Institutional determinants of downsizing

• Published date: 01 January 2014
• Author: María J. Sánchez‐Bueno,Fernando Muñoz‐Bullón
• DOI: http://doi.org/10.1111/1748-8583.12017
• Date: 01 January 2014

Institutional determinants of downsizing

Fernando Muñoz-Bullón and María J. Sánchez-Bueno, Facultad de Ciencias

Sociales y Jurídicas, Universidad Carlos III de Madrid

Human Resource Management Journal, Vol 24, no 1, 2014, pages 111–128

This study analyses the institutional determinants of downsizing in an economy with a highly rigid

labour market: Spain. Our focus is first placed on the impact that the system of severance payment has

on downsizing adoption. In particular, we analyse whether the regulatory environment can explain

variations in employers’ downsizing use. In addition, we analyse how organisations imitate one another

in implementing downsizing, presumably in a quest for legitimacy. The evidence provided indicates that

low levels of severance payments incurred by downsizers in the past promotes downsizing in the present,

but too high severance payments discourages downsizing. Therefore, firms in Spain are constrained by

regulatory forces stemming from labour law. Our results also reflect the importance of rational myths

in downsizing because companies imitate the decisions on downsizing widely used in their industry and,

particularly, those adopted by industry leaders.

Contact: Dr Fernando Muñoz-Bullón, Seccion de Organizacion de Empresas, U. Carlos III de

Madrid, C/ Madrid, 126, Getafe (Madrid), 28903, Spain. Email: fernando.munoz@uc3m.es

Financial support is gratefully acknowledged from Universidad Carlos III in Madrid (Project

CCG07-UC3M/HUM-3287) and from the Spanish Commission for Science and

Technology-ERDF (Projects ECO2008-01513/ECON and ECO2010-21078).

INTRODUCTION

Downsizing is one of the most popular strategies being used by organisations in an effort

to compete in the current business scenario, even in economies traditionally

characterised by stable employment practices (Filatotchev et al., 2000; Yu and Park, 2006;

Zatzick and Iverson, 2006). Spanish companies are no exception to this trend, as workforce

reductions in the last two decades of the 20th century clearly show (Muñoz-Bullón and

Sánchez-Bueno, 2011). One reason for this widespread implementation of downsizing in Spain

has been a significant move towards deregulation which has increased the employers’ ability

to vary the volume of hired labour (Ferner et al., 2001). As some authors have underlined,

structural changes focused on the dominance of neoliberal logic of labour relations have

produced a socially undesirable fast adjustment of permanent workers (see, e.g. Toharia and

Malo, 2001, for Spain, or Danford et al., 2011, for the UK). Although downsizing has attracted

the attention of numerous researchers, much of previous research has focused on the

antecedents of employee downsizing from a techno-economic point of view (Datta et al., 2010;

Day et al., 2012). This perspective assumes that firms seek to operate efficiently and, therefore,

may choose to downsize in order to decrease their employment costs (Youndt etal., 1996; Love

and Kraatz, 2009). In contrast to this research stream, institutional theory has challenged the

notion of an objective rationality (e.g. Dahl and Nesheim, 1998; McKinley et al., 2000; Ahmadjian

and Robinson, 2001). This theory emphasises that organisational behaviour is largely driven by

‘rational myths’ or belief systems that embody stories about cause and effect and successful

solutions to problems (Meyer and Rowan, 1977; Zucker, 1988). These belief systems appear

rational in that they specify in a rule-like manner what organisations must do to be efficient,

but they are myths in that their efficacy depends on the fact that they are widely shared rather

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doi: 10.1111/1748-8583.12017

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 1, 2014 111

© 2013 John Wiley & Sons Ltd.

Please cite this article in press as: Muñoz-Bullón, F. and Sánchez-Bueno, M.J. (2014) ‘Institutional determinants of downsizing’. Human Resource

Management Journal 24: 1, 111–128.

than inherently correct (Scott, 1987). As regards downsizing, the institutional perspective has

emphasised similarities in downsizing responses to institutional forces (DiMaggio and Powell,

1983). According to this theoretical point of view, there is a clear, simple argument why

downsizing should be effective that has been widely promulgated and accepted (DiMaggio and

Powell, 1983).

In this article, we identify institutional determinants of downsizing as those phenomena

related to the search of a given organisation to acquire and retain a high level of social

legitimacy when implementing downsizing. Based on institutional theory, we explore two

institutional mechanisms that may significantly affect the likelihood of downsizing adoption.

Focusing on the regulation of labour relations in Spain, where a strong role of labour law

legislation protecting workers exists, we identify how institutionalisation is achieved and

maintained through regulation. In addition, we identify additional institutional determinants of

downsizing from a normative standpoint. Therefore, our analysis identifies regulatory and

normative elements as two different sources of the institutional influence on downsizing. For

this purpose, we use a sample of manufacturing companies extracted from the Spanish Survey

of Business Strategies (SSBS) for the 1994–2008 period. This time period is some 10 years after

Spain’s entry into the European Community and the initial, tentative introduction of the

neoliberal logic of labour relations.

The regulatory antecedents of downsizing underscore how institutionalisation is achieved

and maintained through regulation (Scott, 1995; Edelman and Suchman, 1997). Severance

payments constitute one of the most common costs downsizers must pay off (Holzmann and

Vodopivec, 2012). However, there is no empirical evidence based on firm-level data regarding

the effect this particular workforce adjustment cost has on downsizing adoption. Following the

institutional perspective, we contend that severance pay constitutes a type of normative

institution with a potential capacity to bring the downsizing behaviour of organisations within

a normative ordering (Oliver, 1991). We posit that past downsizers will be less subject to

institutional constraints than non-downsizers because their previous downsizing experience

may have allowed them to develop a model of customised ‘good practice’ for downsizing. In

contrast, non-downsizers will need to recreate legitimacy for initiating a costly episode of

downsizing. Therefore, we focus on whether severance payments represent a regulatory

pressure on downsizing adoption at the organisational level.

Our second purpose is to study normative determinants of downsizing, which refer to

norms, values, beliefs and actions of other relevant players that define appropriate ways of

managing organisations (Meyer and Rowan, 1977; DiMaggio and Powell, 1983; Ahmadjian and

Robinson, 2001). Because downsizing affects workers under open-ended contracts, it often

connotes opportunism, unreliability and lack of integrity by the employer. Because of the

ensuing normative opposition to downsizing (which questions the firm’s credibility and

reputation), we expect firms to adopt downsizing whenever other firms in their business

community have adopted this practice (DiMaggio and Powell, 1983). We examine the impact

on downsizing adoption of both frequency-based imitation – whereby organisations execute

downsizing if this practice has been previously used by large numbers of other organisations

– and trait-based imitation – whereby organisations downsize whenever this practice has been

previously used by other organisations with certain traits (Pfeffer et al., 1976; DiMaggio and

Powell, 1983). We also test outcome-based imitation, whereby organisations imitate downsizing

experiences which appear to have had good outcomes for other organisations in the past.

Our article contributes to the literature of downsizing in several ways. In so doing, we follow

the invitation by Datta et al. (2010) that there are ‘significant opportunities for future research

aimed at understanding the role of environmental factors in determining the incidence and

Institutional determinants of downsizing

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 1, 2014112

© 2013 John Wiley & Sons Ltd.