Normative and resource flow consequences of local regulations in American brewing industry, 1845-1918

Administrative Science Quarterly,  Dec, 1998  by James B. Wade,  Anand Swaminathan,  Michael Scott Saxon

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Since its emergence, ecological theory has become influential in shifting the focus from adaptation to selection processes in organizational populations, arguing that most change occurs through the founding and failure of organizations rather than through adaptation by individual organizations (Hannan and Freeman, 1977, 1989). Early empirical research in this area primarily investigated rates of organizational failure and founding by focusing on demographic processes (Freeman, Carroll, and Hannan, 1983), population dynamics (Carroll and Delacroix, 1982; Delacroix and Carroll, 1983), and niche width dynamics (Freeman and Hannan, 1983; Carroll, 1985). More recently, ecological research has expanded in scope by incorporating the institutional environment into research on vital rates (Scott, 1995: 108-113). For instance, a key component of Hannan's (1986) theory of density dependence is the institutional concept of legitimation or taken-for-grantedness. Similarly, other researchers have examined the effects of how institutional linkages to powerful state actors and favorable government policies can enhance legitimacy and increase access to resources (Singh, Tucker, and House, 1986; Tucker, Singh, and Meinhard, 1990; Baum and Oliver, 1991, 1992), as well as how regulations that affect only part of an organizational community can lead to unanticipated consequences (Barnett and Carroll, 1993). This study contributes to the growing literature that combines elements of institutional and ecological theory (for a review, see Baum, 1996) by considering the institutional and ecological impact of a broad class of regulations, those that differ across jurisdictional boundaries, in particular, government regulations.

Government regulations can affect organizational populations in two ways. First, regulations affect resource flows by creating opportunities and constraints for different kinds of organizations within an organizational population (Carroll, Delacroix, and Goodstein, 1988). Thus, they influence the number and diversity of organizations within a population (Wholey and Sanchez, 1991). Second, regulations exert an indirect effect on organizational populations by creating "cultural expectations or norms in the society within which organizations function" (DiMaggio and Powell, 1983: 150). These normative expectations can have a powerful impact because they embody widely shared beliefs about how people should behave (Scott, 1994). The consequences of institutional action have been studied both from an ecological and institutional theory perspective. Research in these two traditions emphasizes the resource and normative effects of institutional action, respectively. By examining these effects at the same time, this study combines materialist and cultural approaches to the regulatory environment of organizations (Edelman and Suchman, 1997).

Ecological research on institutional action has focused on the impact of government intervention such as regulations on resource flows within organizational populations (Hannan and Freeman, 1977). For instance, Wholey, Christianson, and Sanchez (1992) showed that state regulations requiring health maintenance organizations (HMOs) to file a deposit increased the failure rate of small HMOs by a disproportional amount when compared with large HMOs. Similarly, Baum and Oliver (1992) found that an increase in the government's budget for the Toronto Social Services Division raised founding rates and lowered failure rates of day care centers in the city. Koza (1988) argued that regulations are part of the micro niche of an organization's environment. This micro niche provides resources to and exerts demands on a homogenous population of organizations.

Institutional theorists have been mainly concerned with the expectations and norms attached to institutional action (Jepperson, 1992). Organizations conform to rules, not only to acquire resources but also to be perceived as legitimate (Meyer and Rowan, 1977; DiMaggio and Powell, 1983). This perspective raises the possibility that institutional action such as regulation may induce responses from affected organizations in ways that transcend the stated purpose of such intervening action (Scott, 1994). Edelman (1990, 1992) argued, for instance, that civil rights legislation in the 1960s created a normative environment that encouraged employers to adopt formal grievance procedures for employees, even though the existing laws did not mandate the adoption of such practices. Organizations that did so were perceived as legitimate and were presumably less likely to come under government scrutiny.

One similarity between these two approaches is that both the normative and resource effects of government regulations often generate externalities, that is, the private costs and benefits for the decision makers are not the full costs and benefits for the decision (Arrow, 1970; Mansfield, 1985: 473-479, 495-501). For instance, the costs of the HMO legislation studied by Wholey, Christianson, and Sanchez (1992) were borne primarily by small HMOs. Similarly, Edelman (1990, 1992) found that large organizations were most likely to adopt formal grievance procedures, even when not required by law, presumably because of their higher visibility. Externalities play an important role in industry evolution. Delacroix and Rao (1994) argued that the legitimation of an organizational form generates externalities because early entrants bear the costs, and reap some of the benefits, of legitimating the form. Similarly, Aldrich and Fiol (1994) suggested that one of the essential tasks of early industry entrants is to establish cognitive and sociopolitical legitimacy. One substantive contribution of the present research is that we simultaneously examine the resource and normative effects of regulations and how their effects vary depending on organizational characteristics.