Martinez_Dacin_1999_JoM_Efficiency motives and normative forces

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Journal of Management 1999, Vol. 25, No. 1, 75-96

Efficiency Motives and Normative Forces: Combining Transactions Costs and Institutional Logic Richard J. Martinez Baylor University

M. Tina Dacin Texas A &M University

This paper provides a synthesis of transaction cost economics and institutional theory. It reviews each of these approaches and provides suggestions on how these perspectives might be broadened via this synthesis. It presents an illustrative model of organization theorizing that combines relevant aspects of transaction cost theory and institutional theory in order to strengthen the explanatory power of both. The model explores conditions under which one or both theories may be most appropriate in explaining decision behavior, focusing on two ~mportant situational factors--the degree of ambiguity surrounding transaction cost analyses and the organization's temporal survival orientation.

During the last two decades organizational researchers have paid significant attention to the study of organizational action from several perspectives. The dominant perspectives include contingency theory (Child, 1972; Miller & Friesen, 1984; Mintzberg, 1979, 1981), population ecology (Hannan& Freeman, 1977, 1984), resource dependence (Pfeffer & Salancik, 1978), transaction cost economics (Williamson, 1975, 1981, 1985), and institutional theory (DiMaggio & Powell, 1983; Meyer & Rowan, 1977; Scott, 1995; Zucker, 1987). The organizations literature continues to see increasing convergence and integrative efforts among these theoretical approaches (for example, see Amburgey & Dacin, 1994; Baum, 1996; Gupta, Dirsmith, & Fogarty, 1994; Madhok, 1997; and Tolbert, 1985). These integrations have enabled us to better understand such phenomena as organizational vital rates (founding and failure), adoption of innovations, organizational coordination and control, as well as the development of organizational capabilities. However, while transaction cost economics (TCE) and institutional theory have independently had significant impact in providing cogent Direct all correspondence to: Richard J. Martinez, Department of Management, Hankamer School of Business, Baylor University, Waco, TX 76798-8006; Phone: (254) 710-6184; Fax: (254) 710-1093; e-mail: . Copyright © 1999 by JAI Press Inc. 0149-2063

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explanations for organizational action, organizational theorists have yet to devote explicit attention to integrate or synthesize them. While both TCE and institutional approaches make important explanatory contributions in their own right, they focus on different domains of organizational action. The TCE approach focuses explicitly on action as purposive and rational, while institutional theory relies heavily on the social construction of organizational behavior and recognizes the limits imposed by social constraints on a purely economic rationale. Despite their differences, each of these approaches has the power to explain a variety of organizational phenomena. For example, TCE greatly enhances the ability of organizational researchers to provide an economic accounting of organizational actions and outcomes. However, the pursuit of transaction cost efficiency may not provide a complete accounting of the motivations or context underlying these organizational decisions. In this regard, TCE has been criticized for proffering an undersocialized view of organizational and market activity (Granovetter, 1985). Many other factors potentially influence firm success such as government involvement, tax laws, competitive dynamics, socio-cultural norms and belief systems. The overarching emphasis on rationality, or even bounded rationality from a TCE view, neglects the complexities of markets, hierarchies, and all exchange mechanisms in between these polar types (partnerships, alliances, joint ventures, etc.). In fact, every transaction takes place in a context of many other transactions. Therefore, exchange is really nested or embedded within the context of multiple transactions (Granovetter, 1985). Alternatively, institutional theory seeks to explain organization-environment relations from an overarching social view. Firm and market activity are explained from the imperative of legitimacy-seeking behavior which, in turn, is influenced by socially constructed norms and rules of acceptable conduct. The institutional theory framework is primarily concerned with an organization's relationship or "fit" with the institutional environment, the effects of social expectations (norms) on the organization and the incorporation of these expectations as reflected in organizational characteristics. However, institutional theory has been criticized for providing oversocialized explanations of organizational behavior, thereby often ignoring the role of power, interest, and agency (Granovetter, 1985; Powell, 1991; Scott, 1987). In this paper, we point out that it may be more useful to think of TCE and institutional theory as complementary approaches and believe that the overall scope of our organizational theorizing can be enhanced by identifying the conditions where they operate with greatest resonance. The complementary nature of these two approaches is important because neither perspective in its own right has the capacity to provide a full explanatory account of organizational behavior. On the one hand, TCE theorists are unable to explain the success of organizational behavior that is rife with inefficiency. On the other side, institutional theorists typically decouple efficiency considerations from social action. This perspective of complementarity is motivated in large part due to existing critiques and reviews of each approach.1 We propose a conceptual merger of these two theories that may be joined together in the concept of utility, which is defined here as the degree to which an organizational action leads to satisfaction of the organization's dominant imperative (efficiency, legitimacy, power, control). This paper attempts to explore JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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such complementarity by developing an illustrative model that integrates fundamental ideas from each approach. The arguments put forth in this paper are important for at least two reasons. First, given that institutions and norms are socially constructed and that the efficiency imperative, which is the primary driver of TCE theorizing, may also to some degree be viewed as a socially constructed institution (Williamson, 1981; Zukin & DiMaggio, 1990), this paper's primary focus is to highlight the value of extending transaction cost logic with ideas from institutional theory. That is, while efficiency is indeed an ever-present concern, the manner in which efficiency is pursued and manifested is often bounded by the presence of other considerations, such as legitimacy and power. This is not to discount the value that TCE brings to institutional theory because we believe that both theories will benefit from a broadened perspective. However, since TCE is especially dominant in several management literatures (e.g., strategic management), our goal is to examine and enhance its utility. Second, the integrative model we propose emphasizes the explanatory strengths of both theories while simultaneously accounting for their weaknesses. In doing so, we hope to illustrate both the boundary conditions and areas of overlap for each theory. We begin with a discussion of the basic theoretical assumptions underlying TCE and institutional theory. Next, we elaborate on various shortcomings of considering the two theories in isolation. We then provide a discussion of the need for and benefits of integrating the arguments of TCE and institutional theory. Finally, we offer an illustrative model and related propositions that suggest the most likely conditions under which the explanations of either theory regarding organizational action may hold. Literature Review

Overview of Transaction Cost Economics (TCE) Williamson's TCE 2 has drawn on the work of Coase (1937) and Commons (1934) in order to explain organizational design and structure in economic terms (Williamson, 1975, 1979, 1981, 1985; Williamson & Ouchi, 1981). Based on Commons (1934), Williamson suggests the basic unit of analysis in economics to be transactions between individuals, representing what Commons referred to as "volitional economics" (1934). Commons (1934) discussed transactions as referring to joint actions in which terms of performance are agreed upon. The efficiency of transactions, in terms of governance and bureaucratic costs, is the key imperative in Williamson's approach to TCE theorizing. Simply put, organizations will conduct various transactions in such a way as to minimize costs associated with exchanges. These transaction costs include visible costs such as those associated with resources, and "not-so-visible" costs such as those associated with monitoring the behavior of the exchange partner. Transaction relationships might be conducted, at one extreme, in the market with price mechanisms governing transactions (governance costs). At the other extreme, the transaction may be internalized within the organization with internal bureaucracy governing transactions (bureaucratic costs). Williamson (1979) has suggested that whether transacJOURNAL OF MANAGEMENT, VOL. 25, NO. I, 1999

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tions are conducted within the market, internalized within the firm, or conducted alternatively by an intermediate form of "obligational market contracting" will be determined by which governance mechanism minimizes transaction costs, thus maximizing efficiency. Two basic behavioral assumptions are set forth by Williamson as explaining the problematic nature of contractual relations which may govern transactions. Rejecting the hyperrationality assumption of individuals preferred by many economists, Williamson draws on the work of March and Simon (1958) in adopting a bounded rationality view of human decision-making processes. Individuals are assumed to base decision-making on limited information and simplified models. Further, Williamson extends the traditional notion of opportunistic human behavior by assuming that individuals may be opportunistic to the point of being self-interest-seeking with guile. Not all actors are assumed to be so opportunistic, but enough may be so opportunistic as to significantly increase the costs of monitoting behavior. The relative impact of bounded rationality and opportunism is determined by the degree of uncertainty surrounding the specifics of the transaction relationship, the frequency with which the transactions occur between the contracting parties, and the degree to which transaction-specific assets are required in order for one or both of the parties to fulfill their contractual obligations. Williamson suggests that, given asset specificity, as uncertainty and frequency increase, the costs associated with monitoring the process and outcome of the transaction will be minimized by internalizing the transaction within the organizational hierarchy. Such internal transactions then become subject to the bureaucratic costs associated with hierarchical govemance, but such costs are deemed to be less than market monitoring costs given the degree of control (or "managerial fiat") that the hierarchy imposes. Thus, Williamson (1983) claims that "the main and only systematic factor responsible" for organizational changes along the lines of internalization is efficiency in terms of minimizing transaction costs. In essence, Williamson has replaced certain restrictive theoretical assumptions, such as hyperrationality, with others that have lead some TCE theorists to draw questionably universalistic conclusions about the application of TCE in explaining organizational actions and outcomes (Ouchi, 1979; Williamson & Ouchi, 1981).

Overview of Institutional Theory In recent years, the institutional school has evolved as a major theoretical approach describing and explaining organizational structures and actions (DiMaggio & Powell, 1983; Meyer & Rowan, 1977; Scott, 1987, 1995; Zucker, 1987, 1988). The underlying rationale behind institutional theory is that our understanding of organizations can be increased by examining the normative context in which organizations exist. This approach explicitly attends to the outcomes and processes of institutionalization (Zucker, 1988). Briefly, "institutionalization" refers to the processes by which societal expectations of appropriate organizational form and behavior come to take on a rule-like status in social thought and action. Institutional theorists argue that the driving force behind organizational action is a desire to achieve a fit with the organization's normative context. Hence, orgaJOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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nizations acquiesce to prescriptions from a variety of institutional norms in a desire to achieve this fit (DiMaggio & Powell, 1983). Institutional theorists point out that pressures toward conformity can often result in sometimes inexplicable and inefficient organizational actions and structures. Pressures for conformity to institutional pressures often lead to the homogeneity of organizational form (or isomorphism) that begets the classic question proffered by Meyer and Rowan (1977) regarding why organizational forms are so similar. Building on this idea, DiMaggio and Powell (1983) similarly view isomorphic tendencies as useful in explaining organizational actions. DiMaggio and Powell state that, "organizational change(s) occur as the result of processes that make organizations more similar without necessarily making them more efficient" (1983: 147). In essence, institutional theorists have explained the homogeneity of organizational forms and actions as residing in the isomorphic tendency of organizations seeking conformity to institutional pressures to increase legitimacy, reduce uncertainty, and increase standardization. These pressures for conformity to institutional norms typically arise from a number of sources. Coercive pressures arise from broad-based societal expectations as well as from organization-organization interdependencies, normative pressures stem from professionalization, while mimetic pressures are experienced as a function of efforts to reduce uncertainty. A large body of work has been generated that examines isomorphism resulting from coercive pressures stemming from a broader societal level (Dacin, 1997), as a function of inter-organizational linkages (Hinings & Greenwood, 1988; Rowan, 1982; Singh, Tucker, & House, 1986; Tolbert & Zucker, 1983) and as a function of network interrelationships (Galaskiewicz & Wasserman, 1989; Oliver, 1988). There is also a growing body of literature on mimetic (Fligstein, 1985; Haveman, 1993) and professionalization (Tolbert, 1988; Torres, 1988) pressures on organizations. Issues and Opportunities While the unique contributions of each theoretical approach has been mentioned, specific shortcomings remain to be resolved. For instance, institutional theory still lacks definitive boundaries, limiting its usefulness in explaining organizational phenomena (Tolbert & Zucker, 1996). Further, although the legitimacy imperative which is central to institutional theory may explain why there are so many similar organizational forms, the work of many institutionalists often fails to fully account for motivating factors that operate outside the fuzzy bounds of their analysis, including power (Pfeffer & Salancik, 1978), control (Ouchi, 1977), interest and agency (Powell, 1991; Scott, 1987), and the efficiency imperative that is central to TCE theorizing. While such an efficiency imperative is never denied outright in institutional discussions, efficiency is not accounted for fully in institutional explanations of organizational phenomena. Efficiency efforts, in fact, may be the result of the institutionalization of economic expectations of organizational actors and observers in certain fields (Zukin & DiMaggio, 1990). The integration of transaction cost economics and institutional theory should effect a more useful account of the complex processes guiding efficiency efforts and the rationalization of organizational structures. JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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In its own right, the transaction cost analysis approach to explaining organizational forms and actions has had quasi-paradigmatic implications for organizational scholars. Without doubt, the introduction of homo economicus into the study of organizations has allowed researchers to grasp more fully the economic implications of organizational actions and exchange relationships. The choice of transactions, rather than markets, industries or firms, as the basic level of analysis is a masterful stroke of insight. Recently, however, empirical results testing the basic tenets of TCE have been interpreted ambiguously (Moran & Ghoshal, 1996; Perrow, 1986). While various shortcomings have been discussed by other researchers (see note 1), we present herein certain problems which we believe may be alleviated if TCE logic is considered concurrently with the logic of institutional theory. These problems include questions regarding level of analysis (which precludes incorporation of institutional constraints), the assumption of universality, neglect of certain socially derived transaction costs, and the related neglect of the explanatory power of social forces that may negate or override the efficiency imperative. We will first explore each of these issues and then present institutional theory explanations as viable complements to TCE. Level of Analysis Issues. Williamson's economic actor is assumed to be subject to opportunistic tendencies that derive from human nature (1975). While this may be true to some extent, by placing the level and unit of analysis at individual transactions, Williamson has displaced an important behavioral constraint-that of institutional and social norms--in favor of firm-specific monitoring and managerial fiat. Williamson himself (Williamson & Ouchi, 1981) suggests that economists have overutilized an aggregated approach to economic analysis. However, by moving the level of analysis to the individual actor, TCE becomes prone to the undersocialization critique asserted by Granovetter (1985). In cautioning against extremist biases in organizational analyses, Granovetter (1985) suggests that, even if opportunistic tendencies exist to tempt transacting individuals, the transactions are embedded within a social system of norms, informal relationships, and the obligations inherent in those relationships. Thus, it is asserted here that the appropriate level of analysis for exploring the effects of "human nature" on behavior that is manifested at the level of organizations is the group- or social-level, consistent with Commons' (1950) notion of the economics of collective action. In a similar economics-based argument, Hill (1990) argues that the "invisible hand" of the market favors those in the long run who cooperate in transacting with others. Hill argues the market will select out those who are known to behave opportunistically. Transaction cost theorists point to the boundedly rational nature of the individual in order to demonstrate how managers and others might have difficulty in implementing optimally efficient transactions. Nonetheless, such boundedly rational, suboptimal individuals are expected in TCE theorizing to be capable of automatically calculating relative transaction costs 3 and of implementing the transaction arrangement most efficient for the organization. This is assumed in TCE despite the boundedly rational nature of the individual and the complexity of knowing and calculating transaction costs. In other words, it should be problematic JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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for theorists that, in the TCE framework, managers are boundedly rational at the individual level, yet economically rational in the aggregate. Universality Assumption. While TCE is quite useful for explaining organizational actions and outcomes in terms of efficiency maximization resulting from transaction cost minimization, the central argument of this paper is that TCE cannot explain all organizational actions and outcomes because efficiency is not always the overriding imperative guiding organizational and individual decisions. In contrast, as noted above, there is an implicit assumption in Williamsonian (1983) TCE that the only useful factor in explaining the internalization of transactions is efficiency derived from a minimization of transaction costs (see also Hennart, 1993). The main problem with such universalistic presumptions is that they necessarily relegate alternative or complementary explanations to inconsequential status. Others have also taken issue with the "universalistic pretensions" of transaction cost theorizing (Madhok, 1996; Neimark & Tinker, 1987). Although Ouchi suggested that TCE brings hope of "a unified social s c i e n c e . . , during our lifetime" (1979: 544), he also proposes that TCE "obsoletes the works by March and Simon, by Thompson, and by anyone who has attempted to understand the implications of bounded rationality, technology and uncertainty for the structure and functioning of organizations" (1979: 540). Williamson and Ouchi (1981) also indicate, essentially, that all organizational relations that can be framed in contractual terms can be explained by transaction cost theorizing. In contrast, Robins (1987) has suggested that transaction costs analyses are best applied only in perfectly competitive markets, few of which exist in reality. More likely, the utility of TCE for analytical purposes lies somewhere between these two extremes. Neglect of Socially Derived Internal Transaction Costs. Even if the appropriate analytical approach to explaining most organizational relations is through transaction cost theorizing, TCE has neglected to adequately account for internal transaction costs that derive from social-level phenomena rather than from individual-level circumstances. Other authors have lamented the failure of TCE arguments to better address the exact nature and sources of transaction costs, and have offered an accounting of several sources of internal transaction costs that may render internalization of transactions ultimately inefficient (see Perrow, 1981, 1986). For example, certain socially derived phenomena may result in hierarchical failure (Ghoshal & Moran, 1996). Although such criticisms may be overstated, a more complete incorporation of socially derived internal transaction costs will strengthen the transaction costs approach (Williamson, 1996). For example, the integration of newly acquired firms within existing hierarchy is not an easy accomplishment (Hoskisson & Hitt, 1994). Synergies that are expected to accrue from the merger of two separate firms (ostensibly as a result of efforts to minimize on transaction costs) are predicted to be the result of symbiotic relationships (Astley & Fombrnn, 1983; Jones & Hill, 1988). The complementary differences that are descriptive of each of the united enterprises, however, are likely to lead to intra-unit friction that, if not properly controlled, can result in some form of hierarchical failure (Jones & Hill, 1988; Perrow, 1986). In transaction cost analyzing that does not consider social-level sources of JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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dysfunction, such transaction costs would not be accounted for (see Jones & Hill, 1988, for an exception). Another example of socially defined transaction costs is related to the loss of internal legitimacy by the organization as perceived by its members. Recent work by Sutton and D'Aunno (1992) has explored the effects of downsizing on the psyche and emotions of an organization' s employees, suggesting that downsizing negatively affects the motivation and efforts of organization survivors (Brockner, 1992). Other structure-related actions also may have negative consequences for internal legitimacy, such as the cultural conflicts inherent in mergers and acquisitions (Buono, Bowditch, & Lewis, 1985). The exact internal transaction costs associated with actions such as downsizing and merger are, thus, more tacit and ill-defined than might be obvious. Organization literature is rich with theories that describe the socially defined (and constructed) nature of motivation and meaning in organizations (Astley, 1985; Pfeffer, 1980; Ranson, Hinings, & Greenwood, 1980; Salancik & Pfeffer, 1978). The exact manner in which one might determine the costs associated with demotivation and negative attitudes (as they are related to organizational structuring), however, remains to be defined. Further, as Perrow (1986) and others (Dugger, 1983) note, an individual-level transaction analysis does not adequately account for transaction costs that accrue from internal power structures and political processes. Miller (1993) and Zucker (1987) have suggested that intraorganizational power arrangements, a social-level phenomenon, may become institutionalized, or be perpetuated and legitimated as institutional norms. This may occur to such an extent that resistance to change adds substantially to transaction costs upon the occasion of structural reorganization (e.g., vertical integration, downsizing). It is not hard to imagine that interorganizational relationships and power arrangements may be a source of transaction costs as well. Finally, if social-level phenomena account not only for certain transaction costs, but also for the motivations underlying certain actions altogether (or in part), then such phenomena ought to be considered in conjunction with factors that lead to economic efficiency. In other words, certain organizational actions may not be explained entirely (or at all) by the never-ending pursuit of efficiency (Robins, 1987). Rather, certain actions may be blatantly inefficient on the face of it, but ultimately utilitarian and rational underneath. Recent work by Jones, Kosnik, and George (1993) must be noted as one of the few TCE works that considers the sometimes inefficient/irrational nature of socially constructed decision schema. While a socially oriented explanation of organizational structuring and formation has been more fully explored by institutional theorists, little has been done thus far to fit these explanations into whatever gaps may exist in traditional TCE. The preceding paragraphs have presented a number of potential weaknesses in the TCE framework when it is applied to the analysis of organizations in isolation from other organization theory approaches. Although these problems (i.e., confusing assumptions at the individual level of analysis, the assumption of universality, and the neglect of socially derived internal transaction costs) place natural limitations on the usefulness of TCE in explaining dynamic organizational behavior, we believe that the usefulness of TCE is enhanced greatly when it is considered in conjunction JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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with the explanatory power of institutional theory. Next, we examine the benefits of integrating the efficiency logic of TCE with the social logic of institutional theory.

The Value of Integration It is asserted here that the complexities of human behavior and collective society may present an opportunity for institutional theory to greatly enhance the explanatory power of TCE. Further, the scope of institutional theory can be greatly expanded by focusing on identification of the conditions in which institutional explanations have the greatest resonance (Powell, 1991). We believe an integration of the two theories that differentiates conditions under which each theory is most likely to have greater explanatory validity is a valuable endeavor. In examining the benefits of integrating TCE and institutional theory, we must first note that institutions and norms are socially constructed. Given the difficulty that theorists have had in determining exactly what constitutes a transaction cost, it would seem apparent that many of these, too, are socially constructed (Jones, Kosnik, & George, 1993) and are subject to differentiation across fLrms and environments. For example, the difference between a cost and an investment expense is a varying, unstable social construction that is debated daily in accounting circles. This is important because, in the TCE framework, boundedly rational managers must struggle to calculate the complex, relative transaction costs of varying structural scenarios. A transaction arrangement that has a long-term, net positive payoff may best be considered in terms of investment rather than cost. Further, because certain transaction costs (or their sources) are to some extent socially defined, their calculation may be less certain than, say, transaction costs that are tied to a simple input/output calculus. That is, certain tacit transaction costs, such as those associated with monitoring, governing, and innovating, are socially defined and, thus, may not be applied consistently. For example, the transaction costs associated with innovation are relatively tacit when compared to the transaction costs associated with supplier contracting (Ghoshal & Moran, 1996; Kogut & Zander, 1993). Thus, it may simply be easier (and, in fact, less costly) to pursue imitation (i.e., mimetic isomorphism) of other organizations when faced with such uncertainty (DiMaggio & Powell, 1983). The decision may never reach the point of being subject to a transaction costs calculation because of the uncertainty surrounding the costs of innovation. Institutional explanations may enrich our understanding of organizational action in this case. On the other hand, supplier contracting that involves more certain and identifiable transaction costs may best be explained by the efficiency explanations of TCE. A second reason that institutional theory should be useful in enhancing the theoretical power of TCE is that the efficiency imperative central to transaction costs theorizing itself is a socially constructed institution. Williamson recognizes this perspective as he states, "since transaction cost economizing is socially valued, it follows that the modern corporation serves affirmative economic purposes" (1981: 1538). That being the case, institutional arguments may subsume TCE logic in that, as the institutional norms of the society change, so too will the imperatives that explain organizational actions. In other words, it is not obvious JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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that efficiency will (or should) always be the overriding imperative in organizational decision-making. Thus, while we recognize that efficiency concerns are natural, should other imperatives prove more powerful and compelling, efficiency would not be a good predictor of actions or structural arrangements. In advocating an alternative social norm that would compel isomorphism along lines other than simple efficiency, Neimark and Tinker (1987) explore the image of organization under a different institutional setting. Written from a Marxist, dialectic perspective, the Neimark/Tinker critique recognizes that the very assumptions and universal lens that TCE depends on for validity are socially derived and are subject to change in a different social construction. While such changes to socially constructed institutions as envisioned by Neimark and Tinker (1987) are not soon likely in Western society, the point is well made that, were society to value other factors over efficiency (even in limited cases), TCE would not explain as much as its proponents currently claim that it does. Third, given that institutions, including the efficiency imperative, are socially constructed, it is likely that TCE would have differential explanatory power in societies in which efficiency is not the overriding concern. Robins suggests that TCE's reliance on the static existence of efficiency-seeking, market economies renders its universal validity deeply flawed, noting that, "large-scale market activity is relatively recent and remains relatively rare as a means of coordinating exchange" (1987: 77). Heilbroner, similarly recognizing that capitalism represents but a tiny fraction of economic history and only part of modem-day economics, states that, "whatever motives and pressures affect production and distribution are inextricably intermixed with the cultural, political, and technological attributes of those societies" (1993: 28). Heilbroner goes on to describe an existent African tribe, the !Kung, in which the production and distribution of labor efforts (i.e., meat from the hunt) is determined according to tradition alone, regardless of any inefficiencies that may arise. In fact, inefficiency is a foreign notion to such a society, as they have no conceptualization of "economy" or "economics" (Heilbroner, 1993). Even in modem, Western-oriented economies, institutional norms can differ such that efficiency explanations are not only complemented by institutional explanations, but may actually be subsumed by them. Inzerilli (1990) has explored the unique organizational arrangements found in Northeastern Italy and found that the network arrangements that exist among and between the predominantly small, family-run firms are partially, if not mostly, accounted for by socially defined institutional explanations, such as the family-based trust that cements contractual relations. The different, trust-based contractual relationships between firms indicate that such system-wide interdependencies need not be held hostage to opportunistic schemes, but rather might be managed collectively subject to varying institutional pressures which differentially constrain self-serving individual tendencies. Noting that opportunism is low in these Italian contractual relationships, Inzerilli suggests that: The reason for low o p p o r t u n i s m . . , would be that economic relationships, both external and internal to the firm, have more the character of trust-based social exchanges, involving diffuse, informal, non-contracJOURNAL OF MANAGEMENT,VOL. 25, NO. I, 1999

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tual obligations typical of familistic associations, than that of opportunistic economic exchanges involving specific and contractual obligations (1990: 15). Still others have noted the limited effect of efficiency under different institutional conditions. Sinha (1994) discusses the effect of coercive isomorphic pressures placed on organizations in India by society, employees, and the government, an argument similar to Hill's (1990) economic discussion of the "invisible hand" effects of the market. The value of employment in India is institutionalized to such an extent that the government will subsidize failing organizations indefinitely in order to maintain the organization's existence as an employer (Sinha, 1994). This is not to say that efficiency is not a concern in India. A TCE view would be able to explain much about organizational actions and structures in India. However, there are certain conditions wherein institutional theory explanations would add much to the equation. Finally, Williamson (1981: 1537) has asked the question, "What are the factors that determine the degree to which firms integrate--in backward, forward, and lateral respects?" Without doubt Williamson (1975) has shown that, in many cases, these motivating factors are primarily economic and might be best analyzed in terms of differential transaction costs. On the other hand, to be fair, firms that are embedded in a social, cultural, and technological setting (i.e., all firms) are subject to many pressures that derive not from economics, but from institutional forces. Thus, Williamson's question regarding the factors driving integration must be assessed according to both economic and social/institutional criteria. As an example, many structural arrangements and re-arrangements may be explained by both economic and institutional forces. Perhaps it is most accurate to analyze first movers (and early adopters) of certain structural innovations (Schnaars, 1994) in economic terms, while looking at late adopters along the lines of a legitimacy-seeking imperative (Carroll &Hannan, 1989; Haveman, 1993; Rowan, 1982). Although this is ultimately an empirical question, it seems likely that neither theory explains all organizational actions and structures even in the same industry. Rather, an integration of the two theories that differentiates among conditions under which each theory is most likely to have greater explanatory validity would be worth pursuing. The model that follows offers an illustrative framework from which this integrative analysis may proceed.

Towards Integration: An Ellustrative Framework The previous discussion has centered on arguing that, although TCE may be appropriate for analyzing organizational actions and outcomes in many cases, there are conditions under which an incorporation of institutional theory arguments would either enrich or supplant TCE explanations. That is, the rationale by which managers make decisions is at times guided mostly by efficiency-centered considerations (Williamson, 1996). Nonetheless, decision-making is subject to the satisfaction of other important imperatives, (Hesterly, Liebeskind, & Zenger, 1990) JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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One may theorize about a seemingly infinite number of constraints and imperatives which define the logical, or rational, decision alternatives available to managers in varying situations. However, in order to provide an illustration of how TCE and institutional theory may be integrated, we focus in this paper on two dimensions of the decision scenario which we feel demonstrate their complementary nature. The following model suggests that the arguments of either theory (or a combination of the two) may be more appropriate in certain situations, depending on two particular factors--the concern for survival of the organization (immediate or deferred) and the degree of ambiguity surrounding the identification and calculation of transaction costs in particular decision scenarios (ambiguous or straightforward). 4 It is important here to note that these particular dimensions are chosen from among many possible alternatives in order to explore the value of synthesizing two theoretical perspectives. For instance, Thompson's (1967) "standards of desirability" and "knowledge of cause-effect relationships" may also prove useful in a synthesis. Another possible dimension involves the emerging literature regarding variability in the degree of institutionalization attained by organizational structures or actions (Goodrick & Salancik, 1996; Rura & Miner, 1996). We believe, nonetheless, that those dimensions employed here best illustrate the value of theoretical complementarity. The model outlined in Figure 1 illustrates the relationship between the two dimensions introduced above. First, organizations differ for various reasons in the degree to which the survival imperative is relatively immediate. One important factor affecting concern for survival is the differing environments faced across organizational life cycle stages (Greiner, 1972). Organizations that are less stable (e.g., newly formed organizations, organizations facing decline or death) face different immediate concerns than those confronting organizations that are more secure in their survivability prospects (Hannan & Freeman, 1989). Because organizations that are less assured of survival need access to critical resources to reach a point of greater stability, they may be inclined to satisfy certain imperatives that are more short-sighted at the expense of long-rnn efficiency, such as a legitimacy imperative (Meyer & Rowan, 1977) or a power imperative (Pfeffer & Salancik, 1978). Legitimacy in this case is similar to Thompson's notion of "fitness for future action" (1967: 88). Organizations that are more assured of immediate survival have the luxury of paying more heed to long-run survival imperatives, such as efficiency (Jones & Hill, 1988) and control (Ouchi, 1977). Jones and Hill, in a footnote, recognize that efficiency is only one of many possible imperatives that compel organizational action (others include survival, growth, etc.), but they suggest that the efficiency (or profit maximization) imperative is the "rational" imperative in that it most contributes to the long-run survivability of the organization (1988: 165). It is argued here that efficiency is not the overriding concern of organizations that face relatively imminent demise. Second, transaction costs that are ambiguous with regard to identification or calculation are of little use in a decision analysis. Note that this condition is a special case of the general environmental "uncertainty" condition which plays a central role in organizational theorizing (e.g., Thompson, 1967; Williamson, 1975). We are not concerned here so much with a general uncertainty about enviJOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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Concernfor Survival Immediate

Deferred

Cell I

Cell III

Isomorphism

Efficient Imitation

Ambiguous Degree of Ambiguity (in identifying and calculating transaction costs)

(Loose Coupling)

Straightforward

Cell II

Cell IV

Ceremonial

Efficient Operation

Adoption

(Tight Coupling)

(Decoupling)

Figure 1. The Power of Institutional and Transaction Cost Theories: A Contingency Model ronmental conditions as we are with the difficulty or complexity in calculating the relevant costs of transactions. In situations where transaction costs are less reliably interpretable, it is possible that decision-makers, when compelled to action, may look to the actions of other organizations in order to garner information and ideas and to reduce uncertainty (DiMaggio & Powell, 1983; Hesterly et al., 1990). For example, if an organization is considering entering a foreign market through an international joint venture, the effects of cultural differences (and other potential sources of opportunism), however real, are difficult to measure and calculate. Thus, organizations considering alliance-based foreign expansion may follow the actions of others based on the success of similar ventures (Gimeno & Hoskisson, 1997). As experience with (and knowledge of) transactions and transaction processes is accrued, we would expect transaction costs to be better understood and less ambiguous. However, because knowledge about transactions and processes exists in several places and people within the firm (Hayek, 1948), the extent to which this knowledge is diffuse should be expected to increase the ambiguity of the transaction cost analysis (Moran & Ghoshal, 1996). That is, in the face of such ambiguity, transaction costs are often difficult to interpret and/or calculate. Further, as Chiles and McMackin (1996) note, some TCE proponents assume a more objective transaction cost analysis while others allow for subjectivity in the process. Whether one assumes objectivity or subjectivity in the analysis of transaction costs as they impact managerial decision making, the lack of available or interpretable transaction cost information should be expected to compel managers to consider and weight more heavily other sources of information, such as the actions of other firms and the expectations of key stakeholders (Thompson, 1967: 87). In Figure 1, as a matter of related discussion, we have also incorporated arguments concerning the degree to which the organization's technical and productive operations are coupled to the organization's more visible elements (structure, JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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procedures, etc.). That is, the factors influencing the decision scenario also affect the degree to which the organization can pursue efficiency and flexibility in its technical core while still satisfying the institutional demands of the environment (Meyer & Rowan, 1977; Thompson, 1967). As is discussed below, fLrms facing different decision and operational environments vary in their flexibility to operate independent of the scrutiny of interested stakeholders. As a result, this degree of coupling may act as a mechanism through which firms accomplish an appropriate combination of institutional and efficient responsiveness. Four quadrants can be identified in the model that differentiate the relative impact of TCE and institutional theory in explaining organizational actions and outcomes. In cell I, or the Isomorphism cell, the organization faces a relatively immediate survival crisis (immediate concern for survival), wherein transaction cost identification and calculation are relatively ambiguous. Thus, decision-makers may be motivated most by a legitimacy or power-seeking imperative in order to gain or ensure access to critical organizational resources, such as capital, supplies, or customers. Greater attention to elements of the institutional environment may require actions--for example, isomorphism (DiMaggio & Powell, 1983) or growth (Pfeffer & Salancik, 1978)---which may not be efficient at all, rather they are intended to be instrumental. That is, to the extent that organizational decision-makers believe that these actions will enhance the immediate survivability of the organization, they may be taken without regard to efficiency calculations. This is not to say, however, that efficiency ceases to be a concern for the firm's managers. 5 Rather, in the scenario described in Cell I, decision-makers often do not have the luxury of pursuing the most economically efficient course of action. It is quite possible that, in the face of organization~ demise, attention to institutional demands will require actions that convey efficiency in the future, such as in the case of firms in mature markets competing on the basis of low cost operations. In this case, fitness for future action is synonymous with organizing for efficient production. As Scott notes, "If their survival is at stake, organizations will abandon the pursuit of their avowed objectives in order to save themselves" (1981: 81). On the other hand, even for firms in environments characterized by institutionalized expectations of efficiency, if evidence of efficiency in production is not easily derived, institutionalized proxies for efficiency may prevail, such as expectations regarding particular structures and processes which are perceived to be efficient. Thus, efficiency concerns do not disappear in the short-run, or in times of survival crisis. Nonetheless, even if efficiency motives may not be entirely disregarded in favor of overriding, conflicting institutional requirements, organizational actions may be taken in order to indicate efficiency more than they are expected to ultimately achieve efficiency. Recent restructuring at Apple Computers is an example of a firm pursuing actions which are meant to convey legitimacy in order to alleviate the concerns of interested stakeholders (especially investors and customers) in the face of possible organizational demise. PI: Actions by decision-makers of organizations facing conditions characterized by immediate concerns for survival and ambiguous transJOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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action cost analyses will be best explained by legitimacy-seeking, isomorphic tendencies, rather than efficiency considerations.

Cell II, or the Ceremonial Adoption cell, involves decisions by organizations that face a survival crisis wherein legitimacy is of great immediate concern. However, as the organization in this case faces transaction cost considerations that are relatively certain and ascertainable, a cost-minimizing course of action would be most rational. Nonetheless, if the organization must attend to institutional factors in order to gain or maintain legitimacy (i.e., demonstrate its fitness for future action) in the face of this particular survival crisis, then the organization may attempt to simultaneously maintain efficiency of production and acquire legitimacy. That is, the firm may enact the more efficient course of action (even if it is separate from the more "legitimated" course of action) while maintaining a symbolic commitment to the legitimated course of action. Meyer & Rowan (1977) referred to this as "ceremonial" adoption of institutional norms. This ceremonial adoption maintains a decoupling6 of the organization s legitimated processes from the efficient running of the technical core (Thompson, 1967), allowing an isomorphic facade of the firm' s peripheral elements to placate the concerns of key external stakeholders (Meyer & Rowan, 1977; Westphal & Zajac, 1994). For instance, the self-trumpeted but non-committal adoption by many organizations of TQM programs is an attempt to satisfy expectations of institutional stakeholders while continuing established organizational routines (Westphal, Gulati, & ShorteU, 1996). Further, firms faced with survival crises may attempt to reduce costs through labor force reductions. Such restructuring efforts may unambiguously increase efficiency of the firm (through reduction of bureaucracy costs, although this point is subject to debate), however, the downsizing of employees is an issue with which several members of the institutional environment are concerned. Firms in the process of downsizing may be forced to set up relocation programs, engage in outplacement efforts, or provide employee counseling. The often noncommittal and ineffective nature of such efforts is well noted (Morin, 1996; Shaughnessy, 1986). P2a- Actions by decision-makers of organizations facing conditions characterized by immediate concerns for survival and relatively straightforward transaction cost analyses will be best explained by a tendency toward ceremonial adoption of legitimated beliefs and norms. P2b: Organizations facing conditions characterized by immediate concerns for survival and relatively straighOCorward transaction cost analyses will maintain a decoupling of ceremonially adopted peripheral elements from the efficient functioning of its technical core.

In cell HI, or the Efficient Imitation cell, the organization is not preoccupied by the trappings of a survival crisis, but does face ambiguity in ascertaining and calculating transaction costs for the decision at hand. Efficiency and control are the primary imperatives facing this type of organization. Thus, given the ambiguity surrounding the identification and interpretation of transaction costs in this case, JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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and the fact that information search is not costless (Cyert & March, 1963) it may simply be most efficient for the organization to look at the actions of its peers or competitors in order to determine the appropriate course of action. Others have referred to this tendency as "strategic followership" (Bolton, 1993) and a follow-the-leader approach (Knickerbocker, 1973). The organization here would not simply imitate other organizations regardless of the economic implications of the decision, but rather would search for examples of actions taken by other organizations that seem to have worked well and are perceived to have been economical. An example would be firms concerned with determining an appropriate level of innovation and R&D. While, it is not suggested that organizations will always imitate because it is cheaper than innovation, it is likely that certain decisions will be made in this isomorphic manner as a result of the tacit nature of innovation costs.

Another viable strategy suggested by institutional theory, and which may be descriptive of the decision environment faced by decision-makers in the Efficient Imitation cell, is the use of loose coupling, especially when ambiguity about efficiency assessment is prevalent (Meyer & Rowan, 1977). By loose coupling, we refer to Thompson' s (1967) notion of the degree of flexibility inherent in the organization's operations and processes. That is, a loosely coupled system is one in which the organization's operations are flexible in responding to uncertainty, such as that found in situations in which knowledge of transaction costs is imperfect (Thompson, 1967). Where transaction costs are not easily identified or interpreted, it may be more efficient to operate loosely coupled. Keeping the operation of the organization's technical core coupled only loosely to other functions more visible to interested stakeholders, such as marketing, public relations, and accounting, allows greater flexibility for decision makers faced with ambiguity in assessing efficiency. Under conditions in which organizational assessment is ambiguous, loose coupling may be both an effective and efficient means of organizing. We would expect to observe loose coupling, for instance, in industries where technological turnover, innovation, and environmental turbulence are highest. Further, where the organization is not faced with questions of imminent survivability, the flexibility inherent in loosely coupled systems allows for more rapid and effective imitation of proven courses of action. Hence, it is assumed that isomorphism that incorporates proven efficiency considerations would be most appropriate in these cases. P3a: Actions by decision-makers of organizations facing conditions characterized by deferred concern for survival and ambiguous transaction cost analyses will be best explained by a tendency toward efficient imitation. P3b: Organizations facing conditions characterized by deferred concern for survival and ambiguous transaction cost analyses will adopt or maintain loosely coupled technical systems, allowing for greater flexibility. JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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In cell IV, the Efficient Operation cell, immediate survival is not the main concern. Organizational assessment is once again concerned with efficiency and control. For organizational decisions in this cell, however, the transaction costs associated with the decision at hand are relatively well known and easily calculable. The organization is a tightly coupled, highly efficient system. This is the cell in which WiUiamson's (1975) classical rendering of TCE most applies. A decision such as the internalization of a supplier whose business is a long-time mainstay of the organization is an example. The supplier' s structure and control system may be similar to the acquiring organization and coordination is not a main concern. Further, firms in certain industries display these characteristics, such as energy industry firms. These firms--including the most well-known (Exxon, Shell, British Petroleum, etc.)---operate in a fairly mature exchange environment, face transaction relationships which have relatively transparent costs, and possess the luxury to defer concern for their survival as a result of protracted product demand, large asset reserves, large firm size, and stable technologies. The actions of these firms----e.g., vertical integration fit well into the TCE framework. Tightly coupled systems have certain advantages--resources can be used more efficiently, there is less redundancy and waste--but these advantages are only enjoyed if there is little ambiguity in the system, such as is the case when information about the causes and effects of transaction costs is available and stable. Because understanding and knowledge of transaction costs is relatively high in these scenarios, organizations are likely to have increased asset specificity, which enhances the tight coupling of the organization' s systems. Although all transaction costs cannot be known and/or calculated, decisions in this cell are relatively straightforward and are most accurately explained by TCE. P4a: Actions by decision-makers of organ&ations facing conditions characterized by deferred concern for survival and relatively straightforward transaction cost analyses will be best explained by the efficiency-seeking arguments of transaction cost theory. P4b: Organizations facing conditions characterized by deferred concern for survival and relatively straightforward transaction cost analyses will adopt or maintain tightly coupled technical systems, allowing for more efficient operations.

Conclusion It has been argued here that TCE, a dominant framework in organizational analyses, stands to gain much from an integration with institutional theory explanations for organizational actions and structural arrangements. Although TCE is an important contribution to theorizing about organizations, it fails to adequately address certain social-level phenomena that affect organizational actions which may be best analyzed through the lens of institutional theory. Despite the rich explanatory power of TCE arguments, weaknesses of TCE include analyzing transactions at the individual level, which neglects social behavioral constraints; and an assumption of the relative universality of TCE's explanatory power, which JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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leaves little room for integration with other organization theories. Further, TCE fails to adequately incorporate some socially derived transaction costs and ignores the explanatory power of institutional isomorphism. The joining of institutional theory with TCE serves to narrow the gaps in organizational theorizing that result from the problems discussed above. Institutional theory accounts for socially derived motivations of action, such as the pursuit of a legitimacy imperative through isomorphismwith institutional norms (Meyer & Rowan, 1977). Whether or not institutional theory subsumes TCE as a result of the social construction of the efficiency imperative is another theoretical issue that begs for further discussion. Clearly, as has been mentioned, varying socially constructed environments may lead to different imperatives for organizational action. Nonetheless, both TCE and institutional theory have much to say about the ways in which organizational actors behave and the consequences these actions have for the organizations themselves. An integrated use of the two theories seems most logical. A model has been presented, along with related propositions, that proposes various conditions under which each of the two theories, or a combination of institutional theory and TCE, might be most appropriate for explaining organizational actions and outcomes. The model differentiates between organizations that face immediate survival crises and organizations that are more able to defer survival concerns in order to focus on efficiency. It further differentiates between organizational decision environments that involve ambiguous or straightforward transaction cost identification and calculations. Finally, the model incorporates, where appropriate, the nature of loosely coupled and tightly coupled technical systems and their relationship to the arguments described herein.

Suggestions for Future Research To simply suggest the integration of two rather disparate bodies of thought is unrealistic if one does not consider the difficulty in implementing such a venture. Both TCE and institutional theory have suffered from problematic operationalization of their relevant constructs. While the relevant constructs, too, are worthy of debate and might best be left to the consideration of the individual researchers who must deal with their particular subjects, certain problems should at least be considered. First, greater theoretical exploration of the synthesis of TCE and institutional theory logics is needed in order to establish boundaries of consideration. We have discussed what we consider to be the reasons why this integration is needed and proposed a model regarding how it might be done, but further theorizing is needed to determine alternative ways in which this might best be accomplished. Second, researchers must establish better than has been done to date exactly what constitutes transaction costs in the environment of interest and what exactly conveys legitimacy for organizations. Finally, an integrated theory would have to address the transaction cost implications (value) attached to legitimacy and other aspects of utility that are derived from institutional isomorphism. By the same token, institutional theorists must consider the legitimacy conveyed through economic efficiency. Although a daunting task, one would expect that, ultimately, legitimacy JOURNAL OF MANAGEMENT, VOL. 25, NO. 1, 1999

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(and other socially derived imperatives) must be modeled mathematically in economic terms that may be incorporated into transaction cost analyses. Theoretical expansion and exploration of an integrated model of organization theory that incorporates both economic and social considerations is the crucial first step. Acknowledgments: We would like to thank David Deephouse, Rick Johnson, and Rahtd Kochhar for their helpful comments. We are also indebted to Robert Vecchio and two anonymous reviewers for important suggestions on an earlier version of this paper. Notes 1.

2.

3.

4.

5. 6.

For example, critiques of TCE include Perrow (1981, 1986), Robins (1987), Niemark and Tinker (1987), Hestedy, Liebeskind, and Zenger (1990), Granovetter (1985), Ghoshal and Moran (1996), and Inzerrilli (1990), although this list is not exhaustive. Critiques of institutional theory include Zucker (1987), Powell (1991), Scott (1995) and most recently Tolbert and Zucker (1996). Although in our discussion we concentrate on Williamsonian TCE, we recognize that there are other flavors of TCE (e.g., internalization theory). While important and interesting differences exist (see Chiles & McMackin, 1996, for one discussion), modern TCE in general stems from the work of Williamson 0975, 1985). While we often employ terminology suggesting that managers engage in specific transaction cost calculations, it is recognized that managers most likely do not think exactly in terms of the researcher's transaction costs and certainly do not put calculators to task in determining the relative transaction costs of alternate exchange arrangements. Rather, managers are believed here to perceive the relative transaction costs associated with alternate arrangements, thereby enabling them to choose the most efficient transaction scenario. This rendering of managerial perceptions is consistent with the arguments of TCE, which also do not assume explicit transaction cost calculations. Although the conceptual convenience of a 2 x 2 matrix model necessitates a dichotomization of the dimensions under analysis, we note that the firm's concern for survival and the degree of ambiguity surrounding transaction cost calculations are continuous variables. To the degree that discussion is faclitated, however, we believe the dichotomization employed is justified. We are grateful to an anonymous reviewer for pointing out the importance of this issue. Open-systems theorists have suggested that the interdependence between organizational elements and the external environment results in loose coupling among core and peripheral elements which interact with different aspects of the environment (Lawrence & Lorsch, 1967). This view complements the rationalized, efficient, tightly coupled relations between organizational elements implicit in closed-system accounts of organizations (Thompson, 1967). Meyer and Rowan (1977) note that, given environmental uncertainty, a more extreme process----decoupling----occurswhen firms attend to the institutional requirements of the environment in a manner essentially separate from the structuring and operation of the firm's technical core (see Scott, 1981).

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