interviews with company leaders from China and India.

In this study, the use of a survey supported by interviews as a research methodology is explicitly aimed at examining more closely a small, but very important, cross-section of the relationships outlined in the conceptual framework described above (Figure 7.1). Senior company leaders, as individuals, are both influenced by and help to shape the culture of the organisation they operate in. The attitudes and beliefs of senior company personnel play an important part in determining how the organisation as a whole responds to institutional pressures for change. Company leaders also play an important part in providing feedback to regulators and in helping (or failing to) promote and implement regulatory change. The manner in which senior company leaders interact with institutional authorities plays an important part in determining the path of regulatory implementation and creating pressure for future change.

The particular type of change this study focusses upon is that brought about by affirmative action rules, policies and guidelines when applied to listed corporation governance structures. What are the attitudes and beliefs of senior company leaders in relation to such change? Moreover, what do these attitudes suggest in relation to potential levels of organisational resistance to regulatory change? The aim is to understand what level of acceptance (or resistance) might regulatory reform aimed at improving gender balance on company boards meet with if introduced? What the European experience demonstrates is that this level of acceptance (or resistance) to regulatory reform can play a major part in determining how successful (or ineffective) a particular reform will be. What also needs to be remembered is that as both representatives of their organisation and members of society, senior company leaders also play a major role in determining the nature of the (reciprocal) relationship between the organisation and society. In many respects they are the glass through which social beliefs about the roles of women are reflected by and within the organisation.

The growing legitimacy of entrepreneurship

Institutional theory focuses on the roles of social, political and economic systems in which companies operate and gain their legitimacy.11 As explained by Scott, institutions provide for the rules of the game and define the available ways to operate by discouraging, constraining or encouraging given behavioral patterns. They have an impact on the decision-making process in giving indications of what would be acceptable or not, and in determining the individual socialization of norms and behaviors in a given society. Scott describes the three pillars on which societies are built: the regulative, the normative and the cognitive. The regulative pillar is formal and legally codified, while the normative one includes non-codified attitudes present in societies. When normative expectations and attitudes are largely diffused in society, they are gradually internalized by individuals and become accepted as the norms to which everybody is encouraged to conform. Institutions give stability and predictability to social behavior. Pressures and expectations can be exerted by institutional constituents, such as the state, professions, interest groups, public opinion and family. The underlying logic of the regulative pillar is conformity to the rules and laws, whereas that of the normative pillar relates to what is considered appropriate.12 But responses to institutional pressures and expectations may range from passive conformity to active resistance, depending on the nature and context of the pressures.

In general terms, it has been said that Asian cultural traits and standard values, including in the selected countries, are not propitious to the development of entrepreneurial spirit. Confucian values, linked for instance to respect for hierarchy, family responsibility and social risk associated with failure, present in Japan, Korea and Vietnam could inhibit entrepreneurs in taking risk and engaging in maverick behavior.13 The traditionally low social status of the merchant class in the Confucian world further complicates the entrepreneur’s task.14 A similar mindset is said to be dominant in Malaysia in the Malay population, where respect for authority tends to discourage challenging or bypassing the hierarchy.15 Up until recently, for a mix of religious, philosophical and ideological reasons,16 this strong sense of social hierarchy permeating human relationships made entrepreneurial endeavors a relatively unattractive professional choice, especially for younger members of the establishment in the whole East and South-East Asian region.

Starting a business is still nowadays perceived as a difficult and risky project. The image of small business in the four countries remains that of management instability, poor working environment and a high level of failures. For the young members of the establishment, starting their career by creating a new business is not (yet?) considered as proof of a gutsy, challenging spirit. In societies where the importance given to the ‘other-regarding’ social evaluation is still paramount, it is either more seen as an apparent failure to have completed one’s study in an ‘appropriate’ educational institution that should have ‘naturally’ led to a job in public service or a large and more prestigious private business commensurate with one’s social status, or it is considered as a significant deviance from social norms. For those not belonging to the social élite and who succeeded in graduating from an academic establishment, prestige employment represents a unique opportunity to climb the social ladder; taking the risk of creating a start-up (whose failure would ruin probably forever their dream of social advancement and reduce to nothing the huge financial sacrifice of their family in putting them through education) means missing out on this opportunity.

In the Western world failure is less perceived as having a negative impact on the social reputation of the family of the entrepreneurs, and has fewer long-term negative consequences for their professional future (at least in the United States, probably much less in some European countries that are close to the Asian mindset in this regard).

Care should be taken, however, to avoid any kind of reification of the institutional effects on entrepreneurship, and explanations based on cultural atavism should be treated cautiously. For instance, the Meiji and Taisho eras in Japan were periods of flourishing entrepreneurship, precisely because they were characterized by breaks of traditions;17 and in the more ancient pre-Edo period Japanese people were adventurous traders and innovative producers of guns, fans and other goods, active all over Asia. The sudden surge in opportunity entrepreneurship in Korea during this decade, with a flourishing of world-class fashion and industrial designers and dynamic ICT and biotechnology-related ventures, after a dearth of three decades under an oppressive regime in which they had no role to play, would probably have occurred even without the proactive public policy in support of entrepreneurship, just in giving people the opportunity to express themselves in a liberalized political and business system. Likewise, the current youthful entrepreneurial boom, including many women, in Vietnam in a business environment not exactly propitious to entrepreneurial endeavors is not completely surprising. Vietnamese people, like the Koreans, have always been enterprising and keen to develop new activities. In the four countries, entrepreneurs have shown a strong resilience to survive. Sometimes in very idiosyncratic ways, with businessmen buying positions in establishments or adopting management practices and philosophies integrating a kind of pre-modern corporate social responsibility policy in order to circumvent their low social status, entrepreneurship always existed in the four countries despite changing, unstable and hostile institutional environments.

For a long period of time after the Second World War the political, socio-economic and cultural contexts did not favor new business development in these countries. What is now observed is the logical consequence of the liberation of markets and minds, the growing eagerness by some segments of the population not to follow the traditions in their professional and private activities and the relatively higher acceptance of diversified lifestyles and professional career models by some segments of society. The social, political and socio-psychological climate within which entrepreneurs operate is better. Since the mid- 1990s successful companies created by highly skilled entrepreneurial business executives, researchers and professors (some coming back from the United States, especially in the case of Korea) have gone some way to improve the image of entrepreneurship. Although it may still be weak and marred by numerous institutional problems, entrepreneurship as an individual endeavor is considered more positively by the public authorities and society at large. The young generation has role models of successful and socially accepted entrepreneurs. It is in this dynamic perspective that we have to examine the development of female entrepreneurship. As we will see later in the case of Vietnamese and Malaysian female entrepreneurs, success as an entrepreneur does not necessarily lead to social ostracism but can bring prestige and other social rewards, apart from business profits. For better or worse, in Japan the strong yearning for predictability in business transactions seems to lead towards the development of female (and male) entrepreneurship where symbiosis between large companies and new businesses will be a hallmark of the business and innovation system. On the one hand, this could provide (it does already for some) the necessary financial, technological and managerial resources to women entrepreneurs. On the other hand, the problem could be that this search for legitimacy and control of uncertainty suffocates the drive for discovery of new territories and impedes the emergence of truly innovative entrepreneurs.

Conversely, with the still-incomplete emergence of a stable legal environment and business system attuned to the needs of start-ups, the kind of entrepreneurship development that is now observed, especially in Vietnam and Malaysia (to a lesser extent in Korea), reflects the transient nature of practices and behaviors induced by the very incompleteness of the process. It makes many people eager to take advantage of the loopholes in the rules and their implementation, and the gaps in both markets and institutional structures. The very fact that huge grey zones and uncertainties still exist in those three countries reinforces the entrepreneurial spirit while increasing moral hazard. Ambiguity remains about the extent of what entrepreneurs can do and what is expected from them. There are rules, but they are not always enforced. It is possible to negotiate exceptions through skillful networking with decision-makers. In doing so the rules could be enforced to the advantage of the entrepreneur offering new business opportunities, rewarding entrepreneurial skills and ingenuity. This is how many Vietnamese and Malaysian women entrepreneurs operate their businesses, navigating in the grey zone in trying to take advantage of any kind of business opportunities. In general terms, entrepreneurship requires a certain level of uncertainty and entrepreneurs should always be given the possibility to break, twist or bend the existing rules or develop new ones, thus assuring innovation. What the Vietnamese and Malaysian entrepreneurs said about their constant state of alert to grasp market chances that could come anytime from anywhere is not at odds with the criticisms (see Chapter 5 for details) they have on the state of the institutional environment in their countries. Corrupt practices and regulatory uncertainties increase the transaction costs, and the lack of respect for property rights makes the launch of new products extremely difficult for many of them. Similar to Japanese women entrepreneurs, but starting from two very different points, they need support in order to gain a certain level of legitimacy and legal protection assuring institutional continuity. But it is also necessary to keep the markets open and flexible. Informality of business relationships in societies such as Vietnam and Malaysia is a two-edged sword. On the one hand, it could lead to moral hazard. On the other hand, it fits with the socio-cultural and economic environment and becomes a source of dynamism. So, with their own characteristics, all four countries are engaged in this process of devising rules related to entrepreneurship that strike a good balance between legitimacy, flexibility and control of uncertainty, allowing the emergence and growth of entrepreneurial ventures in good conditions.

1 A Brief History of Institutions and Their Place in Resource Management

Contributions to institutional theories have flowed from economists, sociologists, and political scientists (Goodin 1996). Such contributions resonate with larger themes in social theory about the relationship between social structure, agency, and outcomes. In explicit counterpoint to the neoclassical paradigm in economics that finds little role for institutions or organizations in social life, advocates of institutions such as North (1990) and Williamson (1985) emphasize the unavoidable influence of institutional constraints on all social action. New institutionalists, property rights theorists, and scholars of the commons have been the most influential in providing insights about the nature of resource institutions. Efforts aimed at understanding institutions have drawn from rigorous mathematical approaches as well as more descriptive and interpretive orientations.

Although resource institutions may serve as constraints upon certain groups and individuals, or certain kinds of actions, they also facilitate and advantage others. In addition to facilitating or constraining actions, and advantaging some people over others in terms of power and benefits (Knight 1992), resource institutions may also help shape desires, motivations, and preferences of groups and individuals. They are rooted in past human actions, and are the result of choices made by individuals and groups. It is easy to see, therefore, that institutions are seldom stationary; they change over time because of human choices.

For a long time, scholars viewed markets and states as the appropriate institutional mechanisms to address externalities that result from the collective goods nature of a vast class of resources. Advocates of market solutions argued for privatization of collectively owned and managed resources such as fisheries and forests, and argued that without privatization collective goods are likely to be overexploited. Voluntary exchanges among private owners on the basis of pricing signals, they held, would lead to the most efficient use of resources. Advocates of state control and ownership, pointing to asymmetric allocations that often result from the operation of market mechanisms, suggested that centralized control of resources was far more likely to promote conservation and sustainable use. Without centralized enforcement, according to them, attempts to manage resources could turn out to be futile. Through much of the 1950s and 1960s, writings on resource use and management viewed community institutions as backward, inefficient, and likely to promote overexploitation.

From the late 1970s, and especially since the mid-1980s, there has been a significant shift in views about the role of community as a resource management institution. This is partly because resource management strategies that rely exclusively on exchange (market) or enforcement (coercive, state-based) have obvious deficiencies. One tends to benefit a small group or a few individuals, and the other tends to create highly asymmetric relations of domination and dependency. Both have shown a tendency to disadvantage and exclude rural residents relying on local resources, who then do not cooperate in management of these resources. Both at the level of policy initiatives, and in terms of theoretical developments, the option of collective management of resources through new types of resource institutions based in communities has found wide appeal (National Research Council 1986, Ostrom 1990).

Despite heated assertions about the superiority of one type of resource management institution over another, in real life most resource institutions do not easily fit the mold of market, state, or community. For the operation of each of these forms of institutions, implicit or explicit understandings that shade into other forms are necessary. For example, often markets and private property arrangements work better only when the force of the state is available to enforce the security of property.

This article examines institutional theory and its contributions to the social sciences. It explains how the study of institutions has developed in recent years. It shows that there are three basic versions of ‘Institutionalism’ each derived from a different disciplinary approach. Sociological institutionalism has been centrally interested in understanding the role institutions play in shaping and reflecting societal culture and norms. Rational choice institutionalists borrow the assumptions and methods of economics and apply deductive logic to the study of politics and history. For these scholars, institutions are seen as incentives and constraints in individual utility maximizing behavior. Finally, historical institutionalists generally see institutions as intervening variables (or structuring variables) through which battles over interest, ideas, and power are fought. For these scholars, institutions are seen both as incentives and constraints on individual choices and instrumental in shaping the very preferences of those actors. The article concludes with a discussion of institutional change and evolution.

23.5 Theoretical Framework

The study adopted the institutional theory propounded by North (1990). Peters et al. (2000) define an institution as a formal or informal, structural, societal, or political phenomenon that transcends the individual level, which is based on more or less common values, has a certain degree of stability and influences behavior.

The institutional theory is found credible in interrogating the causes of flooding disaster in Aba North Local Government. Guy (2000) defines institution as a formal or informal, structural, societal, or political phenomenon that transcends the individual level, based on more or less common values, with a certain degree of stability and influences behaviors. It considers the processes by which the structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior. The key idea behind institutionalism is that much organizational action reflects a pattern of doing things that evolves over time and becomes legitimate within an organization and environment. Most metropolises in Nigeria are just like any other municipal area councils in a developing country which has not benefited from the contributions made by regional development plans because management is via planning authorities, using policies made for them, to achieve different goals that relate to physical planning. Master planning as a policy tool and technique to solve physical planning problems in a regional arena has failed.

This institutional restriction becomes a constraint by not supporting and facilitating the infrastructure delivery to promote sustainable city planning as observed by absence of adequate master planning frameworks to address flooding disaster. In addition, the approval of a plan by government may have to go through lengthy procedures and could then be incorporated into the relevant section of a plan. Aba North Local Government is the fastest growing cosmopolitan town in Abia State but lacks an institutional framework for the effective implementation of any plan to control development. All these are the justification for the relevance of the institutional theory in understanding the place of flood disaster in Aba North Local Government Area.

4.2 Legal Traditions and Property Rights

In modern corporate finance, it is axiomatic that the firm is a “nexus of contracts” (Jensen and Meckling, 1976). Many of the predictions of corporate theory depend at some level on how well-protected the property rights assigned by these contracts really are. People may be less willing to invest and more willing to engage in opportunistic behavior if property rights are insecure. Several theories have recently been advanced to explain the underlying determinants of property rights across countries.

According to the “law and finance view”, cross-country differences in legal origin help explain differences in financial development. The seminal papers in this area by La Porta et al. (1997), La Porta et al. (1998) henceforth LLSV showed that historically determined differences in legal origin shapes both the laws governing financial transactions and the enforcement of these laws. LLSV (1998) argue that there are two broad legal traditions when it comes to the protection of investor rights: The Civil Law tradition, which uses statutes and comprehensive codes as a means of ordering legal material and relies heavily on legal scholars to ascertain and formulate rules; and the English Common Law, practiced in England and its former colonies, where the law is formed by precedents from judicial decisions as opposed to contributions by legal scholars. LLSV further distinguish the Civil Law tradition into French, German, and Scandinavian legal traditions with the French Civil Law system being the most rigid and codified compared to the other civil law traditions. LLSV argue that the legal traditions differ on the emphasis placed on protecting the rights of private investors relative to those of the State, and that the French Civil Law tradition is the weakest in its protection of shareholder and creditor rights. In LLSV (1997), the authors show that whether a country’s Commercial/Company law is based on English, French, German, or Scandinavian legal origins is a determinant of the country’s level of bank and stock market development.

To understand whether a strong system of legal enforcement could substitute for weak laws, LLSV (1998) examine how the quality of enforcement—as measured by efficiency of the judicial system, rule of law, risk of expropriation by the government, likelihood of contract repudiation by the government, and quality of accounting standards as a measure of corporate governance—is different in legal families. These measures of quality of enforcement have become standard in the law and finance literature. In the table below, adapted from their paper, they show averages of each of the measures of quality of enforcement and accounting standards across the different legal origin families. The table clearly shows that in law enforcement, Scandinavian countries are clearly on top, followed by the German civil law family, and the English common law countries. With quality of accounting, again Scandinavian countries come out on top but English common law countries (69.62) are now significantly ahead of the German civil law (62.67) countries. On all measures of the rule of law as well as the quality of accounting, French civil law countries are the worst. Thus, an investor in a French civil law country is poorly protected by both the laws and the system that enforces the laws.

The LLSV papers, in turn, spawned a large empirical literature digging deeper into the channels through which legal traditions matter. Beck, Demirguc-Kunt, and Levine (2003), Beck, Demirgüç-Kunt, and Levine (2005) find that adaptability of the legal tradition to changing economic conditions is a crucial factor. Thus, legal traditions (e.g. English Common Law) that are more flexible than rigid systems such as the French Civil Law are better at promoting financial development.

Other papers relate legal institutions to ownership concentration (LLSV, 1999a, 1999b), access to external finance and growth (Demirguc-Kunt and Maksimovic, 1998; Rajan and Zingales, 1998), cross-firm and cross-industry capital allocation (Beck and Levine, 2002; Wurgler, 2000), the informational efficiency of stock prices (Morck, Yeung, and Yu, 2000), financial fragility (Johnson, et al., 2000), and corporate governance ratings (Doidge, Karolyi, and Stulz, 2004).

A few studies have debated the relative importance of property rights protection versus access to finance. Johnson, McMillan, and Woodruff (2002) examine a sample of former Socialist economies and find that property rights protection dominates access to external finance in explaining the degree to which firms reinvest their profits. McMillan and Woodruff (2002) go on to argue that as economies progress further along in their transitions from planned to developed economies, the relative importance of market supporting financial institutions should increase. Cull and Xu (2005) re-examine this question in the context of China, which had made more progress in its transition to a market economy than the countries of the former Soviet Union by 2002, and find that indeed both property rights and access to external finance are associated with more firm reinvestment. Claessens and Laeven (2003) also study the joint impact of financial sector development and the quality of property rights protection on growth and the access of firms to external finance, and find both to be equally important. While the lack of financial sector development impedes firms’ access to external finance, they find that insecure property rights also leads to a suboptimal asset allocation by firms, and the asset allocation effect is economically as important as the effect of a lack of financing.

While the law and finance view has been a dominant theory in explaining cross-country differences in financial development, other influential works that have proposed shaping the institutions underlying financial development, including the evolution of the legal system. Acemoglu, Johnson, and Robinson (2001) argue that many countries, especially former colonies, did not design the legal system to protect property rights but rather to facilitate the extraction of resources from the indigenous population. Thus, two systems with the same legal origin may in practice offer very different protections. Acemoglu, Johnson, and Robinson (2001), Acemoglu, Johnson, and Robinson (2002) and Engerman and Sokoloff (1997) contend that European colonization offers a natural experiment to test this hypothesis. Europeans set up extractive systems in colonies that were not attractive for colonial settlement, either because of high settler mortality due to natural causes at the time of colonization, or because the indigenous population was relatively large. In colonies where settlement was feasible, countries set up the judicial systems to protect the property rights of the settlers. This theory emphasizes the role of geography (latitude and natural endowments) and disease environment (which affected the settler mortality) in shaping property rights.

Others have proposed that differences in culture, defined as a system of beliefs, can help explain the differences in investor protection and financial development. Stulz and Williamson (2003) highlight the role of religion while Guiso, Sapienza, and Zingales (2004) highlight the role of social capital in shaping financial systems. Rajan and Zingales (2003), Haber (2004), Haber, Maurer, and Razo (2003), Pagano and Volpin (2001), and Roe (1994) focus on how political economy and political stability underlie the development of financial markets. Finally, Easterly and Levine (1997) and Alesina, Devleschawuer, Easterly, Kurlat, and Wacziarg (2003) show that ethnic fractionalization in a country is an important determinant of both rent seeking and the social polarization that affects property rights and social institutions.

The broad spectrum of studies above suggests that several factors—legal, cultural, political, ethnic, and geographic—influence the financial system and some studies have run a horse race between the various theories, to understand which matters more. Beck, Demirgüç-Kunt, and Levine (2003) empirically compare the law and finance theory with the endowment theory to conclude that both are equally important determinants of financial development. Ayyagari, Demirguc-Kunt, and Maksimovic (2008a), Ayyagari, Demirguc-Kunt, and Maksimovic (2008b) run an empirical horse-race between the various theories, using data from the World Business Environment Survey on firms’ perceptions of how well protected their property rights are in practice. Using a regression-based, variance decomposition approach, they compare the contribution to adjusted R-sq of different institutional theories in a regression of firms’ perception of property rights on each of the institutional variables and firm-level variables.

They conclude that all the institutional theories address first-order factors accounting for about 50% of the explainable cross-country variation in property rights (country dummies alone explain 17.82% and all the institutional theories together explain 8.88% of the variation in property rights as shown in the table above).14 However, among the institutional factors, the dominance of the Law and Finance view in explaining property rights variation depends critically on sample selection. In the table above, in the full sample, the Law and Finance view holds the dominant position in explaining variation in property rights protection (3.89%). Removing the former Socialist economies (which arguably have more in common than just legal tradition) significantly reduces the explanatory power of the legal variables by 44%, leaving them to explain just 2.16% of the variation in property rights, while the ethnic fractionalization variable explains 4.57% of the variation in property rights.

In a subsequent paper, using Directed Acyclic Graph methodology to address endogeneity issues, Ayyagari, Demirguc-Kunt, and Maksimovic (in press) again confirm that ethnic fractionalization is the dominant institutional predictor of property rights protection across the world.

The working hypothesis in the literature is that strong investor protections promote efficient contracting and increase firm value. Strong creditor rights may however lead to the premature liquidation of viable firms which are undergoing temporary distress (see, for example, Aghion, Hart, and Moore, 1992; Hart, La Porta, Lopez-de Silanes, and Moore, 1997). Vig (2011) examines this possibility in his study of the 2002 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act 2002 in India. This reform significantly straightened and streamlined the process of liquidating firms which did not fulfill their contractual obligations to creditors. Vig (2011) finds that the act led to a reduction in debt, debt maturity, asset growth, and an increase in liquidity hoarding by firms. As expected, these effects are expected to be larger for firms with tangible assets, since these assets are more easily secured. Thus, it is not the case that more investor protection is always better than less: very strong creditor rights can increase the likelihood of inefficient liquidation and cause firms to decrease leverage in response.

2.3 Assumptions about human behaviour

Another reason to believe that North's institutional framework captures reality better than other versions of institutional theory is its more realistic assumptions about human behaviour. At the macro-level, by incorporating cultural norms into the model, North correctly abandoned the efficiency assumption of human institutions. This concept of institutions is shared by many writers including Max Weber, Talcott Parsons, Mary Douglas and Anthony Giddens. At the firm level, North shares with Max Weber the assumption that “participants in market economies reach decisions based on rational means end calculation of interests.” (Hamilton and Feenstra, 1997, p.63). The assumption about competition and scarce resources is thus retained. This assumption is explicit in the treatment of high transaction costs and insecure property rights as constraints to firm growth and economic development. Redding in his “The spirit of Chinese capitalism” also shares this conception. He points out that insecure property rights and inefficient transaction costs are amongst the major impediments to economic development in Mainland China (Redding, 1993).

This concept of institutions is different from some versions of the so-called institutional theory of organisation in the organisation study literature (see, for example, Powell and DiMaggio, 1983 and Zucker, 1988). Powell and DiMaggio's (1983) article about institutional isomorphism has been influential and widely cited in organisation study literature. This version of an institutional theory of organisation denies the reality of purposeful, interest-driven and conflictual behaviour by a human actor. The assumption of rational action, as Granovetter (1985) pointed out, “must be always be problematic, it is a good working hypothesis that should not easily be abandoned” (p.506). Any social theory which abandons the assumption of rational action is limited in its explanatory scope to certain settings. It is certainly true of the institutional theory of organisation. DiMaggio (1988) admitted that:

“Institutional theory may suffice to explain most organisational phenomena in certain kinds of fields – those that are highly institutionalised and have a weak technical base (such as banks but not computer-software designers) or those in which the legitimacy of member organisations is largely based in traditional authority (such as established churches but not scientific research institutes or those that play too trivial a role in the allocation of resource to attract much political behaviour (such as funeral parlours but not long-distance trucking company). (p.6).

DiMaggio also pointed out that “without more explicit attention to interest and agency of the kind that institutional rhetoric has thus far obstructed, institutional theorists will be unable to develop predictive and persuasive accounts of the origins, reproduction, and erosion of institutionalised practices and organisational forms” (p.11).

With regard to the source of literature on economic organisations in East Asia, Whitley (1992); Hamilton et al (1990); and Orru, Biggart and Hamilton (1997) acknowledged the importance of efficiency. At the end of a paper, Hamilton et al (1990), pointed out that there is a lack of theories, which they called “macro-organisational theories”, which can better explain economic organisations in East Asia:

“What is needed, then, are macro-organisational theories of economies. Certainly efficiency in the allocation of resources and the state's control of business are both important parts of such theories, but these factors are not singular in nature, universal in character and unambiguous in practice. These factors reflect their social location…Such organisational theories should not create, in a Parsonian fashion, an abstract world of pattern variables, but rather should concentrate on real worlds of human activity and of distinctive cultural meanings. Although many diverse analytic traditions provide beginnings for such theories, these macro-organisational theories remain promising tasks for the future.” (p126).

North's theory of institutions certainly provides a framework for such a macro-theory of organisations.

North's theory, however, as mentioned earlier, is not itself a theory of organisation. It explains the typical pattern of economic organisations in each particular institutional setting, but not the internal structure of the firm. To complete the project of building the form of capitalism in the Vietnamese environment we combine North's institutional framework with the ‘embeddedness’ perspective to explain not only the pattern, but also the internal structure of the Vietnamese ‘ideal’ firm. The framework that guided the present research is summarised below (Figure 2.1).

With regard to the process of constructing the typical form of capitalism in Vietnam, two major analytical tasks will be undertaken by this work. The first is an analysis of the nature of the institution matrix, including both the formal and informal side. The second task is to link it to the form and structure of the firm (the ideal firm) which is conceptually demonstrated on the right hand side of the bold vertical line in Figure 2.1 above. The institutional framework determines the pattern of the firm through its incentive structure. The incentive structure is materialised through transaction costs and property rights. That is, for example, an institution matrix with an incentive structure characterised by high transaction costs and insecure property rights is likely to produce small-scale businesses. The institutional matrix (especially the informal side) also partly determines the internal structure of the firm. That is, for example, a low or bounded trust culture is often associated with family business. We will discuss how the Vietnamese institution matrix determines the patterns and structure of the firm in Chapter 6.

The nature of the Vietnamese institutional framework (the first task) is drawn from factors given on the left-hand side of the bold vertical line in Figure 2.1. There are two broad categories of factor. One is the deep-rooted values and beliefs and practices which have been carried out and survived the test of time (the background). The other concerns the ‘matters at hand’ (the proximate), the nature of transition to a market economy, and the temporary political ideology in Vietnam. This task will be carried out in Part 2 of this work. SOE behaviour will then be analysed and interpreted with reference to the ideal type.

Conclusion

The study of organizations and culture is one of the most active fields in organizational sociology today. Institutional theory is based in the social constructionism of Peter Berger and Thomas Luckmann (1967). The perspective first set out in Meyer and Rowan's (1977) Institutionalized Organizations: Formal Structure as Myth and Ceremony and developed in discussions of theory (Meyer et al., 1987; Meyer and Jepperson, 2000), describes the modern worldview as a historical construct. So are organizations and their various routines and practices. Meyer and colleagues offer a radical challenge to the taken-for-granted categories of modernity and the taken-for-granted causal relationships. In Berger and Luckmann's (1967: p. 20) brand of social phenomenology, which Meyer and colleagues draw on, the task is to grasp how collective understandings of the social and physical worlds around us become objectified, such that we do not see them as collective understandings. They ask how our subjective ‘knowledge’ of the world comes to have the feel of objective reality. Berger and Luckmann focus on the different intersubjective realities found in mystified, religious, and rational settings. These realities emerge through experience, and at the level of cognition, the individual makes causal connections on the basis of the wider system of meaning institutionalized in concrete customs. Students of organizations and culture first built on these insights by tracing the spread of new ideas about management and the practices associated with them. They went on to explore the role of expert theorization, as modern-day witch doctors who call themselves sociologists, economists, and management consultants divine laws of the organizational universe and promote practices that conform to those laws. In recent years they have turned their attention to the cognitive processes, mental maps, institutional logics, and microlevel processes that undergird, and ultimately that produce and change, organizational practices and their meanings.