INSTITUTIONAL CAPABILITIES AND ENTREPRENEURIAL ADVANTAGE

377 Pages·2014·5.9 MB·English

by  Christopher Pryor

INSTITUTIONAL CAPABILITIES AND
ENTREPRENEURIAL ADVANTAGE: BRIDGING THE
GAP BETWEEN REGULATORY MANAGEMENT AND
OPPORTUNITY

By
CHRISTOPHER GARRETT PRYOR
Bachelor of Arts/Journalism
University of Oklahoma
Norman, Oklahoma
2004

Master of Business Administration
Oklahoma State University
Stillwater, Oklahoma
2009

Submitted to the Faculty of the
Graduate College of the
Oklahoma State University
in partial fulfillment of
the requirements for
the Degree of
DOCTOR OF PHILOSOPHY
July 2014
INSTITUTIONAL CAPABILITIES AND ENTREPRENEURIAL ADVANTAGE:
BRIDGING THE GAP BETWEEN REGULATORY MANAGEMENT AND
OPPORTUNITY

Dissertation Approved:

Justin Webb
Dissertation Adviser

Robert Baron

Michael Morris

David Knottnerus

ii
Name: CHRISTOPHER GARRETT PRYOR

Date of Degree: JULY 2014

Title of Study: INSTITUTIONAL CAPABILITIES AND ENTREPRENEURIAL
ADVANTAGE: BRIDGING THE GAP BETWEEN REGULATORY
MANAGEMENT AND OPPORTUNITY

Major Field: Ph.D., Entrepreneurship

Abstract: Firms are increasingly using tactics to manipulate their regulatory constraints, while at
the same time regulatory environments are becoming increasingly complex and dynamic.
Although scholars have described many of the activities firms use to change their institutional
environments, this research has largely examined the manipulation and creation of informal
institutions, such as organizational forms or social customs or traditions. We have much less
understanding about 1) what drives firms to manipulate formal, regulatory institutions, and 2)
why firms might differ in their abilities to create institutional change. This dissertation addresses
these issues by linking regulatory constraint manipulation to entrepreneurial outcomes –
specifically, the pursuit of valuable business opportunities – and it proposes that firms may
develop institutional capabilities, which enable them to pursue competitive advantage strategies
that rely considerably on institutional manipulation.

iii
TABLE OF CONTENTS

Chapter Page

I. INTRODUCTION .....................................................................................................1

II. LITERATURE REVIEW ..........................................................................................8

Institutional Theory ..................................................................................................8
Organizational Capabilities ....................................................................................28

III. HYPOTHESES ......................................................................................................46

IV. METHODOLOGY ................................................................................................58

V. RESULTS .............................................................................................................85

VI. DISCUSSION AND CONCLUSION ..................................................................92

REFERENCES ..........................................................................................................109

APPENDICES ...........................................................................................................182

iv
LIST OF TABLES
Table Page

1 129
2 131
3 132
4 133
5 134
6 142
7 145
8 146
9 150
10a-10o 151
11 165
12 165
13 166
14 167
15 168
16 169
17 170
18 171
19 172
20a-20b 172

v
LIST OF FIGURES
Figure Page

I 174
II 175
III 176
IVa 177
Va 177
IVb 178
Vb 178
VI 179
VII 180
VIII 180
IX 181

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CHAPTER 1
INTRODUCTION

A wide array of legal statutes, regulations, codes, laws, and constitutions constrain the
objectives organizations may pursue and how they pursue them, and when these constraints are
violated by an organization, the organization, its employees and its leaders may face punitive
measures, including fines or prison sentences. While organizations retain a great deal of
discretion in setting and pursuing objectives, many of their activities are nevertheless closely
monitored and constrained by the proscriptions of national, state, and local governments
(Edelman & Suchman, 1997; Laeven & Levine, 2009). Some industries, such as defense
contracting, nuclear energy production, banking and finance, and healthcare, are heavily
regulated and subject to multiple levels of regulations, which are often produced and enforced by
government agencies specifically created to monitor a particular industry. For example, hospitals
are constrained by regulations from several federal-level agencies, such as the Department of
Health and Human Services and the Food and Drug Administration, as well as state- and local-
level agencies. Even organizations in lightly regulated environments are still subject to complex,
federal- and state-level proscriptions regarding how they hire, pay and fire employees, how they
maintain workplace safety, and even how they build their buildings and install wiring, hot water
tanks, and other hardware. Table 1 provides many more examples of industries and agencies that
regulate them.
--------------------------------
Please see Table 1
---------------------------------

1
These regulatory constraints, which are a type of formal institution (e.g., North, 1990; Scott,
2001), constitute a critical part of the broader mosaic of the “rules of the game” that constrain the
behavior of all individuals and organizations within society.1 Formal institutions are codified and
enforceable constraints, which range from unwritten contracts to the written constitutions of
states and nations. Organizations are compelled to obey formal institutions because they are
enforced through the coercive power of the legal entities of state (Ostrom, 1986). Informal
institutions may also be defined as constraints in that they limit the range of behavior that may
characterize social interactions between actors. However, in contrast with formal institutions,
informal institutions are not explicit or codified, they are not usually enforced through coercion,
and they are less malleable than formal institutions because they are the outcome of generations’
worth of past interactions (North, 1990).
Entrepreneurs, who uncover and exploit opportunities to create customer value through
introducing innovative products and services (Choi, Levesque, & Shepherd, 2008; Shane &
Venkataraman, 2000; Shane, 2012) are constrained by extensive and complex regulatory
environments. Regulations shape the environment in which entrepreneurs are embedded and
influence the variety of opportunities entrepreneurs may uncover as well as limit their means of
exploitation (Baumol, 1990; Meek, Pacheco, & York, 2010; Shane, 1993). Consider, for
example, the opportunity to manufacture and sell roulette machines to casinos. Such an
opportunity exists in Oklahoma for roulette machine manufacturers while it does not in Texas,

1 North (1990) draws sharp contrast between institutions, which he refers to as the “rules of the game,” and
organizations. He writes: “what must be clearly differentiated are the rules from the players.” This dissertation takes
into consideration both regulation and regulatory agencies; therefore, to avoid confounding both as “institutions,” I
adopt herein a strict adherence to North’s definition of institutions as constraints on individual and organizational
behavior, which are distinct from the organizations that create them. In other words, a regulation, law, or statute may
be an institution, while an agency, political body, social movement, or any other organization are not institutions.
Furthermore, to maintain this conceptual clarity for myself and for the reader, I will refer to institutions primarily by
their function; hence, constraints, proscriptions, restraints or limits.
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which is an outcome of the difference between regulatory environments across both states. Or
consider the example of the front-yard lemonade stand. While the opportunity to have such a
stand is not prohibited, entrepreneurs hoping to exploit the opportunity must first obtain licenses
for food handling or risk being shut down.
While organizations may accept, acquiesce, and conform to their regulatory environments
(Meyer & Rowan, 1977; Zucker, 1987), organizations that encounter constraints that are
especially burdensome or costly may be more likely to attempt to alter their regulatory
environments (Oliver, 1991; Seo & Creed, 2002). Scholars have increasingly examined the
relationship between firms and their regulatory or broader institutional environments.
Institutional theorists have described the strategic approaches firms may adopt in relation to their
institutional constraints, such as attempting to avoid, manipulate, or defy these constraints (e.g.,
Oliver, 1991; Zimmerman & Zeitz, 2002). Under the aegides of institutional entrepreneurship
and corporate political activity, scholars have also cataloged the various tactics firms and other
actors use to manipulate institutions or to create new ones (e.g., Lawrence & Suddaby, 2006;
Pacheco, York, Dean, Sarasvathy, 2010; Hillman, Keim, & Schuler, 2004). These tactics include
a wide range of activities, including simple political advocacy to more complex activities such as
framing and social movement organization. Scholars have also described the means through
which these activities take place, especially the role discourse (i.e., spoken or written
interactions) plays in creating and maintaining new or altered institutions (e.g., Lawrence &
Phillips, 2004). And finally, scholars, in attempting to address the paradox constituted by the
notion of constrained actors altering their constraints (Garud, Hardy, & Maguire, 2007; Leca &
Naccache, 2006), have attempted to describe the conditions under which actors may nevertheless
escape their restraints to effect change, such as the existence of conflicting or contradictory
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constraints (e.g., Battilana, Leca, & Boxenbaum, 2009; Greenwood & Suddaby, 2006; Maguire,
Hardy, & Lawrence, 2004), and the resources deployed by these actors, such as power and
knowledge (e.g., Kahn, Munir, & Willmott, 2007; Levy & Scully, 2007).
Although past research has made notable progress regarding the tactics and strategies
organizations may use to alter their institutional environments, scholars have largely examined
issues related to the neoinstitutionalism of DiMaggio and Powell (1983) and have therefore
focused on explaining how new forms of organizations are created and institutionalized and how
actors may surmount institutional pressures to effect this type of change. We have much less
understanding regarding why and how already-established firms may pursue institutional change
as a central component of obtaining and sustaining competitive advantage and why some firms
may be better at wielding such influence than others. More specifically, no framework yet exists
that describes firms’ routine activities to interact with and manipulate legal regulatory constraints
and the role these routine activities play in facilitating regulatory change, despite scholars’
suggestion that such routine activities may be vital to firm performance (Bagley, 2008, 2010). In
addition, the links between these routines and entrepreneurial outcomes, such as opportunity
identification and exploitation, have not yet been established.
This dissertation tells the story of why and how firms may pursue the core entrepreneurial
functions of opportunity identification and exploitation through developing capabilities to
interact with and manipulate the legal regulatory institutions that constrain them. To tell this
story, this dissertation integrates institutional theory, especially institutional entrepreneurship
research, and organizational capabilities perspective. Institutional theory (DiMaggio & Powell,
1983; North, 1990; Scott, 2001) concerns the relationship between formal and informal
constraints and organizations’ behavior. Organizational capabilities perspective (Barney &
4