Private firms in China: Building legitimacy in an emerging economy

Abstract

Firms are legitimized by their environments if they survive and prosper. But firms can also proactively build legitimacy to enhance their long-term growth prospects. This is vital for private firms based on emerging economies given the weak protection for private property. This article examines ways in which private firms in China build legitimacy for themselves and their industries. Through field interviews with firm founders and top managers in China various legitimization strategies and the conditions under which they can be used are examined. The authors also conducted follow-up interviews in Taiwan to investigate legitimacy-building strategies there. Though more advanced, Taiwan's economy shares many cultural traditions with Mainland China, and it presents firms with similar legitimacy-related challenges. Interviews with managers of multinationals operating in China were also conducted to determine what they are learning from the legitimization strategies of the indigenous Chinese firms.

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).