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This article identifies the emergence of the institution-based view as a third leading perspective in strategic management (the first two being the industry-based and resource-based views). We (a) review the roots of the institution-based view, (b) articulate its two core propositions, and (c) outline how this view contributes to the four fundamental questions in strategy. Overall, we suggest that the institution-based view represents the third leg of a strategy tripod, overcomes the long-standing criticisms of the industrybased and resource-based views ' lack of attention to contexts, and contributes significant new insights as part of the broader intellectual movement centered on new institutionalism.

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ARTICLE

The Institution-Based View as a Third Leg for a

Strategy Tripod

by Mike W. Peng, Sunny Li Sun, Brian Pinkham, and Hao Chen

Executive Overview

This article identifies the emergence of the institution-based view as a third leading perspective in strategic

management (the first two being the industry-based and resource-based views). We (a) review the roots of

the institution-based view, (b) articulate its two core propositions, and (c) outline how this view

contributes to the four fundamental questions in strategy. Overall, we suggest that the institution-based

view represents the third leg of a strategy tripod, overcomes the long-standing criticisms of the industry-

based and resource-based views' lack of attention to contexts, and contributes significant new insights as

part of the broader intellectual movement centered on new institutionalism.

s part of a broader intellectual movement cen-

tered on new institutionalism throughout the

social sciences in recent decades (DiMaggio &

Powell, 1983, 1991; North, 1990, 2005; Scott,

1987, 1995, 2008b; Williamson, 1975, 1985), stra-

tegic management researchers have increasingly

realized that institutions are more than back-

ground conditions (Oliver, 1997; Peng & Heath,

1996). Instead, "institutions directly determine

what arrows a firm has in its quiver as it struggles to

formulate and implement strategy" (Ingram & Sil-

verman, 2002, p. 20, emphasis added). Conse-

quently, an institution-based view of strategic man-

agement has emerged (Peng, 2002, 2003). More

important, this view has been argued to be one of

the three leading perspectives in strategic manage-

ment—the other two being the industry-based and

resource-based views (Peng, 2006, 2009).

With an age of approximately 30 years, strate-

gic management ("strategy" in short) is a rela-

tively young discipline that is constantly in search

of new perspectives (Hambrick & Chen, 2008).

Its first period of growth was in the 1980s, when

Porter (1980) introduced what we now call the

industry-based view. The second period of growth

took off in the 1990s, propelled by the resource-

based view advocated by Barney (1991). We argue

that the third period of growth, largely in the last

decade or so, has been underpinned by the rise of

the institution-based view. Since it takes three

legs to sustain a platform, we believe that the

institution-based view has significantly enriched

the strategy discipline by adding a third leg, lead-

ing to a strategy tripod shown in Figure 1.

What are the origins of the institution-based

We thank the AMP editor, Garry Bruton, and two anonymous review-

ers for excellent guidance and encouragement, Dick Scott for helpful

written comments, and Joseph Clougherty and Klaus Meyer for interesting

discussion. This research was supported in part by a National Science

Foundation CAREER Grant (SES 0552089). All views and errors are ours

and are not those of the NSF.

Mike W. Peng (mikepeng@utdallas.edu) is the Provost's Distinguished Professor of Global Strategy at the University of Texas at Dallas and

Editor-in-Chief of the Asia Paciﬁc Journal of Management.

Sunny Li Sun (lxs055000@utdallas.edu) is a doctoral candidate at the University of Texas at Dallas.

Brian Pinkham (brian.pinkham@utdallas.edu) is a doctoral student at the University of Texas at Dallas.

Hao Chen (chloechenhao@utdallas.edu) is a doctoral student at the University of Texas at Dallas.

2009 63Peng, Sun, Pinkham, and Chen

permission. Users may print, download, or e-mail articles for individual use only.

view in strategy? How does the institution-based

view add to our understanding of strategy above and

beyond what we already know based on the industry-

based and resource-based views? This article ad-

dresses these crucial questions by (a) reviewing the

roots of the institution-based view, (b) articulating

its two core propositions, and (c) outlining how the

institution-based view contributes to the four funda-

mental questions in strategy. While this article draws

on a series of earlier work, its most recent and most

direct companion paper is Peng, Wang, and Jiang

(2008), which emphasized the institution-based

view in international business strategy with a focus

on emerging economies. Differentiating from Peng

et al. (2008), the current article is positioned to

directly speak to the core literature in strategic man-

agement and does not deliberately emphasize the

international aspects. While we discuss research on

emerging economies, we also point out the equally

important ramifications of the institution-based

view for research on developed economies. Combin-

ing the articulation of the two core propositions and

the efforts to address the four fundamental questions

will be the first-time contribution this article makes

to enrich the strategic management literature.

The Roots of the Institution-Based View in

Strategy

wo sets of forces underpin the rise of the insti-

tution-based view in strategy: external and in-

ternal. The first is the broader new institution-

alism movement throughout the social sciences in

the last three decades pioneered by economists

(North, 1990; Williamson, 1975, 1985) and soci-

ologists (DiMaggio & Powell, 1983; Meyer &

Rowan, 1977; Scott, 1987, 1995, 2008b). Institu-

tions are commonly known as the "rules of the

game." More formally, institutions are defined by

economist Douglass North (1990, p. 3) as "the

humanly devised constraints that structure human

interaction," and by sociologist W. Richard Scott

(1995, p. 33) as "regulative, normative, and cog-

nitive structures and activities that provide stabil-

ity and meaning to social behavior." While terms

and labels differ on the surface, North's (1990)

scheme of broadly dividing institutions into for-

mal and informal camps is complementary to

Scott's (1995) idea of three supportive pillars:

regulative, normative, and cognitive (see Table

1). Following Peng (2006, 2009), this article will

use an integrative approach, drawing on the best

insights from both economics and sociology as

well as other allied disciplines, instead of sticking

Figure 1

The Institution-Based View: A Third Leg of the Strategy Tripod

Institutional conditions

and transitions

Strategy Performance

Firm-specific resources

and capabilities

Industry-based

competition

Source: Peng (2009, p. 15).

Table 1

Dimensions of Institutions

Degree of Formality

(North, 1990) Examples

Supportive Pillars

(Scott, 1995)

Formal institutions ● Laws ● Regulative (coercive)

● Regulations

● Rules

Informal institutions ● Norms ● Normative

● Cultures ● Cognitive

● Ethics

64 AugustAcademy of Management Perspectives

with terms and labels from one side of the litera-

ture.

Regardless of disciplinary roots, there is a re-

markable consensus on a core proposition: Insti-

tutions matter. As a next step, scholars must

"tackle the harder and more interesting issues of

how they matter, under what circumstances, to

what extent, and in what ways" (Powell, 1996, p.

297). It is this quest to enhance our understanding

of how institutions matter that leads to the prolif-

eration of new institutionalism research through-

out the social sciences, which now includes stra-

tegic management.

In addition to external forces that spill over to

strategy, the institution-based view has also grown

in response to the internal forces within strategy—

specifically, the long-standing criticisms of the

industry-based and resource-based views' lack of

attention to contexts. The industry-based view,

derived largely from the patterns of competition

in the United States in the 1970s (and before),

has been criticized for ignoring histories and in-

stitutions (Narayanan & Fahey, 2005). Take the

very first of Porter's five forces, interfirm rivalry,

and its prescription for a cost leadership strategy.

The industry-based view seldom questions what is

behind such rivalry. In truth, formal government

policies and informal media and consumer senti-

ments regarding the "dos and don'ts" play a sig-

nificant role in shaping competition (Dobbin &

Dowd, 1997; Fligstein, 1990). Under certain in-

stitutional conditions, a cost leadership strategy

can be accused of being unethical—think of the

trouble Wal-Mart faced by pursuing the "everyday

low price" strategy. Under other conditions, a cost

leadership strategy may become illegal—in the Jap-

anese bookselling industry, price fixing is legal

while price competition is banned (Stevenson,

2009). In international trade, the single-minded

pursuit of a cost leadership strategy that ignores

host country trade laws and regulations can easily

attract legal action centered on antidumping

(Schuler, Rehbein, & Cramer, 2002). In short,

the industry-based view has not paid adequate

attention to contexts.

Likewise, the resource-based view has been

criticized for its "little effort to establish appropri-

ate contexts" (Priem & Butler, 2001, p. 32). Valu-

able, rare, and hard-to-imitate resources and ca-

pabilities in one context may become

nonvaluable, plentiful, and easy to imitate in

other contexts (Brouthers, Brouthers, & Werner,

2008; Oliver, 1997). Barney (2001, p. 52) himself

acknowledged the validity of this criticism, noting

that "the value of a firm's resources must be un-

derstood in the specific market context within

which a firm is operating. . . . [T]oo many authors

have simply assumed away this question, and,

thus, have failed to help develop a more complete

theory of firm advantages."

For example, Dell's

capabilities in "flexible manufacturing" of PCs

added value when competition was moderately

dynamic. However, in the new context of high-

velocity, dynamic competition, Dell's "flexible

manufacturing" capabilities turned out to be not

flexible enough. Dell ended up approaching con-

tract computer manufacturers with offers to sell

most—and possibly all— of its PC factories (Wall

Street Journal, 2008a).

In summary, externally, the rise of new institu-

tionalism throughout the social sciences has en-

ergized scholarly attention in strategy to focus on

how institutions matter. Internally, the frustration

associated with the industry-based and resource-

based views' lack of adequate attention to con-

texts has called for new theoretical perspectives

that can overcome these drawbacks. The result is

the emergence of the institution-based view

(Peng, 2002, 2006; Peng et al., 2008).

Developing the Third Leg of Strategy

o be sure, the influence of the "environment"

(Lawrence & Lorsch, 1969) has long been fea-

tured in the literature. However, strategy re-

search has typically favored a "task environment"

view, which focuses primarily on economic vari-

ables such as market demand and technological

change (Dess & Beard, 1984). Until about the

mid-1990s, researchers rarely looked beyond the

task environment to explore the interactions

Barney (2001) was a response to the critique of the resource-based

view made by Priem and Butler (2001). Overall, Barney (2001, p. 52)

argued that Priem and Butler's primary criticisms were "unfounded." Con-

sequently, Barney's acknowledgment of the validity of this specific criticism

on context speaks volumes about this point.

2009 65Peng, Sun, Pinkham, and Chen

among institutions, organizations, and strategic

choices (as critiqued by Narayanan & Fahey,

2005). Instead, a market-based institutional

framework has been taken for granted, and formal

institutions (such as laws and regulations) and

informal institutions (such as cultures and norms)

have been assumed away as "background." While

some argue that this treatment of institutions as

background conditions is insufficient to gain a

deeper understanding of strategic behavior in de-

veloped economies (Clougherty, 2005; Oliver &

Holzinger, 2008; Scott, 2008b), its deficiency be-

comes more striking when the strategy research

radar starts to probe into the corporate landscape

of emerging economies (Lau & Bruton, 2008).

In other words, when markets work smoothly

in developed economies, "the market-supporting

institutions are almost invisible," according to

McMillan (2007), who went on to argue that

when markets work poorly in emerging econo-

mies, "the absence of [strong market-supporting]

institutions is conspicuous." Coinciding with the

rise of emerging economies in the global economy

since the 1990s, more strategy researchers become

interested in these countries (Hitt et al., 2004;

Lyles & Salk, 1996; Tong, Reuer, & Peng, 2008).

Possessing a number of theoretical tools in their

research repertoire, these scholars often choose to

deploy an institutional perspective, which is be-

lieved to give them the best mileage—relative to

other theories—in advancing strategy research on

emerging economies (Wright, Filatotchev, Hos-

kisson, & Peng, 2005). The fact that an institu-

tional perspective is the most frequently drawn upon

theoretical tool speaks volumes about the particular

usefulness of this perspective when seeking to better

understand the unfolding competition in emerging

economies (Peng et al., 2008).

It is very clear that treating institutions as

"background" (or at best "control variables") will

not advance strategy research on emerging econ-

omies very far. The profound differences in insti-

tutional frameworks between emerging economies

and developed economies force scholars to pay

more attention to these differences in addition to

considering industry-based and resource-based

factors (Khanna & Yafeh, 2007; Li & Peng, 2008;

Zacharakis, McMullen, & Shepherd, 2007). For

example, recent research on the determinants of

multinational subsidiary performance documents

that (a) in developed economies, corporate (firm-

specific) effects are more critical in explaining the

variation in foreign subsidiary performance (con-

sistent with the resource-based view), and (b) in

emerging economies, country effects, which are

proxies for institutional differences, are more sa-

lient (supportive of the institution-based view)

(Makino, Isobe, & Chan, 2004, p. 1028). Overall,

such research articulates the emergence of a third

leg of the strategy tripod. Next, we outline two

core propositions derived from the institution-

based view.

Two Core Propositions

reating institutions as independent variables,

the institution-based view of strategy focuses

on the dynamic interaction between institu-

tions and organizations and considers strategic

choices as the outcome of such an interaction

(Peng, 2002). As shown in Figure 2, strategic

choices are not only driven by industry conditions

and firm capabilities, but are also a reflection of

the formal and informal constraints of a particular

institutional framework that managers confront (Jar-

zabkowski, 2008). As a start, this section outlines the

two core propositions emerging out of the institu-

tion-based view (Peng & Khoury, 2008).

(Boundedly) Rational Choices

While institutions serve many functions, their

most fundamental role is to reduce uncertainty

and provide meaning (Peng, 2006; Scott, 2008b).

Broadly speaking, institutions reduce uncertainty

for different actors by conditioning the ruling

norms of behaviors and defining the boundaries of

what is legitimate. Actors, in turn, rationally pur-

sue their interests and make choices within a

given institutional framework (Lee, Peng, & Bar-

ney, 2007). Uncertainty clouds the judgment of

actors, and the cues that inform decisions and

actions emerge from the relevant institutions, giv-

ing purpose and meaning for decision-makers such

as strategists (Jarzabkowski, 2008). Referring to

Scott's (1995, p. 35) three pillars, compliance or

legitimacy occurs through "(1) expedience (regu-

lative pillar), (2) social obligation (normative pil-

66 AugustAcademy of Management Perspectives

lar), or (3) on a taken-for-granted basis (cognitive

pillar)." Overall, from a rational choice perspec-

tive, we suggest:

Proposition 1: Managers and firms ratio-

nally pursue their interests and make stra-

tegic choices within the formal and infor-

mal constraints in a given institutional

framework.

In theoretical terms, the rationality discussed

here is bounded (but not perfect) rationality (Wil-

liamson, 1985). As economic players, managers

and firms are assumed to be "intendedly rational,

but only limitedly so" (Simon, 1961, xxiv, italics

original)—note the "simultaneous reference to

both intended and limited rationality" (William-

son, 1985, p. 45). One example is the determina-

tion of executive compensation. In the United

States, the (formal) competitive market for exec-

utive talents and the general (informal) tolerance

for larger income inequality have fueled rising

CEO compensation (Kaplan, 2008). In 1980, the

average U.S. CEO made approximately 42 times

the average worker's salary; in 2006, 364 times

(Walsh, 2008, p. 26). In January 2009, news broke

that Wall Street executives paid themselves $18

billion in bonuses in 2008, during which many

financial services firms were being bailed out by

hundreds of billions of taxpayer dollars (New York

Times, 2009). While labeled by President Obama

as "shameful," the executive compensation deci-

sions were understandable based on Proposition 1.

When these firms received bailout funds in late

2008, there were very few strings attached regard-

ing limits on executive bonuses. Therefore, there

was no evidence that any of the firms handing out

large bonuses violated formal law. In the absence

of formal checks and balances, the executives'

decisions were thus rational: They pursued their

interest first (Jensen & Meckling, 1976). Bounded

rationality was also clearly at play: These execu-

tives failed to appreciate the informal (but pow-

erful) norms concerning what was fair (Walsh,

2008), and thus attracted outcries from the media

and the new president.

Formal and Informal Institutions as

Compensatory Structures

Within the institutional literature, economists

have mostly focused on formal laws, rules, and

regulations (La Porta, Lopez-de-Silanes, & Shleifer,

2008), and sociologists have paid more attention

to informal cultures, norms, and values (DiMaggio

& Powell, 1983; Meyer & Rowan, 1977). North

(1990) and Scott (1995) supported a complemen-

tary view where research on the impact of insti-

tutions investigates both formal and informal

components. Extending these insights to strategy

research, we argue:

Figure 2

Institutions, Organizations, and Strategic Choices

Dynamic

s Organizations

Formal and Industry conditions

informal and firm-specific

Strategic

Choices

Institution

interaction

constraints resources

Source: Peng (2002, p. 253).

2009 67Peng, Sun, Pinkham, and Chen

Proposition 2: While formal and informal

institutions combine to govern firm behav-

ior, in situations where formal constraints

are unclear or fail, informal constraints

will play a larger role in reducing uncer-

tainty, providing guidance, and conferring

legitimacy and rewards to managers and

firms.

For example, in the wake of political collapse

in the former Soviet Union, numerous Russian

entrepreneurs attempted to launch and survive by

relying on social ties and connections (known as

blat) within their local networks (Puffer & Mc-

Carthy, 2007). Informal social ties facilitate eco-

nomic exchanges providing continuity for firms

weathering formal institutional transitions (Peng

& Heath, 1996). Further, research on informal

activities such as corruption also shows the impor-

tance of informal institutions in the recognition

and exploitation of opportunities (Webb, Tiha-

nyi, Ireland, & Sirmon, 2009). The common con-

dition in these comparatively unique environ-

ments is the convergence toward informal

institutions in lieu of deficient or absent formal

institutions. Specifically, there is a predominant

reliance on network-based strategies drawing on

informal relationships (Peng, 2003). In other

words, individuals and firms "often find ways of

altering the terms of their formal and informal

contracts to avoid the adverse effects of weak

[formal] contracting institutions" (Acemoglu &

Johnson, 2005, p. 949).

Many observers have the impression that rely-

ing on informal connections is a strategy relevant

only to firms in emerging economies, and that

firms in developed economies pursue only "mar-

ket-based" strategies. This is far from the truth.

Even in developed economies, formal rules make

up only a small (though important) part of insti-

tutional constraints, and informal connections are

pervasive (North, 1990).

Just as firms compete in

product markets, firms also fiercely compete in

political markets characterized by informal rela-

tionships (Oliver & Holzinger, 2008). The best

connected firms are able to reap huge benefits.

Business Week (2007) reported that for every dol-

lar U.S. defense firms spend on lobbying, they

reap $28, on average, in earmarks from Uncle

Sam, and more than 20 firms grab $100 or more.

Such an enviable return on investment (ROI)

compares favorably to capital expenditure (where

$1 brings in $17 in revenues) or direct marketing

(where $1 spent fetches barely $5 in sales). Basi-

cally, the institution-based view suggests that

when a firm cannot be a cost, differentiation, or

focus leader in product markets, it can still beat

the competition on other grounds—namely, the

nonmarket political arena where informal rela-

tionships hold great sway (Oliver & Holzinger,

2008).

Addressing Four Fundamental Questions

very discipline is unified by a set of fundamen-

tal questions, which act to define a field and to

orient the attention of scholars, students, and

practitioners in a certain direction. In strategic

management, Rumelt, Schendel, and Teece

(1994) suggested four fundamental questions: (a)

Why do firms differ? (b) How do firms behave? (c)

What determines the scope of the firm? (d) What

determines the success and failure of firms around

the globe? The industry-based and resource-based

views have addressed these important questions.

Ultimately, the influence of a new perspective

boils down to the new insights it brings on top

of what is already known. What are the new

insights brought by the institution-based view

beyond the answers provided by the industry-

based and resource-based views for these four

fundamental questions?

We will look at each

individually.

Why Do Firms Differ?

A fundamental assumption in strategy research,

especially from the resource-based view, is firm

In contrast to the "(formal) law and economics" tradition in new

institutionalism research, Dixit (2004) proposed a new subfield provoca-

tively named "lawlessness and economics" to leverage the abundance of

informal institutions not specified by formal laws and to explore their

impact on economic behavior. Dixit (2004, p. 9) suggested that "'law and

economics' and 'lawlessness and economics' can be regarded as two mutu-

ally exclusive and jointly exhaustive subfields of the larger field of eco-

nomic governance."

Ingram and Silverman (2002) also organized chapters in their edited

volume, The New Institutionalism in Strategic Management, according to

these four fundamental questions.

68 AugustAcademy of Management Perspectives

heterogeneity (Barney, 1991; Rumelt et al., 1994).

In every modern economy, firms, like individuals,

differ. This question of "Why do firms differ?" thus

seems obvious and hardly generates debate. How-

ever, one of the most influential institutionalism

papers, DiMaggio and Powell (1983, p. 147),

started by asking: "What makes organizations so

similar?" Interestingly, institutional insights on

why firms are so similar can help us address one of

the most fundamental questions in strategy: why

firms differ.

Much of our knowledge about "the firm" is

from research on firms in the United States and to

a lesser extent the United Kingdom, which are

embedded in what is known as Anglo-American

capitalism (Carney, Gedajlovic, & Yang, 2009;

Peng & Jiang, 2009). A smaller literature deals

with other Western countries such as Germany,

France, and Italy, collectively known as continen-

tal European capitalism. While some differences

between Anglo-American and continental Euro-

pean firms have been reported (Carr, 2005), the

contrast between these Western firms and their

Japanese counterparts is more striking (Kotha,

Dunbar, & Bird, 1995; McGuire & Dow, 2009;

Yoshikawa & McGuire, 2008). For example, in-

stead of using costly acquisitions typically found in

the West, Japanese firms extensively employ a

network form of supplier management, giving rise

to the term keiretsu (network). It turns out that

when viewed as a "big picture," firms within one

institutional environment tend to be similar

(DiMaggio & Powell, 1983), but firms differ across

institutional frameworks (Lin, Peng, Yang, & Sun,

2009).

As strategy scholars venture into emerging

economies, more puzzles emerge (Ahlstrom, Bru-

ton, & Yeh, 2007; Bruton, Dess, & Janney, 2007;

Bruton & Lau, 2008; Lau & Bruton, 2008; Li &

Peng, 2008; Young et al., 2008). For example, it is

long established that economic growth can hardly

occur in poorly regulated economies. Yet, given

China's strong economic growth and its underde-

veloped formal institutional structures (such as

ineffective courts), "how can China be achieving

rapid rates of growth, while retaining such an

institutional order?" (Boisot & Child, 1996, p.

607; see also North, 2009, p. 110). Since aggregate

firm growth leads to the growth of the economy,

strategy researchers have endeavored to provide

firm-level answers to address this intriguing puzzle.

A partial answer suggests that interpersonal net-

works (known as guanxi) cultivated by managers

may serve as informal substitutes for formal insti-

tutional support (Peng & Heath, 1996). In other

words, interpersonal relationships among manag-

ers are translated into an interfirm strategy of

relying on networks and alliances to grow the

firm, which, in the aggregate, contributes to the

growth of the economy (Peng & Luo, 2000; Ren,

Au, & Birtch, 2009).

There is a widespread belief that guanxi and the

related network-based strategies are products of

the unique Chinese (or Asian) culture that favors

collectivism. The institution-based view refutes

such reasoning by pointing out that every culture

has a word or two describing what the Chinese

call guanxi (Singh, 2007). The intensification of

informal networks during institutional transitions

is predicted by our Proposition 2, which stresses

the heavier reliance on informal constraints to

combat potential opportunism and facilitate

transactions when formal market-supporting insti-

tutions are underdeveloped. Outside China, the

intensification of informal networks as a driver for

firm strategies has been reported in Argentina

(Guillen, 2000), Indonesia (Dieleman & Sachs,

2006), India (Kedia, Mukherjee, & Lahiri, 2006),

and Russia (Puffer & McCarthy, 2007). Per Prop-

osition 1, managers and firms behave rationally

under these circumstances. Given the prevalence

of institutional nuance in these settings, industry-

based and resource-based views alone will not

foster a sufficiently deep or adequate understand-

ing of the differences between firms (Khanna &

Yafeh, 2007).

Further, the institution-based view predicts

that the more formal market-supporting institu-

tions develop in emerging economies, the more

we can expect a reduced reliance on informal

network-based strategies and a heavier reliance

on arm's-length market-based strategies (Peng,

2003). The history of modern economic develop-

ment throughout the Western world corroborates

this view (Greif, 2006). Preliminary evidence

from China's recent institutional transitions

2009 69Peng, Sun, Pinkham, and Chen

(Guthrie, 1998; Li, Poppo, & Zhou, 2008; Zhou,

Poppo, & Yang, 2008) is also supportive of this

view.

How Do Firms Behave?

Each of the three legs of the strategy tripod (as

shown in Figure 1) sheds light on this question.

The industry-based view suggests that the strategic

task is mainly to stake out a position that is less

vulnerable relative to the five forces within an

industry. The resource-based view posits that firm-

specific capabilities differentiate successful firms

from failing ones.

The institution-based view adds by arguing

that in addition to industry- and firm-level con-

ditions, firms also need to take into account the

influences of formal and informal rules of the

game. For example, consider the Japanese phar-

maceutical industry. The success of innovative

Japanese automobile and electronics products

around the world has led many to naively believe

that all Japanese firms are "innovative." The in-

stitution-based view refutes this thinking, by

pointing out that world-class innovative pharma-

ceutical firms are all Western. Why is there not a

single Japanese pharmaceutical firm that is world-

class? The reason is institutional. The health care

system in Japan does not reward innovative new

drugs (Mahlich, 2009). The Ministry of Health

negotiates drug prices with firms. However, once

fixed, prices are not allowed to rise during drugs'

prespecified shelf life. If prices remain the same

but manufacturing costs decrease because of econ-

omies of scale, then the oldest drugs, not the new-

est, command the highest margins in Japan (Peng,

2009, p. 101). Thus, given these rules of the game

(Proposition 1), Japanese pharmaceutical manag-

ers and firms, being rational, find little incentive

to aggressively invest in R&D. In contrast, West-

ern firms face an institutional environment that

rewards "wonder drugs" with the highest margins,

thus fueling their R&D-intensive strategy (Lu,

Tsang, & Peng, 2008).

In summary, the example of Japanese pharma-

ceutical firms suggests that institutions are not just

"background" conditions and that not all major

pharmaceutical firms should pursue an R&D-in-

tensive strategy. Within the same industry, tre-

mendous diversity exists due to institutional dif-

ferences.

What Determines the Scope of the Firm?

The scope of the firm refers to the product and/or

geographic scope of the firm (Peng & Delios,

2006). Strategy researchers have mostly focused

on the product scope, and international business

scholars have paid more attention to the geo-

graphic scope (Collinson & Rugman, 2007; Lu &

Beamish, 2004; Rugman, 2005). Given our focus

on strategy in this article, this section outlines

work that deals with product scope.

In the United States, the product scope of the

largest Fortune 500 firms has experienced signifi-

cant changes in the postwar era (Davis, Diek-

mann, & Tinsley, 1994). From the 1950s to the

1970s, a broad scope based on a large number of

unrelated product markets was deemed valuable.

However, the consensus since the 1980s favors

product-related diversification and discredits con-

glomeration. This change has been documented

by the dramatic reversal in investor sentiments

toward conglomerate mergers and acquisitions—

"positive in the 1960s, neutral in the 1970s, and

negative in the 1980s" (Matsusaka, 1993, p. 358).

The dominant trend since the 1980s has brought

U.S. firms to focus more on core competencies. In

many respects, the postwar decades were "a round-

trip for corporate America" (Shleifer & Vishny,

1991, p. 51).

How to make sense of this round-trip? Both the

industry-based and resource-based views focus on

product relatedness. The industry-based view

deals primarily with the risks associated with a

single-industry strategy and calls for some moder-

ate diversification for risk reduction purposes. The

resource-based view emphasizes synergy in related

industries and products. Both views converge to

an argument in favor of product-related diversifi-

cation, as opposed to conglomeration. However,

both views have a hard time explaining why con-

glomeration took place in the first place and then

This section focuses on the determinants of the scope of the firm in

developed economies, specifically the United States. See Khanna and Yafeh

(2007), Lee, Peng, and Lee (2008), Peng and Delios (2006), and Peng, Lee,

and Wang (2005) for explications on how the institution-based view sheds

light on what is behind diversification strategies in emerging economies.

70 AugustAcademy of Management Perspectives

why the round-trip was undertaken. There are two

rival interpretations. The first is that the con-

glomeration strategy of the 1960s was a good idea

back then, but was no longer a good idea more

recently. The second is that conglomeration,

whose overall performance was dismal, was a mis-

take from the start, and was corrected more re-

cently—in other words, "corporate America took

a 30-year detour away from efficiency" (Shleifer &

Vishny, 1991, p. 54).

The institution-based view suggests a plausible

explanation tapping into both formal and infor-

mal aspects of the institutional environment

(Peng, Lee, & Wang, 2005; Wan & Hoskisson,

2003). Between the 1950s and the 1970s, the

federal government, through a set of formal con-

straints, inadvertently promoted conglomeration

(Fligstein, 1990). The post-1950 antitrust policies

eliminated horizontal and vertical mergers within

the same industry as viable growth strategies be-

cause they were viewed as "anticompetitive." Re-

luctant to pay out the high cash flows as divi-

dends, managers and firms seeking growth were

forced to look beyond their primary industry by

engaging in unrelated acquisitions, which would

not be challenged by antitrust authorities. In

other words, our Proposition 1 suggests that man-

agers and firms in an earlier era behaved ratio-

nally given the formal institutional constraints.

In terms of the influence of the informal insti-

tutions, the 1950s was the first decade during

which MBA education took off in the United

States. As more MBAs, trained to be multi-

industry general management specialists, en-

tered corporate America, they led to an infor-

mal but powerful norm that viewed a firm as an

economic entity—regardless of its industry

membership—in search of profits, as opposed to

a producer dedicated to a particular industry

(Fligstein, 1990). In short, conglomeration was

in vogue (Abrahamson, 1996), and most large

corporations deviant from this norm were forced

to conform (Davis et al., 1994).

However, by the early 1980s, the formal con-

straints that favored conglomeration changed sub-

stantially. Intraindustry mergers were no longer

critically scrutinized by the Reagan administra-

tion, thus allowing for acquisitions of rivals within

the same industry.

In contrast with the way con-

glomeration was facilitated by heightened anti-

trust policy, the movement for more related diver-

sification, typically within the same industry, has

been enabled by more relaxed antitrust enforce-

ment since the 1980s (Shleifer & Vishny, 1991).

Moreover, we saw a new generation of MBAs

influenced by the newly coined idea of "share-

holder capitalism" (Jensen & Meckling, 1976).

The rise of "shareholder capitalism" directly cor-

related with the demise of the previous legitimacy-

enhancing informal norms in favor of conglomer-

ation (Davis et al., 1994). Consequently, the new

norm—or "fashion" (Abrahamson, 1996)—is to

focus on core product areas.

Overall, the curious round-trip of the product

scope of the firm over time in the United States

cannot be adequately explained by the industry-

based and resource-based views only. The institu-

tion-based view adds a significant piece to the

puzzle by drawing on both formal and informal

aspects of the institutional framework during post-

war decades (Peng et al., 2005). It is the combined

impact and change of these institutional con-

straints that is behind the evolution of the scope

of the firm (Lee, Peng, & Lee, 2008).

What Determines the Success and Failure of Firms

Around the Globe?

This focus on performance, more than anything

else, defines the strategy field (Hambrick &

Chen, 2008; Peng, 2006, 2009; Rumelt et al.,

1994). All three major perspectives that form

the strategy tripod ultimately seek to answer this

question. The industry-based view posits that the

degree of competitiveness in an industry largely

determines firm performance (Porter, 1980). The

resource-based view suggests that firm-specific ca-

This change was not because the U.S. government suddenly changed

its mind. It was in part because of efforts made by new institutionalism

scholars, who promoted "a growing appreciation for transaction costs"

(Williamson, 1985, p. 365). These scholars argued for the efficiency ben-

efits of vertical mergers. If antitrust authorities do not allow a supplier and

a buyer to merge and thus force them to constantly negotiate with each

other, the additional transaction costs are likely to translate into higher

prices for consumers, who will ultimately suffer. Internalization through

mergers and integration may reduce some of these transaction costs and

benefit consumers (Williamson, 1975).

2009 71Peng, Sun, Pinkham, and Chen

pabilities drive performance differences (Barney,

1991).

The institution-based view argues that institu-

tional forces also provide an answer to differences

in firm performance. As firms increasingly venture

abroad, it is difficult to imagine firms that fail to

do their "homework" by getting to know the var-

ious formal and informal rules of the game in

overseas markets will emerge as winners (Glober-

man & Shapiro, 2009; Hitt et al., 2004; Luo &

Peng, 1999). This point is obviously crucial for

firms doing business internationally. However,

firms doing business domestically also need to ex-

ercise significant due diligence regarding the rules

of the game to ensure good performance; other-

wise, firms can be burned in their own home

country. In October 2008, India's Tata Group,

developer of the critically acclaimed Tata Nano

automobile that would retail for just $2,500 (the

cheapest car in the world), painfully scratched its

plans to manufacture the Nano in West Bengal

(Economist, 2008). Evidently Tata's plans, which

would generate thousands of jobs in West Bengal,

failed to take into account the hostile state gov-

ernment and farmers who resented the loss of

farmland for the Nano factory.

Overall, although different schools of thought

often debate with each other, the true determi-

nants of firm performance probably involve a com-

bination of these three-pronged forces, thus calling

for a strategy tripod perspective (Brouthers et al.,

2008; Gao, Murray, Kotabe, & Lu, 2009; Meyer,

Estrin, Bhaumik, & Peng, 2009; Yamakawa, Peng,

& Deeds, 2008; Yang, Jiang, Kang, & Ke, 2009).

In a first comprehensive quantitative test measur-

ing the impact of industry-based, resource-based,

and institution-based variables on firm strategy

and performance, Gao et al. (2009) found that

institution-based variables assert significant ef-

fects on exporters' strategy and performance

"above and beyond the impact of firm competen-

cies and industry factors." Overall, the institution-

based view complements the existing industry-

based and resource-based views to collectively

sustain a strategy tripod.

In summary, these four questions represent

some of the most fundamental puzzles in strategy.

While other questions can be raised, they all re-

late in one way or another to these four (Rumelt

et al., 1994). The institution-based view adds sig-

nificantly new insights to these questions by

bringing institutions to the forefront of the re-

search agenda (Ingram & Silverman, 2002; Peng

et al., 2008).

Discussion

Contributions

y arguing that the institution-based view has

emerged as the third leg for a strategy tripod,

this article makes three contributions: (a) We

identify the roots of the institution-based view,

(b) we outline the two core propositions that go

beyond the relatively simplistic "institutions mat-

ter" assertion, and (c) we illustrate how the insti-

tution-based view adds significant insights to the

four fundamental questions in strategy above and

beyond what we already know based on the in-

dustry-based and resource-based views.

McKinley, Mone, and Moon (1999) argued

that whether a particular theory gains widespread

acceptance depends on its continuity, novelty,

and scope. We believe that the institution-based

view excels in these three attributes, thereby

propelling its recent rise as the third leading per-

spective in strategy. First, by extending new insti-

tutionalism into strategy research, the institution-

based view exemplifies a great deal of continuity

from the larger social sciences literature (Ingram

& Silverman, 2002). Strategy researchers are fa-

miliar with certain elements of new institutional-

ism, such as transaction cost economics (TCE).

Further, the institution-based view exhibits strong

continuity with existing research by being able to

address strategy's four fundamental questions

head on.

Second, by emphasizing the path-dependent

nature of the evolution of institutions and its

impact on strategy, the institution-based view

brings significant novelty to strategy research. Ex-

amples include the puzzling growth of economic

development in China, the curious lack of world-

class innovative pharmaceutical firms in Japan,

and the mind-boggling round-trip of the product

scope of the firm over time in the United States.

New institutionalism research outside strategic

72 AugustAcademy of Management Perspectives

management often examines economic and orga-

nizational outcomes from the deep past (Greif,

2006; North, 1990, 2005).

This approach con-

trasts sharply with the usual "best practice" in

strategy research coming from the industry-based

and resource-based traditions that ignore histories

and contexts (Narayanan & Fahey, 2005). Ac-

cording to Ingram and Silverman (2002, p. 6):

The treatment of history in the new institutionalism

stands in sharp contrast to the normal practice in research

on business strategy. Strategy often suffers from a tyr-

anny of the here and now, a desire to celebrate contem-

porary phenomena and slight historical ones. This ahis-

toricism is one reason why research in strategy struggles

for social-scientific legitimacy. By reveling in current af-

fairs and de-emphasizing their underpinnings in the past,

strategy scholarship often undermines its own claims to

develop explanations that transcend their contemporary

context. In other words, the field of strategy struggles to

develop good theory, because it downplays temporal tran-

sitivity and generalizability.

It is not surprising that scholars who focus on

strategic choices during institutional transitions in

emerging economies are among the first groups of

strategy researchers to pay attention to the impor-

tance of contexts (Luo & Peng, 1999; Peng &

Heath, 1996). Simply focusing on traditional in-

dustry-based and resource-based variables will not

paint a complete picture (Meyer et al., 2009), thus

triggering the quest to probe deeper into institu-

tion-based insights. Of course, scholars interested

in developed economies have long argued for

more attention to institutions (Dobbin & Dowd,

1997; Fligstein, 1990; Oliver, 1997). Both streams

of work have now converged to lead to the insti-

tution-based view.

The institution-based view also excels in its

scope. The many possible institution-based fac-

tors that may influence firm strategy and per-

formance allow for numerous ways of theorizing

and testing, resulting in an expanding and cu-

mulative body of knowledge. As examples, we

use three diverse areas to illustrate the broad

scope of the institution-based view. First, the

institution-based view can add significant in-

sights to the industry-based and resource-based

views by specifying in what contexts and under

what circumstances certain capabilities in cer-

tain industries add value (Brouthers et al., 2008;

Dacin et al., 2007). Second, the institution-

based view can also benefit from cross-fertiliza-

tion with the evolutionary perspective, whose

leading question is "How do firms coevolve with

their environment?" (Lewin & Volberda, 1999,

p. 520). Third, research on multinational enter-

prises (MNEs) can be further propelled by the

institution-based view (Dunning & Lundan,

2008; Kostova, Roth, & Dacin, 2008).

While the institution-based view adds to the

strategy literature, it also contributes to the

larger new institutionalism literature. Focusing

on firm-level strategy, the institution-based

view contributes to institutional economics by

connecting its micro and macro branches. The

micro TCE branch has taken the macro insti-

tutional environment as a given "background"

and focused more on microanalytical aspects

such as opportunism (Williamson, 1975, 1985).

The macro branch of institutional economics

(Greif, 2006; La Porta et al., 2008; North, 1990)

has reminded us that such "background" needs

to be brought to the forefront. Yet institutional

economics tends to talk about rulers and inter-

est groups on the one hand and economic out-

comes on the other hand—leaving the interme-

diate, firm-level strategy-making processes

largely unexplored. In other words, institutional

economics has not focused on how individual

firms respond to institutional frameworks from a

strategy perspective. The institution-based view

of strategy, therefore, directly connects the

firm-level strategy-making processes with both

the micro and macro branches of institutional

economics.

The institution-based view of strategy also

adds to the sociologically oriented institutional

theory by demonstrating the benefits of inte-

grating with efficiency-oriented research. Di-

Maggio and Powell (1991, p. 8) suggested that

the "new institutionalism...comprises a re-

jection of rational-actor models" often found in

efficiency-based research (italics added). While

such a perspective may make sense when study-

ing educational institutions and public bureau-

For example, North, Wallis, and Weingast (2006) recently developed

a conceptual framework for interpreting "recorded human history."

2009 73Peng, Sun, Pinkham, and Chen

cracies, where sociologically driven new insti-

tutionalism research initially arose (Meyer &

Rowan, 1977), more recent work has advised us

not to pit "strategic and institutional," "substan-

tive and symbolic," and "economic and social"

factors against each other (Powell, 1996, p.

295). In other words, initial work may have

"overstated" organizations' urge to adopt super-

ficial conformity at the expense of their quest

for efficiency (Scott, 2008a, p. 431). As insti-

tutional theory moves away from schools and

bureaucracies to assert its influence in strategy,

a focus on efficiency outcomes, which is a hall-

mark of strategy research, becomes necessary

and enriches institutional theory (Oliver, 1997;

Scott, 1987, 2008a).

Finally, the institution-based view of strategy

also holds potential to push the boundaries of the

emerging literature on the varieties of capitalism

(VOC) (Hall & Soskice, 2001) as well as corpo-

rate social responsibility (CSR) (Husted & Allen,

2006). The VOC literature seeks to understand

the diverse topography of institutional landscapes

(Carney et al., 2009; Jackson & Deeg, 2008). On

the other hand, the CSR literature posits that the

relationship between basic economic conditions

and corporate behavior is mediated by institu-

tional constraints (Campbell, 2007). For example,

the recent recall of certain toys made in China

reminds us that firms face the possibility of losing

their legitimacy (and business) if they ignore their

basic CSR concerning product safety (Peng &

Chen, 2009). Both VOC and CSR can be en-

hanced by integrating with the institution-based

view of strategy.

Why the "Institution-Based" View Label for

Strategy?

One interesting point to discuss is why we use

the particular label "institution-based view." Is

it the same as an "institutional view"? Is it the

same as "institutional economics"? Or "institu-

tional theory"? What is the value of a new label

for strategy?

The adoption of the term "institution-based

view," coined by Peng (2002), stems from the

confusion in the literature and the decision to

avoid an interdisciplinary turf battle.

First, the

proliferation of "institutional" research has pro-

duced some confusion. In our (impartial scholarly)

view, broadly speaking, any theory that invokes a

new institutionalism framing can be legitimately

labeled "institutional theory." However, in the

literature the term "institutional theory" increas-

ingly refers to the sociological version of the insti-

tutional literature (DiMaggio & Powell, 1983).

The economic version, represented by North

(1990), is often labeled simply "institutional eco-

nomics." Because of the interdisciplinary nature of

strategy research, using either label ("institutional

theory" or "institutional economics") would cause

confusion. Furthermore, there has been significant

interpenetration between economics and sociol-

ogy. For example, Scott (1995) has long acknowl-

edged North's (1990) influence in economic soci-

ology. North's (2005) more recent work has

explicitly discussed "stickiness" (resistance to

change) as part of cognition, which notably bears

reciprocal correspondence to Scott's (1995) third

(cognitive) pillar. Some economists have now

worked on typically "sociological" constructs such

as culture and social capital (Guiso, Sapienza, &

Zingales, 2006) and drawn extensively on the

sociological literature. Therefore, in response to

reviewer pressures from both sides, Peng (2003, p.

276) clarified:

Although the economic (e.g., North, 1990) and socio-

logical (e.g., Scott, 1995) versions of institutional theory

have some differences, they are broadly complementary

(Scott, 1995). Following Peng and Heath (1996,

p. 499), who suggest that "a combination of the two is

natural" for management research, here I draw on the

best available insights from the institutional literature,

regardless of the disciplinary background.

During the review process, Peng and Heath (1996), Peng (2003), and

Peng et al. (2005) were pushed by some economically oriented reviewers to

declare that our theoretical background was "institutional economics,"

which should have nothing to do with (the sociological) "institutional

theory." At the same time, we were pushed by some sociologically oriented

reviewers to declare our "party line" by following the sociological version of

"institutional theory." As part of management scholarship, our work was

indeed inspired by both the economic and sociological versions of the

institutional literature. To remain intellectually honest, we felt uncomfort-

able declaring allegiance to any disciplinary "party line" at the expense of

another discipline. Of course, other strategy scholars may choose not to

blend these lines of reasoning in order to strive for greater consistency—at

least in relation to the literature in one discipline (Estrin, Baghdasaryan, &

Meyer, 2009).

74 AugustAcademy of Management Perspectives

Innovation is often forced by necessity. The in-

novative "institution-based view" label is forced

by the necessity to get the papers accepted by

reviewers while advancing strategy research, and

is the fruit of an interdisciplinary dialogue or

"trade" (Peng, 2004). The value of the new label

is that this is a progeny the strategy field can lay

claim to as its own (Peng & Khoury, 2008). We

need to have the self-confidence to declare that

we are doing neither second-class economics nor

second-class sociology, but first-class strategy re-

search. Advocated by Peng (2002, 2006, 2009;

Peng et al., 2008), the "institution-based view"

label has helped us differentiate from existing

work in economics and sociology, and has at-

tracted a series of additional papers that carry this

research forward (Gao et al., 2009; Lee et al.,

2008; Lu et al., 2008; Mahlich, 2009; Meyer et al.,

2009; Peng & Jiang, 2009; Peng & Pleggenkuhle-

Miles, 2009; Yamakawa et al., 2008; Yang et al.,

2009).

Future Directions

Institution-based research in strategy is likely to

develop in at least three directions. First, the

institution-based view, for the first time, enables

strategy scholars to confront important public pol-

icy issues. Because institutional frameworks have

typically been assumed to be "background," strat-

egy researchers have largely shied away from im-

portant public policy issues (Barney, 2005). De-

spite the popularity of TCE in strategy research,

we as a field have almost totally failed to pay

attention to Williamson's (1975) subtitle: Anti-

trust Implications.

The upshot? Microsoft, an oth-

erwise brilliant firm, the poster child for the in-

dustry-based and resource-based views, ended up

in court for alleged antitrust violations. Its alleged

crime? Not voluntarily helping its competitors (!).

It is clear that Microsoft strategists trained by

the industry-based and resource-based views

failed to appreciate the rules of the game that—

rightly or wrongly—govern a leading firm dif-

ferently than nonleading firms. While Mi-

crosoft, its accusers, and its defenders could

vehemently argue (Liebowitz & Margolis, 1999;

Schmalensee, 2000), Microsoft's failure to in-

clude antitrust issues on its strategy radar

screen, until it was sued, was an evident failure

in strategic due diligence. In the long run, strat-

egy's tendency to eschew engagement with ma-

jor public policy issues may keep the field on the

sidelines in debates about issues in which it can

potentially contribute (Peng, 2003, p. 275). We

hope the institution-based view will help over-

come this tendency.

A second direction is to study how firms adapt

to institutional changes and regulatory shifts

(Peng, 2003; Walker, Madson, & Carini 2002).

The ongoing global economic crisis and firms'

strategic responses will prove to be fertile ground

for such research. For example, some U.S. politi-

cians blame the current financial crisis on Con-

gress' 1999 deregulatory decision to repeal part of

the Glass-Steagall Act of 1933 and a 2004 SEC

rule that allows more leverage, and now call for

more regulation. Strategy scholars need to answer

why five leading investment banks folded while

most hedge funds and private-equity companies

have had fewer problems under the same deregu-

lation policy. Why have GM and Ford sold large

numbers of their desirably fuel-efficient cars in

Europe but not in the United States? Clearly, it is

not because they do not possess capabilities in

fuel-efficient technologies. Their lack of incentive

to market such cars in the United States is under-

pinned by an institutional framework character-

ized by lower taxes on gasoline. Conversely, their

aggressive marketing of such cars in Europe is

fueled by another institutional framework cen-

tered on heavier taxes on gasoline and stronger

discouragement of consumption and pollution

(Wall Street Journal, 2008b).

A third direction is to develop stronger mea-

sures of institutions, probably first arising out of

descriptive, qualitative, and historical research

but ultimately quantifying their dimensions (La

Porta et al., 2008). Criticizing the literature, Go-

mez-Mejia, Wiseman, and Dykes (2005, p. 1512)

argued:

A complete search of all Strategic Management Journal publications

since its first volume in 1980 yielded only a grand total of one (!) article

with "antitrust" in its title (Clougherty, 2005) and one more article with

"antitrust" in its abstract (Shleifer & Vishny, 1991).

2009 75Peng, Sun, Pinkham, and Chen

The danger of extending institutional theory too broadly,

however, such that each institutional context is different,

is that our application of the theory becomes atheoretical,

leading us down a path toward highly stylized idiosyncratic

examples that prevent the development of a generalizable

theory of the firm. In our view, there must be a balance

between recognizing unique contextual factors and the

theory.

We agree. We are not advocating "dense descrip-

tions" and "case studies" for every paper. The

ultimate aim for proponents of the institution-

based view will be to demonstrate how institution-

based variables matter. The potential institutional

variables include institution relatedness (Peng et

al., 2005), institutional distance (Chan, Isobe, &

Makino, 2008; Estrin, Baghdasaryan, & Meyer,

2009; Xu & Shenkar, 2002), legal origins (La

Porta et al., 2008), and corruption indexes (Cu-

ervo-Cazurra & Genc, 2008; Lee & Oh, 2007).

However, institution-based variables tend to be

coarse-grained and universal—at least within one

context. In other words, since the rules of the

game within one institutional framework, in the-

ory, apply to all firms within its jurisdiction, how

can certain firms better use these rules to outper-

form the rest? For example, intellectual property

regimes centered on patents as a specific rule of

the game are generally argued to facilitate more

innovation and better performance. However,

empirical links among R&D, patenting, and per-

formance of specific firms are tenuous (Khoury &

Peng, 2008).

It is here we need to reemphasize that the

institution-based view is one of the three legs of

the strategy tripod— but not the only leg. It is in

combination with the industry-based and resource-

based views that the institution-based view can

add its value (Gao et al., 2009; Meyer et al., 2009;

Oliver, 1997). In the case of patenting, the indus-

try-based view suggests that patents contribute

more to leading firms in certain industries (such as

pharmaceuticals) than in other industries (such as

electronics) (Bessen & Meurer, 2008, p. 18). The

resource-based view argues that it is not capabili-

ties in R&D per se that drive performance (Git-

telman, 2008). It may be the firm-specific, in-

house patent law expertise, in combination with

R&D prowess, that leads to superior firm perfor-

mance (Somaya, Williamson, & Zhang, 2007).

Finally, in terms of teaching and learning, we

believe that incorporating the institution-based

view will make the strategy teaching and learning

experience more insightful, realistic, and bal-

anced. Table 2 outlines a series of important in-

stitution-based topics and debates that are typi-

cally missed or ignored in strategy teaching at the

undergraduate and MBA levels. We recommend

that they be added. Otherwise, we are doing the

practitioner community a disservice by training

Table 2

Institution-Based Topics Recommended for Strategic Management Teaching

Areas in Strategy Teaching Recommended Institution-Based Topics and Debates

Industry-based view (ﬁve forces) ● Formal: Competition policy (e.g., Microsoft's antitrust issues)

● Informal: Norms governing a cost leadership strategy (e.g., the Wal-Mart effect)

Resource-based view ● Government intervention in the determination of value (e.g., bailouts in 2008–2009)

Market entry ● Antidumping laws in host countries

Competitive dynamics ● Collusion versus competition

Strategic alliances ● Antitrust considerations (especially when collaborating with competitors)

Mergers and acquisitions ● Antitrust scrutiny, which may come from abroad (e.g., the proposed merger of two U.S.-based ﬁrms, GE and

Honeywell, was torpedoed by the EU)

Product diversiﬁcation ● Persistence of business groups (conglomerates) in emerging economies

Organization structure ● Location of key units (such as R&D)—do they have to be in the home country?

Corporate governance ● Formal laws and informal norms governing executive compensation (e.g., Wall Street bonuses in 2008–2009)

Corporate social responsibility ● Formal: Environmental regulations ("race to the bottom" versus "race to the top")

● Informal: Norms governing domestic and overseas social responsibility

Source: Adapted from text in Peng (2009).

76 AugustAcademy of Management Perspectives

would-be strategists solely in the tradition of in-

dustry-based and resource-based views. Imagine

the shock that Microsoft's strategists experienced

when informed that they were being sued by an-

titrust authorities, after these strategists had

done everything "right" by the playbooks of the

industry-based and resource-based views.

Teaching of the industry-based view and re-

lated topics such as competitive dynamics, strate-

gic alliances, product diversification, and acquisi-

tions needs to take into account the role of formal

competition (antitrust) policies (Clougherty,

2005). Teaching topics such as five forces, corpo-

rate governance, and CSR will be significantly

enriched if we engage students with debates on

the informal (but powerful) norms regarding a

variety of issues. For example, how low can a

Wal-Mart-type low-cost strategy go without at-

tracting public criticism? How high can executive

compensation be set without provoking media

outcries (Kaplan, 2008; Walsh, 2008)? How much

investment can be made overseas without endan-

gering firms' social responsibility toward domestic

employees, communities, and governments (Peng

& Pleggenkuhle-Miles, 2009)? As a dynamic, fast-

moving field, strategy will have no shortage of

new institution-based topics and debates that can

be brought into the classroom.

Conclusion

hirty years is a tender age for the relatively new

discipline of strategic management (Hambrick

& Chen, 2008). The latest leading theoretical

perspective in strategy—the institution-based

view—has an even younger age of approximately

ten years within the strategy literature. Overall,

the rise of the institution-based view can be

viewed from a simple SWOT analysis. In terms of

O and T, externally, the rise of new institution-

alism throughout the social sciences has created

an opportunity. Internally, further development of

the strategy field has been threatened by a lack of

attention to crucial contexts exhibited by the

existing literature. Strategy as a field needs to

embrace the proposition that "institutions matter"

and to push forward to shed light on how institu-

tions matter. In terms of S and W, the institution-

based view excels in its continuity, novelty, and

scope as its leading strengths. Researchers also need

to be aware of its weaknesses (such as being too

broad and too encompassing) and endeavor to

overcome them.

In short, it is the emergence of the third leg

that sustains a strategy tripod. If strategy is truly a

discipline about the "big picture" (as many of us

like to say in our teaching), then the institution-

based view, based on its explicit link between

broad institutional issues and firm strategy and

performance, will help substantiate strategy's "big

picture" claim.

More than 20 years ago, Scott (1987) labeled

the institutional theory literature to be in its ad-

olescence.

Within the field of strategic manage-

ment, we can make the case that the institution-

based view is currently in its adolescence as the

third leading perspective. In conclusion, it is use-

ful to quote Scott's (1987, p. 510) conclusion:

Adolescents have their awkwardness and their acne, but

they also embody energy and promise. They require en-

couragement as well as criticism if they are to channel

their energies in productive directions and achieve their

promise.

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... Formal institutions have a direct impact on the behaviour of firms and managers as they directly prohibit specific activities or alter their outcomes (Scott, 1995(Scott, , 2008. Accordingly, extensive research on the interplay between resources and formal institutions provides evidence that formal institutions affect the value of managerial resources (Peng, Sun, Pinkham & Chen, 2009). Hence, we expect formal gender-related institutions to alter the value of resources of female managers. ...

Felix Hoch

Research investigating the relationship between firm performance and gender diversity has so far reported conflicting evidence: Some studies find firm performance to benefit from gender diversity, others find negative results or no effect at all. Taking this inconclusive evidence as a sign for moderators influencing the effect of gender diversity on firm performance, we investigate the moderating influence of institutions on this relationship. Using data on 7,661 firms in 71 countries, we employ a multilevel linear regression with fixed effects to examine the moderating effect of formal as well as informal institutional characteristics. We find that institutions indeed moderate the relationship between gender diversity and firm performance. In particular, informal institutions seem to moderate the effect of diversity on market valuation (Tobin's Q), while formal institutions moderate the effect of gender diversity on firm financial performance (ROA). These results have important theoretical implications for the academic debate on gender diversity and firm performance as well as practical implications for both businesses and lawmakers.

... The strategy tripod perspective suggests that the firm (resource) and the market (industry) based views of the firm alone, while powerful, are not sufficient to explain the complexity of entrepreneurship. Instead, the combination of the three legs of the strategy tripod (firm, markets and institutions) provide a better understanding of firm strategies (Peng et al., 2009;Yamakawa, Peng, & Deeds, 2008). The rise of the institution-based view as an influential theoretical tool is an outcome of Kiggundu, Jørgensen, and Hafsi's (1983) call for new theoretical tools to capture the complex and rapid change in the organizationenvironment relationships in emerging economies. ...

The chapter explores the change in educational philosophies application through the rapid adaptation of simulations and technologies

... Companies' legitimacy processes and social behaviours depend heavily on the institutional environments' characteristics, which can force them to adopt shared rules and norms (Campbell, 2007), meaning, that beyond firm-specific characteristics, institutions can also influence corporate decision-making processes and strategy (Peng et al., 2009). Not all institutional environments have the same quality levels, and, under low quality conditions, informal institutions can often emerge, which make the relationship between legitimacy and legality more complex (Palmas et al., 2014;Webb et al., 2009Webb et al., , 2013. ...

As Legality Rating (LR) for Italian companies was only recently introduced, it is an under-investigated phenomenon that is difficult to univocally interpret or structure within a well-defined theoretical framework. Given that certain governance characteristics can drive strategic decisions and have a crucial role to play in the legitimacy process, this paper sets out to explore how governance can influence a firm's attitude and signal its socially responsible behaviour, in terms of legality. We investigated both corporate and regional governance antecedents using a sample of 1049 private Italian firms with a listed LR in 2016. We analysed hierarchical linear models with the LR score as a dependent variable, ranging from one to seven points. As a first in governance studies, we adopted the European Quality of Government Index to investigate differences in regional-level governance. We found that board size, ownership concentration, foreign ownership and being a cooperative were positively related to LR. Our results show that, where governance features make firms more inclined to safeguard their reputation, the LR is higher. Thus, rather than encouraging changes oriented to greater respect for the principles of legality, the LR primarily highlights companies that already behave honourably. Finally, a battery of robustness tests and further analyses on the role of regional governance quality reveal a substitution effect between regional and corporate governance.

... Peng et al. (2008) discuss formal; regulatory; and informal, normative and cultural dimensions. Organizations are legitimate when they respond and behave according to pressures exerted by external stakeholders and established institutions, which reduce uncertainty and define boundaries (Ketokivi and Schroeder, 2004;Peng et al., 2009). Thus, the institutional factors affecting organizational decision-making can be seen as either hindrances or enablers. ...

Olena Klymenko
Lise Lillebrygfjeld Halse

The purpose of this paper is to investigate how sustainable practices in supply chains are affected by the COVID-19 pandemic through the lens of institutional theory. The study suggests that during the COVID-19 pandemic, companies tend to focus on short-term decisions and economic issues. The long-term focus on sustainability has, however, increased at the cluster level. The research also indicates that the pandemic has led to the development of new business routines that may transform institutional norms. The diversity of institutional contexts can, on the one hand, drive sustainability transitions through pressures and supportive programs but, on the other hand, also hinder the development of sustainability thinking.

... It is well-acknowledged in the literature that the host country institutions influence a firm's strategy and performance (Buckley & Munjal, 2017;Chan, Isobe, & Makino, 2008;Peng, Sun, Pinkham, & Chen, 2009;Scott, 1995;Daude & Stein, 2007;Julio & Yook, 2016;Zhang et al., 2011). Existing studies have revealed the direct effect of host countries' institutional quality on CBA completion (Zhang et al., 2011(Zhang et al., , 2017. ...

Zhang Jianhong

This paper contributes to the literature on emerging multinational enterprises (EMNEs) by revealing how the conditions in their home countries influence their cross-border acquisitions. The study focuses on the liability of emergingness (LOE). It develops an integrative theoretical framework based on neo-institutional theory and the concept of legitimacy to explain the relationship between LOE and EMNEs' cross-border acquisitions completion and the situational conditions that shape this relationship. The study uses data on 27,648 announced acquisitions conducted by EMNEs from 24 emerging economies in 175 host countries to estimate the relationships. The results reveal that, while two types of LOE (economic and institutional) have negative impacts on cross-border acquisition completion, the negative impacts become less important or disappear when the host country's unemployment rate is too high, and the host country's institutional quality is too low. This finding suggests that EMNEs can mitigate the negative effect of the LOE by carefully choosing a good time and a suitable location to enter into these transactions.

... Speculation about an "institutional void" helped popularize the argument, highlighting the untapped business opportunities that are up for grabs for those who apply strategies that "fit emerging markets" (Khanna et al., 2005). In the search for fitting strategies, Peng pushed early and consistently for institution-based strategy research (Peng, 2002(Peng, , 2003(Peng, , 2014Peng et al., 2009). In this framework, formal and informal institutions not only influence industry-based competition as well as firm specific resources and capabilities, but also directly determine the suitability of distinct strategies. ...

Sonja Opper

Almost two decades ago, Asia Pacific Journal of Management , 19(2/3): 251–267 Peng (2002) called attention to the promise of institution-based strategy research. The puzzle was to explain differences in strategies around the globe. Building on the work accomplished so far, I ask: Can institution-based strategy succeed when embedded in inappropriate social networks? Institutions and networks are usually studied as separate phenomena, yet each also defines the capabilities of the other. Institutions shape social network contacts and structures because institutions define opportunities for affiliation and the relative value of distinct contacts and network structures. At the same time, social networks shape institutions and organizations' capabilities for institutional innovation. Thus, the social network in which a manager or organization is embedded can either amplify or counteract success in implementing institution-based strategy. After I review the co-constitutional nature of institutions and networks and discuss a number of sample studies using China as a productive research site, I sketch questions that need to be answered to more tightly integrate network behavior into institutional strategy research, and discuss four emerging areas of research into how network-strategy fit affects performance: (1) network fit to adaptive strategy, (2) network fit to change strategy, (3) institutional dynamics and network-strategy fit, and (4) institutional distance and network-strategy fit.

Fábio Lotti Oliva
Pedro Marins Freire Teberga
Lucas Israel Oliveira Testi
Miguel Pina Cunha

Startups in the Brazilian organizational scenario have been growing fast and understanding these startups' internationalization strategies have been highly relevant. Such startups have developed a social, environmental, and economic impact solution that had the support of government programs in its internationalization process, seeking to understand the impact of these programs. This article has sought the following: (1) identify the risks and critical success factors in the internationalization process of born global startups of industry 4.0, (2) analyze the social, environmental, and economic aspects. The authors have based the methodology on a single-case analysis, a global startup - Asel-Tech, a technology and automation company focused on developing and providing solutions for leak detection in oil pipelines and derivatives. Among the main results, we highlight: (1) the proposition of a model for risk and critical success factors analysis in the internationalization of born global startups of industry 4.0, (2) the analysis from the institutional view perspective on the strategy, on the social, environmental, and economic aspects of digital manufacturing. For professionals, the article provides a model to assist startups in future internationalization processes.

Mehmet Bagis

Bu araştırma 1991-2021 arasında dinamik yeteneklerin entelektüel yapısını incelemeyi amaçlamaktadır. Araştırmanın verileri Web of Science veri tabanındaki veri süzme kriterleri çerçevesinde ulaşılan 7.792 çalışmadan oluşmaktadır. Veriler, VOSviewer yazılımıyla analiz edilmiş ve araştırmada bibliyometrik analiz tekniklerinden ortak kelime analizi kullanılmıştır. Bulgular 1991-2001 arasında dinamik yetenekler araştırmalarına kaynak temelli görüş, kaynaklar, yetenekler, rekabet avantajı ve inovasyon kavramlarının hâkim olduğunu göstermektedir. 2002-2011 arasında ise dinamik yetenekler, kaynak temelli görüş, rekabet avantajı, performans, bilgi temelli görüş, bilgi yönetimi, örgütsel öğrenme, stratejik ittifaklar, inovasyon ve özümseme kapasitesi gibi kavramlar hâkim duruma gelmiştir. Son olarak 2012-2021 arasında ise dinamik yetenekler, kaynak temelli görüş, bilgi yönetimi, örgütsel çift yeteneklilik, araştırmacı ve fırsatçı yenilikler, rekabet avantajı, açık inovasyon, özümseme kapasitesi, firma performansı, girişimcilik, girişimsel yönelim, iş modeli, iş modeli inovasyonu, örgütsel öğrenme, uluslararasılaşma, pazarlama yeteneği, ittifaklar, tedarik zinciri yönetimi, büyük veri, dijitalizasyon, dijital dönüşüm, örgütsel çeviklik ve esneklik, mikro temeller, liderlik ve yönetişim kavramları öne çıkmıştır. Bu bulgular temelinde çalışma, gelecek araştırma önerileriyle tamamlanmıştır.

Our research builds on existing literature examining institutional voids in emerging economies. Using data from two cases of mining FDI in Argentina, we conceptualize the triggers, processes and consequences of informal institution-building by a social movement. We found the cases to exhibit different 'community sustainability orientations', enabling two contrasting strategies, 'bargaining' and 'gatekeeping', to address the existing institutional void. This led to the development of new formal institutions – regulated CSR for the former and legal ban on mining operations for the latter case. Our study thus offers insights into the processes through which institutional entrepreneurship by social movements influences MNEs.

M.W. Peng
Theodore A. Khoury

Critics suggest that the industry-based view has the five forces framework and the resource-based view converges on the VRIO framework, yet what specific propositions or frameworks does the institution-based view of IB strategy have? This article addresses this important and legitimate question, by identifying and articulating the two core propositions underpinning the institution-based view: (1) individuals and firms act rationally according to formal and informal institutional structures; (2) when formal institutions fail, informal institutions regulate exchange relationships. In other words, this article endeavours to advance the institution-based view of IB strategy by unbundling the broad proposition that 'institutions matter'. It leverages and extends contemporary research to illustrate the explanatory and predictive power of the two propositions underpinning the institution-based view of IB strategy.

Paula Jarzabkowski

Research on top managers' strategizing behavior has addressed how they shape either the structural context or the interpretations of organization members. I offer a struc-turation theory framework integrating these two partial explanations and treating strategy shaping as socially dynamic. A qualitative seven-year analysis of top managers in three universities shows a sequential pattern of shaping strategy first in the action and then in the institutional realm, and also a simultaneous pattern of shaping strategy in both realms at once. Both patterns are successful in weakly institutionalized strategy contexts, whereas the simultaneous pattern is more successful in strongly institutionalized strategy contexts.

Michael C. Jensen
William H. Meckling

This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.

Donald C. Hambrick
Ming-Jer Chen

Numerous histories of the early days of individual academic fields have been written, but scholars generally have stopped short of proposing generalizable frameworks or testable propositions for why these focal fields survived and prospered. We integrate logics from social movement theory and the sociology of science to model the rise of an aspiring academic community as an admittance-seeking social movement consisting of three major elements: differentiation, mobilization, and legitimacy building. We offer propositions based on in-depth analysis of the rise of a specific field-strategic management-within the administrative sciences.

This paper examines the role of institutional analysis within the field of international business (IB) studies. Within IB, institutions matter, but the view of institutions tends to be "thin", utilizing summary indicators rather than detailed description, and thus approaches institutions as unidimensional ''variables" that impact on particular facets of business activity. This paper argues that IB research would be usefully advanced by greater attention to comparing the topography of institutional landscapes and understanding their diversity. A number of alternative case-based approaches are outlined that draw on a growing "comparative capitalisms" literature in sociology and political science. The paper develops a number of empirical examples to show the utility and limits of these approaches for IB scholars.

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Source: https://www.researchgate.net/publication/241354238_The_Institution-Based_View_as_a_Third_Leg_for_a_Strategy_Tripod

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