The Process of Institutional Innovation in Networks

Institutional innovation has been the core problem of the new institutionalism economics. Following North D. C. (1981, 1990)’s pioneer contributions, many scholars go along the direction pointed by North. Current research mainly concerns the following aspects: 1) The mechanism of institutional changes (for example, Davis and North,1975, cf. North, 1981); 2) The way of institutional changes (Arthur,1988; Dosi, 1994; Li Yifu,1994, cf. Coase, 1996); 3) Institution evolution in the game of large population (Aoki, Masahiko and OKUNOFUJIWARA, 1996; Aoki, 2001); 4) The historical and empirical analysis of institutional changes (Grief, 1994, 1998; Alston, Eggertsson, and North, 1996). Nevertheless, to my knowledge, the most literature is about the institutional change in the national level and in the long term. There are still many topics for future research, for example: 1) the micro foundation of the macro level institutional change has been neglected; the cognitive pattern is not linked with the change effectively; 2) Although researchers has recognized the conflict and friction in the process of institutional change and defined the relative ‘fictional costs’, they haven’t analyzed the reason why fictions appear and the solving method in details; 3) Past research does not leave room for knowledge use and knowledge creation in the classic theory of institution change; 4) Most importantly, the role of entrepreneur in the institutional innovation has not been paid enough attention to. The basic point of view of this paper is that institutional innovation can be regarded as a new ‘connection’, therefore the process of institutional innovation itself is the process of use of knowledge and growth of knowledge. We can observe these phenomena more clearly in the network. I regard network as niche of knowledge distribution in this paper to analyze the institutional innovation with knowledge use and creation in the network. I also compare the process of institutional innovation with the process of market making. We argue that the institutional innovation is very similar to the concept of ‘market making’ when we focus on how institutional arrangements have come into being. To provide the new product and service is the task of entrepreneurs in the common sense, likewise, to create the new institutional arrangement is the task of institutional entrepreneurs. The above theories are about the general situation of the institutional