2000 words assignment excluding reference
WEEK 5: ORGANISATIONAL LEGITIMACY AND EMNCS
Emerging Market MNCs: Internationalisation and HRM (CMSE11380)
Dr. Keyan Lai Office: 4.10
Email: keyan.lai@ed.ac.uk
Home country and host country states play important role in internationalization of all MNCs.
Home country state seems particularly relevant to EMNCs
Support and sponsorship
Double-edge effect (e.g. legitimacy challenge)
Recap of last week: the state
Legitimacy is “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995: 571)
In the process of legitimacy judgement, social actors evaluate various aspects of organization’s activities, structure and outcomes (Bitektine, 2011).
Organizational legitimacy
Rests on the self-interested calculations of an organizations most immediate audiences
Often involves direct exchanges between organization and audience; also involves broader political, economic, or social interdependencies (Suchman, 1995)
‘captures the degree to which an organization represents its constituents’ self-interests or provides them with favorable exchanges, relative to alternative forms or structures’ (Bitekline, 2011:158).
Key concern: How/whether we can benefit from this organisation?
Pragmatic legitimacy
Moral legitimacy reflects a positive normative evaluation of the organization and its activities
To evaluate whether the activity conducted by an organization is ‘the right thing to do’ (i.e. rightness)
Organization gains moral legitimacy when evaluators believe that it is acting in accordance with norms and values shared by that society
Key concern: Does it do the right thing? Does it promote societal welfare?
Moral legitimacy
Refers to the “acceptance of the organization as necessary or inevitable based on some taken-for-granted cultural account” (Suchman, 1995: 582).
Represents the most subtle and the most powerful source of legitimacy
A category-based judgment (Bitektine, 2011).
The organization is categorized as belonging to a certain known organizational form, based on a set of recognizable organizational characteristics (i.e. member of the legitimate class)
Cognitive legitimacy helps organizations avoid evaluation and questioning by their audience
Cognitive legitimacy
Compared with domestic firms, MNCs face greater challenges in establishing and maintaining legitimacy in multiple host environment, because
The stereotyping and different standards applied to foreign firms by the host environment (e.g. the liability of foreignness)
The increased potential for conflict that that they face between the requirement for internal versus external legitimacy
Legitimacy spillovers (from sister units, MNCs as a whole, home country)
(Kostova & Zaheer, 1999)
Legitimacy and MNCs
The largest private agricultural company in USA
Entered India market to create and distribute hybrid seeds
India government introduced Seed Policy in 1988, ‘to upgrade seeds and provide the Indian farmer with the best planting materials in the world so as to optimize his output.’
Cargill encountered substantial resistance from local farmers
Some offices and warehouses were burned down by angry farmers.
The story of Cargill
The local farmers claims the seeds project
Lead to dependence on MNCs, financial distress and economic exploitation
Take away their traditional self-sufficiency in seed production
Destroying their traditional way of life
The first step toward a ‘new’ colonization of India by the West
(Kostova & Zaheer, 1999)
“It is generally assumed that emerging country firms suffer from a legitimacy deficit due to their home countries’ weak institutions and poor reputation” (Fiaschi, 2017:556)
“Significant aspects of the liabilities of origin include adverse attributions such as those denoted by negative country images and negative product country images” (Pant & Ramachandran, 2012:227)
“Chinese firms are often perceived as having less legitimacy than the firms they are acquiring” when they pursue acquisitions in Europe and USA (Zhang et al, 2018)
Legitimacy and EMNCs
A wide range of legitimacy evaluators and a wide range of challenges
Host country consumers may consider their products and services lower quality because of poor business environment at home
Host country governments may worry about the spill-over of corruption from home to foreign operations
Host country civil societies may have concerns about their ethical operations given weak environmental or labour rights protections at home
Host country investors may be wary of poor corporate governance practices due to weak enforcement at home
Legitimacy and EMNCs
Liability of origin
Liability of advantages
Liability of emergingness
Liability of Asianess
Indian software service firms in USA
Enhancing legitimacy
Listing on U.S. stock market
Establishing trade association for Indian software firms (e.g. policy recommendation, industry study commissioning)
Aligning to industry standard, e.g. ISO 9001 certification
Personal connection with Indian American
“…despite a roster of big name North American clients, Infosys was battling the crass Western perception that a smart, honest reputable company could never come out of a country where cows still run in the street”
(Forbes magazine,1999; cited in Pant & Ramachandran, 2012)
| Countries | No. of SOEs |
| UK | 24 |
| USA | 19 |
| France | 48 |
| Germany | 72 |
| China | 147,000 |
| India | 1097 |
| Russia | 1147 |
SOEs, a global phenomenon
Interesting read: Cuervo-Cazurra, A. (2018). Thanks but no thanks: State-owned multinationals from emerging markets and host-country policies. Journal of International Business Policy, 1(3-4), 128-156.
Although liberalization and privatization policies in 1980s and 1990s have reduced the number of SOEs in most countries, the existence of SOEs persists in all countries, including all OECD countries (Cuervo- Cazurra, 2018; Musacchio, Lazzarini, & Aguilera, 2015).
SOEs, in general, face legitimacy challenges abroad, e.g. opposition from host countries, stricter scrutiny and screening
Considered to pose threat to local business because of their advantageous, unfair position in the competition resulted from their supports from the home government (Christiansen & Kim, 2014).
Their positive spillover to the host economy called into questions because of poor business performance as a result of their problematic corporate governance (Globerman & Shapiro, 2009)
SOE’s objectives have caused suspicions. Owned by the home country government, SOEs have been perceived by host countries not only as economic agents, but also as political actors of their home government.
The legitimacy of SOEs in IB
How are EDF and CGN judged in a different way?
What are the key concerns for EDF?
What are the key concerns for CGN?
How are these concerns translated into the questioning of the three aspects of legitimacy (i.e. pragmatic, moral, cognitive)?
What are the legitimation strategies would you propose to CGN?
Case study: legitimacy evaluation of SOEs
Local isomorphism
Isomorphism legitimates! (Deephouse, 1996)
Conform to local formal/informal rules through mimicry behaviours and adaptation of products, operations, and organisation
Behave in a way that are viewed as locally legitimate
Local affiliation
To ‘borrow’ legitimacy from partners (David, Sine & Haveman, 2013)
People often rely on more easily observed signals (e.g. status, legitimacy of affiliates) to evaluate the legitimacy of new commers
Partner with local actors, integrate with local networks
Legitimation strategies
Local isomorphism
CSR and CSR internal/external communication (part of employer branding)
Local talent recruitment & development
HR philosophy and practice localization
Local affiliation
Local community embeddedness (e.g. professional body, NGO)
Legitimation strategies & HRM
EMNCs are subject to liability of origin, i.e. negative perception in host countries about their willingness and ability to conduct legitimate business
CSR and CSR reporting enable EMNCs to
Convey to the global legitimacy-conferring stakeholder that the firm conforms to meta-norms and expectations
Join a globally legitimate class of organizations
Disassociate themselves from their home countries
(Marano, Tashman & Kostova, 2017)
CSR as legitimation strategy
‘The firm’s consideration of, and response to, issues beyond the narrow economic, technical and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks’
The definition and pyramid of CSR
(Davis, 1973)
(Source: Carroll, 1991: 42)
Wages
Wage comparison: foreign firms pay higher wages than domestic firms
Wage spillovers: payment of higher wages by foreign firms results in higher wages in domestic firms
Productivity
Productivity comparisons: research generally indicates that higher productivity in foreign plants, due to higher capital intensity or larger scale of production in the foreign-owned plants
Productivity and knowledge spillovers to local firms
Economic impact & responsibility
New industry and export
One of the main contributions of foreign investment has been to introduce new industries, or dramatically change the composition of production (e.g. subindustries, or new varieties of products).
Thus, shifting production toward tradable goods, and toward export.
Technological and industrial upgrading: e.g. transfer of technology, supplier linkages
Economic growth
Research on the effects of FDI inflow on national economic growth are inconclusive; almost all studies find positive effects in some periods, or among some groups of countries, but there are no universal effects.
Economic impact & responsibility
Case study: Huawei’s economic
impacts on the UK
( Source: The Economic Impact of Huawei in the UK, May 2019, Oxford Economics)
MNCs have a wide range of positive and negative impacts on host counties, but much more difficult to discern, e.g. HRM related issues:
human capital development
Diversity, equality, and discrimination
human rights
Workers’ rights and voices
Best scenario: MNCs as powerful and wealthy actors are able to contribute to social development (e.g. greater respect for human rights) through adoption of voluntary codes of conduct and CSR policies.
MNCs’ social impact
Chinese MNCs may be contributing to employment, but not to upskilling of workers, mutual learning, or engagement with local communities (Jackson, 2014)
“Although working conditions at Chinese companies in Africa differ across countries and sectors, there are some common trends such as tense labour relations, hostile attitudes by Chinese employers towards trade unions, violations of workers’ rights, poor working conditions and unfair labour practices.
There is a virtual absence of employment contracts and the Chinese employers unilaterally determine wages and benefits. African workers are often employed as “casual workers”, depriving them of benefits that they are legally entitled to. ”
Chinese MNCs in Africa
Use of casual/temporary workers (142 out of 250)
Many incidents of violations of national labour law (but no action taken against the company)
No record of any form of CSR, or any involvement in any development-oriented projects
All profits made are allegedly transferred back to the owner in China
Employees sometimes resorted to strike action, but afraid to do so, because striking could lead to dismissal
Chinese and Indian firms in Ghana
Only junior workers are allowed to join the union
Senior staff, managerial staff and temporary workers have no freedom of association
Very low wage level, with salary increase of 0% or 2%
Limited provision of health and safety: 22 occupational injuries and accidents in the last 5 years
(Akorsu & Cooke, 2011)
EMNCs in general do not perform strongly in CSR, particularly in the aspect of social & environmental impacts. Why?
Quick discussion
Note: several slides are missing here intentionally to facilitate better discussion. Full set of slides will be uploaded to LEARN after lecture.
All MNCs face challenges in building and maintaining their legitimacy when in a foreign market.
Pragmatic
Moral
Cognitive
Such challenge is particularly difficult for EMNCs due to their country of origin (e.g. weak institutions, relations with the state)
CSR as legitimation strategy
Conclusions
A mixed picture of EMNCs’ CSR efforts. While their economic responsibility and impacts can be clearly felt and measured, other aspects of social responsibility and impacts received some attentions by some EMNCs in some parts of the world.
From a legitimacy building perspective, positive economic impacts may lead to enhancement of pragmatic legitimacy of EMNCs, but more efforts required for building moral and cognitive legitimacy.
Conclusions