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Institutional perspectives in HRM and MNC research: a review of key concepts.


The study of institutions traverses the academic fields of economics, sociology, political science and organisational theory. The common denominator for institutionalism in various disciplines appears to be that 'institutions matter' (Kaufman, 2011). An underlying assumption in the study of institutions is that organisations are deeply embedded in the wider institutional context (Powell, 1988; DiMaggio & Powell, 1991); thus, "organisational practices are either a direct reflection of, or response to, rules and structures built into their larger environment" (Paauwe & Boselie, 2003, p. 59). This institutional environment is the source of legitimation, rewards or incentives for, as well as constraints or sanctions on, organisational activities (Meyer & Rowan, 1977). The relevance of institutional theory to human resource management (HRM) was initially derived from this view (Rosenzweig & Singh, 1991).

The institutional approach used in organisational analysis is referred to as organisational institutionalism (Greenwood et al., 2008). It deals with the overall question, "What does the institutional perspective tell us about organisational behaviour?" Institutional theory is a useful lens to analyse organisational behaviour because it can respond to empirical mismatch, where "what we observe in the world is inconsistent with the ways in which contemporary theories ask us to talk" (March & Olsen 1984, p.747). The theory is credited with its emphasis on the contextual, historical and processual aspects in which organisational actions take place (Currie, 2009).

Institutional theory is widely used in organisational analysis (Bjorkman, 2006). Despite this, there is no consensus among scholars about the relevance of some of the key concepts of institutional theory to organisational research. For instance, Kostova et al. (2008) by offering a set of provocations that challenge the validity of traditional neoinstitutionalism in the context of multinational companies (MNCs) argue that concepts such as organisational field, isomorphism, decoupling and legitimacy are irrelevant in the MNC context. There are various points of divergence among institutional scholars over the theoretical and empirical measurement of core institutional concepts (Dacin, 1997). In the introductory remarks of the special issue of the Academy of Management Journal, which focused on 'organisations and their institutional environment', Suddaby et al. (2010) noted that some of the key constructs of institutional research are often taken for granted, and that these constructs need to be defined in relation to the context of the research. This seems to be particularly important in the context of MNCs, as there have been ongoing arguments for and against the relevance of some of the key concepts of institutional theory to MNC research. This paper, therefore, aims to review key concepts of institutional theory in relation to HRM, and in the context of MNCs, and to highlight the issues researchers may consider when applying institutional theory to HRM and MNC research.

The remainder of this paper is as follows. The next section provides a brief history of the development of institutional theory, and how the theory was initially linked to industrial relations (IR) and HRM research. Then, key concepts of institutional theory are reviewed in relation to HRM, and in the context of MNCs. The key concepts considered for review include institutions, isomorphism, organisational field, legitimacy, institutional logics, institutionalisation, decoupling and institutional entrepreneurship. The paper concludes by highlighting some implications of the key concepts of institutional theory for future HR and MNC research.


The roots of institutional theory can be traced back to the 19th century (Scott, 1995). In the early years of its development, institutional theory was closely associated with neo-classical economics theory (Hodgson, 2004; Sayilar, 2009), resource dependence theory and ecology theory (Greenwood et al., 2008), and has more recently been associated with structuration theory (Scott, 2008).

Institutional theory gained prominence in organisational sociology in the 1980s when a group of US-based sociologists (eg Meyer & Rowan, 1977; Zucker, 1977; DiMaggio & Powell, 1983; Meyer & Scott, 1983), presented themselves as neo-institutionalists. Two seminal papers on institutional theory were released in 1977: Meyer and Rowan (1977) and Zucker (1977). Meyer and Rowan (1977) embraced the view of the institution from a macro perspective, seeing it as a web of cultural roles, whereas Zucker's (1977) study was focused on the micro foundations of institutions, with the power of cognitive aspects guiding the behaviour of individuals (Scott, 2008). Studies that followed these seminal papers (eg DiMaggio & Powell 1983; Scott & Meyer, 1983) focused on the macroanalytical perspective in understanding organisations (Scott, 2008). DiMaggio and Powell (1983) brought a new dimension to the discussion of institutions by introducing isomorphism (structural similarity), while Meyer and Scott's (1983) study proposed that both technical and institutional forces shape organisations. These contributions are often regarded as substantive work on the institutions-organisations nexus in the context of organisational theory.

Institutional research in the 1950s is often referred to as 'old institutionalism', while the work on institutional theory in the late 1970s and early 1980s is referred to as 'new institutionalism'. 'Old institutionalism' is concerned with how concrete social processes regulate social behaviour (Selznick, 1949), focusing on how power, coalitions, and informal structures influence organisational behaviour (Greenwood & Hinings, 1996). In contrast, the focus of 'new institutionalism' is on the cognitive processes that create the taken-for-granted structures that establish legitimacy around certain ideas. DiMaggio and Powell (1991, pp. 12-13) draw a distinction between, and provide a comprehensive comparison of, old and new institutionalism. Institutional theory has developed significantly since they made this distinction.

According to Bray et al. (2009), the link between institutional theory and IR can be traced back to the work of scholars such as Webb (1894) and Commons (1913). Since then, institutional theory has widely been applied to IR research. However, consistent with mainstream IR research, institutional theory-IR research has also been largely empirically descriptive, contributing little to theoretical development in the institutional theory-IR nexus. HRM scholars started to recognise the applicability of institutional theory to HRM research in the early 1990s. Wright and McMahan (1992) were first to note this. Following this, Oliver (1997) and Purcell (1999) incorporated elements of the institutional framework in relation to HRM in their research. Paauwe and Boselie (2003) were first to apply new institutionalism systematically in HRM, and developed an initial proposition for HRM and institutional research. Since then, institutional theory has been applied in a plethora of HRM studies. Nevertheless, until the mid-2000s, institutional theory-HRM research viewed organisations as products of social constructions.

Institutional theory has widely been applied in research into MNCs or international HRM (Bjorkman, 2006; Kostova et al., 2008). Issues covered in international HRM with the help of institutional theory include, but are not limited to, isomorphic pressures from host-country and home-country institutional environments--such research applies concepts such as institutional distance and institutional duality (Ferner & Quantanilla, 1998; Kostova & Roth, 2002; Rosenweig & Nohria, 1994); the transfer of HRM practices from headquarters to overseas subsidiaries and the role of headquarters management in the transfer of practices (Gooderham et al., 1999); and the varying degrees of interaction between actors and institutions--for instance, the role of subsidiary managers in the transfer of HRM practices (Almond et al., 2005).

Having provided an overview of the development of institutional theory and its early links to industrial relations/HRM research, the paper will briefly outline the salient features of institutional theory in relation to HRM and MNCs.



There is no consensus among institutionalists on the meaning of the term 'institution' (DiMaggio & Powell, 1991). This has created space for scholars to define institutions in different ways and depending on the context in which they are being studied (Vatn, 2005). North (1990), elaborating on the definition of institutions, states that they could take the form of formal rules, informal norms and their enforcement characteristics. According to his definition, formal institutions include written policies, laws and regulations, political rules, economic rules and contracts. On the other hand, informal institutions include codes of conduct, norms and behaviour and conventions, which often emanate from a society or culture (North, 2005). One of the distinctions made between formal and informal institutions is that the former are intentional, created and written, while the latter are unwritten, and often evolve over time (North, 1990). However, institutions are mutually dependent: informal institutions often result from formal institutions (North, 1990).

Scott (1995) offers a more encompassing definition for institutions. According to him, "institutions consist of cognitive, normative and regulative structures and activities that provide stability and meaning to social behaviour. Institutions are transported by various carriers--culture, structures, and routines--and they operate at multiple levels of jurisdiction" (Scott 1995, p. 33). Institutions not only exist at multiple levels but take multiple forms: ranging from handshakes at the interpersonal or individual level to those like the United Nations World Food Program at the macro level (Jepperson, 1991), and they may potentially be contradictory (Friedland & Alford, 1991). Although institutions exist at all levels, organisational institutionalism is largely interested in institutions and institutional processes that exist at the organisational or field levels (Greenwood et al., 2008). Besides incorporating both the regulatory and cultural view of institutions (similar to North's formal and informal institutions), Scott's (1995) definition of institutions "increases specificity but encourages continued application of institutional theory to multiple levels, topics, and settings" (Greenwood et al., 2008, p.32). For these reasons, in order to conduct a comprehensive analysis of the interactions between the institutional environment and HRM practices in MNCs, there is a need to adopt Scott's (1995) definition of institutions.

The components of Scott's (1995) definition--regulative, cognitive and normative institutions--are often referred to as the three pillars of the institutional environment. The regulatory component of the institutional environment reflects laws and rules in the environment that promote particular behaviours and suppress others, eg legislation governing the employment relationship (Kostova & Roth, 2002). The cognitive component reflects cognitive schema and frameworks shared by the people in a given country or sector, for example widely shared social knowledge about HRM (Kostova, 1997). The normative component reflects shared values, beliefs, norms and assumptions about human action (for example, how people are being managed), and defines goals and appropriate ways to achieve these (Scott, 2001). Kostova (1997) suggests that together these three pillars make up the institutional profile of a country or sector. An institutional profile can incorporate issue-specific regulatory, cognitive and normative institutions in a given country (eg HRM), which may differ from other issues. In IHRM research, the concept of institutional profile has been applied to study impacts of the host-country institutional environment on HRM practices in MNC subsidiaries.

Organisational field and level of analysis

DiMaggio and Powell (1983, p. 148) define organisational field as "those organisations that, in the aggregate, constitute a recognised area of institutional life: key suppliers, resource and product consumers, regulatory agencies, and other organisations that produce similar services or products". This definition is closely related to concepts such as 'societal sectors' (Scott & Meyer, 1983) and 'industry systems' (Hirsch, 1985). The concept of field is viewed "both as a unit and a level of analysis" (Scott 2008, p.181). It encompasses individuals, organisational sets and organisation populations. It also encompasses "relevant actors, institutional logics and governance structures that empower and constrain the actions of participants in a delimited social sphere" (Scott, 2008, p. 208).

The concept of organisational field plays an important role in connecting organisation studies to the macro-environment. In DiMaggio and Powell's (1983, p.337) terms, "the organisational field has emerged as a critical unit bridging the organisational and the social levels in the study of social and community change". This concept is important in understanding the role of organisations as actors in larger networks and systems (Scott, 2008). It is effectively used "in examining delimited systems ranging from markets to policy domains to the less structured and more contested arenas within which social movements struggle" (Scott 2008, p.182).

A great deal of existing research has treated organisational fields in a homogeneous manner. However, organisational fields can also have subfields, where a set of organisations may have specific ways of organising themselves (Karhunen, 2007). For example, within an industry, specific sectors may have different rules, norms and practices (Coser et al., 1982). Nevertheless, it may not be easy to define subfields, as "how actors view their organisations and consequently identify themselves in a given subfield is by and large a subjective question" (Karhunen 2007, p.42). Some existing research (eg Lant & Baum, 1995) has identified subfields based on managers' beliefs about who their competitors are, rather than a single objective variable such as firm size.

In relation to MNCs, Kostova et al. (2008) argue that since MNCs and their subsidiaries face multiple and often conflicting institutional environments, organisational fields as defined above do not exist, or are at best ill-defined, for MNCs. These authors further argue that "such conditions, coupled with spatial, language, cultural, and organisational barriers, preclude sufficient inter-organisational interactions, which are fundamental to structuration and field formation" (Kostova et al., 2008, p. 998). In the case of MNC subsidiaries, these authors suggest that due to an ill-defined organisational field and a vague institutional environment to which subsidiaries belong, the intra-organisational institutional environment may define their actions and behaviours. In response to this argument, Philips and Tracey (2008) contend that the existence of multiple or contradictory institutional environments at different levels (national, regional and global) for MNCs and their subsidiaries does not lead to the conclusion that organisational fields do not exist for these organisations, or that MNCs and their subsidiaries are members of none of the organisational fields. These authors argue that large organisations such as MNCs are embedded in multiple organisational fields that both constrain and provide opportunities: "Organisational fields shape the activities of MNCs, but MNCs, in turn, also shape the fields they are a part of" (Phillips & Tracey, 2008, p.170).

Although MNC subsidiaries are embedded in multiple layers of institutional environments or fields, subsidiaries tend to recognise their primary field of reference based on the degree of embeddedness in a particular field (Rupidara & McGraw, 2011; Chung et al., 2012). For instance, a subsidiary that is independent, and adopts a local orientation, may find it necessary to conform to local regulations, values and norms in exercising their routine HRM activities (Rosenzweig & Nohria, 1994). Alternatively, globally oriented or structured subsidiaries might have a primary field of reference that is more internally focused, and are more likely to follow internally consistent HRM practices. For them, primary reference points may be other large international organisations or other comparable subsidiaries within the MNC network with which they might be competing for resources and survival (Belanger et al., 2003).

While institutional theory predicts that organisations operating in the same field will adopt similar forms and practices, multiple institutional fields within which MNCs operate or subfields within a given organisational field may lead to diversity. Thus, in IHRM research, the concept of organisational field can explain both homogeneity and diversity of HRM practices in an organisational field in a given point of time.

Institutional and competitive isomorphism

Emphasising field-level structuration processes, DiMaggio and Powell (1983) argue that organisations increasingly become similar as rational actors try to change them. The terminology that best explains this process of homogenisation is isomorphism (Paauwe & Boselie, 2003), which is "a constraining process that forces one unit in a population to resemble other units that face the same set of institutional conditions" (DiMaggio & Powell, 1983, p. 149). Isomorphism is an outcome of both competitive and institutional pressures (DiMaggio & Powell, 1983). According to Scott (2008), it is challenging to distinguish between institutional and competitive pressures using institutional theory. Competitive pressures assume a system of rationality, and emphasise market competition and niche changes; organisations subject to these pressures are expected to do business effectively and efficiently (Scott & Meyer, 1991). Much of the HRM literature prioritises competitive pressure, as if this is the only form of pressure facing organisations. However, "organisations compete not just for resources and customers, but for political power and institutional legitimacy, for social as well as economic fitness" (DiMaggio & Powell, 1983, p. 150). Hence, an organisation's response to institutional pressure is crucial for their success and survival.

Institutional isomorphism results from organisations being members of a common organisational field (DiMaggio & Powell, 1983). According to these authors, institutional isomorphism takes three forms: coercive, normative and mimetic.

Coercive isomorphism could result from both formal and informal pressures exerted on organisations upon which they are dependent and by cultural expectations in the society within which they operate (DiMaggio & Powell, 1983). Organisations can receive these pressures as force, persuasion or invitation to join in collusion (Meyer & Rowan, 1977). Coercive institutional pressures are mainly "embedded in regulatory processes, which can manifest themselves in different forms, and differ in their degree of enforcement" (Paauwe & Boselie, 2003, p. 63). Related to HRM, coercive mechanisms include the influence of social partners (trade unions and work councils) and employment laws and regulations. These mechanisms can be visible at different levels (international, national and industry). International-level pressures may include different ILO conventions, national-level regulatory pressures including employment laws, and industry-level regulatory pressures including sector-wide collective-bargaining agreements (Paauwe & Boselie, 2003). Organisations may have to bring changes to their HRM policies and practices in response to coercive pressures (Tsai, 2010).

Normative isomorphism refers to "relations between the management policies and the background of employees in terms of educational level, job experience and networks of professional associations" (Paauwe & Boselie, 2003, p. 60). It is associated with professionalisation, which is often interpreted as "the collective struggle of members of an occupation to define conditions and methods of their work, to control 'the production of producers', and to establish a cognitive base and legitimacy for their occupational autonomy" (DiMaggio & Powell, 1983, p. 162). The degree of professionalisation of employees affects the nature of the management control system (DiMaggio & Powell, 1983). Norms and values that professionals develop through formal education and professional networks increase the similarity of the skills and knowledge of the total workforce in a given organisational field (Boon et al., 2009). Professionals from highly institutionalised professions (eg accountancy) can occupy similar positions in various organisations in the field. Professionals can bring their professional norms and values into organisations, which might lead to similar organisational behaviour. Similarly, if HR professionals working in the same industry receive education from the same institutions and associate with the same trade associations, organisations that employ these professionals tend to adopt similar HRM practices (Tsai, 2010).

Mimetic isomorphism results from the organisational response to uncertainty. According to DiMaggio and Powell (1983, p. 151), "when organisational technologies are poorly understood, when goals are ambiguous, or when the environment creates symbolic uncertainty, organisations may model themselves on other organisations" in the organisational field, which are perceived to be successful and legitimate. Organisations may do so "without being fully cognizant of the means-ends relationships that reside within the structures and processes" (Grewal & Dharwadkar, 2002, p. 87). Related to HRM, organisations may imitate the HRM practices of a competitor as a result of uncertainty or fads in the field of management. For example, organisations may adopt the HR scorecard and some practices of high-performance work systems due to uncertainty or to cope with the competition (Paauwe & Boselie, 2003).

Kostova et al. (2008) argue that because isomorphism occurs in an organisational field, but there is no clearly defined institutional field to which MNCs belong, there is limited isomorphism in MNCs, or that isomorphism as discussed above is not possible in MNCs. However, these authors suggest that some form of isomorphism may occur at the meta (or global) level for the MNC as a whole, and at the intra-organisational level for MNC units such as subsidiaries. According to this perspective, "the multiplicity and ambiguity of organisational fields at the meso-level result in more diverse but weaker institutional pressures for MNCs overall" (Kostova et al., 2008, p. 994). Such diversity and weakness give more leeway for subsidiaries in choosing HRM models or practices in response to institutional pressures. Local isomorphism is particularly rare for MNC subsidiaries due to their superiority and lack of dependence on the local environment, and the limited capacity of the local institutional environment to enforce local conditions on MNC subsidiaries (Kostova et al., 2008). However, Collings and Dick (2011, p. 3862) argue that the assertion that MNCs are relatively insulated from isomorphic pressures "is contingent on the extent to which the MNC compares favourably with others in terms of its structures and practices. Financial success and a dominant global position cannot insulate an MNC from such pressures". Gepper et al. (2006) suggest that as MNCs operate in multiple layers of institutional contexts, they face multiple institutional forces, all of which exert isomorphic pulls to follow a particular set of institutionalised practices. Balancing these pressures depends on the degree of embeddedness in a particular layer of institutional environment (Chung et al., 2012).

Although there are arguments over the relevance of isomorphism in the MNC context, IHRM research has attached significance to isomorphic tendencies because isomorphism can explain the homogeneity among organisations in the same organisational field at a given point in time. At an organisational level, isomorphic pressures affect MNC decisions to standardise HRM practices or to adapt them to local institutional requirements. At a field level, isomorphic pressures may lead HRM practices towards a dominant model of HRM (Mellahi et al, 2013).

Institutional logic

The focus of institutional theory has recently shifted from isomorphism to the effects of different, often conflicting institutional logics on individual and organisations (Greenwood et al., 2008). Institutional logic can be defined as "the way a particular social world works" (Thornton & Ocasio, 2008, p. 101). "Institutional logics shape rational, mindful behaviour, and individual and organisational actors have some hand in shaping and changing institutional logics" (Thornton & Ocasio, 2008, p.100). Actions, decisions and outcomes are a result of the interaction between an individual agency and an institutional structure (Friedland & Alford, 1991; Thornton & Ocasio, 2008). Therefore, an individual agency guided by interest, power and opportunism can play a key role in selecting and changing the institutional logics of employment practices (Thornton & Ocasio, 2008).

Foreign MNC subsidiaries face institutional complexity as they are often confronted with multiple and sometimes competing institutional logics (Greenwood et al., 2011; Rupidara & McGraw, 2011). Guided by these multiple and contradictory institutional logics, these subsidiaries may play multiple games with multiple rules (Friedland and Alford, 1991). As a result, although organisations may have to comply with the logics in order to gain endorsement from their stakeholders, they may resolve conflicting logics by exercising decoupling strategy. In IHRM research, one area where institutional logic can be applied is to explain resistance from subsidiary managers in the transfer of HRM systems from headquarters to a subsidiary. A plausible source of resistance in such cases could be a mismatch between the institutional logics in incumbent subsidiary HRM systems and new HRM systems. Although this mismatch may lead to misalignment between the subsidiary and the HQ, subsidiary managers can minimise this misalignment through bricolage or creating a hybrid-formats of HR systems.

Institutional entrepreneurship

Institutional entrepreneurs are defined as "actors who leverage resources to create new or transform existing institutions" (Battilana et al., 2009, p. 68). Institutional entrepreneurship is an important concept in institutional change--changing present ideas and practices (DiMaggio, 1988), which requires "purposeful continual actions of determined individuals" (Reay et al., 2006, p.993). Battilana et al. (2009) highlight the conditions under which one could be regarded as an institutional entrepreneur--able to initiate change and actively participate in these changes. Kossek et al. (1994) argue that HR managers, given the strategic position attributed to them, can play a key role in the organisational change process not only by proposing or stimulating a particular practice but also by taking on multiple roles and responsibilities in leading the change. In the context of shaping of HRM systems in foreign subsidiaries of MNCs, Rupidara and McGraw (2011) suggest that the role of HR managers in overlapping environments might be seen as a gatekeeper, interpreter, or a judge of the most appropriate configuration of HR practices stemming from different institutional fields.


Suchman (1995, p. 574) defines legitimacy as "a generalised perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions". In this view, organisations are considered as legitimate to the extent that they are in compliance with rational prescription, and with law and regulations (Scott, 2008). Organisations that demonstrate culturally approved forms and activities (including strategies) receive backing from normative authorities and approval from legal authorities are more likely to survive than those that lack these evaluations (Scott, 2008).

Suchman (1995) identifies three types of organisational legitimacy: pragmatic, moral and cognitive. According to this typology, pragmatic legitimacy reflects exchange-based aspects that involve calculations based on self-interest to estimate the expected value to be received from organisational actions. Moral legitimacy is based on positive normative judgments of organisations and their activities in terms of whether the organisations behave appropriately (Evans & Novicevic, 2010). Cognitive legitimacy reflects cognitions that stakeholders establish in terms of whether organisational practices are seen yielding as an appropriate outcome that fits within the larger cultural environment (Evans & Novicevic, 2010).

Based on Suchman's (1995) typology, Zimmerman and Zeitz (2002) identify pragmatic, procedural and cognitive legitimacy, and map this typology onto Scott's (2001) three pillars of institutions. According to this typology, regulative institutions are concerned with pragmatic legitimacy aspects in managing the expectations of the government, professional bodies and other powerful organisations in the environment. Normative institutions are concerned with procedural legitimacy, whereby organisations embrace the socially accepted norms and behaviours (Selznick, 1984). Organisations can demonstrate legitimacy by aligning with societal norms: treating employees fairly and receiving societal endorsement, and establishing and maintaining networks. Normative legitimacy can be particularly important for MNC subsidiaries operating overseas to overcome the 'liability of foreignness', and for new entrants to overcome the problem of 'liability of newness' (Zimmerman & Zeitz, 2002). Cognitive institutions are associated with cognitive legitimacy (Berger & Luckmann, 1967; Hoffman, 1999), which can be achieved through addressing the widely held beliefs and taken-for-granted assumptions that make up everyday life.

According to Suchman's (1995) definition, legitimacy of an organisation's HRM practices reflects whether these practices are likely to be seen as desirable, proper and appropriate in the eyes of its stakeholders. Evans and Novicevic (2010) applied Suchman's (1995) typology of organisational legitimacy to examine how managers evaluate the perceived legitimacy of their organisation's HRM practices for creating both economic and normative values. In relation to pragmatic legitimacy, Evans and Novicevic (2010) suggest that managers tend to be pragmatic when they evaluate HRM practices and determine the value to be received in return for their endorsement of a practice. With regard to moral legitimacy, Evans and Novicevic (2010) note that organisations make positive normative judgments to assess whether their choice of HRM practices is in line with the value systems held by respective stakeholder groups. Cognitive legitimacy reflects whether HRM practices of organisations are perceived as the only available alternative, or are taken for granted as appropriate outcomes (Suchman, 1995). Legitimacy is only achieved when these practices become routine operations and are viewed as given, or when alternatives are literally unthinkable (Zucker, 1983).

As stated above, in the case of foreign MNC subsidiaries, legitimacy is critical for them in order to overcome the 'liability of foreignness' (Kostova & Zaheer, 1999). However, Kostova et al (2008) argue that achieving and maintaining legitimacy in MNCs is extremely difficult due to the multiplicity and complexity of legitimating environments and intraorganisational differences, and the ambiguity involved in the process of legitimation. Kostova et al. (2008) contend that it is impossible to achieve legitimacy through isomorphism for MNCs at the meso-level, as both the organisational field and isomorphism are absent at this level. The authors further argue that there need to be alternative legitimating mechanisms for MNCs. The authors suggest that the only way to become legitimate in the eyes of legitimating actors is to negotiate with each of these actors. This implies that achieving legitimacy is a political process that involves interaction, communication and exchange between legitimating actors, which in turn form a perception about the organisation (Kostova et al., 2008).

MNCs should be more concerned with managing legitimacy, as legitimacy is dependent on the social recognition of all their subsidiaries (Surroca et al., 2013). For example, a negative perception created by a foreign subsidiary of an MNC in the management of employees can spill over and adversely affect an MNC's ability to attract and retain talent by other subsidiaries and its HQ.

Institutionalisation versus decoupling

Meyer and Rowan (1977, p. 341) define institutionalisation as the process by which "social processes, obligations, or actualities come to take on a rule-like status in social thought and action". According to Tolbert and Zucker (1983) institutionalised practices exhibit permanence and are widely followed without debate. Based on these definitions, "institutionalized acts require no monitoring or enforcement but persist solely through transmission from one generation to another" (Greenwood et al., 2008, p.5).

Although it is expected that organisations will tend to institutionalise the rationalised myths (widespread social understanding about policies and practices) dictated by the institutional context within which the organisations operate, they may adopt these myths ceremonially if adopting these myths harm the organisational efficiency (Meyer & Rowan, 1977). Ceremonial conformity to a widespread understanding of a practice can be achieved by decoupling a symbolic practice from the organisational technical core (Greenwood et al., 2008). Ceremonial adoption or decoupling is a likely outcome when organisations adopt HRM practices for reasons of legitimacy rather than efficiency (Fenton-O'Creevy, 2003). It is common for organisations to introduce HRM practices at a very superficial level, without any real commitment to the underlying principles of those practices and with little effort to integrate them within the existing system and structures (Collings & Dick, 2011).

While the notion of institutionalisation implies the widely followed and taken-for-granted behaviour of organisations, the notion of decoupling implies organisational foresight and choice (Greenwood et al., 2008). Organisations sometimes play an active role in leveraging institutional contexts. "Powerful organisations attempt to build their goals and procedures directly into society as institutional rules" (Meyer & Rowan, 1977, p. 30). Organisations such as MNCs influence the institutional environment in which they operate (McGraw, 2004; Ferner et al., 2005; Tempel et al., 2006).

However, Kostova et al. (2008) argue that decoupling is less likely to take place in subsidiaries of MNCs, as an institutional field and isomorphism do not exist for them. Supporting this argument, in the context of transfer of HRM practices from an MNC's headquarters (HQ) to its subsidiaries, Collings and Dick (2011) state that HQ tend to scrutinise the process of transfer to ensure that diffusion of practices are standardised, as a result, there is less likelihood of decoupling behaviour on the part of subsidiary managers. These authors, however, argue that where the HQ want subsidiaries to adopt and diffuse HR practices primarily for reasons of legitimacy, parent and subsidiary may not be too concerned with the depth of implementation, as long as external audiences from whom legitimacy is desired are not interested in measuring or monitoring the implementation of the practice. Ceremonial adoption of HRM practices thus is a likely outcome. As MNCs operate in pluralist institutional contexts, they may ceremonially adopt certain practices to reconcile the conflicting and multiple models imposed by various legitimating actors (Kraatz & Block, 2008; Kostova & Roth, 2002).

Although all decoupling is not always a deliberate strategic response to organisational complexity, ceremonial activities may over time take over the organisation. Some decoupling activities may affect the identity of the subsidiary and precipitate further tension between the subsidiary and the HQ (Hamilton & Gioia, 2009, as cited in Greenwood, et al, 2011). Decoupling activities with regard to HRM may also damage the subsidiary's reputation and that of the parent company in the long run in the eyes of both employees and external stakeholders. Therefore, future research should focus on understanding how and why decoupling takes place and the long-run implications of decoupling in foreign subsidiaries of MNCs (Greenwood, et al, 2011).


Despite the wide application of institutional theory in IHRM, it is still under-exploited in IHRM research (Bjorkman & Gooderham, 2012). This review of key concepts of institutional theory in relation to IHRM suggests that institutional theory can be a useful lens through which to examine more complex and comprehensive IHRM issues and problems. The review also highlights four broad implications for the application of institutional theory in future IHRM research.

First, one strength of institutional theory has been its ability to explain variations between national HRM systems (Bjorkman & Gooderham, 2012). However, institutional and HRM research has largely been distilled through the lens of economic, social, and cultural dynamics of the industrial world (Guillen, 2001; Budhwar & Debrah, 2009). These accounts provide "a limited picture of the world" (Mizruchi & Fein, 1999, p. 680) and miss important and interesting institutional contexts and effects (Guillen, 2001): "It is difficult, if not impossible, to discern the effects of institutions on social structures and behaviours, if all cases are embedded in the same or very similar ones" (Scott, 1995, p. 146). Therefore, in order to further develop institutional perspectives and constructs in relation to IHRM, future research should focus on foreign subsidiaries operating in developing countries, which thus far have not attracted substantial IHRM research.

Second, one of the limitations of neo-institutional theory has been its very mechanistic portrayal of organisational responses to normative, coercive and mimetic pressures in society. It dismisses the strategic ability of organisations to respond to institutional pressures (Oliver, 1991). There has been little use of agency when applying institutional theory in organisational analysis (Bjorkman, 2006; Bjorkman & Gooderham, 2012). Although the extent to which agenic behaviour is accounted for institutional theorising on MNCs has recently gained researchers' attention (see Chung et al., 2012), Kostova et al. (2008) noted that the application of institutional theory in IHRM has been dominated by a narrow set of neoinstitutional ideas. The MNC setting is a complex context rich with conflicting pressures affecting the process of HRM development and implementation (Rupidara & McGraw, 2011). Organisational actors play a significant role in this process; thus, emphasising their role will enrich institutional explanations in IHRM research (Bjorkman & Gooderham, 2012) Therefore, there is a need to account for the agency in future IHRM research.

Third, the review highlights the usefulness of institutional concepts such as organisational field, isomorphism, legitimacy and decoupling in MNC research while raising the need to address specific issues in relation to these concepts in future IHRM research. For example, there is a need to analyse the extent to which foreign subsidiaries of MNCs adopt, implement, internalise and integrate HRM practices emanating from headquarters (Bjorkman & Goderham, 2012). However, in general, Kostova et al's (2008) concerns about the limitations of these institutional concepts can be addressed by complementing these concepts with emerging institutional concepts, such as institutional logic and institutional entrepreneurship, or by integrating 'old' and 'new' institutionalism perspectives in the institutional analysis (Greenwood & Hinings, 1996; Selznick, 1996; Hirsch & Launsbury, 1997; Kostova et al., 2008). Application of these emerging institutional concepts would contribute to a more comprehensive understanding of research phenomena from an institutional perspective. Concepts such as institutional entrepreneurship and institutional logic link institutions and actions (Barley & Tolbert, 1997), bridging between macro-structural perspectives and macro-process perspectives) and allowing multiple levels of institutional analysis. Application of these concepts may also help future IHRM research to account for how organisational actions facilitate field-level institutional change or maintenance, as opposed to the traditional focus on analysing the top-down effects of institutional pressures on organisational behaviour (Greenwood et al., 2011).

Fourth, the review of literature on the concept of isomorphism suggests that both competitive and institutional pressures need to be considered in organisational analysis in order to avoid dichotomous explanations. The fact that the development of institutional theory has been accomplished through juxtaposition with other theories (Greenwood et al., 2008) lends support to the idea of incorporating non-rational and rational elements in organisational analysis. DiMaggio (1988) recommends that institutional and political models should be regarded as complementary tools in the analysis and understanding of institutional phenomena. Bjorkman and Gooderham (2012, p.479), in a review of recent IHRM studies that applied institutional theory, they concluded that there is "a need for multi-level analyses that combine institutional view with other explanations". Therefore, future research should apply institutional theory with other theoretical perspectives in the study of HRM in MNCs.


This paper reviewed key concepts of institutional theory in relation to HRM, and in the context of MNCs. Although the key concepts and features of institutional theory appear to be highly relevant to HRM and MNC research, the review of literature also illuminates the complexity, ambiguity and diversity associated with the application of institutional theory in IHRM research (Currie 2009). This could be regarded as both an opportunity and a challenge to use institutional theory in future HRM and MNC research. Future HRM research in the MNC context may benefit from the application of institutional theory if the following are taken into consideration: first, conducting comparative IHRM research using different country contexts; second, emphasising the role of actors; third, application of emerging concepts such as institutional logic and institutional entrepreneurship; and finally, combining institutional perspectives with other theoretical perspectives in the study of HRM in the context of MNCs.


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Ali Najeeb

University of Wollongong
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Title Annotation:human resource management; multinational companies
Author:Najeeb, Ali
Publication:International Journal of Employment Studies
Geographic Code:1USA
Date:Oct 1, 2013
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