Abstract
Keywords
Introduction
Why do actors so frequently struggle with institutional complexity? One largely overlooked reason is that they may introduce complexity themselves as they seek to benefit by
In developing our arguments, we draw on the extensive literature on institutional logics (Thornton, Ocasio, & Lounsbury, 2012), defined as overarching sets of principles that prescribe ‘how to interpret organizational reality, what constitutes appropriate behavior, and how to succeed’ (Thornton, 2004, p. 70). In addition to highlighting how logics shape organizational life, scholars have argued persuasively that actors often struggle when making decisions and taking action in contexts where multiple logics involving incompatible prescriptions are present (Greenwood, Kodeih, Micelotta, Raynard, & Lounsbury, 2011). This recognition has led scholars to focus more recently on the challenges of institutional complexity and how actors can deal with these challenges (Battilana, Besharov, & Mitzinneck, 2017).
But this focus on the effects of institutional complexity, and how it can be managed, has obscured the process through which this complexity is introduced in the first place. We believe that an important source of institutional complexity arises from the fact that actors often seek to deliberately bring different institutional logics together in their quest to achieve valued organizational outcomes. In fact, researchers have highlighted various ways actors do this. For example, actors purposefully construct hybrid organizations such as social enterprises, enabling them to achieve social impact by deploying market approaches (Battilana & Dorado, 2010; Fosfuri, Giarratana, & Roca, 2016). In other cases, they blend together incompatible logics such as a corporate logic with a religious logic, resulting in organizations that can do things that were previously impossible to do such as offer products to formerly inaccessible customer segments (Gümüsay, Smets, & Morris, 2020). Actors may also engage with organizations adhering to alternate logics in hybrid organizational spaces, enabling companies, for example, to exploit the logic of public science for corporate innovation (Perkmann, McKelvey, & Phillips, 2019). Relatedly, actors construct interstitial spaces (Furnari, 2014; Villani & Phillips, 2021) in order to leverage, for instance, the logic of user innovation to facilitate innovation. Yet even though researchers have identified many ways in which actors leverage the differences between institutional logics, we lack a theory explaining the underlying process and how it generates benefits for actors.
To begin to fill this important gap, we argue that the different ways in which actors creatively leverage differences between logics are all forms of the same activity and are enabled by a set of common tactics. We call this activity arbitrage, building on a concept used in finance and international business to denote efforts by actors to exploit differences between domains such as different regulatory regimes or different national contexts. More specifically, we define institutional arbitrage as
We believe our arguments are important as they highlight that the complexity faced by actors is not always simply the result of institutional forces. Despite much of the discussion to date, institutional complexity is not just a problem to be managed to mitigate its negative impact. Discussions of complexity need to reflect the different motivations and strategies of actors and the fact that while in some circumstances minimizing complexity and its negative effects may be the goal, in others following courses of action that increase complexity may bring benefits. Understanding and theorizing the different motivations, processes and effects of arbitrage is therefore key to developing a better understanding of complex institutional settings. The theory of institutional arbitrage that we present in this paper provides a first step in developing a more nuanced understanding of this important aspect of institutional processes.
Institutional Logics and Complexity
Early work in organizational institutionalism focused on organizational fields – communities of organizations that interact more ‘frequently and fatefully’ with one another than with actors outside the field (Scott, 1994, pp. 207–208). While early research focused on field stability and isomorphism, scholars’ attention soon turned to the strategic responses of organizations to institutional processes (e.g. Oliver, 1991). Central to much of this later research is Friedland and Alford’s (1991) concept of institutional logics and the notion that each field has a logic. Logics characterize how ‘a particular social world works’ (Jackall, 1988, p. 112). They represent ‘the socially constructed, historical patterns of material practices, assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space, and provide meaning to their social reality’ (Thornton & Ocasio 1999, p. 804).
What makes the institutional logics perspective so useful is the idea that if we are to understand ‘individual and organizational behavior, it must be located in a social and institutional context, and this institutional context both regularizes behavior and provides opportunity for agency and change’ (Thornton & Ocasio, 2008, pp. 101–102). In other words, in addition to creating pressure for conformity, logics provide opportunities for agents to change or maintain institutional arrangements in ways that are favourable for their interests and goals (Battilana, Leca, & Boxenbaum, 2009; Hardy & Maguire, 2017). A particularly important variant of this research focuses on the challenges that arise for actors facing incompatible logics, i.e. from institutional complexity.
Institutional complexity
Institutional complexity refers to situations where actors ‘confront incompatible prescriptions from multiple institutional logics’ (Greenwood et al., 2011, p. 317). Incompatibility means that, in a specific situation, two logics would prescribe two different courses of action or goals, and possibly both, to be pursued (Pache & Santos, 2010). Scholars have focused on how organizations respond to this situation, yielding significant insights into how complexity can or cannot be managed (Pache & Santos, 2010; Ramus, Vaccaro, & Brusoni, 2017; Smets, Jarzabkowski, Burke, & Spee, 2015). Their work suggests that actors often find themselves in the position of having to simultaneously respond to different imperatives, posing the challenge of deciding which imperatives should be privileged over others and how responses can be made compatible inside the organization (Reay & Hinings, 2009).
Beyond characterizing its challenges, prior work has also hinted at how actors productively engage with institutional complexity and how they exploit affordances arising from it. As Kraatz and Block (2008, p. 253) comment, ‘Society is composed of multiple institutional logics which are available to individuals and organizations as bases for action.’ In this view, institutional complexity is often the result of deliberative and purposeful agency in organizations.
A precursor of this idea is the work on practice translation that has emphasized how actors move practices from one institutional context into another (Sahlin & Wedlin, 2008). Studies of reforms in the Scandinavian public sector show how actors sought to introduce new ways of working inspired by private sector practices and how they adapted them to the new context (Czarniawska-Joerges & Sevón, 1996). To enable the travel of practices in this way, actors edit practices in order to fit them into the new context; this involves removing context specific attributes, packaging them into rationalist models, and enfolding them into suitable narratives (Claus, Greenwood, & Mgoo, in press; 2021 Wedlin & Sahlin, 2017). Even though this body of work does not always use the concept of logics explicitly, it illustrates how actors adopt practices – structured patterns of actions – taken from alternate institutional contexts characterized by different logics and thereby introduce institutional complexity into their organizations and the fields in which they operate.
Combining institutional logics
Three streams of recent work illustrate how actors combine different institutional logics to achieve specific purposes. First, actors construct and manage hybrid organizations – i.e. organizations characterized by complex imperatives for action informed by multiple, typically competing logics (Santos, Pache, & Birkholz, 2015). This specific feature enables hybrid organizations to achieve ends that are not commonly achievable by the accepted and prevalent forms of organizing within a field (Jay, 2013). For instance, microfinance organizations are able to follow developmental goals within emerging economy contexts while trading profitably (Battilana & Dorado, 2010). Broadly, because of their institutionally complex nature, social enterprises are able to operate in markets not served by ordinary for-profit firms (Pache & Santos, 2013a; Ramus et al., 2017) and achieve demand-side synergies as they render the social mission part of their product proposition. Some of the insights gained from studying hybrid organizations appear to generalize to any organization that combines different logics in a deliberate manner. For instance, Dalpiaz, Rindova and Ravasi (2016) illustrate how firms that brought a cultural logic into industrial manufacturing were able to exploit new market opportunities.
A second relevant body of work examines how individuals navigate institutionally complex organizational environments. For example, McPherson and Sauder (2013) illustrate how individuals use logics in a discretionary way. They do this by deploying decisions or courses of action aligned with the principles of specific logics to obtain desired organizational outcomes. Smets and colleagues (2015) identify various tactics by which individuals manage the coexistence of logics, allowing them to manage the tensions that arise from the coexistence of logics and also to exploit the benefits that can be gained. Similarly, Gümüsay and colleagues (2020) show how individuals can productively manage the multi-logics nature of contested hybrid organizations by practising what the authors call ‘polyphony’. This in turn enables hybrid organizations – in this case Islamic banks – to offer products and services that cannot be provided by mainstream (and institutionally simpler) organizations.
Third, work on boundary organizations and boundary structures is also relevant. Many organizations have boundary spanning units, such as technology transfer offices in universities (Colyvas, 2007) or investor relations departments in industrial firms (Rao & Sivakumar, 1999), that help them bridge into other domains. Within these boundary spaces, organizations can introduce practices adhering to other logics, and thereby achieve outcomes that would not be obtainable within the organization (Perkmann et al., 2019).
Similarly, boundary organizations operating at the intersection of distinct organizational fields have been found to offer capabilities that allow actors within each of the connected fields to achieve useful outcomes when interacting with each other. For instance, boundary organizations allow software firms to engage with open-source programmers to gain access to technology, expertise and labour (O’Mahony & Bechky, 2008), or pharmaceutical firms to access public science research performed in academia (Perkmann & Schildt, 2015). Recent work has also introduced the concept of an interstitial space (Furnari, 2014) where members of different fields can come together informally and collectively to experiment with new ideas and activities. These spaces are important as the interactions that occur within them can lead to the development of innovative new practices which may reverberate in the fields of the actors involved or even result in the creation of a new organizational field.
Overall, the literature we reviewed suggests that the incompatibility between logics is not insurmountable; rather, actors may deploy individual skills and specialized organizational structures that allow them cope with incompatible prescriptions or even combine multi-logic elements to achieve desired organizational outcomes.
Actors and institutional arbitrage
To understand how actors can benefit from combining logics, it is important to be clear on what constitutes an actor. We use the term ‘actor’ to refer to individuals acting within or on behalf of their organization. This compound definition provides an actor with agency and volition, but also includes an organization that benefits from the arbitrage. While institutional theory is primarily a theory of organizations, the central place of intention and action in institutional arbitrage makes attention to the role of individuals important. At the same time, individual actors are not acting on their own behalf, but on behalf of their organizations, thus providing the necessary connection to the organizational level of analysis.
The discussion of actorhood also raises the thorny question of institutional embeddedness. Institutions provide ‘preconscious understandings that actors share’ (DiMaggio, 1988), and actors are always more or less institutionally embedded (Battilana et al., 2009). Yet much prior work has also pointed to the many circumstances in which actors approach institutions reflectively and act upon them, via tactics including institutional entrepreneurship (DiMaggio, 1988), institutional strategy (Lawrence, 1999), institutional work (Suddaby, Lawrence, & Leca, 2009) and social-symbolic work (Lawrence & Phillips, 2019).
We view actors as culturally competent and equipped with the knowledge and skills to recognize institutional regularities and differences, and consciously consider and deploy them. This does not mean that some actors are not institutionally embedded to such a degree that they are unable to reflexively perceive and act upon an institutional logic and associated rules and norms. Such actors are not in the position to perform institutional arbitrage as they are unable to perceive alternative ways of achieving organizational outcomes in their own context. Hence, the ability to discern institutional logics – usually helped by actors’ individual trajectories and structural positioning – represents a minimal requirement for performing institutional arbitrage. For instance, individuals who have been exposed to different logics during their career, or those inhabiting positions that require collaborating with actors adhering to alternate logics, are more likely to recognize arbitrage opportunities.
In order to act upon perceived opportunities, actors also need to be open to engaging with alternative institutional logics, even if only for the purpose of helping to achieve outcomes that are valued by the logic to which they primarily adhere (Pache & Santos, 2013a). Individuals whose identity is strongly oriented towards a specific logic – such as ‘idealists’ committed to the social impact cause of social enterprises – will be less prepared to engage with alternate logics, compared with ‘pluralists’ (Besharov, 2014; Pache & Santos, 2013b).
Overall, in order to perform institutional arbitrage actors need to be able to discern alternate institutional logics and be prepared to engage with them. It is important to note, that, in contrast to theories of institutional entrepreneurship and institutional work, we do not assume that the interventions of actors are necessarily aimed at affecting the institutional order. Rather, actors can recognize different institutional logics, and engage with them, for instance by enacting them or interacting with actors embedded in different logics, without necessarily envisaging a change to the institutional order. While such agency may indeed lead to institutional change if pursued by many actors in concert over time (Cardinale, 2018), actors carry out institutional arbitrage to better their own position and achieve organizational outcomes. In sum, our vantage point is one that assumes that some organizational actors are institutionally reflective and skilled, and that they use their capabilities to deploy institutions to achieve outcomes without necessarily aiming to affect them.
Combining logics and creating complexity
Our discussion so far leads to the following conclusions. First, prior research suggests that institutional complexity is often the consequence of conscious activity, rather than blind institutional evolution. Actors create new ways of operating, or change the way they operate, by adopting practices, assumptions, values, beliefs and rules drawn from logics that differ from the dominant logic of their home field (Schildt & Perkmann, 2017). In effect, combining different logics can offer actors opportunities to diversify their repertoires of action in ways that allow them to acquire new capabilities and pursue valued goals. Accordingly, hybrid organizations can achieve unique outcomes in their niches, individuals can either progress individually or help their organization progress by drawing on and combining multiple logics, and boundary structures can be put in place to explicitly generate synergies from the interaction of different domains.
Second, existing research has tended to focus on exploring the ways in which institutionally complex organizations can be made to work
Overall, in other words, prior work has suggested that complexity is introduced when actors consciously leverage multiple logics given that it can enable previously unavailable organizational goals, and a variety of mitigating measures can be deployed to optimize the functioning of complex organizations. Yet, the existing literature has placed less emphasis on how exactly the underlying sources of the advantages are created in the first place. How does combining logics generate benefits for organizations? Extant research offers various explanations for idiosyncratic situations. For instance, Fosfuri and colleagues (2016) suggest that social businesses generate demand-side positive externalities as the social nature of their products becomes a unique selling benefit; Battilana and Dorado (2010) illustrate how microfinance organizations are able to serve customer segments inaccessible for mainstream banks; and Perkmann and colleagues (2019) show how universities can obtain research resources from corporations by establishing institutionally complex boundary spaces. However, prior work does not provide a general explanation of how drawing together courses of actions or structures from different logics may generate those benefits.
In the next section, we propose a theory of institutional arbitrage that highlights the common foundation of these seemingly different activities and helps explain how arbitrage creates advantages for the actors who engage in it. Our aim is to conceptualize arbitrage in a way that is general enough to be applicable to the whole range of circumstances where actors purposefully deploy institutional complexity, but also parsimonious and useful for guiding future research.
Defining Institutional Arbitrage
In finance, where the term is commonly used, arbitrage refers to the simultaneous purchase and sale of an asset in different marketplaces in order to profit from a difference in the asset’s price (Sharpe & Alexander, 1900). However, the principle underpinning arbitrage – the attempt to benefit from the presence of differences – can be applied more widely. Van de Ven and Johnson (2006) used the concept to characterize the structural conditions prevailing when practitioners and scholars collaborate. They define intellectual arbitrage as a ‘strategy of exploiting differences in the kinds of knowledge that scholars and practitioners can contribute on a problem of interest’ (Van de Ven & Johnson, 2006, p. 803) and propose that academic researchers and practitioners can fruitfully resolve problems by confronting divergent theses and antitheses that arise from their different viewpoints. A related concept is ‘information arbitrage’, used to describe the actions of network brokers who exploit information differences between network nodes (Burt, 2004, p. 354).
In the international business literature, the term institutional arbitrage is used to refer to the way that multinational corporations exploit differences in the institutional arrangements of different countries (Jackson & Deeg, 2008; Kogut, 1983; Schneider, Schulze-Bentrop, & Paunescu, 2010). For large multinationals, this often means performing different activities in locations where the institutional arrangements are more favourable, to exploit institutional differences. Multinational corporations might, for example, choose locations with low factor prices or taxation levels for their manufacturing operations, or with specific educational institutions to carry out their R&D (Hall & Soskice, 2001). In addition, for small and medium-sized firms, institutional arbitrage can take the form of ‘institutional escape’ where the firm seeks a very different context to locate a part of their company due to a mismatch between the firm’s needs and the local context (Wu & Deng, 2020).
The idea of institutional arbitrage between national contexts provides a useful starting point for theorizing institutional arbitrage. We propose a notion of institutional arbitrage that is generalized in two ways from the notion used in international business. First, we generalize locational variation from national institutional spaces to institutional domains more generally. If actors can exploit cross-country differences, it is intuitively appealing that benefits may also be achieved by arbitrage across domains governed by different institutional logics. This may, for example, involve establishing exchange relationships with actors located in different domains, and hence aligned with a logic different from their own. A for-profit firm seeking to join a self-governed open community to help the firm develop innovative software is a good example of this sort of arbitrage (Jeppesen & Frederiksen, 2006).
Second, we generalize the way in which benefits from institutional differences can be generated. Apart from establishing exchange relationships with actors located in a different institutional context, actors may also purposefully integrate elements stemming from a different domain with their own repertoires of action. For example, for-profit firms developing knowledge-intensive products may seek to import the kinds of practices that enable frontier knowledge to be developed in academia, and take advantage of the latter’s conventions of knowledge creation and sharing (Murray & O’Mahony, 2007).
Based on this understanding of the opportunities provided by institutional difference, we define institutional arbitrage as
Institutional arbitrage is made possible by an intrinsic property of institutions, namely, their relative permanence as a regulator of human cognition and behaviour. They represent social structures that exist and persist beyond the discretionary remit of any actor at any given point in time (even though they evolve and change over time). This feature underscores the strength of institutions: any attempt to change or weaken institutions requires an amount of institutional work that is proportional to the degree of institutionalization.
Because of their relative permanence, institutions generate predictable institutional effects. For instance, the institution of public science has the effect of enabling the ongoing production of a large volume of knowledge that is publicly shared and can be used by anybody able to deploy it (Polanyi, 2000 [1962]). The institution of recycling has the effect that large numbers of people spend time separating their household waste, enabling the reutilization of materials (Lounsbury, 2001). Such institutional effects lie at the root of the possibility of institutional arbitrage. While an actor embedded in a specific institutional domain is unlikely, particularly in the short term, to be able to change the values, routines or practices prevailing in that context, they may be able to access (by establishing exchange relationships, or appropriating practices) other institutional contexts where they find values, routines or practices that are conducive to their intended goals. Of course, this presupposes that an actor is able to reflexively recognize both the institutional frameworks in which they are operating as well as those governed by alternative logics that they may wish to leverage for organizational outcomes. As outlined earlier, it also presupposes that an actor is not precluded from embracing an alternative logic by their own identity and ideology. We will return to the macro conditions that facilitate actors’ ability to perform arbitrage in a later section.
In addition, it is useful to specify in more detail when the construct of institutional arbitrage applies. First, this kind of exploitation of institutional differences can occur both within fields as well as across fields. As interactional arenas for organizations, fields are often characterized by the presence of multiple institutional logics; for instance, in healthcare or education the state logic typically operates side by side with the market logic (Reay & Hinings, 2009). As such, institutional arbitrage can be conducted by an actor by combining logics that already exist within a field. Alternatively, arbitrage may be performed across fields, for instance, when actors in banking interact with the religious sector (Gümüsay et al., 2020).
Second, the construct applies to situations when actors combine logics that have been commonly combined before, as well as when a logics combination is novel. Our construct implies that arbitrage can be effective in both cases and is agnostic regarding the novelty of combinations. However, actors may face higher hurdles regarding the acceptability of combinations when the combination is novel and not recognized by stakeholders in their context. It may also be that specific contexts are so tightly coupled with a specific logic that stakeholders resist attempts to import other logics. In these cases, arbitrage may fail not because of the lack of intrinsic benefits, but for lack of acceptance.
In the next section we detail some of the tactics that actors adopt to perform institutional arbitrage. Specifically, we focus on tactics that grow out of how logics shape perceptions of value, constitute actors’ purposes, inform practices and govern legitimacy judgements.
Performing Institutional Arbitrage
In this section we present four different tactics actors use to perform institutional arbitrage that we have derived from a careful review of the existing literature on institutional logics. Each of the tactics is based on a specific property of institutional logics. By focusing on these tactics, we can better explain how differences between institutional logics generate opportunities that actors may choose to exploit. While we think that the tactics we have identified are important, we do not mean this list to be exhaustive. At the same time, we hope it provides some useful initial thoughts about how actors perform institutional arbitrage. We summarize the tactics we discuss in Table 1.
Arbitrage Tactics.
Valuation and institutional arbitrage
The first tactic is rooted in differences in valuation across logics. Work on the economics and sociology of worth has explored how actors use different accounts in different social domains to justify the value of what is being produced and transacted (Boltanski & Thévenot, 1991; Stark, 2009). Each social order has its own principles defining what is considered worthy, and hence of value for the participants (Boltanski & Thévenot, 1991). An equivalent insight is implied in the notion of institutional logics (Brandtner, 2017; Reinecke, van Bommel, & Spicer, 2017). Just as an institutional logic provides a cognitive map to give meaning to social reality and stipulate legitimate means and ends, each logic also defines the value of the outcomes of social activity (Thornton et al., 2012). Furthermore, each logic prescribes practices suited to create valued outcomes. These outcomes are often referred to as resources (Friedland, 2017) and can include a broad range of intangible (status, legitimacy, social capital) as well as tangible (time, space, knowledge) outcomes.
As a result of differences between logics as to what is valued, resources are unequally distributed across domains governed by different logics. A specific resource may be abundant in one domain but scarce in another. For instance, hobbyists and amateurs may deploy considerable amounts of energy and resources to create artefacts they enjoy producing and using with little concern for their commercial potential (Furnari, 2014). Innovation by such users is a process where individuals create new products on a ‘non-commercial’ basis, where the commercial value of the resulting product would not be sufficiently high to remunerate professional innovators in corporations (von Hippel, 2005). This situation provides an opportunity for institutional arbitrage as commercial innovators – rooted in the market logic – access innovations that are generated by users or hobbyists working according to a different logic with different standards for evaluating value (Jeppesen & Frederiksen, 2006).
Another example can be found in interactions between industry and public science. When collaborating with academia, for-profit firms are often able to appropriate results from painstaking research in niche areas conducted by PhD students or postdoctoral researchers over a period of several years (Perkmann et al., 2019). These researchers pursue curiosity-driven, relatively risky projects as part of their apprenticeship for a career in science. Outputs from such projects may turn out to be of considerable value to industry – or indeed the academic researchers’ own spin-off companies (Fini, Perkmann, & Ross, 2021) – yet the cost of instructing company employees to pursue such projects at scale would be prohibitive. These types of interactions between firms and universities, in other words, represent another case where, in line with the prevailing logic, resources are created in relative abundance in one domain and then transferred to another domain where the prevailing logic is not conducive to generating them, or, where they are valued in a very different way. In summary, a first tactic enabling institutional arbitrage consists of exploiting the differences in value that resources have from the vantage points of different logics. The outcome obtained by an actor from adopting this tactic is the mobilization of a resource that would be unobtainable or more costly to produce within a local institutional context.
Purpose and institutional arbitrage
A second tactic relates to differences in purposes. This mechanism is rooted in the fact that institutional logics play a central role in prescribing value systems in society (Besharov, 2014). As different social systems are governed by different institutional logics, individuals operating within particular fields internalize the applicable values, norms and rules (Pache & Santos, 2013b), which leads them to be interested in different objectives and outcomes (Wang, Du, & Marquis, 2019). The notion of purpose implied here is broader than the economic notion of utility maximizing, as each logic constitutes specific sets of goals that inform the purpose of actors adhering to that logic (Thornton et al., 2012).
For instance, for an individual socialized into the system of public science, the orderly pursuit of scientific inquiry will represent an essential part of their professional ethos, and one that is rewarded by the professional system as it underpins the quality of scientific work. For this reason, scientists play an important role in society as a counterpoint to commercial interests when claims are contested. Evidence shows that studies authored by industry authors are more likely to generate industry-friendly outcomes than those authored by university-based authors (Lundh, Lexchin, Mintzes, Schroll, & Bero, 2017). Because the purpose of academic scientists is oriented towards pursuing reputation, or even grandeur, within their own system, they are less likely to be entangled in commercial interests.
This creates an opportunity for institutional arbitrage. For instance, when a company requires an objective assessment of a contested issue, they may engage an academic scientist or a retired judge, rather than a consultant or corporate expert, as they anticipate that individuals socialized in science or law may be less likely to exhibit commercially motivated biases in assessment.
In other words, actors can anticipate certain behaviours based on the overarching logics of the field of the actor. Reaching out to actors operating in a different domain may therefore provide a means to benefit from the outcomes of predictable patterns of behaviour that are different from what would be expected in an actor’s home domain. This in turn may generate benefits, such as lower monitoring costs and higher transparency, and reduce opportunism (Hamel, 1991; Larsson, Bengtsson, Henriksson, & Sparks, 1998). In summary, a second tactic underpinning institutional arbitrage consists of exploiting the differences in terms of the deeply engrained purposes that actors rooted in different logics pursue. The outcome obtained from this tactic would be the ability to draw benefits from the relative certainty that an exchange partner rooted in an alternative logic will behave in a predictably different way from actors in their local field.
Practices and institutional arbitrage
The third tactic relates to variations in organizational practices across domains governed by different logics. Practices – relatively coherent and established sets of socially meaningful activity (MacIntyre, 2007) – are fundamentally interrelated with institutional logics (Delmestri & Greenwood, 2016; Smets, Aristidou, & Whittington, 2017). By defining basic principles for social agency, logics shape patterns of shared routine behaviours by actors in a given social order (Thornton et al., 2012). As a result, practices develop within the constraints posed by a logic and are coherent with the dominant logic in the field where they emerge.
As different logics encapsulate different principles, the practices informed by these principles will also differ accordingly. This situation of practice divergence generates opportunities for institutional arbitrage. The practice of recycling is a useful example. Recycling, an activity aimed at facilitating the reuse of discarded materials, is a practice informed by a general logic of environmental conservation, or environmentalism (Lee & Lounsbury, 2015). Recycling requires a voluntary, value-driven commitment by consumers or organizations to collect discarded materials, sort them and place them in the appropriate containers. By implication, recycling does not represent a practice that coheres with the market logic, as demonstrated by the need for government to regulate the behaviour of firms in this respect. However, a firm, or municipal authority, may decide to engage with communities or organizations where recycling is practised as a matter of routine. In this way, actors governed by one specific logic, e.g. the market or government, are able to access outcomes generated via practices prevailing within settings governed by other logics, in order to achieve certain objectives (Lounsbury, Ventresca, & Hirsch, 2003).
Another example of how actors can exploit differences in practices associated with different logics is provided by Battilana and Dorado (2010) in their study of commercial microfinance. These types of organizations originated in the NGO sector but later integrated commercial lending practices into their organizations. Adopting practices adhering to the commercial logic allowed the firms to raise funds from other, more developed, sources of capital. Overall, by engaging in this kind of institutional arbitrage, actors may access the benefits arising from specific regularized patterns of behaviour without having to work towards the creation and diffusion of new practices themselves. In summary, a third tactic underpinning institutional arbitrage consists of exploiting variations of practices informed by different logics. The outcome obtained from this tactic would be to allow an actor to access practices that produce outcomes not available in their local field.
Legitimacy judgements and institutional arbitrage
A fourth tactic relates to legitimacy (Kostova & Zaheer, 1999). An organization operating according to a specific logic will be judged as legitimate by audiences that also adhere to that logic (Deephouse, Bundy, Tost, & Suchman, 2017; Suddaby, Bitektine, & Haack, 2017). In other words, logic-specific audiences will perceive the actions of the organizations as ‘desirable, proper, or appropriate’ based on the ‘norms, values, beliefs and definitions’ of that logic (Suchman, 1995, p. 574). They will make legitimacy judgements about the organization and its activities using the standards associated with the logic to which they subscribe (Bitektine, 2011; Bitektine & Haack, 2015; Tost, 2011). Within this general notion of legitimacy, institutional theory places a particular focus on cultural conformity that forms the basis for audience approval (Kraatz & Block, 2008).
For instance, an energy company focusing on extracting hydrocarbons will be regarded as legitimate by the market-oriented network of shareholders, suppliers and regulators in the energy sector. By contrast, it may suffer a legitimacy deficit with audiences dissatisfied with the company’s environmental record (York, Vedula, & Lenox, 2018). The company may therefore decide to engage with the environmental logic – by, for example, establishing business units centred on solar power or by sourcing and installing carbon capture technology. The overall effect of engaging with an alternate logic in this way, the firm hopes, is an expansion of the audience that regards the organization as legitimate. This also implies limited or no legitimacy loss with the original core audience due to these activities, which could be the case in some situations.
The notion of ‘selective coupling’ developed by Pache and Santos (2013b) provides another example of this type of arbitrage: an organization adopts a template from an alternate logic with the explicit purpose of signalling legitimacy to the respective audience without, however, embracing the template in its entirety so as not to damage the organization’s legitimacy in its original domain. This behaviour allows the organization to be ‘multiple things to multiple people’ (Kraatz & Block, 2008) with the benefit of increasing the overall amount of legitimacy, and ensuing resource flows, with its audiences.
Overall, by reaching out to other institutional logics organizations can increase the range of audiences in whose eyes they are legitimate. The legitimacy of an actor is relative to an audience, and audiences can endorse or punish actors that fail to conform to certain expectations (Suchman, 1995; Zuckerman, 1999). Therefore, actors draw advantages from deliberately engaging with new audiences to whom they appear legitimate. Associating oneself with legitimate actors in other institutional domains, and adopting practices from those domains, may provide welcome opportunities for audience diversification. In summary, a fourth tactic underpinning institutional arbitrage consists of exploiting the differences between what is considered legitimate from the vantage point of different logics. The outcome obtained from this tactic would be to gain legitimacy with important audiences by associating with legitimate actors and adopting practices that are seen as legitimate by these audiences.
Combining tactics
We have outlined four different general tactics of institutional arbitrage. Each of these tactics is underpinned by a specific way in which institutional logics differ. It is important to emphasize that we are not suggesting that these tactics are mutually exclusive and, in fact, actors may in practice combine them or use them in various orders over time. For example, institutionally complex arrangements like university-industry centres draw (at least) on resources arbitrage (researcher time is valued differently within academia and industry) and practices arbitrage (using the academic practice of open publishing allows industry to attract more people to work on an R&D domain). Moreover, one may argue that the more institutionally reflexive and skilled actors are, the more likely they are to deploy multiple tactics in various ways to leverage other logics for achieving goals in their own context.
Theorizing Institutional Arbitrage
Enabling conditions for institutional arbitrage
Given that actors are institutionally embedded (Battilana et al., 2009), it is important to clarify what circumstances enable an actor to attempt institutional arbitrage. Not all circumstances will lend themselves to initiating and performing arbitrage. While the kind of circumstances enabling arbitrage are related to the ones enabling actors to change institutions (Battilana et al., 2009), they are not identical and thus deserve our attention here. Institutional arbitrage is local in scope, and hence the enabling conditions pertain to the extent to which actors can envision, initiate and implement local combinations of different logics.
First, field maturity will play a role because interactions within a mature field are more highly institutionalized and hence actors are less likely to become aware of new opportunities for performing institutional arbitrage. Further, even when opportunities are identified, patterns of expected behaviour are relatively settled and therefore innovations with respect to organizing templates or accepted practices will be more difficult to introduce.
Interestingly, however, while it may be more difficult for actors in mature fields to deploy institutional arbitrage, it may be more rewarding for those that succeed in doing so. Successfully conducting arbitrage allows them to differentiate themselves from others in ways that provide them with a comparative advantage. This means situations where institutional arbitrage is most difficult to carry out may also offer the highest potential rewards. In this case, fewer actors will be able to successfully perform arbitrage but those that do so will be comparatively more differentiated vis-a-vis their peer organizations. While our discussion of institutional arbitrage points to this relationship, further research and theorizing is required to explore whether and how the maturity of a field affects institutional arbitrage.
Second, the ease or difficulty of engaging in arbitrage will be shaped by where an actor is positioned within a field. Actors positioned at the margin of a field, or with roots in multiple fields (Maguire, Hardy, & Lawrence, 2004), are likely to have better insight into elements of alternative logics that could potentially be deployed for achieving organizational outcomes in their setting (for an exception, see Greenwood & Suddaby, 2006). They may also be less embedded in, and less vested in, the rules and norms that govern organizational life in their setting, and hence more likely to embrace innovative ways of achieving outcomes that involve integrating elements from alternate logics. For example, Quirke (2013) examines how ‘rogue’ organizations in distant corners of a field can deviate considerably from the taken-for-granted recipes that shape the organizations that are more central and visible in the field.
A further circumstance likely to shape engagement in institutional arbitrage is the nature and strength of an organization’s identity. Logics provide the cognitive and normative references around which collective identities form (Glynn, 2017). However, organizations differ with respect to how salient and applicable the collective identities are for them. Organizations more strongly anchored in a collective identity will be less able to resort to institutional arbitrage because they are more cognitively constrained, and less likely to do so because engaging with another logic will create higher levels of complexity than they are prepared to manage (Pratt & Foreman, 2000).
The ability to engage in arbitrage is also be shaped by the novelty of certain combinations of logics. Attempts to combine logics that have been rarely combined will face significant uncertainty as to whether the desired outcomes can be realized in the first place. In addition, such combinations may lack legitimacy with stakeholders whose support is required. Conversely, certain forms of institutional arbitrage may become widely diffused, and hence, by implication, find relative acceptance both within organizations and in the field more widely. For example, research collaborations between corporations and universities are a form of institutional arbitrage that has become so common as to be expected in many countries even though doing so creates significant institutional complexity that must be managed.
The paradox of institutional arbitrage
Logics vary with respect to the degree to which they are compatible with each other (Besharov & Smith, 2014; Greenwood et al., 2011; Gümüsay et al., 2020). This variation has repercussions for both the ease with which arbitrage can be conducted and for the relative benefits that actors will gain from it. When logics are more compatible, institutional arbitrage will be easier to implement because actors will encounter fewer tensions. Further, research has shown that logics that differ in terms of ends are more incompatible than those differing with respect to the means they deploy to reach those ends (Pache & Santos, 2010).
Conversely, the potential payoff from arbitrage is inversely related to their compatibility. When logics are more compatible, the differences between them in terms of what is defined as meaningful, what practices they prescribe, and how they measure success are less significant. Because arbitrage extracts value precisely from these differences, the value obtained from arbitraging more compatible logics will be lower. Furthermore, if arbitrage is more difficult, then it will be successfully performed by fewer organizations in a field, and hence give those who succeed a greater opportunity to differentiate themselves. Hence there is a paradox inherent in institutional arbitrage: namely, that the more compatible the logics being brought together are, the easier it is to perform institutional arbitrage, but at the same time the value obtained from doing so is likely to be lower. Conversely, payoffs are likely to be higher when actors bring together two very different logics, yet this will be difficult to implement and result in organizational tension and conflict that must be skillfully managed (Greenwood et al., 2011).
Our argument also implies that when combinations of logics are novel and unproven, the outcome of institutional arbitrage is uncertain, possibly deterring risk-averse actors from pursuing it. In fact, arbitrage involving logics that are very different can bring with it considerable risks because being seen to be associated with a distant logic brings with it a potential threat to the legitimacy of the actor attempting arbitrage. For example, officers of a bank attempting to arbitrage between the logics of Islamic banking and traditional Western banking risk losing legitimacy in the Islamic banking field altogether if their bank is seen to stray from Islamic principles. Which actors are successful in leveraging distant logics, and why they are successful, as well as what benefits they obtain, are all important questions that require further investigation.
From institutional arbitrage to field-level institutional change
Institutional arbitrage is an intrinsically local activity, and as such it is not generally aimed at engendering institutional change at the field level. However, the specific recipes by which actors perform institutional arbitrage may be copied by others, and hence may, over time, diffuse across fields. The birth of the biotechnology industry provides an example. In the 1970s, innovators began performing institutional arbitrage between the academic and industrial logics (Powell & Sandholtz, 2012), which resulted in the emergence of a new organizational form: the biotechnology company. This specific recipe was subsequently adopted at a wider scale by actors within the university sector, the venture capital industry, and later the pharmaceutical industry. In this way, novel ways of performing institutional arbitrage can lead to institutional change.
From this stylized example, we can distil the following implications. First, it is likely that many innovators who devise new ways of exploiting institutional differences aim to achieve local advantages, without necessarily aiming at a wider institutional change. However, once proven in a local context, they may well recognize the value of a specific recipe of institutional arbitrage and become institutional entrepreneurs. Mohammed Yunus established a pioneering commercial micro-finance bank, and later become an evangelist for this organizational form and a leading force in helping to diffuse it more widely. Alternatively, and probably more commonly, this kind of institutional entrepreneurship may be driven by emerging actors with a vested interest in the wider diffusion of a particular recipe for institutional arbitrage, such as interest or umbrella organizations.
Second, the effectiveness of institutional arbitrage may increase as a particular configuration of logics becomes more established across a field (or establishes a new field). When a configuration is novel, the institutional arbitrageurs may still be experimenting with their recipe, and important stakeholders may not be ready to get involved. The type of institutional arbitrage may also not work, and hence it may be discontinued. But if the experiment yields benefit, it may diffuse more widely, and the local complexity introduced can come to characterize a field, making institutional arbitrage an important potential source of complexity at a field level. Once a specific model is more widely diffused, stakeholders will increasingly recognize its relative legitimacy and the underlying recipe may become more effective as it can be more quickly implemented, and stakeholders comply with mutual expectations. In this way, a particular form of arbitrage can become an accepted ‘settlement’ (Schildt & Perkmann, 2017) and become institutionalized across the field despite the tensions perceived as arising out of the complexity initially created (Glynn, Hood, & Innis, 2020).
Conclusions
While much recent research has focused on the negative consequences of institutional complexity and has explored how actors struggle to comply with competing prescriptions and manage the associated tensions of doing so, the concept of institutional arbitrage highlights an important source of institutional complexity that deserves more attention. We have presented a theory of institutional arbitrage that explains how actors
We have identified four tactics that enable institutional arbitrage. First, logics define distinct yardsticks for what is perceived as valuable, creating opportunities for the exchange of resources among domains. Second, each logic prescribes specific purposes that orient the dispositions and behaviour of actors; differences in purpose generate opportunities for actors to reach out to alternative domains to capture benefits from engrained behaviours uncommon in their home domain. Third, different logics are associated with different practices, enabling actors to access practices from other domains that solve problems but that may be difficult to develop and maintain in their home domain. Finally, each logic defines different criteria as to what is perceived as legitimate – differences that enable actors to increase or change the range of audiences by whom they are judged as legitimate by embracing the logics to which the respective audiences adhere.
Why is institutional arbitrage important?
We believe institutional arbitrage is an important addition to the existing conceptual toolkit of organization theory. The concept provides us with a language that allows us to systematically capture how an actor might go about extracting benefits from combining different logics. From our perspective, actors devise institutionally complex organizational courses of action as they find ingenious ways of exploiting differences between logics and bringing them together for specific purposes. Our discussions here have identified some tactics that underpin arbitrage, based on the features of institutional logics as principles guiding cognition, identity and behaviour. Various literatures, from translation, hybrid organizations and boundary organizations to interstitial spaces, have implicitly or explicitly outlined how actors leverage institutional differences yet we were lacking a conceptual frame to understand the underlying process through which it works.
We would also like to emphasize some limitations of our discussion of institutional arbitrage. First, we do not claim that our list of arbitrage tactics is comprehensive; in contrast, we believe there are many additional ways in which arbitrage can convert differences between logics into benefits in specific organizational situations. Second, we do not claim that combinations of logics created via institutional arbitrage are the only way by which actors encounter institutional complexity. In many organizational situations, institutional complexity is present, and must be managed, as a function of where the organization is positioned and the combination of isomorphic pressures to which it is exposed. Both limitations point to fruitful areas for further research.
In emphasizing the local, purposeful nature of exploiting institutional differences, we also believe that the concept of institutional arbitrage captures a distinct type of activity that is not covered by the existing vocabulary of institutional theory. We have characterized arbitrage as a specific type of agentic action that deploys institutional elements for certain purposes but, unlike institutional work, is not aimed at creating, changing, or maintaining institutions. Institutional arbitrage is aimed at creating local combinations of institutional elements drawn from different logics for local advantage. Other concepts used in the literature, such as translation or hybridization, refer to specific organizational implementations of how different logics are combined. They may or may not involve institutional arbitrage, depending on whether actors purposefully leverage institutional differences. This may not be the case, for instance, when combinations of logics are mandated coercively, or encouraged via the availability of resources.
Summing up
We have introduced the concept of institutional arbitrage and discussed some of the underlying mechanisms that make it possible. We believe that the concept is an important addition to the stream of theorizing on the purposeful actions of actors to engage with their institutional context. In proposing the concept, we add to the developing literature on how actors purposefully combine logics in various ways to create advantage and provide a way of highlighting the common aspects of several literatures on topics including hybridity, interstitial spaces, boundary spaces and translation. In addition, the concept of institutional arbitrage points to a range of interesting new research areas and provides a way to understand points of connection among previously unconnected streams of research. We very much hope that the concept inspires new research and new conversations on the relationship between institutions and agency.
Footnotes
Declaration of Conflicting Interests
Funding
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