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points and are different across two subsamples. Table 3-5 presents that, compared to low group legitimacy subsample, both the first-order and the second-order terms of strategic deviation from foreign peers had lower coefficients and the first-order strategic deviation from local peers had higher coefficient in high group legitimacy subsample. The turning point of the inverted-U relationship between strategic deviation from foreign peers and firm performances was indeed smaller (from 2.54 to 2.28) compared low to high group legitimacy, which is consistent to our main analysis.
However, the coefficients of squared strategic deviation from local peers for two subsample were the same (0.018), lending no support for Hypothesis 4
.--- Insert Table 3-5 about here ---
Sixth, we incorporated the interaction term of strategic deviation from foreign peers and from local peers and curvilinear term of group legitimacy into analysis because the two independent variables are highly correlated. In order to test for the true curvilinear relationship, Ganzach (1997) found that one should control for the interaction term of two independent variables. Therefore, we controlled for the interaction term and reexamined H1 and H2. The results were consistent to the main analysis. Ganzach (1997) also suggested that curvilinear term of the moderator should be added for control, in order to test the true interaction relationship. Following this suggestion, we included the squared group legitimacy into moderation analysis. The results were similar to the main analysis, indicating our results presenting the true relationship.
SECTION 3.4 DISCUSSION AND CONCLUSION
This study investigates the tension between gaining legitimacy and wining
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competition both across and within groups using a context of MNCs operating in China. The major findings of this study are summarized as follows: (1) moderate level of distance within an emerging group and low level of deviation from the established group’s norms are most beneficial to MNCs’ performance; (2) the across-group effect is weakened when MNCs gain emerging group legitimacy; (3) if we only treating firm performance as a function of either across-group effect or within-group effect, casual ambiguity caused by omitted variables will mislead research findings. This study has several important contributions.
First, this study contributes to the strategic balance perspective in several ways.
Although in the past this stream of research has investigated the tension of legitimacy and competition, it has focused only on a well-established social group and ignored a context where multiple social groups coexist in an industry, especially when one of them is an emerging group that has relatively lower legitimacy (Patvardhan, Gioia, and Hamilton, 2015; Clegg, Rhodes, and Kornberger, 2007; McKendrick, Jaffee, Carroll, and Khessina, 2003). In this context, the tension is more complicated and the choice of positioning strategy is more difficult for firms in an emerging group. By exploring the context of MNCs operating in China and combining collective identity and organizational legitimacy theories, this study extends the strategic balance perspective to a context consisting of multiple social groups. Besides, this study finds that positioning strategy induces interdependent across-group and within-group effects simultaneously, which calls attention to an empirical concern of omitted variable when examining the effects of positioning strategy in a multi-group context.
Second, this study also contributes to the international business literature. Prior work suggests that gaining legitimacy in the host country is critical for MNCs, which is consistent with our findings of legitimacy obtained through conforming to prevalent
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norms of the local group. However, it ignores the other two legitimacy issues—
legitimacy within a foreign group and collective legitimacy for all members of an emerging group. This study combines international business literature with the idea of multiple legitimacy (Kostova and Zaheer, 1999; Ruef and Scott, 1998; Suchman, 1995), shedding light on a more complete picture of legitimacy issues faced by MNCs in a host country and, to our knowledge, is the first study that explores the interdependence of the three legitimacy. Besides, this study directly investigates the competition between MNCs and local firms, which has rarely been studied in extant research (Chang and Xu, 2008). Our findings suggest that local firms in China have accumulated some skills and resources to compete with MNCs.
Third, this study has contributions to strategic group literature as well. Scholars have debated the conception and the identification of strategic groups in an industry.
Some scholars using industrial approach focus on the different strategies and profitability across strategic groups and argues that these differences arise because differential barriers to intergroup mobility (Caves and Porter, 1977; Cool and Schendel, 1988). This study provides empirical support for the idea of socially constructed strategic group. Some scholars adopting a cognitive approach argue that managers cognitively partition their competitors into groups based on managerial perception of similarity and differences among competitors in order to simply their complex environments (Porac et al., 1989; Reger and Huff, 1993). Other researchers based on organizational identity theory argue that a set of mutual understandings regarding the central, enduring, and distinctive characteristics of a strategic group emerge among members of that group constituting the foundation of s strategic group, namely, strategic group identity. This study provides an empirical support to identity-based strategic group and suggests that foreignness is one of the central,
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enduring, and distinctive characteristics that constitute strategic groups. Furthermore, we introduce both within and across groups legitimacy issues associated with collective identity into strategic group discussion, while scholars primarily emphasize on the competition aspects.
This study has several practical implications. Managers often decide their positioning strategy only comparing to their cognitive rivals which are firms in the same social group. Our findings show that only comparing to cognitive rivals may bias the consequence of positioning strategy and mislead managers’ learning by doing when multiple social groups exist in the industry. Managers in MNCs should conform to local norms and develop linkages with local institutional environments. In the meantime, they should also maintain moderate level of deviation from the foreign group in order to obtain best performance. Besides, MNCs should keep eyes on their social environment as well as competition environment and both within group and across groups at the same time, in order to successfully manage the tension between these environments.
This study has several limitations and incurs questions worthy of further investigation. We find that both the benefits and costs of deviating from foreign group norms are reduced after MNCs gain emerging group legitimacy. While we only expect the presence of weaker positive competition effect due to increased resource pool, the negatively quadratic legitimacy effect of legitimacy in foreign group is also lessened. This finding suggests that within group legitimacy becomes less important to MNCs once the whole emerging group accepted by local stakeholders. One possible reason is that emerging group legitimacy also has a spillover effect on legitimacy in the foreign group, which deserves further investigation.
Some attributes of an emerging foreign group are specific to MNCs operating in
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a host country context, but our theories and hypotheses are generalizable to other context. Although the need to fight liability of foreignness together continuously is valid to MNCs, studies of group dynamics showed the importance of borrowing legitimacy from established groups and maintaining optimal distance from the norms of the emerging group (Xu et al., 2014; Patvardhan et al., 2015). It is likely that, regardless of the context, the dynamics across and within groups we depicted in this study could be generalized to other contexts featuring an emerging group that competes against an established group. Similarly, although this study only includes two groups, past work on strategic groups also found moderate distance from group norms increases firm performance the most in multiple group situations (Mcnamara, Deephouse, and Luce, 2003). It implies that our theories are applicable to multi-group contexts. Future research can validate our findings in other emerging-established groups or multi-group settings.
This study explores the dynamics across and within groups and their effects on firm performance. Our findings suggest that in order to gain legitimacy and win competition across and within groups simultaneously, a member in an emerging group such as MNCs in a host country should follow norms in local firms and maintain moderate level of distance from other MNCs. The higher group legitimacy an emerging group gains, the weaker the tension of legitimacy and competition a firm in an emerging group faces. Overall, this study enhances our understandings of how MNCs balance legitimacy and competition across and within groups and obtain better performance through proper positioning strategy.
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Table 3-1 Firm Performance and Strategic Dimensions in Different Groups All firms
(n=335,728)
MNCs (n=72,966)
Local firms (n=216,230)
Conventional local firms
(n=47,080)
Mean s.d. Mean s.d. Mean s.d. Mean s.d.
ROA
7.68% 14.47% 6.45% 12.19% 8.52% 15.30% 5.76% 13.40%
Sales growth Rate
37.45% 2941.35% 25.87% 124.24% 43.69% 3663.25% 26.62% 196.55%
Advertising
intensity
0.09% 0.43% 0.10% 0.49% 0.09% 0.42% 0.07% 0.39%
R&D intensity
0.16% 0.74% 0.14% 0.69% 0.16% 0.75% 0.16% 0.76%
Capital intensity
33.99% 43.73% 33.57% 39.53% 30.14% 37.30% 52.32% 66.72%
Non-production
overheads
8.71% 7.26% 9.67% 7.04% 7.78% 6.66% 11.51% 9.13%
Inventory levels
16.43% 20.59% 19.39% 21.74% 15.01% 19.25% 18.41% 23.90%
Financial leverage
53.99% 54.24% 47.25% 45.58% 51.61% 51.24% 75.34% 71.97%
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Table 3-2 Means, Standard Deviations, and Correlations for All Variables
aMean s.d. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 Relative ROA 0.00 0.98
2 Market share 0.00 0.01 0.09***
3 Financial slackb 0.02 0.19 0.07*** 0.19***
4 Firm size 5.44 1.14 0.03*** 0.34*** 0.07***
5 Firm age 9.29 4.52 -0.08*** 0.04*** 0.03*** 0.11***
6 Joint venture 0.07 0.25 0.02*** 0.04*** 0.01* 0.00 0.06***
7 Market growth 0.19 0.08 0.00 0.00 0.00 -0.10*** -0.07*** 0.02***
8 Average firm age for
foreign peers 9.28 1.30 0.00 0.00 0.01** 0.03*** 0.28*** 0.01 -0.23***
9 Average firm age for
local peers 10.33 2.11 0.01 0.04*** 0.04*** -0.02*** 0.16*** 0.04*** -0.03*** 0.56***
10 Number of foreign
peers 756.62 675.34 0.00 -0.20*** -0.02*** 0.04*** -0.01 0.01** -0.07*** -0.02*** -0.13***
11 Number of local peers 372.66 430.03 0.00 -0.17*** -0.01*** 0.14*** -0.02*** -0.02*** -0.16*** -0.05*** -0.25*** 0.77***
12 Industry concentration 0.19 0.10 0.00 0.23*** 0.06*** 0.06*** 0.01** 0.02*** 0.06*** 0.03*** 0.20*** -0.43*** -0.40***
13 Group legitimacy 0.78 0.47 0.00 -0.08*** 0.03*** 0.28*** -0.02*** -0.05*** -0.24*** -0.08*** -0.12*** 0.33*** 0.62*** -0.06***
14 SD from foreign peers 2.86 1.76 -0.09*** -0.01*** -0.02*** -0.10*** 0.03*** 0.00 0.03*** -0.01** 0.03*** -0.07*** -0.09*** 0.06*** -0.07***
15 Squared SD from
foreign peers 11.26 19.82 -0.11*** -0.02*** -0.02*** -0.07*** 0.03*** 0.00 0.02*** -0.01* 0.02*** -0.04*** -0.04*** 0.04*** -0.03*** 0.93***
16 SD from local peers 2.92 2.07 -0.14*** -0.02*** -0.02*** -0.05*** 0.04*** -0.01*** -0.01*** -0.04*** -0.05*** -0.05*** -0.04*** 0.03*** -0.02*** 0.83*** 0.77***
17 Squared SD from
local peer 12.80 26.73 -0.13*** -0.02*** -0.02*** -0.04*** 0.04*** -0.01* -0.01 -0.03*** -0.05*** -0.03*** -0.03*** 0.01** -0.02*** 0.75*** 0.78*** 0.92***
a N=71215. “SD” is strategic deviation. b Financial slack = working capital / 106 * p < 0.05, ** p < 0.01, *** p < 0.001
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Table 3-3 Results of Driscoll-Kraay Estimation for Relative ROA of Foreign Firms in China
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
Intercept 0.003(2.41) * 0.009(5.82)** * -0.006(5.47)*** 0.001(1.36) 0.001(1.39) 0.001(0.77) 0.001(1.39) 0.000(0.11)
Control variables
Market share 0.214(14.49)*** 0.214(14.37)*** 0.213(14.61)*** 0.212(14.40)*** 0.212(14.43)*** 0.212(14.34)*** 0.212(14.39)*** 0.212(14.37)***
Financial slack 0.059(7.31)*** 0.059(7.30)*** 0.059(7.27)*** 0.059(7.22)*** 0.059(7.22)*** 0.059(7.21)*** 0.059(7.21)*** 0.059(7.15)***
Firm size 0.121(20.38)*** 0.122(20.01)*** 0.119(20.27)*** 0.119(20.26)*** 0.121(19.59)*** 0.121(19.39)*** 0.121(19.74)*** 0.120(19.75)***
Firm age -0.036(-5.58)*** -0.036(-5.63)*** -0.035(-5.48)*** -0.035(-5.42)*** -0.035(-5.53)*** -0.035(-5.54)*** -0.035(-5.53)*** -0.035(-5.58)***
Joint venture -0.012(-0.89) -0.012(-0.85) -0.012(-0.87) -0.011(-0.75) -0.011(-0.78) -0.011(-0.76) -0.011(-0.78) -0.011(-0.76)
Market growth -0.001(-1.37) -0.001(-1.26) -0.001(-1.22) -0.001(-0.97) -0.002(-1.60) -0.002(-1.54) -0.002(-1.59) -0.001(-1.05)
Average firm age for foreign peers 0.010(2.67)** 0.010(2.76)** 0.009(2.28)* 0.009(2.00)* 0.009(2.28)* 0.009(2.21)* 0.009(2.30)* 0.008(2.02)*
Average firm age for local peers -0.012(-5.96)*** -0.012(-5.74)*** -0.013(-5.27)*** -0.014(-5.08)*** -0.013(-4.34)*** -0.013(-4.16)*** -0.013(-4.42)*** -0.011(-3.96)***
Number of foreign peers -0.138(1.95) -0.131(1.81) -0.144(1.85) -0.131(1.47) -0.135(2.18)* -0.139(2.29)* -0.138(2.22)* -0.160 (2.80)**
Number of local peers -0.051(-2.15)* -0.052(-2.39)* -0.058(-2.28)* -0.067(-2.63)** -0.122(-20.51)*** -0.120(-21.97)*** -0.121(-19.49)*** -0.106(-14.63)***
Industry concentration 0.009(1.09) 0.009(1.13) 0.010(1.25) 0.013(1.46) 0.010(1.17) 0.010(1.20) 0.010(1.17) 0.009(1.15)
Strategic deviation
SD from foreign peer 0.019(3.66)*** 0.038(3.76)*** 0.024(4.35)*** 0.080(5.54)*** 0.080(5.54)*** 0.080(5.48)*** 0.080(5.46)*** 0.076(4.99)***
Squared SD from foreign peers -0.006(-3.06)** -0.016(-5.18)*** -0.016(-5.19)*** -0.016(-5.07)*** -0.016(-5.14)*** -0.016(-4.92)***
SD from local peers -0.117(10.96)*** -0.118(11.09)*** -0.153(-13.75)*** -0.188(-11.26)*** -0.188(-11.24)*** -0.188(-11.17)*** -0.187(-11.01)*** -0.183(-10.34)***
Squared SD from local peers 0.009(48.80)*** 0.018(11.29)*** 0.018(11.21)*** 0.018(10.09)*** 0.018(10.85)*** 0.018(10.27)***
Moderator and interaction variables
Group legitimacy -0.019(-4.08)*** -0.021(-4.22)*** -0.019(-4.00)*** -0.020(-3.49)***
Group legitimacy × SD from foreign peers -0.005(-1.60) -0.021(-4.86)***
Group legitimacy × squared SD from foreign
peers 0.001(2.22)* 0.002(4.60)***
Group legitimacy × SD from local peers 0.003(0.92) 0.022(5.34)***
Group legitimacy × squared SD from local peers 0.000(0.47) -0.002(-3.10)**
Within R2 0.021 0.022 0.022 0.024 0.024 0.024 0.024 0.024
F value 871.99*** 5.72*** 8.41*** 4.69*** 92.82** 92.12*** 92.60** 79.41***
N=71215. T value is in parentheses. Two-tailed test. * p < 0.05; ** p < 0.01; *** p < 0.001
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Figure 3-1 The moderating effect of group legitimacy on the relationship between strategic deviation from foreign peers and firm performance
Figure 3-2 The moderating effect of group legitimacy on the relationship between strategic deviation from local peers and firm performance
-0.40 -0.30 -0.20 -0.10 0.00 0.10 0.20
-2 -1 0 1 2 3 4 5 6 7
Relative ROA
SD from foreign peers
Low group legitimacy High group legitimacy
-0.60 -0.40 -0.20 0.00 0.20 0.40 0.60
-2 -1 0 1 2 3 4 5 6 7
Relative ROA
SD from local peers
Low group legitimacy High group legitimacy
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Table 3-4 Firm performance among a matrix of relative position to foreign peers and relative position to local peers
Strategic deviation from foreign peers
Low Moderate High
Table 3-5 Compared results among subsample analyses
Variables Average firm age for foreign firms Group legitimacy
Low High Low High
Strategic deviation
SD from foreign peer 0.076(5.59)*** 0.041(9.55)*** 0.079(4.01)*** 0.076(5.68)***
Squared SD from foreign peers -0.013(-7.97)** -0.010(-12.54)** -0.016(-4.06)*** -0.017(-6.33)***
SD from local peers -0.196(18.38)*** -0.143(42.42)*** -0.193(-15.36)*** -0.175(-6.81)***
Squared SD from local peers 0.016(68.44)*** 0.014(27.86)*** 0.018(12.11)*** 0.018(7.19)***