Reference : Signaling legitimacy for small and medium-size enterprises in transition environments...
Dissertations and theses : Doctoral thesis
Business & economic sciences : General management & organizational theory
Signaling legitimacy for small and medium-size enterprises in transition environments - The case of the Bulgarian IT sector
Ivanova, Olga [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Luxembourg School of Finance (LSF)]
University of Luxembourg, ​Luxembourg, ​​Luxembourg
Docteur en Gestion
Arregle, Jean-Luc
[en] Organizational legitimacy IT sector ; Signalling Bulgaria ; SMEs ; Transition environments
[en] The process of institutional transition from one coordination mechanism to another one is an important period in the evolution of any society. Transitions are associated with fundamental political, legal, economic and social changes (Danis et al. 2010) affecting all aspects of life (Peng 2003). The transition from planned to open-market economy that has taken place in Central and Eastern Europe (CEE), East Asia, and the newly independent states of the former Soviet Union represents an institutional transition. An environment that goes through transition is characterized by high level of vulnerability and uncertainty which impacts all actors evolving in it, including the organizations (Peng 2003). The dynamic relationship environment-organization is reflected in the concept of legitimacy. Legitimacy is a pertinent concept to study the transition stage since it exists on the borderline between the organization and its environment. In transition environments, the processes of deinstitutionalization of the old structures and the reinstitutionalization of the new ones coexist. This leads to a lack of institutional framework to guide behavior of actors or a situation called institutional vacuum. Since institutions regulate economic exchanges (North 1990), the lack of them leads to elevated costs for all actors due to the proliferation of opportunistic behavior (Meyer 2001). In such environments, demonstrating legitimacy becomes crucial for the survival of structures and actors. Legitimation is sought by new elites (Raychev and Stoichev 2008), the government (Peng 2000a), the new laws, decrees and regulations (Stark 1992), and the private organizations (Peng 2000a). The success of the transition directly depends on the strategies of organizations evolving in such environments (Peng 2000). Small and medium-size enterprises (SMEs) play an important role as catalysts of the process of change (McIntyre 2003: 1) since they are expected to spur economic growth and employment (Peng 2000a), and maintain social peace (McIntyre 2003: 1). Despite their central role in transition environments, little is known about the challenges SMEs face and the actions that can be undertaken in order to overcome them (Danis, Chaburu and Lyles 2010).

One of the main challenges of SMEs in transition environments is to demonstrate that they are legitimate players implying that they comply with the expectations of relevant stakeholders’ groups. The main objective of this study is to shed some light on how SMEs in transition environments gain organizational legitimacy necessary for obtaining stakeholders’ support. The interest of the study lies in the fact that if organizational legitimacy is problematic for all organizations due to changing norms, beliefs, and stakeholders’ expectations over time (Ashforth and Gibbs 1990), it is even more problematic for small organizations in transition environments since the norms, beliefs and expectations are not clearly defined.

In order to address the legitimacy needs of small organizations in transition environments, I propose a signaling theory of legitimacy, which postulates that the legitimacy-claiming entities can rely on valid signals in order to demonstrate (communicate) their adherence to the requirements of the evaluating audiences. In general, the signaling theory of legitimacy should hold for any organization facing a liability - the discount the evaluating audiences place on it in comparison to its potential competitors. Organizations in transition environments face liability of origin (Bartlett and Ghoshal 2000) – a discount that the evaluating audiences (both domestic and foreign) may place on them based on their context of origin. For small organizations , the challenges resulting from liability of origin are even bigger because of their size, they are more prone to import instability from the environment. The higher level of vulnerability of small firms encourages them to engage in opportunistic behavior. Hence, demonstrating their legitimacy is a key issue for SMEs operating in transition environments.

Organizational legitimacy becomes especially important when organizations engage in long-term arrangements since this requires an assessment of the organization not only in terms of its products/services but also in terms of its ongoing access to resources and capabilities as well as its reliability as a partner. In order to address the legitimacy needs of small firms evolving in transition environments and trying to obtain long-term partnerships, a new legitimacy typology is proposed. It is comprised of two types – functional and relational legitimacy. Functional legitimacy represents the adherence to the evaluating audiences’ requirements regarding relevant resources and capabilities. Relational legitimacy is the conformity with the evaluating audiences’ expectations regarding the reliability of an organization as a partner.

Hence, this study addresses two research questions:
1. What are the dimensions (and valid signals) of functional and relational legitimacy (for small organizations in transition environment)?
2. Does using signals of specific types of legitimacy (depending on the liability faced) enhance organizational legitimacy?

This doctoral research examines the legitimacy challenges of SMEs in transition environments trying to obtain long-term arrangements. In the first part of the study, the two types of legitimacy - functional and relational legitimacy - are constructed. Similar to organizational legitimacy (Deephouse and Carter 2005), functional and relational legitimacy are also multidimensional constructs comprised of different facets.

In the second part, I examine whether the signals of functional and relational legitimacy help SMEs in transition environment gain organizational legitimacy. The research model is tested on data collected from the information technology (IT) sector in Bulgaria.

Based on the data analysis and results, this research has several theoretical and methodological contributions. The results also have practical implications for the managers of small organizations in transition environments as well as the public policy agents.

The theoretical contributions are associated mainly with the signaling theory of legitimacy. It looks at how organizations can overcome certain liabilities by communicating their adherence to the expectations of relevant stakeholders’ groups. Organizations can demonstrate their conformity to the evaluating audiences’ requirements by using valid signals – organizational characteristics that can be observed, are costly to imitate and are based on shared meaning between the sending and the receiving party.

In addition, the study contributes to the literature on transition environments by looking at the particular case of SMEs and their attempt to demonstrate that they are legitimate players when trying to engage in long-term arrangements.

The methodological contribution lies in the way the two types of legitimacy (functional and relational) are measured via formative measurement constructs (Diamantopoulos and Winklhofer 2001; Jarvis et al. 2003) under the partial least squares (PLS) technique. Formative constructs are associated with causality that goes from the manifest (directly observable) variable to the latent construct or in other words, the manifest variables cause/build the latent construct (Diamantopoulos 1999). This made possible to match the legitimacy claims of organizations from once side based on the functional and relational signals and the legitimacy granted by relevant stakeholders’ groups, on the other side. In addition, the research contributes to the growing number of studies in strategic management that use PLS as a structural equation modeling technique (Birkinshaw et al. 1995; Cool et al. 1989; Fornell et al. 1990; Johansson and Yip 1994; Tsang 2002).

The practical implications of this research shed some light on which signals (organizational characteristics) are important for managers of small organizations in transition environments. Signals are costly and since all organizations (and especially small firms) have limited resources, managers have to know which signals to invest in. It is important to note that many managers disregard the relational aspect of their legitimacy claims which (based on the results of the study) are more important in the communication process between the legitimacy-claiming and legitimacy-granting entities. Overall, this study represents a fertile area for future research. Researchers can test the signaling theory of legitimacy in other contexts – i.e., other transition environments (Eastern Europe vs. China), as well as compare the signals used by organizations in transition environments and developed economies. Researchers can also test the signaling theory of legitimacy on organizations facing different liabilities (i.e. liability of market newness) and try to extend the existing legitimacy typologies. In addition, future studies can focus on issues of meaning construction (based on signals) in the communication process between organizations.

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