How Multinational Banks in India Gain Legitimacy: Organisational Practices and Resources Required for Implementation.
| Verfasser | Caussat, Paul |
| Posten | RESEARCH ARTICLE |
1 Introduction
The banking industry represents an exceptional context to investigate the so-called liability of foreignness (LOF) that is, the difficulties and additional costs that multinational enterprises (MNEs) encounter when they operate in a foreign market (Zaheer 1995). First, as a tool for public policy implementation that involves money creation and circulation--an attribute of national sovereignty as important as defence or internal security-banking is in essence a politicised activity (Cole 2009; La Porta et al. 2002) that needs to remain under the control of local authorities. Second, foreign bank entry increases local competition and pushes local banks towards less profitable customer segments (the 'cream-skimming' effect) (Gormley 2010; Mian 2006). Third, multinational bank (MNB) subsidiaries may act as a transmission channel of financial shocks (e.g., the 2008 financial crisis) to the local market that the government tries to minimize (Jeon et al. 2013). In addition, the banking business essentially involves collecting and lending money to people, corporations, or public bodies, which requires access to 'soft' information (i.e., knowledge about local customers' expectations and capacity to reimburse) and familiarity with which they can build mutually trustful relationships. In this regard, domestic banks are more familiar with local customs and have better access to soft information vis-a-vis foreign banking MNEs (Bhaumik et al. 2018; Claessens and van Horen 2012; Mian 2006).
The institutional literature in international business discusses strategies to mitigate the negative impact of LOF (Kostova and Zaheer 1999) by acquiring legitimacy--"the social licence to operate" (Ehrnstrom-Fuentes 2016, p. 434). Research to date has emphasised three legitimation strategies directed at various external sociopolitical recipients (i.e., legitimacy providers), such as the regulator and the media (Deephouse 1996): isomorphism (conformism to local institutions), transference (partnership with legitimate local actors), and sociopolitical activism (establishing relationships with host and home governments).
However, some important gaps remain in the extant literature. First, these studies view the local subsidiary as a relatively submissive actor facing institutional constraints in which the management of LOF is based on a powerless or 'passive' adaptation to local rules (which is the case for isomorphism and transference strategies). Going further in institutional theory (Kostova et al. 2008), we question the extent to which subsidiaries must remain passive; instead, we posit that, even in a context of high LOF, MNEs can proactively implement organisational practices to obtain legitimacy with sociopolitical actors.
Second, most studies on legitimacy conceptualise it as a macro phenomenon (Bitektine and Haack 2015), which implies that they mostly investigate the impact of these strategies at the macro level of the (local) society and the (multinational) firm. This perspective ignores the concrete micro level of organisational practices that a subsidiary can implement to support legitimation strategies and reduce LOF. Kostova et al. (2008) call for more agency and suggest rethinking institutional theory as less deterministic. Any strategy requires a certain amount of internal resources and the competence to make use of these resources to achieve a strategic objective (Johnson et al. 2017). Thus, to identify what companies actually do in their attempt to pursue a legitimation strategy, researchers should focus on the micro level of organisational practices mobilised by country managers, which would also allow for more concrete and operational managerial implications.
Third, following the same argument, the macro level of analysis does not allow us to understand how the various legitimation strategies can be implemented internally, which can affect MNCs' internal relationships between the local subsidiary and its headquarters. Country managers mobilise internal organisational practices (Dorrenbacher and Geppert 2006, 2012) to gain local strategic autonomy and to mitigate potential tensions between the need for internal resources when interacting with local sociopolitical actors and the demands for efficiency from the firm's headquarters (Li et al. 2016). Consequently, research should complement the external view of legitimation strategies (which are by definition directed at recipients outside the company) with an investigation into their intraorganisational consequences. Last, we lack empirical knowledge on these micro-level processes (i.e., organisational practices).
Consequently, the present research aims at enriching the institutional theoretical framework on legitimation strategies of MNEs in their foreign country markets. To (1) facilitate identification of strategies beyond the institutional framework of isomorphism, transference, and political activism and (2) be able to ask how these strategies are implemented internally at the level of the subsidiary, we use an exploratory, qualitative case-based study of three French MNBs that operate in India and their attempts to gain legitimacy in the host environment. In so doing, this research offers the following contributions. First, we present an empirical investigation into various legitimation strategies. Hereby, we use the micro level of organisational practices to operationalise legitimation strategies in managerial terms by reflecting on how country managers use them in a context of high LOF. Second, the exploratory, qualitative research design that we use allows us to identify rhetoric proactive strategies as complementary to and distinct from the passive paths of isomorphism and transference and the reactive path of political activism. Third, using the resource-based view, we discuss the internal implications of implementing legitimation strategies directed at external recipients within the intraorganisational network of MNBs.
Our study relies on a context especially suited to investigate legitimation strategies resulting from high LOF: multinational banks (MNBs) and their subsidiaries in India. The Indian context is also particularly suitable as it represents an adverse institutional environment, which, although typical of emerging markets (Sheth 2011), is also unique due to strong economic nationalism and cultural traditions. In addition, India is a favourable environment for investors considering its economic growth has made it one of the fastest-growing large economies over the past decade.
The remainder of the article is structured as follows. We proceed with a review of the theoretical framework, including the various legitimation strategies that we aim to complement. We next present the specific societal context of our study and the methodology applied. The section on the empirical results is the heart of our article and subdivides into (external) legitimation strategies and (internal) intraorganisational implications. The discussion synthesises the findings and as such presents a nuanced picture of organisational practices that put various legitimation strategies (including proactive rhetoric ones), as well as internal implications, into action. We conclude by pointing towards fruitful avenues for future research.
2 Theoretical Underpinnings
2.1 The Eclectic Theory and the Liability of Foreignness
Many MNEs experience LOF, as evidenced by the vast international business literature devoted to the topic (Eden and Miller 2004; Zaheer 1995). The international business literature has discussed several solutions to the LOF problem of MNEs in general. A first stream of research shows that foreign internationalising firms can increase their local competitiveness by exploiting ownership-specific advantages (firm-specific advantages [FSAs]) that they have developed in their home country (i.e., tangible and intangible resources and competences) and that are not accessible to competition. The ownership-location-internalisation (OLI) paradigm (Dunning 2009) provides an 'eclectic view' of how firms can search for the best combination of each OLI advantage and recommends specific entry strategies accordingly (the view is 'eclectic' in the sense that it simultaneously considers all the types of advantages--namely OLI advantages--that firms can benefit from when they internationalize). Foreign MNBs typically have FSAs (relating to the ownership and internalization dimensions of the OLI paradigm) when competing abroad, especially specific knowledge and assets (e.g., technicity, foreign capital, positive country-of-origin brand reputation) (Aichner 2014; Claessens et al. 2001) and internalisation capacities (e.g., the ability to integrate banking operations efficiently between headquarters and subsidiaries). These capacities allow MNBs to control their assets more effectively, reduce asset-sharing risks, and be more cost-efficient through a wholly owned subsidiary (WOS) than they would be in a partnership with a local firm (Dunning 2009). When developing abroad in countries that display location advantages, such firms will typically choose a WOS to benefit from the combination of OLI advantages.
However, rooted in an economic perspective, this body of research is more concerned with entry mode selection and the efficiency of MNEs' investment decisions (Santangelo and Meyer 2017) than with the question of how to circumvent frequent adverse local conditions and LOF. Scholars point out that the OLI paradigm may not be sufficient in explaining internationalisation decisions to enter distant (or high LOF) markets (Buckley and Ghauri 2004; Buckley et al. 2016), as it can undermine the question of local sociopolitical dynamics around the expansion of MNEs into the targeted environment. In contexts of high LOF, foreign actors can potentially face discrimination from a range of actors, including nonbusiness entities such as the government ([Li et al. 2013] in...
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