Chapter 9

INSTITUTIONS AND ENTREPRENEURSHIP1


Hokyu Hwang
Stanford University

and

Walter W. Powell
Stanford University




1.
INTRODUCTION

Much of the literature on entrepreneurship examines the attributes of
individuals, the networks of affiliations in which those individuals are
enmeshed, the resources they assemble, and the openings that are present in
the competitive environment. More recently, scholars have attended to the
legal and political conditions that support entrepreneurial behavior, and the
wider ecosystem that serves to deter or reinforce risk-taking behavior. We
follow this line of research in our review of work on institutional aspects of
entrepreneurship. Our aim in this chapter is to assess the role of various
institutional actors and processes in fostering entrepreneurial behavior.
We take a broad view of entrepreneurship, focusing not only on the
creation of new business organizations, but also on the generation of new
organizational models and policies that change the direction and flow of
organizational activity. Common to these diverse activities and domains is
the recognition of opportunities. In contrast to much research on
entrepreneurship that assesses either the capabilities of individuals or
organizations to recognize such possibilities, our attention is directed towards
the wider environment that both defines and creates opportunities. We also
focus on how individuals and groups attempt to shape the institutional context
in a fashion that privileges their preferred policies and programs.

We begin with a discussion of the social context of entrepreneurship,
considering how the larger social environment lends both cognitive and socio-
political legitimacy to entrepreneurial activity. We observe that the
cornerstone of entrepreneurship is the belief in individual autonomy and
discretion, a liberal creed that locates agency in individuals as the primary
unit for creating new activities (Meyer, Boli, and Thomas 1994; Meyer, 1996;
Meyer and Jepperson, 2000). While such a view is widely embraced in the

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United States, and more generally in Anglo-Saxon countries, it is worth
noting that there is considerable variation in acceptance across other nations,
due in part to religious, cultural, or political factors. We consider the extent to
which entrepreneurship is, in fact, a modern western institution.

Following Schumpeter (1934, 1991; Swedberg, 2000; Fagerberg,
2003), we recognize that much entrepreneurial activity entails recombination
of existing materials and structures, rather than “pure” novelty. Schumpeter
regarded this combinatory activity as “the entrepreneurial function.” He was
open-minded as to whether the entrepreneur was an individual or an
organization, and the latter could be either a firm or a political organization.
His focus was on the nature of the activity, not the identity of the participant.
He famously described five types of innovative activity, involving the
creation or introduction of: a.) new products, b.) new methods of production,
c.) new sources of supply, d.) new markets, and e.) new ways to organize.
Presumably, the latter might entail the emergence of a new industry or
reorganization of an existing one. Notably, for our purposes, he did not
discuss in detail the introduction of new organizational practices or structures
in his writings on entrepreneurship. Yet many of the innovations that fostered
economic growth in the United States in the twentieth century were
organizational, notably in the design of sales and distribution (Chandler, 1962,
1977). We extend Schumpeter’s ideas on recombination to include the
generation and translation of organizational practices and structures.2
We thus ask how existing institutions are remade or reassembled to
create new combinations that may, in turn, generate social, political, or
economic change. We discuss how shifts in the institutional environment
create opportunities for individuals and organizations to seize upon
recombined tools or constructs to subvert existing ways and bring about new
forms of organizing. We also consider how existing institutions are
transformed and how standards and practices are altered by individuals and
organizations who may, nevertheless, reaffirm the larger institutional system.
We should stress at the outset that an institutional perspective on
entrepreneurship is more “constructivist” than “agentic.” By this distinction,
we mean that while much entrepreneurial activity is purposive, it is not
necessarily directly intentional. As organizational goals and missions are
contested and reshaped, organizational participants often discover their
interests “on the fly,” so to speak, as strategies and goals co-evolve.


2.
THE SOCIAL CONTEXT OF ENTREPRENEURSHIP

The historical literature on entrepreneurs points out that such
individuals were often outsiders or strangers (Barth, 1963, 1978; Collins,
1980; Simmel, 1950:402-408). As alien to existing and often deeply
conservative social orders, these outsiders were able to serve as bridges

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between different groups or across different spheres. In settings where
novelty was often actively resisted by political and/or religious authorities,
strangers were among the few members of society who did not feel sharply
constrained. The role of strangers was to connect groups that would not
otherwise interact, deriving value from the exchange. In work on both
Norway and Central Africa, Frederik Barth (1963,1978) has stressed this
bridging role, whether in using financial means to garner political support or
in commodity trading in rural communities. The African village of Darfar
had long had a division into two distinct spheres, one in which cash was used
and the other based on barter. The two domains had traditionally been kept
separate, until, as the story goes, an Arab merchant linked the two spheres by
swapping beer in exchange for tomatoes, which he sold at a profit. Swedberg
(2000) points out that entrepreneurial activity of this type is often deeply
corrosive to the values of a traditional community.
The expansion of entrepreneurship from an unusual activity
conducted by outsiders to a widely accepted practice embraced by small
businesspersons, business and political leaders, as well as social movement
activists, is no small feat. Weber’s (1930) classic treatise, The Protestant
Ethic and the Spirit of Capitalism, argued that commerce and an acquisitive,
pecuniary logic were viewed as rivalrous to dominant religious ideologies all
over the medieval world. In the 16th and 17th centuries, the rise of Calvinism
and other forms of ascetic Christianity had the unintended consequence of
shifting largely hostile views toward commerce to a more accommodating
acceptance. The methodical, rational character of Protestantism fostered the
growth of capitalism, which over time became more secular and lost many of
its religious underpinnings. This elective affinity between Protestantism and
capitalism did not readily translate across the globe, however. Lipset (1970)
has argued that predominantly Catholic countries, notably in Latin America,
have preserved values of family, particularism, and patriarchy that hinder
capital accumulation and entrepreneurial behavior.
Even in the U.S., often regarded as the wellspring of entrepreneurial
activity, small business has historically been regarded as a conservative
group. In the 1950s, support for the deeply conservative, anti-communist
views of Senator Joseph McCarthy was strongest among small business
owners (Trow, 1958). In recent years, however, small businesses have been
singled out as the fountain of new job creation, critical to regional economies,
and challengers to large stagnant firms. This transformation in which the
concept and practice of entrepreneurship is enshrined with virtuous status is a
potent act of institutionalization.
Consider the academy as but one illustration. Despite an absence of a
theoretical underpinning or a core disciplinary basis, the teaching of
entrepreneurship in U.S., European, and Asian business schools has grown
remarkably in recent decades. Aldrich (2004) notes that despite the struggles

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for legitimacy that have accompanied growth of the field, the area has
proliferated with respect to books, specialized journals, and business school
course offerings.
Critical to this growth and celebration of entrepreneurship is the re-
framing of all manner of activities as entrepreneurial. Founding a small
business is an effort that entails hard work with limited prospects for success.
Battling entrenched interests in large corporations or political parties is
fraught with risk and long odds. Pursuing socially responsible goals, such as
environmentally friendly production or inner-city investment, were once
counter-cultural activities, now such efforts are championed in business
schools as “social entrepreneurship.” In short, a diverse array of activities
that have long been regarded as “tilting at windmills” have been redefined as
entrepreneurial. Indeed, the very notion that research on institutions, things
we tend to regard as relatively fixed, durable, and potent, can inform the study
of entrepreneurship is further evidence of this expansion. We find some
considerable irony in the growth in usage in the scholarly literature of the
term “institutional entrepreneur” (DiMaggio 1988; 1991; Fligstein 1997;
2001; Beckert 1999).


3.
THE REMAKING OF INSTITUTIONS

Typically, most discussions of institutions focus on their durability or
fixity. Whether conceived of as shared mental models (North, 1990), the
rules of the game (Schepsle,1989; Powell and DiMaggio, 1991), or taken-for-
granted understandings (Berger and Luckman, 1967), most social science
research assumes that institutions are relatively stable and settled. Such a
focus, however, elides questions of emergence and transformation. How do
new practices and structures become institutionalized? And how do existing
arrangements that are widely regarded as appropriate and normatively
sanctioned become unsettled and lose their force?
We identify several strands of research that address the question of
how creating change in existing institutional arrangements can be considered
as a form of entrepreneurship. One key force in the redefinition of what
practices and structures are appropriate is professional knowledge. By
expanding their jurisdiction, professionals reshape the landscape, particularly
with respect to definitions of the law. Similarly, a second trend occurs when
occupational groups and professional and technical communities engage in
the creation of standards. When these generalizing technical procedures are
widely diffused, the existing set of organizational practices can be altered in
subtle or profound ways.
A third process of institutional change involves rule-making, or the
creation of formal laws that define the playing field, enabling certain groups
and retarding the efforts of others. In some cases, rule-making is highly

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instrumental and driven by specific agendas. In other circumstances,
institutional entrepreneurship may occur as a result of unintended
consequences, particularly when groups seize upon unexpected opportunities
created by legislative change.


3.1 The Expansion of Professional Jurisdiction

Professionals, as well as some categories of authorized actors in
particular issue or jurisdictional domains, are often key institutional
entrepreneurs who help redefine and reconfigure existing institutions by
facilitating the adoption of new organizational practices or models. One of the
main contributions of neo-institutional scholarship has been to focus on the
spread of various organizational practices, models, and governance
mechanisms. Over the last decade and a half, several studies have deepened
our substantive understanding of the influence of Civil Rights legislation in
the American workplace, enriching a theoretical account of the mechanisms
by which broad government mandates in a fragmented and weak state system
bring about the widespread adoption of new organizational practices and
models. While the enactment of these Civil Rights laws made clear the federal
government’s intent to eliminate employment discrimination, the policies
were deeply ambiguous regarding standards of compliance and lacked
effective mechanisms for enforcement. Employers, faced with the federal
government’s broad mandates to halt discrimination on the one hand, and the
legal consequences of their actions on the other, had to develop and
experiment with their own compliance strategies and mechanisms.
Consequently, various organizational practices, including internal labor
markets (Dobbin et al. 1993), grievance procedures (Sutton et al. 1994;
Edelman et al. 1999), due-process governance (Sutton and Dobbin 1996;
Edelman 1990), and sex discrimination and maternity leave policies (Kelly
and Dobbin 1999) have been created and widely diffused, becoming standard
features of the American workplace.
Frequently, legal changes have broad and ambiguous mandates and
often do not specify clear standards of compliance, especially under a weak
state regime such as the United States (Sutton and Dobbin 1996).
Consequently, responding to legal changes is often problematic for
organizations who are left to their own devices to develop appropriate
standards and mechanisms of compliance. As organizations formulate
measures and breathe substance into legal ambiguity, organizations help
constitute legal change. Dobbin et al. (1993) describe an iterative process in
which the state provided a broad mandate through the Equal Employment
Law, and human resource professionals and lawyers elaborated specific
practices that were eventually approved by the courts. Through this recursive

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process, “Legal change engenders a process of institutionalization whereby
new forms of compliance are diffused among organization and gradually
become ritualized elements of organizational governance” (Edelman 1992:
1545).
The central entrepreneurs in this development of employment
practices are personnel professionals. First, professionals serve as “filtering
agents” (Kidder 1983; Edelman and Suchman 1997). Professional groups
through their professional discourses construct the meaning of initially
ambiguous laws, determine the situations to which legal reasoning applies,
and more generally, advocate for the legality and legitimacy of particular
worldviews (Edelman and Suchman 1997: 499). Personnel experts put forth
their interpretations of the laws, and develop and prescribe recipes for
compliance through such venues as professional journals, conferences,
professional networks and conventions (Edelman 1990, 1992; Sutton et al.
1994).
As mediating or filtering agents, professionals interpret legal
doctrines, formulate appropriate compliance strategies, and diffuse these
strategies. In doing so, they employ various means that enhance and
legitimate their prestige, standing, and authority within organizations. Further,
in order to promote their solutions as the appropriate response to ambiguous
legal mandates and to persuade employers of their usefulness, professionals
couch their solutions and strategies in the rationalist language of efficiency
and equity, or progress and justice.
Edelman and her colleague’s (1999) extensive analysis of the
business literature in their study of the creation of Equal Employment
Opportunity grievance procedures revealed that personnel professionals
framed the advantages of their proposed strategy—that is, the adoption of
internal grievance procedures—in the rhetoric of equity and efficiency. While
protecting organizations from legal liability, “grievance procedures provide a
sense of justice to employees and will therefore improve morale and
productivity” (Edelman et al. 1999). The professional literature was replete
with arguments that claimed instituting new internal grievance procedures
would deter employees from seeking litigation and would therefore result in
significant cost savings. These experts often exaggerated the legal threats to
employers when championing their policies. Similarly, Dobbin et al. (1993)
showed in their analysis of the diffusion of employment practices that by
couching the necessity of formal evaluation and promotion systems in the
language of equity and efficiency, personnel managers successfully persuaded
their superiors about the putative usefulness of these practices in both battling
discrimination and rationalizing the management of human resources.
In this sense, personnel professionals are the structural linkages to the
wider environment (Sutton et al. 1994: 966). By their active interpretation of
the law and promulgation of organizational responses, they play an
entrepreneurial role as mitigating or filtering agents at the interface of the

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legal environment and organizations. They “proffer stories about the legal
value of grievance procedures to organizations …, as they are told and retold
in the professional journals, the stories tend to become widely accepted in
organizational fields and to influence ideas about organizational rationality
across organizational, professional, and legal realms” (Edelman 1999: 408).
In this way, professionals created a new legal environment in which beliefs
about the efficacy and appropriateness of certain practices and models
become taken for granted. Further, organizations with direct connections to
the wider environment proved to be more likely to adopt these newly
dominant models and practices, thus institutionalizing these new views.
Sutton et al. (1994) showed that involvement in this wider environment had
palpable effects on the adoption of grievance procedures. Organizations’
structural linkages to the national environment through professions were
operationalized as having personnel offices and/or labor attorneys on retainer;
and analyses showed that organizations that had personnel offices or retained
labor attorneys were more likely to adopt them. Coupled with the finding that
direct linkage to the state through federal contacts did not prove to be a
significant predictor, the effect of embeddedness in the wider legal
environment showed that “due-process mechanisms are not a direct result of
federal regulatory pressure, but rather a symbolic response to diffuse and
ambiguously perceived shifts in the legal environment” (Sutton et al. 1994:
966).
Although both personnel professionals and lawyers were important in
the institutionalization of these novel organizational practices, Sutton and
Dobbin (1996) argued that these two groups played different roles in the
process, describing personnel administrators as “explorers” and labor lawyers
as “settlers.” More generally, “institutionalization can be conceptualized as a
sequential process in which different sets of agents—each of which occupies a
different position in the organizational field, has different stakes in the
outcome, and controls different kinds of discursive resources—commit
themselves to a given practice only at certain stages of the game” (Sutton and
Dobbin 1996: 808). Personnel experts or semiprofessions—who are
unconstrained by professional orthodoxy and occupy marginal positions in the
organizational field—are much more entrepreneurial and likely to embrace
novel or untested policies or practices in their attempt to expand their
occupational jurisdiction. In contrast, more established professions like
lawyers are conservative and slower to embrace these new ideas.

Nevertheless, when these dominant and mature professions act, they serve as
“settlers” that theorize practices, rendering them integral parts of the
organizational field.
In sum, the enactment of equal employment opportunity and
affirmative action laws has transformed the American workplace as
employers faced with broad and ambiguous compliance standards have

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reinterpreted their own compliance measures. These efforts were championed
by personnel, human relations, and legal professionals. The new institutional
literature suggests that the enactment of EEO/AA law did not have direct
impact on the specific practices that were eventually created and adopted.
Instead, the ambiguity of the laws and the lack of enforcement mechanisms
created uncertainty about the proper means of compliance, opening space for
personnel experts to be engaged in institutional entrepreneurship. Beyond the
institutionalization of particular organizational practices and compliance
strategies as formalized elements of the American workplace, these practices
and strategies also reflected the expansion of individualism in the form of
employee rights and organizational citizenship both in organizational
governance and the wider environment (Dobbin et al. 1993; Sutton et al.
1994).
This modern account of EEO/AA law also has strong parallels in the
past. From the 1930s to 1970s, labor relations were mediated by industrial
relations departments in large U.S. companies. Labor relations professionals
maintained harmony, or at least a truce, between management and labor,
pressing workers to be more compliant during lean times, and encouraging
management to be less frugal during expansive periods (Katz, 1985).
Sluggish productivity growth, foreign competition, and oil price shocks in the
1970s interrupted this long era of labor-management peace, and led many
firms to adopt anti-union policies, such as subcontracting or the building of
nonunionized “greenfield” plants, typically in Southern states. As the
dominant system of industrial relations unraveled in the 1970s and 1980s,
leading practitioners and academic experts began to re-theorize labor
relations, which dealt largely with unionized work forces, and articulated a
broader vision of human relations management, which was applicable to the
entire work force (Kochan, Katz, and McKerzie, 1986; Walton, 1985; Cole,
1989). In some companies, the human relations function even became an
integral part of corporate strategy. In these settings, a core group of personnel
professionals and academic experts were central to the recasting of labor-
management relations into a new framework that fused elements of an older
industrial relations or personnel approach with an expansive view of the
employment relationship as a key organizational asset.





3.2 The Creation of Standards

Another significant area in which neoinstitutional research has made
important contributions concerns the salience and ubiquitous nature of
standards (Brunsson and Jacobsson 2000). We consider the creation of

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standards that guide the activities and behavior of a class of organizations as
an entrepreneurial act. The modern social world is replete with various kinds
of standards or rules of behavior that are thought to improve human
conditions. At the most general level, there are two kinds of rules: some rules
are described as voluntary, while others are described as mandatory or as
directives. The distinction is an analytical one; empirically the same rule can
be mandatory for a certain set of actors, while for others it is conditional. For
example, the rules governing basketball games of the National Basketball
Association are mandatory for all NBA franchises, but are rarely followed in
local playground basketball games. In other words, whether a rule is a binding
directive or a standard to follow voluntarily depends largely on one’s
membership in particular collectivities.
From how to play a game of basketball to how to organize a school,
or how to report a financial transaction or the steps to prepare osso buco,
standards are everywhere in modern life. Similarly, self-proclaimed experts
who know best how certain things should be done increasingly populate the
modern world. Some of these experts, armed with professional knowledge,
have more legitimate professional claims than others, and therefore their
preaching is more readily followed than that of other less legitimate
proselytizers. In this vein, Jacobsson (2000:40) has observed that: “Reference
to expert knowledge is often used to give standardization legitimacy.” This
observation parallels Sutton and Dobbin’s (1996) argument about the role of
mature professions as “settlers” that theorize and help institutionalize certain
practices or models in an organizational field.
Increasingly, these experts—self-proclaimed and otherwise—and
professional groups, operate at the global level. Haas (1992) described
networks of professionals with authoritative claims to expertise in a certain
issue domain or a body of (policy relevant) knowledge as “epistemic
communities.” Abrahamson and Fairchild (2001:148), examining a more
commercial and market context, point out the growing importance of
“knowledge industries” and “idea entrepreneurs” in the contemporary world.
The former refers to “set[s] of organizations that produce substitutable
knowledge products” and the latter, to actors that operate within knowledge-
intensive industries.
While both standards and standardization are frequent and have
become a routine aspect of an increasingly globalized society, various stages
of standardization involves moments of (institutional) entrepreneurship. Initial
conceptualization and construction of a standard or a model and its
subsequent championing involve considerable entrepreneurial activity and
zeal—in both the traditional sense of entrepreneurship, as well as from an
institutional perspective. Each step of standardization involves various actors,
including original innovators, proselytizers, and proselytes, and these actors,
if successful, contribute collectively to the wide diffusion and eventual

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institutionalization of a standard or model. Nevertheless, the processes of
popularization and institutionalization of particular models may require more
than expertise or professional knowledge, which although a crucial ingredient
that provides credibility and legitimacy, may not be sufficient. Proselytizers
often deploy significant social and political skills to convert would-be
followers to adopt a given model or technology as a standard (Fligstein 1997,
2001; Garud et al. 2002; Hargadon and Douglas, 2001).
Garud et al. (2002), in their study of Sun Microsystems’ sponsorship
of Java as a technological standard, illustrate the challenges an individual firm
faces in sponsoring its own technology as a common technology standard. In
making Java an architectural standard for the Internet, the importance of
political and social skills to negotiate through difficulties in the process
cannot be overstated. In sponsoring Java as a common standard, Sun
Microsystems initially relied on an “open systems” strategy by allowing third-
party developers to download Java for free and to aggressively market their
product. Further, in drafting licensing agreements for commercial use, Sun
permitted licensees to modify the technology as long as the modifications
were freely shared with Sun and other licensees (Garud et al. 2002). As a
result, Sun was successful in mobilizing firms around its technological
standard so that Microsoft, who had been developing its own alternative
software, had to license Java.

There is an inherent tension, however, in technology sponsorship. “To
enable Java’s evolution into a technology that justified its original promise,
Sun had to allow members of the collective to adapt it for their own use. At
the same time, Sun had to exercise control to ensure that the technology was
not compromised by the creation of incompatible versions” (Garud et al
2002:204). Thus, as the technology became widely accepted as a standard and
licensees developed their own modifications, Sun faced the problem of
fragmentation within the Java field. Consequently, Sun attempted to prevent
fragmentation with its certification initiative to test the compatibility of
different Java applications. This attempt to control the standardization
process, coupled with Sun’s introduction of Java-based products that
essentially competed with Sun’s licensees created concerns about Sun’s
credibility as a technology sponsor. Further, Sun’s initial refusal to hand over
the control of Java to a neutral international standards body, such as the
International Organization for Standardization, further exacerbated the
problem.

The case of Sun Micrsosystems and Java illustrates the difficult
process of standardization, particularly the challenge of juggling the dual roles
of creator and enforcer. In the process of standardization in a competitive
setting, Sun was increasingly seen as changing rules of the game to favor and
advance its own self-interests. This tension points to the necessity or
importance of a division of labor among the participants involved in

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