The institutional embeddedness of economic activity

This paper develops a theoretical. framework that explains market inefficiency and firm heterogeneity as a function of firm and market embeddedness in an institutional context. The paper introduces the concept of institutional impediments to market efficiency to explain the influence of embeddedness on sustainable firm differences. These institutional impediments are proposed to affect three key sources of sustainable competitive advantage: transaction costs, social capital, and cognitive sunk costs. An institutional perspective on firm heterogeneity suggests that opportunities for above-normal returns are not only a function of firm and market characteristics but also depend more fundamentally on the normative and social context of firm and market conduct.