The last chapter took a deeper insight into the relevant theory about legitimacy in a more overall view. For this chapter, we will solely look at organizational legitimacy regarding the MNC and not as an overall concept. This chapter will give a deeper insight into the complex areas of MNC’s legitimacy leading up to the third chapter where we will look at the complexity regarding legitimacy in the MNC’s subsidiaries.
The legitimacy of the MNC as a whole is the approval or acceptance by is institutional environment (Kostova & Zaheer, 1999, p. 65). Here it is important to notice that this does not necessarily refer to the legitimacy at any of the subsidiaries. Kostova and Zaheer (1999, p. 67) suggest that there are two levels of organizational legitimacy in an MNC. The level of legitimacy of the MNC as a whole and the level of legitimacy at the MNCs subunits. They propose that these two levels are interrelated. The legitimacy of the MNC as a whole is affected by the legitimacy of the subunits and vice versa. However, it is important to keep in mind that the legitimacy of the MNC as a whole may not be a simple average of the legitimacy of it subunits (Kostova & Zaheer, 1999, p. 65).
For an organization like The MNC, that operates worldwide and with many different institutional environments and which in itself is an evolutionary system with multiple subsystems that evolve and interact with each other (Westney, 2014) legitimacy is a key factor. The ability for the MNC to obtain legitimacy is crucial in order to survive and prosper especially for its subsidiaries in their foreign locations (Mukherji, 2009; Suchman, 1995;). Legitimacy is so closely connected to the ability to obtain and exchange resources under favorable circumstances. Thus if an organization is not viewed as legitimate, it will have a hard time being able to prosper. Resources for an organization is alfa omega, whether we talk about human resources, like attracting the right candidates for the job or financial resources, attracting investors for future projects, they are all part of creating value for the organization. Attracting the right candidates or investors may be very hard, or at least very expensive, if the organization is viewed as illegitimate. Organizational legitimacy as a resource can be used both as a means or an end. If it is perceived as a means the MNC use their legitimacy to gain other resources whereas if it is an end, legitimacy is the result of an organization’s actions.
The institutional environment
The MNCs are faced with different expectations from various stakeholders in their institutional environment, and these expectations are often incompatible with each other and thus, are a permanent threat to organizational legitimacy (Scherer, Palazzo & Seidl, 2013). Baumann-Pauly, Scherer and Palazzo (2014, p. 32) nicely demonstrate these heterogeneous expectations based on their longitudinal study of legitimacy strategies at a sportswear brand company. Investors expect return on investment, customers want trendy clothing and sport shoes at low prices, employees want to work at reputable companies and earn high salaries, the public wants companies to comply to social and environmental standards, NGOs demand of companies to do more than the legal minimum, the media critically scrutinize the behavior of companies, host governments want companies to comply with local laws and morals and to provide investments and jobs, and workers at the suppliers simply want jobs to earn a living.
The institutional environment for the MNC is vast and consist of three areas. The institutional environment of the home country, the institutional environment of all of the host countries and a higher supranational environment (Kostova & Zaheer, 1995, p. 65), which have a certain interest because of the MNC visibility, power and the spread over multiple countries. The European Union with the Parliament and the Court of Justice of the EU are examples of this. But, also institutions such as WTO, the World Trade Organization, and global media. The legitimating environment also consists of activist groups such as Greenpeace or WWF, World Wide Fond for nature but also non-profit organizations like Wikileaks and international networks of activist such as Anonymous. The big players in a global setting such as Greenpeace and global media are much more essential to a vast and powerful MNC then to purely domestic organization because the visibility and size of the organization in itself is a target for such global institutions. The audience or observers in the institutional environment of the MNC differs from one organizational field to another (Bitektine, 2011). Not all of the observers are equally important and the importance of some audience will also shift through time, making it necessary for the organization always to know the audience of their institutional environment. However, this also gives the organization a strategic opportunity only to attend to those audiences that are important for the organization, either for developing legitimacy or for avoiding illegitimacy. (Referance) Hybels (1995) looked at the institutional environment and identified four critical organizational stakeholders. He argued that each of the stakeholders, influence the flow of resources and are crucial to the organization’s establishment, growth and survival. Each of the four stakeholders controls a number of resources that can affect the organization positively or negatively. The four critical organizational stakeholder and their resource are; The state which controls resources such as contracts, legislation, grants, regulations and tax. The second is the public, which holds resources such as consumer taste, public opinions, support, and labor. The third stakeholder is the financial community who has the power of money and investment. The fourth stakeholder has received quite a lot of attention by scholars on legitimacy and is the media. The media does not have much direct control over the transfer of resource to the organization, however, the ability for the media to influences the other stakeholders indirectly is a great resource in itself. The unit of analysis for Hybels (1995) is the organization and even though he does not specify it in his article his explanation of the four critical organizational stakeholder’s centers around domestic organizations.
Based on Hybels (1995) four stakeholders I suggest that in order for making them relevant for the MNC and its Subunits we need to look at the unit of analysis and add another critical organizational stakeholder, the supranational organization (Kostova & Zaheer, 1999). The unit of analysis must not just be domestic but need to comprehend all of the MNCs institutional environment; therefore the unit of analysis is three-faced: The home environment, the host environment, and the global environment. By suggesting some other unit of analysis, I am not saying that Hybels (1995) did not think these into his four stakeholders. I am merely stating that his primary focus is on the domestic organization. In fact, all four of his stakeholders can to some extend also be viewed as global, such as global media, or global public groups. The MNC institutional environment also consists of a more supranational level (Kostova & Zaheer, 1999) and therefore I suggest that another stakeholder is added to Hybels (1995) list. Looking at the four original stakeholders one can argue that you also can see them on a more global or supranational level. For instance, if we consider the state and the legislative resource, This resource can also be interpreted as a more overall supranational legislation such as the Court of Justice in EU. However, I believe that considering the MNCs size, power, visibility and the operations in multiple countries establish just how important the supranational environment is for the MNC and therefore should be classified as a critical organizational stakeholder. (see table ?)
Factors of organizational legitimacy
Institutional theorist has identified some of the determinants of organizational legitimacy and suggests that they are impacted and shaped by three important factors (Hybels, 1995; Maurer, 1971; Powell & Dimaggio, 1991; Scott, 1995; Kostova & Zaheer, 1999; Mukherji, 2009). These are, (1) the environment institutional characteristics, (2) the organization’s characteristics and actions and (3) the legitimation process.
(1) The environment institutional characteristics are the complexity of the environment. This is reflected in two major areas (Kostova & Zaheer, 1999, p. 67). First, there is the complexity in which the institutional environment is fragmented and composed of different domains. These domains reflect various types of institutions, namely the three pillars, the regulatory, the cognitive and the normative (Scott, 1995). The second area is the complexity, that the MNCs operates in multiple countries, which vary in regards to their environments and therefore the MNC is restricted to multiple sources of authority. (2) The organizational characteristics in itself are also complex because the MNC is made up of multiple subunits with varying levels of interdependencies. The subunits face their own host institutional environments and at the same time, at least indirectly face the MNCs institutional environment, which can course a complex dilemma between internal and external legitimacy. (3) The last factor is the complexity in the legitimation process, which is the complex social and cognitive process subject to bounded rationality (Kostova & Zaheer, 1999, p. 67). The process of legitimation is a process which evolves through ongoing interactions with the environment and involves the continuous testing and redefinitions of the organization’s legitimacy (Baum & Oliver, 1991). The fact that it is subject to bounded rationality makes is especially evident in the case of the MNC. The MNC and the legitimating environment are both complex structures, therefore, making it difficult for them to understand, interpret and evaluate each other appropriately.
For this chapter and the next chapter about the MNCs subunits I will use these three factors, to identify in the literature, the different legitimacy issues that make legitimacy in the MNC and its subunits so complex. More precisely the challenges for the MNC to establish and maintain organizational legitimacy regarding the complexity in the environment, in the organization and, in the process of legitimation. Many of the subjects will to some extend belong in both this chapter and the next. However, I have chosen to only place each subject one time under either the headline of the MNC or the subsidiaries. The reason for this is to make it easier and more structured for the reader to understand all of the complicated areas. However, the reader should note that there are areas that imbricate. (For a better overview see figure ?)
Environment institutional characteristics
Following Kostova and Zaheer (1999) this is divided into two areas, the multiplicity of domains, with the three pillars of institutions and the number and variety of countries the MNC operates in.
Multiple domains of the institutional environment
As we already know, the MNC operates worldwide in multiple locations and countries and therefore face multiple environments in each country. The MNC as a whole faces an overall institutional environment which is represented by the MNCs home country, the subunits host countries and by the supranational environment. Because the MNC has its origin in the home country, the MNC will follow the rule and norms of that country, more exactly the MNC will be dominated by the regulative, normative and cognitive domain of the home country. Within the regulative domain, the MNC will follow the rules and regulations of its home country, but it will most likely also be subject to some supranational rules such as EU rules and trade agreements. The MNC normative and cognitive values will also be dominated by the home country. This is not much different than how a large domestic company is shaped by its institutional environment. The difference is that the MNC owns subunits around the world which have their own institutional environment. In other words, each of the institutional environments in the host countries is dominated by its own set of regulative, normative and cognitive domains (Westney, 1993). The legitimacy requirements often vary across national’s environments, as well as the structure and composition of these institutions (Kogut, 1991; Kostova, 1996). All of this leads up to, that what is viewed legitimately in one institutional environment might not be legitimate in another institutional environment. The MNC, therefore, has a complex assignment with structuring and forming the organizational structure so that it fits all of the institutional environment it operates in. This is most likely an impossible job, however it is the task the MNC is up against. Kostova and Zaheer (1999, p. 70) proposed that the MNC will face a greater challenge when facing the normative and cognitive domains when establishing and maintain legitimacy compared to the regulatory domain. As discussed in chapter one, the regulative domain is the most visible domain and even though that rules and laws can be a jungle, it is possible to find the main part of these rules written down. The normative and cognitive domain is much more embedded in the society and for an outsider like the MNC to understand and interpret the social values of a society, the norms, the routines and the culture seems like a much more challenging assignment. Bounded rationality also plays a vital part in understanding the multiple institutional domains. The MNC on its own, lacks the time, access to information and the cognitive limitations to understand fully all of the different institutional environments it is operating in, making establishing and maintaining legitimacy difficult. The MNC will only properly function and benefit from the institutional environment when there is taken for granted legitimacy to the relevant audience (Suchman,1995; Mukherji 2009). However, the taken for granted legitimacy originate from the cognitive domain of the institutional environment, which as stated above can be very hard for the MNC to interpret and understand.
Number and variety of countries
The complexity of the MNCs multiple institutional environments are also impacted by how many countries the MNC are operating in, as well as the diversity of these countries. The more countries the MNC operates in, the more likely it is that one of them is facing a legitimacy problem that might spillover to other subunits, but also to the MNC as a whole, making it potentially difficult to maintain legitimacy (Kostova & Zaheer, 1999). The more countries the MNC operates in, the larger chance there is that there will be a large variety across these environments. The larger the variety, the more difficult it will be for the MNC to identify the relevant legitimacy audience and actors in the different institutional environments. The subunits, however, will likely find it easier to establish legitimacy in a host country if the MNC is operating in a vast number and variety of countries (Kostova & Zaheer, 1999, p. 71). Many parts of the world share many of the same or similar regulative, normative and cognitive institutions, such as South America, Eastern Europa or Northern Europa. Their institutional profiles are more similar compared to for example a country in Europa and Asia. For the MNC it will be easier to understand, interpret and makes sense of their multiple environments they operate in if they have similarly institutional profiles. This will make it simpler for the MNC to respond appropriately to the legitimacy requirements from their multiple institutional environments. The large and often older MNCs operating in a large number and varieties of institutional environments point towards that the organization has considerable organizational experience with handling and understanding different environments and legitimacy issues. It also suggests that the organization has comprehensive bargaining power in the regulatory domain of various authorities, most likely giving the MNC an edge, compared to smaller organizations, when trying to establish legitimacy in a host country.
The huge multiplicity in the environments domains, the number of countries the MNC operates in and the large variety of the institutional profiles of these countries, is what’s differentiates the MNC from domestics’ firms (Sundaram & Black, 1992).
Organizations characteristics
The characteristics of the organization play a vital role in how the multiple institutional environments are coped with as well as internal versus external legitimacy. Here in this section, we will look at the organization’s global orientation and internal versus external legitimacy will be discussed in the next chapter.
World orientation
It is not only the multiplicity and variety of the environments that have an impact on organizational legitimacy. The mentality and the strategies of an organization as well as the cultural mindset also plays a significant role in the complexity of the MNCs legitimacy (Mukherji, 2009). Perlmutter (1969, p. 11) Suggested that MNCs and their managers operate with three different mindsets. These three distinct mindsets emphasize what global orientation the MNC has as well as address some indication for why the MNCs structure their organizations the way they do. These are ethnocentric, polycentric and geocentric mindsets. The ethnocentric mindset is home country oriented, which signify that the MNC sees themselves as more trustworthy, more reliable and superior to foreigners and host countries. An ethnocentric mindset will lead to a centralized structure of the organization where key positions in the host countries are occupied by people from the MNCs home country. The polycentric mindset is host country oriented. Managers with this mindset believe that the subsidiaries in the host country should be as local as possible. They have the understanding that the host country has a different culture and that foreigners are difficult to understand and therefore knows what is best for themselves. An MNC managed with a polycentric mindset will have a more decentralized organizational structure where key positions in the host country are occupied by nationals, and the subsidiaries work very independently from the MNC. The last mindset is geocentric and is world oriented. The goal of this mindset is a worldwide approach, where both the MNC and their subsidiaries are part of a whole and where there is focus on both worldwide and local objectives. An MNC with a geocentric orientation will have a collaborative organizational structure, where key positions in the whole organization will be occupied by the best person for the job, regardless of nationality. Communication is encouraged not only from the subunits to the HQ but also between the subunits, helping each other solve issues. Perlmutter (1969, p. 11) suggest that an organization’s true degree of multinationalism is measured by the extent to which the MNC and its managers thinks geocentrically. He also stresses the point that any MNCs to some degree processes both the ethnocentric, the polycentric and the geocentric mindset, but that one of them will be prevailing. Kostova and Zaheer (1999, p. 73) propose that the challenges for the MNC will be affected by the global orientation of the parent company and that it will be easier for the MNCs subsidiaries to establish and maintain legitimacy if the orientation is either polycentric or geocentric compared too ethnocentric. This proposal makes sense considering that a polycentric or geocentric MNC will be more equip to identify and handle legitimacy issues in the host countries.
The legitimation process
Size and visibility
As stated earlier the larger MNC, the more complex the institutional environment, however it is not only the environment that is influenced by the scale of the MNC but also the visibility. The more visible the MNC is, the more likely it is to attract attention from legitimating actors. An activist organization like Greenpeace will find it more profitable to attack a large and visible cooperation than a smaller MNC or a domestic firm (Kostova & Zaheer, 1999). Those big better-known MNCs will provide the most publicity for the course the legitimating audience is trying to expose. Another aspect with a large and visible MNC is that as discussed in chapter one, issues that could be vulnerable to a legitimacy crisis goes unnoticed because there are not enough observers to raise the course to exposure (Suchman, 1995). The more visible the MMC becomes, the larger the legitimating audience of the organizations will be and the bigger the chance that legitimacy issues do not go unnoticed.