How Regulation and Globalization Affected Organizational Legitimation and Competition Among Commercial Banks in Singapore, 1840-1994

How Regulation and Globalization Affected Organizational Legitimation and Competition Among Commercial Banks in Singapore, 1840-1994

By Glenn R. Carroll, Albert C. Teo
1999Working Paper No. 3035

Organizational theorists now widely recognize that both institutions and competition play major roles in the evolution of industries and organizational populations. A central research question facing the field concerns how these two phenomena affect each other. Theorists often argue for the primacy of one or the other set of factors and empirical researchers often treat one set as fully exogenous while studying the other. Yet, in most general theoretical analyses, both institutions and competition are regarded as endogenous to long-term organizational evolution. This possibility raises great theoretical and modeling difficulties that require more attention by organizations researchers. 

We address these issues here by studying the banking industry in Singapore—an ideal research context because of the development of strong regulations and the presence of diverse international competitors. Historical development of the industry is characterized by the appearance and prevalence of different organizational forms of banks, from early trade-facilitating foreign banks to local Chinese banks to multinational banking corporations. Banking regulations in Singapore are enacted and put into place at various times throughout history. The major regulations impose great restrictions on certain banking activities; these restrictions often apply only to specific organizational forms. 

Theoretically, we examine competition as well as the two dominant conceptions of legitimation used in the organizational analysis, constitutive legitimation and sociopolitical legitimation. We formulate hypotheses based on each conception. These efforts include a novel application of the multi-level specification of Hannan et al. (1995) to apply to the various secondary forms of organization within a population. The general argument says that constitutive legitimation operates broadly across all secondary forms while competition works mainly within a form. 

Our empirical analysis relies on data we compiled on the 210 commercial banks ever to operate in Singapore from 1840 to 1994. We report here our investigation of organizational founding and mortality. This investigation uses hazard functions to estimate rates of founding and organization-specific rates of mortality. We use covariates representing characteristics of the organization, industry and economy. 

In initial analyses, we find strong and significant industry-wide effects of both institutions and competition. For institutions, we find evidence of constitutive legitimation of the banking organizational form as well as increased general stability as a result of establishment of the socio-politically legitimating Monetary Authority of Singapore, the most important regulatory change. For competition, we find that as the banking industry becomes increasingly crowded (with all kinds of competitors), the founding rates of banks decrease and mortality rates increase. 

Further analyses show that the effects of both regulations and competition depend on a bank’s organizational form in complex ways. Full license banks, which predate much regulatory change, benefit the most from elaborated regulation; the mortal