Institutional Economics and Human Resource Development

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Greg G. Wang and Rita L. Dobbs

Advances in Developing Human Resources 2008 10: 770 originally published online 6

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Institutional Economics andHuman Resource Development

Greg G.WangRita L.Dobbs

The problem and the solution.Institutional economics has longbeen associated with economic and training behaviors in organiza-tions since the 1950s.Human resource development (HRD) scholarshave not been adequately exposed to the relevant theories for itsfoundational role and direct applicability to HRD research and prac-tice.In an effort to properly understand economics as a foundationof HRD,this article presents institutional economic theories andmodels pertinent to HRD research and practices.By examining insti-tutional school of contemporary economics,especially the internallabor market theory,it is shown that economic theories not onlyprovide a foundation but also have important implications toresearch and analytical approaches to the field of HRD.Keywords:

institutional economics;internal labor market;HRD theorybuilding;neoclassical economics

Institutional economics is the study of relationships between the role of humaninstitutions and related economic behaviors in a broad sense. It focuses on insti-tutional roles in determining the efficiency of economic transitions. Institutionaleconomics considers market complex interactions of various institutions,forexample,individuals,organizations,governments,socio-culture and history,rather than a simple demand–supply equation. The development of institutionaleconomics is also based on what is known about behavioral psychology and cog-nitive science,rather than on simple assumptions of economic man.

Institutional economics originated from a qualitative approach to economicanalysis (Hodgson,1997,1998,2002,2004). Institutional economics has longbeen associated with economic-related behaviors,from job specification to

This article was subjected to a two-tier blind review process that did not involve the authors whoare currently members of the editorial board.

Advances in Developing Human Resources Vol.10,No.6 December 2008 770-787DOI:10.1177/1523422308324622Copyright 2008 SAGEPublications

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career development,from on-the-job training (OJT) to organization culture,aswell as internal labor market (ILM) and internal training market since the1950s. We believe human resource development (HRD) scholars have not beenadequately exposed to the relevant theories for its foundational role and directapplicability to HRD research and practice (Wang & Holton,2005). In fact,institutional theories,from its research methodology to theoretical framework,may have natural appeal to HRD scholars and practitioners. Linking to othercontributions in this issue,this article explores the institutional economictheory and its implications to HRD research and practice.

A Brief Overview of Orthodoxy Economics

It is necessary to briefly review the mainstream economics before present-ing the institutional theory. Generally speaking,orthodoxy neoclassical econ-omists define economics as the study of the allocation of scarce resourcesamong alternative ends. They emphasize equilibria,where the solutions toindividual and firm maximization problems are reached (Nicholson,1992). Inother words,neoclassical theories often revolve around utility and profit max-imization. Profit maximization lies behind the neoclassical theory of the firm,the derivations of supply curves for consumer goods and demand curves forfactors of production. Many economic theories have been developed based onthe orthodoxy framework to guide national economic and financial policies.For example,human capital theory was developed based on the followingassumptions as discussed in Dobbs,Sun,and Roberts (2008):

•all individuals and firms have equal access to resources such as information,

•job changing is costless,

•access to market information is free,and

•there are a large number of firms demanding the particular skills concerned.The purpose of the assumptions was to simplify the complexities of labormarket for theoretical abstraction.

In contrast,institutionalists oppose the notion of economic man by theirrivalry school of neoclassical economics. They deny that people maximize inpursuit of their economic goals and argue that people’s decisions are less ratio-nal than economic man modeled process.

Principles of Institutional Economics

The main rival to the neoclassical economic theory with regard to HRD andtraining in economics is the institutional school. As early as the conceptionperiod of human capital theory,a group of economists has taken up the topic

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of institutional labor market (e.g.,Dunlop,1966; Kerr,19). Institutionaleconomists reject neoclassical theory as sterile exercises in deductive logicand scholarly apologias for laissez faire. They sought to develop a “new eco-nomics”with a more psychologically informed,humanistic representation ofthe human agent,models of markets that recognized the growth of trusts,anda view of the economic process that made it possible for institutions to pro-mote social welfare (Fine,1956; Lutz & Lux,1988).

The key assumptions of institutional economics about institutions includethe following:

1.Institutions involve the interaction of agents with crucial information

feedbacks.

2.Institutions have common conceptions and routines.

3.Institutions sustain and are sustained by shared conceptions and expec-tations.

4.nstitutions have relatively durable,self-reinforcing,and persistent

qualities.

5.Institutions incorporate values and processes of normative evaluation

(Hodgson,1998).Under these assumptions,institutional theorists oppose the notion of theeconomic human proposed by their rivals. They deny that people maximize inpursuit of their economic goals. Instead,they believe in a theory of motivationknown as satisficing(Kaufman,1994),meaning that individuals pursue a goalonly until they reach a minimum satisfactory level,regarded as good enough,even if it is not the best they can do. The reason is that the human brain is toolimited to effectively process all relevant data and make all the complex cal-culations that are required to arrive at optimal and consistent decisions.

The institutional paradigm accepts the maximum efficiency proposition of themainstream theory but adds two more propositions:Economic outcomes mustsatisfy minimum standards of equity or justice,and they must contribute towardhuman development and self-realization in institutional settings (Himmelweit,Simonetti,& Trigg,2001). They believe that economic theory should be modeledas purposive and self-interested with the following conditions:(a) Human ratio-nality is limited by “stupidity,ignorance,and passion”or “bounded rationality”(Simon,1982) and thus decision making may not maximize utility (Kaufman,1994),and (b) many human emotions arise from interactions or comparisons withothers thus making behavior interdependent (Tversky & Kahneman,1991).In addition,institutional theory realistically believes that labor markets con-tain significant imperfections such as limited and asymmetric information,sig-nificant costs of mobility,for example,turnover,and limited numbers of firmshiring specific employees with certain skills. These factors give employersmarket power over wages and working conditions and may produce noncom-petitive outcomes for employees. Thus,firms often do not bear the full cost of

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production thereby leading to a misallocation of scarce resources and shiftingof costs to workers and communities (Stabile,1993). Furthermore,wage ratesoften are unable to equilibrate demand and supply,thus clearing labor markets.An important reason is that the wage rate performs a dual role in labor mar-kets; it not only allocates labor,as in neoclassical theory,but also is used byfirms to motivate employees (Palley,1995). The wage rate that meets oneobjective often does not meet the other,consequently,leading to nonmarket-clearing outcomes.

Apparently,institutionalists take an interdisciplinary approach to labormarket analysis. As pointed out by Dunlop (1988),

An understanding of labor markets and compensation requires a recognition that the workplace is a social organization,at least informally,and that labor markets take on significantsocial characteristics that do not characterize commodity and financial markets and that are notreadily encapsulated in ordinary demand and supply analysis. (p. 50)

Under such humanistic economics,it was logic to see the development of theILM theory that will be discussed subsequently.

Internal Labor Market

The concept of ILM was first proposed by Doeringer and Piore (1971,1985). ILMs are concerned with the allocation of labor within the organizationamong different job positions,including the availability and nature of training.According to the institutional economists,an ILM was initially defined

by enterprise,or a part of an enterprise . . . Entry into such markets is from the point of entryto other work positions and is governed by administrative rules and customs. These rules andcustoms differentiate members of the ILM from outsiders and accord them rights and privi-leges which would not otherwise be available. Typically,these “internal”rights include certainguarantees of job security,opportunities for career mobility,and equity and due process intreatment at the workplace. (Doeringer & Piore,1985,p. 10)

The ILM is to be distinguished from the external labor market in the neo-classical world,where pricing,allocating,and training decisions are controlleddirectly by economic variables. Key features of this kind of markets were that

Employees enter the firm at limited ports of entry and progress along well defined job ladders.Wage setting is administered via a series of bureaucratic procedures,which,at the minimum,delay and diffuse market forces. Well defined procedures and company norms govern jobsecurity rules. Training is typically on the job and firm specific. This,plus limited port ofentries,makes inter-firm mobility difficult. (Osterman,1982,p. 350)

ILMs structure careers around job ladders,and produce “movement up theladder associated with a progressive development of knowledge or skill”(Althauser & Kalleberg,1981).

The original purpose of ILM research was that of bringing institutions back tolabor economics,forging a more thorough and comprehensive understanding of

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labor markets,removing the nonrealistic assumptions of orthodoxy economicsabout firms’and employees’behaviors. This “institutional realism”(Wilkinson,1983,p. 426) contrasted standard labor economics in the sense that it suggested aneconomic process radically different from that of equilibrium in orthodoxy theory,where power relations and other imperfections merely displaced economy bysome conceptually measurable distance to a disequilibrium. Instead,the institu-tionalist view of the labor market implied a nonequilibrium process.

On the other hand,these two markets are interconnected,and movementbetween the two occurs at certain job classifications that represent ports ofentry and exit to and from the ILM. The remainder of the jobs within the inter-nal market is filled by the promotion or transfer of workers who have alreadygained entry. Consequently,these jobs are shielded from the competitiveforces in the external market. It is important to point out that the ILM is indeedthe subject of HRD research and object of HRD practice.

Training and HRD activities in an institutional world reflects three economicstructures:(a) the ILM structure that simultaneously forms and allocates employ-ees’skills; (b) the firm’s organizational structure,including training and HRDprocess,that shapes the demand for and use of employees as labor; and (c) themacroeconomic structure,especially the institutions shaping unemployment andinvestment that governs the economy (Brown,1994). The first two scenarios areinterrelated,and they function under the context of the third.

Within the ILM,there are no market supply and demand curves for givenpositions (Doeringer & Piore,1971). An employee’s productivity is related tothe job he or she does and is not the result of human capital decision-makingprocess (Brown,1994). In other words,for a given level of skill and effort,anemployee’s productivity depends on his or her job,because the job determinesthe worker’s access to resources and training. The system of job ladders andinternal promotion permits the development of skills through OJT. Job place-ment thus determines the employees’long-run productivity,bargaining power,earnings,and future careers.

Under this framework,the labor market can be seen as comprising favor-able jobs in structured ILMs,and disadvantaged jobs in unstructured ILMs,such as part-time employees. Access to favorable employment opportunities isnot based on the productivity-related characteristics that individuals possessbut on social acceptability and custom (Doeringer & Piore,1971). This is rein-forced by the fact that training is an integral part of the job and requires thecooperation of coworkers and the acceptance of group norms and organiza-tional culture. In other words,ILM theorists consider training as part of orga-nization culture or subculture and related to teamwork and job functions.In the institutional economic world,several factors are centered on theILMs that are familiar to all HRD researchers and practitioners,but are notenvisioned in neoclassical world. These factors include job skill specificityand careers,OJT,and organizational culture and individual habits (Doeringer& Piore,1971).

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Job Skills Specificity and Careers

On surface,jobs are structured under multiple dimensions such as duties andresponsibilities,functions (e.g.,programmer,marketing),work groups,businessunits,and reporting relationships,among other numerous facets. An in-depthanalysis of the specificity of a job,however,reveals that a job can be defined byits skill content. Jobs and associated technology require a specific set of skills.Different jobs require different skills sets that may be more or less specific(Baker,Gibbs,& Holmstrom,1994). Even the simplest tasks are facilitated byfamiliarity with the physical environment specific to the workplace in whichthey are performed. Moreover,performance in some production and most man-agerial and professional jobs involves a team element,and a critical skill is theability to operate effectively with assigned members of the team. The skills ofteam interaction are specific in such a way that skills necessary to work on oneteam may not be quite the same as those required by another team.

A related basic element of ILM is the concept of career. Institutional theo-rists observe that when a job opens up in an ILM,those who are alreadyemployed by the organization are provided with better opportunities to be con-sidered than external applicants. This practice reinforces employee retentionand encourages them to pursue careers inside the ILM. Thus,the ILM modeldefines careers as a series of promotions,based on skill specificity,to higherlevel jobs with higher rewards and responsibilities (Baker et al.,1994). Thisanalysis is consistent with the common practice in organization humanresource management,such as the internal opportunity systems (IOSs) in mostmultinational organizations.On-the-Job Training

In the institutionalists’view,formal education is often used as a screeningdevice for selecting employees with certain aptitudes and social backgrounds.OJT then provides either the larger proportion of skills actually used for jobperformance or is a prerequisite for the successful applications of formal edu-cation.

According to the institutionalists,the informality of OJT makes it difficult toidentify the precise nature of the process,but the following elements are fre-quently involved. First,training typically occurs in the process of production ofgoods or services,partly through trial and error. It is the production process thatdisciplines the learning process and provides indications of success or failure.Both monetary and psychological rewards and penalties stimulate the masteringof the skills required. Second,when instruction of one kind or another is needed,it is usually provided by a supervisor,the incumbent worker,or workers on neigh-boring jobs. The employees in the training process therefore assume dual roles:one in the production/service process as supervisors or subordinates,and theother in the learning process as instructors or learners. Third,the very process of

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OJT tends to blur the distinction between jobs. Each job in the progression linedevelops skills requisite for the succeeding job and draws upon the skills requiredin the job below it (Doeringer & Piore,1985). Similar examples may be found incross-training and job rotations.

We can almost immediately make the connection between the ILM modeland the HRD-related literature on informal learning. HRD theorists defineinformal learning as a process of learning that takes place in everyday experi-ence,often at subconscious levels. Not only is informal learning unique to theindividual,but control of learning rests primarily in the hands of the learner(Marsick & Watkins,1997). Informal learning occurs in the presence of bothaction and reflection and includes “self-directed learning,networking,coach-ing,mentoring,performance planning . . . and trial-and error”(Watkins &Marsick,1997,p. 291). Clearly,the HRD literature in organizational informallearning is consistent with the economists’analysis.Organization Culture and Individual Habits

Organizational culture and individual habits are major components impor-tant to understanding ILM systems. Cultural change in organization develop-ment (OD) practice is also considered a critical component of HRDinterventions. In fact,“organization-wide OD practice is often focused onorganization culture . . . to ensure the existence of the organization as well asits advancement”(Swanson & Holton,2001,p. 321). Institutional theory con-tends that organizational culture in the workplace is an unwritten set of rulesbased largely on past practice or precedent,often dependent on organizationpolicies and practices. These rules can govern any aspect of the work relation-ships from disciplinary to motivational factors. Organization cultures have thecapacity to mold and change aspirations and expectations of individuals andcan either constrain or enable habitual behaviors (Hodgson,2004).

Specifically,the theory accepts the concept of individual habits as definedby psychology as a behavioral propensity (e.g.,Dewey,1922; Margolis,1994).It maintains that individual habits are acquired under the constraints and thecontext of certain culture. The downward causation nature of habits makesindividuals act or think the same old way even when cultural constraints areofficially being removed. New habits,once established,become a potentialbasis for new beliefs and values (Hodgson,1997,1998,2004). Therefore,indi-vidual habits both reinforce and are reinforced by organization culture.

Through this cycle of mutual engagement,organizations are endowed witha stable and inert structure. This can be seen from the durability of cultures,because habits established under certain cultures can create stable expectationsof behaviors. This is also reflected by the fact that organizations play an essen-tial role in providing a cognitive framework for interpreting sense data and inproviding intellectual habits or routines for transforming information into

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work knowledge,which become factors that form organization culture.Eventually,organizational culture creates an ethical or quasi-ethical environ-ment (Hodgson,1998).

The tendency of individuals to form the types of social groups that generatethe organization’s culture is rooted in certain basic principles of group and indi-vidual psychology. What is described as group custom may appear to be theaggregate of habits common to the individuals comprising the group. In a groupsituation,imitation clearly facilitates the development of modes of behaviorcommon to the members of the group. No wonder Waller (2003) summarizedthe essence of institutional theory as “it’s culture all the way down!”

In short,an ILM determines the existence of an internal training market,especially OJT,and organizational culture and individual habits. The system ofjob ladders and internal promotion permits the development of skills andcareers through either formal or informal employer-sponsored training andHRD interventions,whereas the rules that allocate labor within the organizationensure the willingness of incumbent experienced employees to train their juniorcounterparts by removing the threat the latter might pose to their job securityand earnings. Institutional theory and ILM model have been empirically testedby many studies in the field of economics (e.g.,Baker et al.,1994; Gibbons &Waldman,1999; Prendergast,1996). A most recent empirical study on Dutchnational aircraft builders (Dohmen,Kriechel,& Pfann,2003) further confirmedthe relevance of skills and job specificity to employee careers in ILMs.ILM in the new economy.Starting from late 1990s,the rise of “contingentemployment”or short-term employment arrangements such as part-time work,temporary employment,outsourcing,and home-based work seemed to challengethe ILMs concept and its interpretive power. In other words,changes in technol-ogy,production models,organization forms,and globalization appeared to rede-fine the nature of knowledge,skills,and experience,hence the interactionsbetween organizations and employees. However,a number of recent studies onhigh-tech and new-economy organizations still demonstrated a certain degree ofstability in the employment relations with apparent ILM structures (Grandori,Solari,Usai,& Bagdadli,2002).

A general conclusion among ILM theorists is that the concept of ILMremains important despite the changes occurred in the economy. At the sametime,institutional theorists recognized that “a renovated effort of theoreticaland field research is required and desirable”to meet the challenge posed bythe knowledge economy (Camuffo,2002,p. 291). For example,the ILM pio-neering scholar Piore (2002) recently specified that the boundaries of ILM aresocially defined,“not necessarily coincident with the boundaries of a formalorganization,but more broadly include social practices and customs”(p. 272).Clearly,institutional theory and ILM model will not stand still but evolve toembrace the new dynamics of the economy.

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Comparison of Neoclassical and Institutional Paradigms

This section summarizes and compares assumptions made by institutional eco-nomics in relation to the neoclassical economics as relevant to the field of HRD.Institutional theory assumes imperfect competition or nonmarket-clearingoutcomes,thereby implying that underemployment is a basic characteristic ofthe labor market. All training and HRD-related activities take place under thisassumption. In contrast,in the neoclassical theory,a full employment para-digm is assumed that is produced by the competitive market forces,which,inturn,determines the subsequent training activities.

Under the institutional paradigm,job allocations and training opportunitiesare determined by a set of institutional rules and organizational culture and areinfluenced by individual habits,whereas they are dictated by prices/wages inthe mainstream world. Under the institutional umbrella,employees’produc-tivity is associated with the jobs they assume,which results in the access toresources including training and HRD opportunities and is not necessarilyassociated with their skill levels. For the neoclassics,employees’productivityis a result of individual human capital decisions,which are the outcomes ofpast investment decisions and current OJT.

Regarding the process of training,institutionalists’assumption is that OJT,although mostly specific in nature,increases the value of employees to thefirm,and training is embedded in the work process as well as taught by super-visors or coworkers. On the other hand,the neoclassical theorists assume train-ing is differentiated by the type of skills—that is,specific versus general—thatdetermines whether the firm or employees pay for the investment and receivethe return.

Perhaps the concept of OJT used in economic theories by both schools isconfusing to HRD professionals as it is defined differently from the same con-cept defined in HRD,thus conveying different connotations. It is necessary toclarify their uses of OJT in order for HRD professionals to benefit from theeconomic foundations. In general,there is no direct match between OJT con-cept used in HRD and either of the economic schools.

Becker (1962) was among the first to use OJT in the neoclassic school. Hestated,

Workers increase productivity by learning new skills and perfecting old ones while on the job . . . . On-the-job training,therefore,is a process that raises future productivity and differsfrom school training in that an investment is made on the job rather than in an institution thatspecializes in teaching. (p. 11)

More recently,Parsons (1990),in his comprehensive review of the literaturein economic analyses of training,offered a neoclassic version of the OJT defin-ition:“On-the-job training refers to any activity undertaken on the job (duringwork hours) that increases the worker’s subsequent productivity”(p. 56).

It is apparent that neoclassic theorists use OJT to refer to a wide range oflearning interventions. They include formal classroom training and structured

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and unstructured OJT as defined by HRD professionals so long as theemployee’s learning takes place on the job and during the work hours asopposed to learning within a formal educational system.

Although there are no explicit assumptions in both schools regarding indi-vidual learning,it is not difficult to identify implicit assumptions from therespective theories. By definition,institutionalists believe that institutions andcultures play a vital role in establishing the concepts and norms of the learn-ing process (Hodgson,1998). They consider learning to be a developmentaland reconstitutive process. Learning typically takes place through and withinorganizational social structures and involves adaptation to changing circum-stances. Such adaptations mean the reconstitution of the individuals involved.On the other hand,neoclassical theory has difficulty accommodating thenotion of adaptive learning because of the very idea of rational learning. Ittreats learning as the cumulative discovery of preexisting blueprint informa-tion,a stimulus and response,or the Bayesian updating of subjective proba-bility estimates in light of incoming data (Hodgson,2002). In other words,economic man only learns through reacting to market stimuli.

Institutional school assumes that training produces job-related skills as wellas networks and socialization that form the correct behavior and value systemin an organization. Although the neoclassical theorists agree that training pro-duces job related skills,they believe that the formation of behavior and valuesystems are exogenous to the skills acquisition process and are not essentialconditions for making the training decision.

Another fundamental difference between the two is the treatment of techno-logical change in their respective assumptions. In the institutional framework,itassumes technological change is an endogenous variable whose value is deter-mined within an economic system. As such,technology is explained by the inter-actions of economic and social institutions with all players involved. Newproduction technology is the driving force generated through new learning tech-nology and performance technology. On the other hand,neoclassic considerstechnological change is an exogenous variable,which is determined outside theanalytical models and taken as given. It does not explain how and where differ-ent technological possibilities arise but only considers the market outcome,suchas price equilibria,after the technological change. In other words,there is noanalysis of the sources of new technology. Some even refer to the treatment ofnew technology in neoclassic theory as a “black box”(e.g.,Himmelweit et al.,2001,p. 423). Apparently,institutionalists’assumption about technologicalchange allows HRD researchers to consider the performance improvement roleplayed by learning and performance technologies in organizations. Table 1 sum-marizes the contrasting assumptions of the two schools.

Despite the contrary assumptions by the two rival theories,recent develop-ment in both paradigms displays a clear trend that they are converging to somedegree in economic analysis. For instance,Baker et al. (1994) observed that inILM,general and firm-specific human capital investment and training are

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780Advances in Developing Human ResourcesTABLE 1:

December 2008

Comparison of Assumptions by Institutional and Neoclassical Theories

Institutional School

Neoclassical School

Labor market

Jobs

Productivity

HRD

OJT

Imperfect labor market withunderemployment as an outcome

Institutional rules and customsallocate employees’ jobs withinunequal job and training structures

Employees’ productivity is dictated by their access toresources including OJT,whichmay not reflect their skilllevels

HRD increases the value of

employee to the organization,and the interventions isembedded in the work

process as well as taught bycoworkers

Learning by doing on the job.More aligned to structuredand/or unstructured OJT asdefined by HRD professionals

Labor market is competitiveand reaches full employmentin the long-run

Job allocation is by marketclearing prices or wages

Employees’ productivity is aresult of individual humancapital decisions,which isshaped by education and OJTTraining is differentiated bytypes of skills,i.e.,specific vs.general,which determineswho pays for the investmentand who receives the returnReferring OJT to any learninginterventions undertaken on the job (during work

hours).Does not differentiateformal classroom trainingfrom real OJT

Learning is the cumulative discovery of preexisting blueprint information,stimulus and response,or the Bayesian updating of subjective probability

estimates in light of incomingdata.It has difficulty in

accommodating the notion of learning because of the assumption of rational“economic man”Technology is a given exoge-nous variable.Its advance-ment takes place in a blackbox.Productivity increase isonly expressed as a supplycurve shift.Performanceimprovement due to theapplication of new learningtheories and learning technologies cannot beexplained

Learning

Technology

Learning is a developmental andreconstitutive process.

Learning typically takes placethrough and within socialstructures and involves adaptation to changing

circumstances.Such adaptationsmean the reconstitution of theindividuals involved.Meanwhile,institutions and cultures play avital role in establishing the concepts and norms of thelearning process

Technology is an endogenousvariable and can be

determined within institutions.It creates innovative interactionsbetween institutions and theirplayers.New production

technology can be explained bythe driving force generatedthrough new learning,learningtechnology,and performancetechnology

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closely related to career outcomes of employees,and an organization’s knowl-edge about employees’ability is also an important determinant of careerdynamics. Other studies combining the two schools also explored areas andsubjects that may be of interest to many HRD scholars,such as motivation,supervision,and empowerment (Osterman,1994); mentoring and diversity(Athey,Avery,& Zemsky,2000); and career concerns in team collaborations(Auriol,Friebel,& Pechlivanos,2002).

Implications to HRD Research and Practices

The theories of institutional economics,as with other economic theoriespresented in this issue,have important implications for HRD research andpractices. This section discusses the implications of institutional economicsfor HRD research and practices.

Implications for HRD Theory Building

HRD scholars have much to learn,from the theory building methodologyperspective,from institutional theorists. In a field dominated by conventionalmathematical derivations and positivistic quantitative analyses,institutionaleconomists are able to explore new theoretical frontiers and challenge themainstream orthodoxy theory with a radically different constructivist andcase-based approach. They emphasize on case-gathering,focus on the impor-tance of realism of assumptions,rely on the virtues of a “go and see”methodof investigation,and value the necessity for an interdisciplinary approach totheory-construction (Boyer & Smith,2001). This approach often required“participant observation”combined with “open-ended,unstructured inter-views with the economic actors themselves”(Piore,1983,p. 250). However,the use of qualitative methods was not seen as a weakening of scientific rigor(Piore,1979a). Rather,it was considered sound and solid since hypothesiscould be assessed by contextual validation by cross-checking different sourcesof evidence collected from diverse actors (Piore,2002). For a much youngerfield,HRD is facing more challenges to theorizing its research and practices.In this aspect,a critical task for HRD scholars is how to explore new HRD the-ories with innovative and unconventional methods while maintaining the “sci-entific rigor.”To this end,HRD may consider economics not only a theoreticalfoundation,but also a methodological foundation (Wang & Swanson,2008).Economic research has consistently demonstrated the power of rigoroustheory building both quantitatively and qualitatively for almost a century.Particularly,the importance of contributing roles by rivalry theories and theirprolonged debate during a theory-building process deserves particular attention byHRD scholars. Such a process is crucial for a field to become mature. The previ-ous discussions demonstrate that the development of economics to date is the out-come of a century-long debate and disagreement between neoclassical and

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institutional theories,among others. The experience from economists provides anexcellent example of the type of theoretical discourse in which HRD researchersneed to engage in order to further advance HRD theories.Implications for HRD Research and Practice

The institutional theory also provides a number of implications for HRD-related research and practices. This has been demonstrated by the fact thatmanagement scholars had long been integrating ILM theory with research inhuman resources management and organizational behavior (e.g.,Grimshaw,Ward,Rubery,& Beynon,2002).

First,the institutional economic theory,especially the theory of ILM,con-stitutes a significant portion of the economic foundation for HRD. This articlepoints to a broad direction that is likely to be fruitful and provocative forexpanding HRD’s theoretical base as well as practical application in organiza-tions. This,however,should not be considered as disputing the value of humancapital (neoclassical) economics as discussed in Dobbs et al. (2008). Rather,we suggest that HRD theory grounded only in the mainstream economic the-ories may be too limited for binding HRD research and application. Morecomprehensive research is needed to integrate both neoclassical and institu-tional economics into HRD foundational theories.

Second,the fundamental assumptions specified by institutional economicsabout institutions have particular practical implications for HRD practice.They conceptualize,in succinct theoretical abstraction,complex organiza-tional contextual environment under which HRD functions. For example,theassumption on agent interactions with information feedbacks represents thecomplexities of organizational communications. Common conceptions androutines are embedded in daily business operations; a main goal of changemanagement process in OD is to breakdown the rigid conceptions and routinesand create new ones for organization competitiveness and flexibility; organi-zational culture,once established,reinforces itself in a persistent way,whichmay become either a barrier or impetus for organizational change or trainingand development. Clearly,all the assumptions by institutionalists have naturalconnections to HRD practice related context and environment,thus,are foun-dational to HRD research and practice.

Third,the ILM is where all HRD interventions take place. These interventions,as defined and identified in HRD literature,include training and development,organization development,and career development (e.g.,Marsick & Watkins,1997; McLagan,19; Swanson & Holton,2008). Although economists studythese activities with different purposes,their analyses of organizations as ILMs cancertainly strengthen HRD scholars’understanding on the nature of the workplace.In fact,the importance of ILM to HRD can be easily seen from its roles in main-taining and developing ILM. Due to the delayed and diffused market force by theILM as posited by the institutionalists,organizations are able to keep a relatively

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stable competitive edge through HRD activities. The tasks of HRD under this envi-ronment are reflected in two major areas:(a) maintaining a stable workforce thatis competent in,and ready and motivated to,performing designated jobs; this taskis often accomplished by (b) training and development or OD-related interventionsin skills and cultural changes. Therefore,HRD operations play important roles inorganizational-based ILM.

Furthermore,the importance of HRD in the ILM makes it not difficult toassociate the factors identified in the ILM model with the major HRD compo-nents. Training and development and career development relates more or lessto the skills and job specificity and OJT concept as defined by economists,although their definitions are somewhat different from those in HRD. The in-depth analysis of skills and job specificity by institutional economists some 30years ago can be extended to all training and development arenas in HRDdomain,even though the specific OJT activities and environment discussed bythe economists may have been changed due to the technological developmentover the past thirty years. As noted by Osipow and Fitzgerald (1996),careerdevelopment is “the evolving sequence of a person’s work experiences overtime.”The major component of career development indeed involves advance-ment in specific skills and competencies with regard to particular job require-ments. More recent development in HRD practice on employee competencymanagement may also be considered as an intuitive response of organizationsto the demand of ILM.

OD and change management can be easily linked to the factor of cultureand custom outlined in the ILM model. Indeed,one of the key focuses of ODinterventions is on organizational culture (Swanson & Holton,2008).Essentially,the economists’conclusion that training not only produces jobrelated skills but also builds institutional networks,behavior,and value sys-tems has been observed and practiced in HRD through various interventionsfor many years. Additionally,other issues in ILM raised by the institutional-ists,such as team skills necessary for various types of teams and team culture,also deserve HRD scholars’attention.

Third,institutional theory presents at least one more piece of the puzzle thatfits well with what we know about the complexity of organizational resourceallocation and bounded rationality decision making. Its strength is that itaccounts for the messy,irrational nature of the social and cultural system thattypifies organizations in which HRD operates. For example,scholars in botheconomics and management have found that organizations tended to adoptnew human resources policies and practices for very diverse economic,orga-nizational,and institutional reasons,and seldom did they root such decisionson a thorough understanding of the relationships that linked employees’com-petencies and satisfaction,organizational capacities,and firms’performance(Baron & Kreps,1999; Osterman,2000). HRD scholars need to furtherexplore whether such observations are consistent with the HRD practices forthe purpose of developing human resources in organizational settings.

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Last,but not the least,combining this study with current HRD theory build-ing reality,we maintain that HRD scholars have not been adequately equippedwith necessary knowledge and expertise to conduct HRD theory buildingresearch in economic related field. There is an urgent need for HRD scholarsto expand their knowledge base in order to advance the field. Equally impor-tant,HRD academic programs may consider expanding formal training inHRD graduate programs and embrace more multidisciplinary subjects,includ-ing recruiting graduate students from the foundational fields,such as econom-ics and psychology as other related sister disciplines have done. For example,educational policy studies departments in major universities are recruiting can-didates trained at leading economics schools,including labor economists,economists specializing in economics of higher education and internationaleducation. Expanding current and future HRD scholars’knowledge base willcertainly ensure a sustained improvement of quality HRD research and expe-dite the field’s maturity.

Conclusion

To expand HRD researchers’understanding of economic foundations ofHRD,we presented institutional economics,a major rivalry theory to themainstream economic theory that is pertinent to HRD theories and practice butare often overlooked by HRD researchers. The review of institutional theories,as well as the comparison between the two rivals,has suggested that econom-ics not only constitute a general theoretical foundation of HRD but can also beeffectively applied to support HRD research and the theory-building process.Broadening our research directions may be fruitful and provocative forexpanding HRD’s theoretical base as well as practical applications in organi-zations. Much research is needed to incorporate economics theories into HRDtheory building and practice. For this purpose,HRD graduate programs mayconsider to embrace requirements to multidisciplinary subjects for current andfuture graduate education.

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Rita L. Dobbs,PhD,is an associate professor in the School of Human ResourceDevelopment and Technology at The University of Texas at Tyler. She has more than20 years of teaching and training experience and is a partner in Research Consultants,her consulting firm. She also serves as the Director of Graduate Studies for the Schoolof Human Resource Development.

This refereed journal article is part of an entire issue on Economic Foundation ofHRD:Theory and Application. For more information or to read other articles in theissue,see Wang,G. G.,& Dobbs,R. L. (2008). Economic Foundation of HRD:Theoryand Application. (Special issue). Advances in Developing Human Resources,10(6).

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