Understanding ecosystem pt.1- What are insitutional norms and why do they matter?

Venus Sharma
Jul 27, 2017 · 5 min read

This is a multi-part series of articles on various interconnected elements and forces that influence and define entrepreneurial ecosystems. The concepts range from the fields of sociology, complexity to evolutionary economics and strategic studies. Each of these elements brings a unique perspective to understanding dynamic and complex ecosystems and predicting their evolution.

What are institutional norms and why do they matter?

Institutional norms, this term often comes up while discussing the ways of acquiring legitimacy either for a paradigm or a venture. In simple terms or as Schuman has described, institutional norms are socially constructed values, beliefs, and definitions. Their most fundamental role is to reduce uncertainty and provide meaning. To elaborate on this, W. Richard Scott, a pioneer in institutional research and sociologist identifies three cognitive pillars or dimensions to the institutional norms or patterns — cultural, normative and regulative (Sine, David, 2010). Another division of institutional norms complimentary to Scott’s labels is done by North (1990), as informal (cognitive, normative) and formal (regulatory).

Here is how Sine and David broadly describe the three dimensions of institutional norms. Cultural, where legitimacy comes from taken for granted understandings or templates such as the importance of business plans and its templated content and length. Another example would be the ventures that are incongruent with existing taken for granted models, are often considered to be riskier by the investors. Normative, are the norms and values considered “good” or “appropriate” in their social definitions such as selective career paths that represent identifiable sequence or stability over a period of time, or how certain occupations are considered more prestigious or attractive to pursue entrepreneurship. Regulative includes rule setting usually by powerful actors such as the state. For example, in India post the Government’s decision of demonetization and acknowledgment for a cashless economy, the prospects of Fintech companies to raise investments increased even more than anticipated earlier and sought them massive legitimacy.

More than often the environment is looked at as a naturally evolving phenomenon mostly occurring in the ‘background’(Peng, Sun et al.,2009) . However, consciously or not, these are the ‘rules of the game’ that entrepreneurs end up playing by and accordingly adjusting themselves to these structures. For instance, we see new ventures consisting no more than the founding team choosing to use titles such as CEO, or vice president/ head of a department with no team under to manage. This is often to incorporate the industry demand of founders abiding by the business norms and demarcating the functional roles. Or how often than not founders seek team members or founding partners from prestigious universities which act as an important initial judgment call for many venture capital firms. Why do you think founders are advised to indulge in storytelling while talking about their organization? It appears that through storytelling one can actively negotiate legitimacy with their audience (O’Neil, Ucbasaran, 2016) by imbibing their values in the narration. In most conditions, entrepreneurs feel the need to conform to these norms as a natural progression in the milieu of the market phenomenon. However, acknowledging these norms as discrete rules governing their organizational strategy, they can instead choose to take a position where they actively participate in strategically orchestrating them.

What could be the implications (?)

As it proceeds, these institutional norms and the need to seek legitimization by conforming to them often leads to founders finding themselves trapped in the conventional structures of authority. However, are these norms always constraining? Probably not. Founders often utilize these norms as a template to move forward and devise their roadmap. While sometimes working within these norms helps an organization attain approval, there are instances when defying these norms and coming across as an unconventional and innovative organization not only helps in the legitimization process but additionally contributes to reforming the existing norms. However, going by the current industry examples, this is less likely to happen. When it does, people often label it as disruptive. In either case, it is important to know what these norms are and how they are formed. The two primary reasons for this would be, firstly, to find opportunities in the pre-existing stable institutions and, secondly, to introduce and facilitate changes to these institutional logics. This further evokes the query to understand the extent to which entrepreneurs can influence these institutional logics and in this case what would be the scope of their actions to facilitate it. Overall, institutional norms have an important impact on entrepreneurial events such as that of founding, structuring, and growth or failure of new ventures.

A brief contemplation on institutional norms at play in the social entrepreneurship ecosystem

New ventures based on non-traditional models or newer markets are the most vulnerable to these institutional norms as they lack the taken-for-grantedness. Similar could be said about the new paradigms which seek the active involvement of normative actors to build legitimacy. For example, in India, the need for a separate legal structure beyond Section 8 (on the lines of B Corp and CIC) has been sporadically expressed by some of the entrepreneurs, but would require either a collective movement or support of normative actors such as the government or lobby groups to propagate the idea into a new institution. That would act as a formal or regulative norm proceeding the discourse on legitimizing and legally defining social entrepreneurship in the Indian context. As argued by Joseph W. Yockey (2015), more than the immediate encouragement of socially oriented investors, consumers, and employees, social enterprise laws are rather instrumental in creating a new institutional structure to govern the advancements in this space and lending credibility to the movement. Furthermore, as a long term impact, there could be a possibility (if at all) of changing social attitudes about the importance of balancing social and economic concerns in all corporations. Meanwhile, with the introduction of Section 135 of the Companies Act, popularly known as the CSR (corporate social responsibility) law, and the new found availability of these funds for social enterprises there has been a recent upsurge in social enterprise support structures in the form of acceleration and incubation programs. This is a notable regulatory shift that has created movement after a decade of the inception of the concept of social entrepreneurship in India. Needless to say, the institutional norms for this field are still dynamic and in making. It would, however, be interesting to see if the upcoming non-profit incubation too is influenced by the same CSR law or the demand from the non-profit organizations who are not compatible to shift to a for profit model but would want the precision of a business. This case, however, primarily consists of grant making foundations as an important normative actor, who is expecting their funds to be utilized in a more effective manner and on a larger scale by developing the competencies of nonprofit organizations. As a further inquiry, it could be reviewed if the non-profits, too, are influencing the structure of these programs and introducing their internal logics and in that case, what would be the scope of activities undertaken by them to accomplish it.

References and further reading:

North, Douglass C. Institutions, institutional change and economic performance. Cambridge university press, 1990.

O’Neil, Isobel, and Deniz Ucbasaran. “Balancing “what matters to me” with “what matters to them”: Exploring the legitimation process of environmental entrepreneurs.” Journal of Business Venturing 31.2 (2016): 133–152.

Peng, Mike W., et al. “The institution-based view as a third leg for a strategy tripod.” The Academy of Management Perspectives 23.3 (2009): 63–81.

Scott, W. Richard. “Institutions and organizations. Foundations for organizational science.” London: A Sage Publication Series (1995).

Sine, Wesley D., and Robert J. David. “Institutions and entrepreneurship.” Institutions and Entrepreneurship. Emerald Group Publishing Limited, 2010. 1–26.

Yockey, Joseph W. “Does social enterprise law matter.” Ala. L. Rev. 66 (2014): 767.


Originally published at Research in impact.

Research in impact

A probe into the new models of social innovation, their advancements and potential future.

    Venus Sharma

    Written by

    Practicing writing intermittently; researcher; indulging in critical theory; Mooroo's comfort.

    Research in impact

    A probe into the new models of social innovation, their advancements and potential future.

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