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CHAPTER 3 THE TENSION BETWEEN LEGITIMACY AND COMPETITION FACED BY FIRMS IN AN EMERGING GROUP:
EVIDENCE FOR FOREIGN FIRMS IN CHINA
Although strategic balance perspective shows the tension between legitimacy and competition and how to balance them in a well-established social group (i.e., an industry), recent developments in collective identity and organizational legitimacy theories reveals a more complicated situation that remains unexplored where multiple groups exist in an industry and each group possesses different levels of legitimacy and competitive advantage—and hence different considerations when it comes to balance the tension between legitimacy and competition— due to their distinct background.
Recently, some studies of collective identity theory focus on the legitimation process of emerging groups within an established social group and investigate when, where, and how a new group will emerge (e.g., Patvardhan, Gioia, and Hamilton, 2015;
Clegg, Rhodes, and Kornberger, 2007; McKendrick, Jaffee, Carroll, and Khessina, 2003). This steam of research reveals that a firm in an emerging group should not only be optimally distinctive from other groups to develop a profitable niche, but also be optimally distinctive from other members of the same emerging group to gain the leader position. Research in organizational legitimacy suggests a multidimensional model of legitimacy and indicates that dimensions of legitimacy may include (1) the elements or aspects of institutions (e.g., the normative, the regulative, and the cognitive aspect; Scott, 1995), (2) the sources of legitimacy (i.e., various constituencies), and (3) the level where legitimacy resides (e.g., population level, firm level, and subunit within-a-firm level) (Kostova and Zaheer, 1999; Ruef and Scott, 1998; Suchman, 1995). These studies imply that firms in an emerging group confront multiple legitimacy issues including (1) building group-level legitimacy collectively;
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(2) gaining firm-level legitimacy in the emerging group; (3) gaining firm-level legitimacy in the established group. To simplify things, we consider a situation where an industry consists of two groups (i.e., an established group and an emerging group5) where the emerging group—due to its newness, marginal status, or unfamiliarity to the stakeholders—is desperate for gaining legitimacy from the established group and the stakeholders.
Under this circumstance, the dynamics across and within groups make the tension more complicated than what has been explored by the existing literature.
Firms in the emerging group face legitimacy and competition issues not only within but also outside the group: that is, they have to appear legitimate both to their peer firms and to firms in the established group; likewise, they also have to compete against their peers as well as firms in the established group. On the one hand, a firm in such an emerging group first and foremost has to gain legitimacy among the broader industry, and may fail or exit market due to the lack of legitimacy in the eyes of the established group and industry stakeholders (Kostova and Zaheer, 1999; Rosenzweig and Singh, 1991). Yet at the same time, it also has to differentiate itself from the established group to maintain at least some level of distinctiveness in order to preserve its competitive advantage (Patvardhan, Gioia, and Hamilton, 2015). On the other hand, actors in the same emerging group are direct competitors against each other because of their similar resources and market niche (Cool and Dierickx, 1993;
Hatten and Hatten, 1987). Being different is thus more critical among firms within emerging groups. However, this does not mean that legitimacy concern is not important within an emerging group; such firms tend to cooperate and identify with
5
The difference between an established versus an emerging group may be based on member firms
countries of origin (which is the case in this study), production mode, market orientation, or other
factors that are critical to a firm’s identify.
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each other because they typically face the same uncertainty and social status (e.g., lack of legitimacy and liability of foreignness) (Li, Yang, and Yue, 2007) and need to work collectively to overcome the disadvantages associated with their newness or low legitimacy. Gaining legitimacy within a group helps firms’ access necessary resources and information shared by their peers within the same emerging group.
Multinational corporations (MNCs) operating in host countries confront the complicated tension we mentioned above, making it the ideal context for this study.
To enhance firm performance, MNCs have to make two related decisions when operating in a host country: to what extent to be similar to local peers and to what extent to be similar to foreign peers. Taking MNCs in Taiwan as an example, foreign banks such as Citibank and HSBC often choose to be distinct from local banks while foreign retailers such as Carrefour and RT-MART often decide to be similar to local retailers. Foreign banks often focus on their profitable niche such as business loans, foreign exchange services, and investment services and employ differentiating strategy from local banks. However, some foreign banks such as Standard Chartered Bank act like local banks providing comprehensive financial service and having more branches than other foreign banks (at the end of 2016, the number of branches in Taiwan: Standard Chartered Bank, 73; Citibank, 55; HSBC, 356). On the contrary, foreign retailers often serve similar customers with local retailer and provide localized services. Some foreign retailers such as Costco emphasize on their foreignness and behave distinctively from both local peers and major foreign peers.
In China, MNCs are new entrants that can be seen as the emerging group within the local industry of the host country, competing against local firms, or the established group. Even though different MNCs may come from different countries, their foreign
6
Data source is Central Bank of the Republic of China (Taiwan).
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status and the fact that they often need to fight the liability of foreignness together constitute the common identity basis for such firms. Studies of international business and the field of strategy have accumulated a body of literature about legitimacy and competition between local firms and MNCs. Some studies find that MNCs need to mimic local practices to gain legitimacy in the host country and overcome the disadvantage of being a ‘‘stranger in a strange land’’ (Eden and Miller, 2001;
Resenzweig and Singh, 1991). Some studies focus on the competition between local firms and MNCs (Chang and Xu, 2008; Zeng and Williamson, 2003). Other studies explore how MNCs interact with each other and engage in isomorphic process to deal with uncertainty in host country (Kostova and Roth, 2003; Rosenzweig and Nohria, 1994). However, the extant literature has not yet explored the aforementioned tension, that is, whether gaining legitimacy and wining competition both across and within groups are important to firms (such as MNCs) in an emerging group; and if so, how these firms balance legitimacy and competition across and within groups and obtain optimal performance through proper positioning strategy, and whether the relative importance of legitimacy and competition across and within groups remains when the emerging group has built its legitimacy in the industry.
In this study, I explore these questions by studying a sample of MNCs operating in China. I construct MNCs’ strategic similarity to local peers and to other foreign peers separately to examine their effects on firm performance. This study contributes to the literature of strategic balance perspective as well as international business. First, we extend the strategic balance perspective to the context where multiple groups exist in an industry and investigate how firms in an emerging group balance legitimacy and competition across and within groups. Second, we indicate that firms should consider the effects of positioning strategies across and within groups together because the two
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effects are related to each other. Otherwise, casual ambiguity caused by omitted variables can mislead research findings if we only treating firm performance as consequence of either across-group effects or within-group effects. Third, our results supplement the international business literature. That is, conforming to local norms in host countries is critical to MNCs, even when they play important roles in the industry and their legitimacy is improved. In addition, we specify three types of legitimacy issues (i.e., firm-level legitimacy within both local and foreign groups and group-level legitimacy in an industry) which enhance our understanding of the complexity of the legitimacy issues MNCs typically facing.