Most institutional theories see local actors – whether individuals, organizations, or national states – as affected by institutions built up in much wider environments. Individuals and organizations are affected by societal institutions, and national-states by a world society.

Today perhaps the most popular organizational theory is institutional theory.

Contemporary institutional theorizing in the field of organizations dates back thirty-odd years. This particularly describes what are called new or neo-institutionalisms. These terms evoke contrasts with earlier theories of the embeddedness of organizations in social and cultural contexts, now retrospectively called the ‘old institutionalism’ (Hirsch & Lounsbury, 1997; Stinchcombe, 1997). They went through a period of inattention, so that when institutional thinking came back in force after the 1960s, it seemed quite new.
Institutional theories, as they emerged in the 1970s, received much attention in the field, along with other lines of thought emphasizing the dependence of modern organizations on their environments. Perhaps surprisingly, they continue to receive attention, and seem to retain substantial measures of vigor.

Organization theory is the branch of sociology that studies organizations as distinct units in society. The organizations examined range from sole proprietorships, hospitals and community-based non-profit organizations to vast global corporations. The field’s domain includes questions of how organizations are structured, how they are linked to other organizations, and how these structures and linkages change over time. Although it has roots in administrative theories, Weber’s theory of bureaucracy, the theory of the firm in microeconomics, and Coase’s theory of firm boundaries, organization theory as a distinct domain of sociology can be traced to the late 1950s and particularly to the work of the Carnegie School. In addition to sociology, organization theory draws on theory in economics, political science and psychology, and the range of questions addressed reflects this disciplinary diversity. While early work focused on specific questions about organizations per se – for instance, why hierarchy is so common, or how businesses set prices – later work increasingly studied organizations and their environments, and ultimately organizations as building blocks of society. Organization theory can thus be seen as a family of mechanisms for analysing social outcomes.

The new institutionalism in organization theory and sociology comprises a rejection of rational-actor models, and interest in institutions as independent variables, a turn toward cognitive and cultural explanations, and an interest in properties of supra-individual units of analysis that cannot be reduced to aggregations or direct consequences of individual’s attributes or motives.

An explanation of the "institutional approach" to economic theory is a plea for a particular kind of theory. It is possible to come upon the same object from different angles; but more often those who take different routes chance upon different things. The "institutional approach" doubtless has some importance because it is a happy way to acceptable truth, but its significance lies in its being the only way to the right sort of theory. An appeal for "institutional economics" implies no attack upon the truth or value of other bodies of economic thought, but it is a denial of the claims of other systems of thought to be "economic theory." This, however, is no pointless struggle in method to be carried on by breaking syllogisms over concepts and by engaging in polemics over niceties in statement. On the contrary, it involves the very nature of the problems which the theorist should set himself; its real issue is over what economic theory is all about.

Many formal organizational structures arise as reflections of rationalized institutional rules. The elaboration of such rules in modern states and societies accounts in part for the expansion and increased complexity of formal organizational structures. Institutional rules function as myths which organizations incorporate, gaining legitimacy, resources, stability, and enhanced survival prospects. Organizations whose structures become isomorphic with the myths of the institutional environment-in contrast with those primarily structured by the demands of technical production and exchange-decrease internal coordination and control in order to maintain legitimacy. Structures are decoupled from each other and from ongoing activities. In place of coordination, inspection, and evaluation, a logic of confidence and good faith is employed.

In the organizational sciences (e.g., organizational behavior, organizational psychology), one of the more misunderstood terms is “organizational theory.” To some, organizational theory is a field of study; to others, it is the process of using metaphors to describe organizational processes... or it represents an attempt to determine the best way to organize work organizations. The term is used to indicate all of these things, but an “organizational theory” is really just a way of organizing purposeful human action. Given the diversity of purposeful human endeavors, there are numerous ways to organize them, and, hence, a great many organizational theories.

Given that organizational theory deals with different ways of organizing human activity, how does one “theorize” about organizations? In most scientific disciplines, if one wants to theorize about something and ultimately study it, the most common approach is to bring it into a laboratory for closer inspection. Unfortunately, organizational theorists cannot do this because organizations are largely abstractions, and thus cannot be subjected to laboratory investigations. Although we can draw elegant organization charts to represent reporting relationships, and so on, what keeps an organization together is the fact that an organization’s employees understand it and adapt their behavior accordingly.

Another recent development is the theory of formal organizations, that is, structures planfully instituted, such as those of an army, Bureaucracy, business enterprise, etc. This theory is framed in a philosophy which accepts the premise that the only meaningful way to study organization is to study it as a system.

Our contribution to the study of organisations will be greatly enriched if we are able to discern the sources of institutional patterns, their subsequent elaboration and potency, the degree to which these forces are sustained, and the kinds of settings where they operate with the greatest resonance. This agenda is consonant with the core insights of the institutional approach: modern organisations are more likely to arise, expand, and survive in those settings where the social environment creates and sustains the basic building blocks of formal, rational organisation.

Institutional theory presents a paradox. Institutional analysis is as old as Emile Durkheim's exhortation to study 'social facts as things', yet sufficiently novel to be preceded by new in much of the contemporary literature.

Some institutionalist lines of thought, arising particularly in economics and political science, retain very strong notions of society as made up of bounded, purposive, sovereign, and rational actors. In economics, these might be individuals or organizations, operating in market-like environments. In political science, they might be sovereign national-states operating in an almost anarchic environment. Institutionalism, in such schemes, involves the idea that some fundamental institutional principle must be in place before systems of such actors can effectively operate. The classic core principle required in economic versions is property rights (North & Thomas, 1973). In international relations theory it is the principle of nation-state sovereignty (Krasner, 1999).

Organizational theories have three origins: Max Weber’s original work on bureaucracies which came to define the theory for sociologists, a line of theory based in business schools that had as its focus, the improvement of management control over the work process, and the industrial organization literature in economics. Unlike many fields in sociology, organizational theory has been a multidisciplinary affair since World War II, and it is difficult to understand its central debates without considering its linkages to business schools and economics departments.