How Do International Joint Ventures Build Legitimacy Effectively in Emerging Economies? CSR, Political Ties, or Both?
| Verfasser | Bai, Xuan |
| Posten | RESEARCH ARTICLE |
1 Introduction
Legitimacy is an important strategic resource that can create significant economic and competitive benefits for firms (Dacin et al. 2007). For foreign companies operating in international markets, gaining legitimacy is particularly crucial because of unfamiliarity with the local market and high uncertainty about any new venture's credibility (Alcantara et al. 2006). When facing the challenges of doing business in unfamiliar institutional environments, foreign firms need to build legitimacy to achieve competitive advantage (Claasen and Roloff 2012; Yin and Zhang 2012). An important and often-used strategy for foreign firms to gain local legitimacy is formation of international joint ventures (IJVs). An IJV is an organizational form where local and foreign partners share equity jointly. By forming a joint venture with legitimate local partners, the IJV enjoys the benefit of the local partner's social reputation and legitimacy through inter-organizational linkage (Alcantara et al. 2006; Baum and Oliver 1991; Rao et al. 2008).
However, IJV formation is not sufficient to overcome legitimacy-related challenges in a foreign market because not all local firms possess adequate local market legitimacy (Alcantara et al. 2006). The legitimacy obtained from inter-organizational linkage does not ensure an IJVs growth and survival. IJVs must actively seek to build legitimacy to achieve market penetration and superior firm performance (Alcantara et al. 2006; Dacin et al. 2007). Yet few studies have explored the strategies IJVs use to accumulate the legitimacy which is so vital for competitive advantage.
This research aims to identify and evaluate the effectiveness of various legitimacy-building strategies. Our first research objective is to distinguish between two types of legitimacy: political legitimacy and market legitimacy. Legitimacy is the acceptance of IJVs by social actors (Deephouse 1996), and two important sets of social actors for all IJVs are government authorities and market-related stakeholders (e.g., customers and business partners). Therefore, legitimacy garnered from both government authorities and market-related stakeholders is vital (Deephouse 1996). Few researchers have explicitly studied legitimacy or examined the different sources and effects of political and market legitimacy. On one hand, market legitimacy is crucial for IJVs who suffer from the 'liability of foreignness'. On the other hand, a dynamic institutional environment makes political legitimacy more significant in China (Yin and Zhang 2012). Political legitimacy is particularly important in China due to weak formal institutions and cultural reliance on business networks as well as the access to regulatory resources it offers. Previous empirical studies typically conceptualize legitimacy as a unidimensional construct (e.g., Bronn and Vidaver-Cohen 2009; Lu and Xu 2006; Shu et al. 2016; Yang et al. 2012), so it would be informative to distinguish and compare the two different types of legitimacy.
The second objective of this study is to identify prominent strategies that help IJVs gain legitimacy and, more importantly, clarify the relative contributions of these strategies on political and market legitimacy. We propose two non-market strategies, namely corporate social responsibility (CSR) and political ties as important legitimacy-building strategies in emerging economies. While legitimacy has been inadequately studied in empirical research (Vergne 2011), some case studies have pointed to the important role of CSR on legitimacy building in foreign countries (Claasen and Roloff 2012; Du and Vieira 2012). In addition, a firm's connection with government officials (i.e., political ties) has been found to positively influence an LIV's performance and success in an emerging market (Banerjee and Venaik 2017; Li et al. 2008; Sheng et al. 2011). Although both CSR and political ties may enhance an IJVs legitimacy, their effectiveness on political and market legitimacy may differ. As the normative pressure for firms to engage in CSR is growing rapidly in China and Chinese customers respond positively to CSR initiatives (Wang and Qian 2011), CSR may help IJVs more effectively acquire market legitimacy. However, political ties may more effectively enhance political legitimacy than CSR because connections with government authorities can directly help IJVs access regulatory resources (Preffer and Salancik 1978). Therefore, it is important to empirically examine the different impacts of the two non-market strategies in enhancing political and market legitimacy.
The paper is organized as follows. First, we review the relevant literature on legitimacy and non-market strategies (CSR and political ties), develop a conceptual framework and propose corresponding hypotheses. Second, we introduce the methodology (e.g., sampling, data collection and measures, etc.) and the results of the statistical analysis. Finally, we discuss the theoretical and managerial implications and the limitations of this study and provide suggestions for future research.
2 Theoretical Background
2.1 Legitimacy and Typologies of Legitimacy
Legitimacy is defined as "the endorsement of an organization by social actors" (Deephouse 1996, p. 1025). The criteria social actors use in determining an organization's legitimacy depends on whether the organization's values and behaviors are congruent with the social actors' values and expectations (Preffer and Salancik 1978). In the IJV context, legitimacy is typically categorized as internal or external legitimacy based on the evaluating audiences. The internal legitimacy of a foreign subsidiary refers to an IJVs acceptance and approval by its parent firms, while the external legitimacy refers to its acceptance and approval by host-country institutions (Lu and Xu 2006). This study focuses on external legitimacy as we study the accumulation of legitimacy after an IJV's formation.
To gain external legitimacy, an IJV needs to meet the expectations of key institutional constituencies (Suchman 1995), and its survival depends on external legitimacy given by various social actors (e.g. consumers, regulatory authorities, business partners, etc.) (Kumar and Das 2007). Therefore, identifying the most important social actors is critical to legitimacy building (Deephouse 1996). We identify two types of legitimacy, namely political and market legitimacy, which are essential for IJVs to conduct business in China (Wei et al. 2017). The two types of legitimacy correspond to two sets of actors: government authorities and market-related stakeholders (e.g., customers and business partners). These two types of actors are recognized as important for IJVs operating in China (Li et al. 2009; Sheng et al. 2011). Political legitimacy is derived from rules, standards and expectations created by government officials and is the acceptance of an organization by government officials (Zimmerman and Zeitz 2002). Market legitimacy refers to the extent that an organization is accepted by its business partners and customers and indicates a firm's rights and qualifications to conduct business in a particular market (Dacin et al. 2007).
2.2 Non-market Strategy: Corporate Social Responsibility and Political Ties
Market strategies, such as Porter's generic strategies (e.g. differentiation, cost-leadership strategies) are well studied, and their effects on performance are well documented (Baron 1995). These strategies deal with issues in the market environment (e.g. customers and business partners) and aim at creating value by improving economic performance. In contrast, non-market strategies refer to actions organizations conduct in the non-market environment (e.g. government and public institutions) aimed at creating value by improving firm performance (Baron 1995). Non-market strategies are viewed as complementary to market strategies and can bring competitive advantages as well as improve firm performance (Lai et al. 2011; Li and Zhang 2007; Sheng et al. 2011; Surroca et al. 2010). Two important non-market strategies that have been receiving increasing attention among scholars and practitioners are CSR and political ties (Baron 1995; Hillman and Wan 2005; Husted and Allen 2007).
Political ties are defined as informal social connections a firm has established with local and central governments (Li et al. 2009; Sheng et al. 2011). The importance of political ties is particularly evident in emerging markets such as China (Luo et al. 2002; Mondejar and Zhao 2013). As a non-market strategy, CSR is defined as "a firm's voluntary consideration of stakeholder concerns both within and outside its business operations" (Homburg et al. 2013, p. 54). Every company has various stakeholders including governments, customers, business partners and so on, and they all have legitimate expectations of the firm's activities (Donaldson and Preston 1995). We take the stakeholder perspective and view CSR as a strategy that builds relationships with key stakeholders and meets their expectations of appropriate and acceptable corporate behavior (Mishra and Suar 2010; Wang and Qian 2011).
2.3 An Institutional View of Corporate Social Responsibility
According to institutional theory (Powell and DiMaggio 1991), the dynamics in an organizational environment stem not only from technological imperatives, but also from institutional factors, which can be broadly classified as formal or informal (North 1990; Scott 1994). Formal institutional factors include laws and regulations, while informal factors may be social norms, beliefs and cultural practices in the host country. The theory suggests that the institutional environment imposes significant pressure on organizations and influences their strategic actions (Dacin et al. 2007). In other words, organizations act in ways that conform to institutional factors in order to obtain legitimacy. Organizations that fail to conform to...
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