I. INTRODUCTION
1.2. Research puzzle and research questions
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additional empirical puzzle of how both countries have escaped path dependent paths and pursued entirely new trajectories.
The empirical case study is important advancement for new institutionalism by contributing one of the first studies of new institutionalism researching how new startups, innovation and the firm churn influence institutional evolution, and by so the research provides entirely new data to new institutionalism. The endogenous approach and especially the data of constant firm churn has been previously entirely ignored by new institutionalism and hence demands extensive re-theorizing of the theoretical and conceptual foundations of new institutionalism. The endogenous approach is moreover important to understanding the trajectories of institutional change – how new institutions can be created – and how the functionality and coherence of institutional systems is created and sustained endogenously. To emphasize, the research approach aims to create truly actor-driven theoretical model where new institutions are created and sustained by new startups, which creates a properly dynamic understanding of social systems. Thus, the dissertation aims to contribute to theoretical puzzles how the Northian and Coasian evolution of social cooperation towards more efficient templates is constantly operating and why some countries outperform others in the endogenous evolution of institutions.
Finally, the research aims to place constant dynamism at the center of new institutionalism – institutions are constantly evolving – but the constant evolution is essential for continued and sustained vitality and stability of institutional systems.
Constant evolution of institutions is paradoxically necessary for institutions to stabilize and structure societies.
1.2. Research puzzle and research questions
The research is motivated by both theoretical and empirical research puzzles. Firstly, at the center of new institutionalism is a theoretical puzzle almost entirely unaddressed by earlier theoretical work: how can we co-fit agency of actors and structural imperatives of institutionalism together without compromising neither of them, and more specifically, as institutions are inherently endogenous – created internally within societies – but become exogenous to structure operation of societies, how this dynamic evolution of institutional
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systems occurs has not been addressed by theories of the new institutionalism. New institutionalism includes two basic tenets – institutions structure human behavior and institutions are endogenous (Przeworski, 2004; North, 1990) – but nearly all theories of new institutionalism have failed to co-fit these basic tenets. New institutionalism has instead consistently simplified the nature of the theoretical puzzle to gain analytical leverage to explain static behavior but this has left the central theoretical puzzle entirely unaddressed. Moreover, the focus on static behavior had led to inflexible, empirically inaccurate and static theories where inability to explain dynamic behavior of institutional systems compromises the leverage over static transactions. Secondly, the theoretical puzzle of the research is derived from the empirical puzzle of observations of the continuous evolution of market economies: constant flow of new firms, new behavior, new culture, and new ideas challenging older institutions and creating new institutions.
Empirical observations reflect constant dynamic innovation and experimentation – constant flow of new firms, behavior and culture emerging endogenously via new generations of startups – and this constant churn of new behavior cannot be reconciled with existing static theories of new institutionalism (Rodden, 2009; Seo & Creed, 2002).
Across OECD countries, each year 20% to 30% of firms are replaced with new ones, highlighting a significant and constant renewing of the social structures of societies (OECD, 2016a; Seo & Creed, 2002).
The empirical observations of fintech startups in Taiwan and Korea especially illustrate how a new wave of organizations challenge the social order (including hierarchy and dominance of traditional financial sector), and by innovation proposes new models to organize coordination within the societies, and lastly this new innovative behavior creates new informal and formal institutions (including formal regulations). Theories of new institutionalism not only fail to understand this, but the theories even argue that rational actors would and could not act as institutional entrepreneurs (Greif & Laitin, 2004; Hall
& Soskice, 2001; DiMaggio & Powell, 1983). Empirical observations thus propose interesting puzzle effectively challenging existing literature of new institutionalism and requiring new theoretical work. For Varieties of Capitalism the fintech proposes a significant theoretical challenge as Hall and Soskice (2001) proposed that financial sphere is a crucial institution influencing the nature of capitalism (e.g. stock market in
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US, banks in Germany, chaebols in Korea), but empirical data of fintech shows that in mere two years 2016-2018 the new ICO funding mechanism has become a significant source of capital for new ventures (in 2018 ICOs allocated funding to startups equivalent to 45% of capital in IPO markets, 31% in VC markets (Long, 2018)), which indicates the endogenously new financial institutions can be added to market economies and the new financial institutions can rapidly endogenously transform the governance of capitalism in contemporary societies. The empirical observations of fintech provide a crucial case study that challenges VoC theory and demands new innovative conceptual and theoretical framework to establish a truly dynamic theory of institutions.
The case study of fintech industry in Taiwan and Korea is interesting as the fintech industry in both countries consists of new startups who have without government or public support started to experiment with new ways to organize financial models in their societies, where the innovative business models of fintech startups have often not only been without regulatory support but have even been considered illegal by the regulatory authorities. Taiwan and Korea provide a suitable comparison due to shared history as developmental states but also provide an empirical puzzle as despite of institutional affinities the two countries have pursued different trajectories with fintech as in Korea the fintech is a national agenda while in Taiwan the regulators have effectively blocked new industry growth. Theories of new institutionalism suggest the startups would not pursue new behavior as the structural imperatives erode utility of innovative behavior, but empirical observations suggest startups perceive utility to act as institutional entrepreneurs. The empirical puzzle is hence how and why these fintech startups have engaged in experimental behavior and institutional entrepreneurship, and how they succeeded in institutional entrepreneurship. Both countries have various fintech startups that started well-before government or financial regulators had recognized fintech trend – Taiwan has such startups as Bitmark, BitoEX, MaiCoin, CoolBitX, OwlTing, while Korea has Viva Republica, DAYLI Financial Group, 8Percent, Bithump – which is an interesting empirical puzzle: what inspired these startups to experiment with business models that often were not understood, not regulated, even banned, and how were they able to nurture institutional evolution. Institutions as equilibria approach argues this does not happen due uncertainty of whether other actors will pursue complementary strategies
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(Greif & Laitin, 2004). To reiterate, the existing theoretical work of new institutionalism states that endogenous institutional change cannot occur as the individual actors lack either resources, agency and incentives to engage in institutional evolution, but empirical observations of experimental fintech startups provide evidence of constant churn of new startups creating new innovative business models and successfully driving institutional evolution in Korea and Taiwan, including creation of new formal institutions.
The empirical and theoretical puzzle thus proposes a puzzle of how and why fintech startups engage in experimental behavior, how institutional structures allow this to occur and how the fintech startups have succeeded in fostering institutional evolution. The core theoretical puzzle is how institutional systems are able to structure and stabilize market economies while also enabling endogenous institutional evolution to occur. That is, the institutional systems are required to have structural propensities that allow institutions to structure behavior while also being structured by behavior – institutional systems are both constitutive and constituted of behavior. The empirical puzzle is also a puzzle of startups – why and how they engage in institutional entrepreneurship of intentional activities to leverage resources and networks to create institutions. The research puzzle is formulated via following research questions to provide structure of the theoretical and empirical research work.
The research is structured around the following main research question:
- What is the mechanism of endogenous institutional evolution of market economies and what is the role of startups in the evolution?
Supportive research questions:
- How existing institutional environment and its characteristics influence and condition the agency and ability of startups to engage in institutional entrepreneurship – how institutions enable endogenous evolution without compromising structural stability of institutions? How institutional evolution and quality of formal institutions are interconnected?
- What are the main mechanisms and processes of institutional evolution? How co-evolution and co-interdependence of organizations and institutions operate?
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- How economic, political and sociocultural dimensions of institutional systems work together as a system; how the competing demands co-exist and co-evolve? How economic, political and sociocultural preferences of actors interact?
- What motivates actors to pursue endogenous institutional evolution?