Private firms in China: Building legitimacy in an emerging economy
Introduction
Global firms today face a host of challenging environments as they do business in the emerging economies of the world. One of the key issues that such firms face is how to establish their legitimacy, or right to exist, in a given market (Ahlstrom & Bruton, 2001; Stillman, 1974). The local firms based on these emerging economies regularly face such problems. These firms have developed a number of legitimacy-building strategies to help them cope with the challenging and sometimes chaotic environments in emerging economies. To better understand the many approaches used to build legitimacy in an emerging economy, we interviewed firm principals and founders from China's growing private sector. In addition, senior mangers of global firms operating in China were interviewed to determine which strategies they were able to adopt from the local Chinese firms. To further substantiate these findings subsequent interviews in Taiwan were conducted. Although more developed and amenable to private property, Taiwan shares the same cultural traditions as Mainland China. Firms in Taiwan reported they face a number of comparable legitimacy-building challenges.
Legitimacy represents a legal and societal judgment of the norms, appropriateness, image, and legal standing of an organization (Aldrich & Fiol, 1994; Suchman, 1995; Rindova & Fombrun, 1999). Legitimacy can help a firm survive and avoid significant interference from outside parties in its environment (Zimmerman & Zeitz, 2002), something that can be a particular problem in emerging economies (Ahlstrom & Bruton, 2001; Bai, Lu, & Tao, 2006). In addition, enterprises that have achieved a level of legitimacy can more easily obtain access to resources and markets needed to prosper (Dowling & Pfeffer, 1975). It is not always easy for firms to build legitimacy for themselves and the type of industry they are in as new firms, technologies, and organizational forms are not automatically accepted by markets and local constituencies (Stinchcombe, 1965). Lacking the support conferred by legitimacy, a firm's ability to conduct business can be significantly hampered by governments, banks, and other organized groups or simply by market indifference (Suchman, 1995, Tsang, 1996).
Much prior research has viewed legitimacy retrospectively. The survival of an organization suggests that legitimacy must either have already been present for that organization (or its industry), or was achieved primarily through sheer numbers of similar organizations entering a market (Zimmerman & Zeitz, 2002). Prior research on legitimacy has also typically focused on established organizations in developed economies, where private enterprise is well accepted. It is commonly assumed that the environment conferred legitimacy based on firm survival, profitability, and the supplying of valued inputs (e.g. Baum & Singh, 1994). This view tends to downplay the role that an individual firm may have in establishing its own legitimacy.
Securing legitimacy for a new firm or business model is difficult enough in developed economies where private enterprise is well accepted and property rights secure.3 In emerging economies, legitimacy can even be more difficult to obtain (Wright, Filatotchev, Hoskisson, & Peng, 2005). Private enterprise has little history or legitimacy in many emerging economies (Soto, 2000). Though there is variation in emerging economies such as Russia and China (Wright et al., 2005), the legitimacy of private business cannot be assumed (Peng, 2000, Soto, 2000). Instead the growing presence of private ownership during economic transitions has maintained an uneasy coexistence with a residual statist ideology (Peng, 2003). Observed a former senior government official in China:
“There's nothing to keep the [Chinese] Government from taking those private assets back …. One year things are open and everyone can prosper; the next year the Government decides to collect everything for the state.” Cao Si-yuan, senior adviser to former People's Republic of China General Secretary Zhao Ziyang (South China Morning Post, June 16, 1999: p. 1).
It is true the support for private enterprise is increasing in emerging economies such as China and Russia. However, the past opposition to private property continues to have a major impact since the ownership of property in China can sometimes be unclear (Delios, Wu, & Zhou, 2006; Huang, 2005, Wank, 1999). For example, many private businesses in China were founded during the early reform period before it was legal to possess private property. These firms have none of the required documentation technically legalizing their operations. Other more recently founded private firms started when it was legal to have private property but bypassed many of the various bureaucratic regulations for such businesses, sometimes mixing assets of state and private entities as the firms grew. The fear held by these private enterprises, including several in our sample, is that if the government challenges the firms’ right to exist, their assets can be appropriated and they can even be driven out of business. In the absence of stable legal arrangements legitimacy building becomes crucial for the private firms in China. Thus, in facing residual hostility in China, and what is often unclear legal status private enterprises can help to legitimize their commercial activities through image building, networking, and developing close connections with the government, particularly the local legal regime and power structure (Ahlstrom, Young, Nair, & Law, 2003; Peng & Luo, 2000; Tung & Worm, 2001; Tung, 2002).
Our point of departure with past work is to understand how private firms in a major emerging economy build legitimacy for themselves, their industry, and even their entire (private) sector and to examine how multinational firms are learning from these actions. This article extends previous work on tactics used by firms in emerging economies to secure legitimacy (Ahlstrom & Bruton, 2001; Kumar, Rangan, & Rufın, 2005; Tsang, 1996; Tung & Worm, 2001) by developing a hierarchy of the strategies that private firms in China are using to build legitimacy. These strategies range from individual firm action to collective actions by networks of firms, sometimes in concert with the government. While private firms in China, along with some in Taiwan are used to ground this study to establish clarity about legitimacy building, these strategies are potentially relevant to various enterprises in many emerging economies such as those of Eastern Europe and Latin America, as well foreign firms that need to learn and employ the same strategies when they enter those markets (Kumar et al., 2005).
Section snippets
A traditional view of firm legitimacy
The term legitimacy commonly refers to the right to exist and perform an activity in a certain way (Suchman, 1995). The legitimacy of firms in an industry has historically been viewed from a macro level where the industry both seeks and is impacted by socio-political and cognitive approval from society and its institutions (Aldrich & Fiol, 1994). Socio-political legitimacy stems from the approval of the general public, key opinion leaders, or government officials. Cognitive approval is based on
Emerging economies
Emerging economies differ from those of more developed market economies (Wright et al., 2005). Interpreting firm actions in such economies cannot assume to be analyzed by simply taking models from mature economies and applying them in such environments (Clark & Soulsby, 1999). In part this is due to the fact that emerging economies are not institutionally well developed and alternative mechanisms are often necessary to govern economic activity (Boisot & Child, 1996; Peng, 2000). To illustrate,
The study
To explore and categorize the numerous legitimacy-building strategies used by private firms in China, this study used a modified version of an interview questionnaire first utilized by Ahlstrom and Bruton (2001). As is common with sensitive data about firm policies and strategies in China, it is generally best to obtain this information through face-to-face interviews. The interviews ranged between one and two hours with the majority taking a little more than an hour.
Legitimacy-building strategies in China
Prior to the limited legalization of private property in recent years, the less than legitimate status of private firms in China resulted in widespread abuses with no outlet for private firms to protest or to seek legal redress (Clarke, 1991; Gold, Guthrie, & Wank, 2002; Wank, 1996). Thus, while the constitution of China now allows private enterprise, many important officials still do not approve of their right to freely conduct business. Even for officials more accepting of private property,
Legitimacy building in Taiwan
Taiwan shares similar traditional Chinese culture with China, that is, a similar cognitive institutional structure (House, Hanges, Javidan, Dorfman, & Gupta, 2004). Taiwan is also classified by the World Bank as an emerging economy although it is viewed as less turbulent than that of China. Thus, it would not be unreasonable to assume that many legitimacy strategies are similar in Taiwan and China. As a result, Taiwan offers the opportunity to substantiate the findings on China and to also
International firms and legitimacy
It can be seen in examining Taiwan that most of the same legitimacy strategies are in place. The major differences concern the role of government and the greater security of private property in Taiwan. Yet many idiosyncratic practices surrounding building legitimacy through guanxi, charity, and gift giving remain in place. In examining the other international firms it was clear that the international firms were trying to learn from their Chinese partners. For example, two of the foreign firms
Discussion
In past work, researchers have often concluded that business and industries that survived and grew had achieved legitimacy. This perspective does not call attention to how firms can act to shape legitimacy. It is possible for firms to build legitimacy, and it is indeed a very important activity for firms in emerging economies with uncertain property rights. This extension of the theoretical understanding of legitimacy by incorporating this institutional entrepreneurship is a major contribution
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