What Drives Political Risk: The Legitimacy Based View

The legitimacy-based view (LBV) of political risks derives the motivation on the part of a government to intervene in the activities of a company as a political risk from the legitimacy status of the respective company (Stevens 2016, 949). Consequently, legitimacy deficits represent a risk for the respective company. Stevens’ model of the LBV shows that legitimacy deficits of multinational companies vis-à-vis the government, but also vis-à-vis civil society, are a source of political risks. For multinationals, a distinction can be made between society and government in a specific country of entrepreneurial activity and in the company’s home country. However, there is no contrast here between legitimacy vis-à-vis the civil society and the government in a country/culture, but significantly between the actors in a specific country, of entrepreneurial activity and the actors in the home country of the company. (Stevens 2016, 949).

What is legitimacy?

Stevens defines the concept of legitimacy according to Suchman as: ” (…) a generalized perception or assumption that an entity’s actions are desirable, correct, or appropriate within a socially constructed system of norms, values, beliefs, and definitions.” (Suchman 1995, 574). Consequently, this is an empirical understanding of legitimacy.It is therefore a question of whether the company is perceived as legitimate by the actors with whom it interacts in the superordinate social system, primarily government and society (Suchman 1995, 574). Organizational legitimacy is therefore based on the fact that the members of a group determine for themselves a correspondence between the actions of a company and their ideas of values and norms. It is therefore not a matter of universalistic, but of subjective values and norms.However, these values and norms can be different across cultural borders.Values can be defined in this context as: “(…) broad tendencies to prefer things facts over others” (Hofstede 1997, 8). In a highly simplified way, national cultures can be distinguished on the basis of six so-called cultural dimensions, which de facto operationalize national value systems (Hofstede 1997, 12-15).

From the illustrations, strong differences between the national cultures and the corresponding value systems can be seen.It can be concluded from this that companies must change themselves or their actions if they want to become active in new/different cultural contexts. Since in other markets a different value system can be foreseen, on the basis of which the government/society judges the legitimacy of the respective company.

When in Rome, do as the Romans do?

One of the simplest and most belite strategies to secure one’s own legitimacy is to adapt to the environment. In the context of a multinational company operating in a new market with a different culture, this would mean adapting its corporate culture and business practices to local conditions (Suchman 1995, 587). As a result of this strategy, Western companies could feel compelled to pay bribes. It would also be conceivable to reconsider the organizational engagement for the LGBTQ community (e.g. pride month) in Arab countries.By adapting one’s own behavior to local customs, values and norms, one’s own legitimacy and the acceptance of one’s own company by the local government/society is ensured.However, there is a risk that a company’s actions in a specific market may not be perceived as legitimate in the company’s home country. One and the same action can therefore be perceived as legitimate in one culture and as illegitimate in another.This presents multinational companies with a conflict of objectives. Companies that operate across cultural boundaries and want to minimize the incentives for governments to intervene in their business must be aware of this issue.

Prominent cases

The furniture store group Ikea removed images of women from its catalog in order to avoid any problems in the Saudi Arabian market with the way women are portrayed, which did not correspond to local values.This caused outrage throughout the West and especially in Sweden, thus damaging Ikea’s image (Handelsblatt 2012).

After entering the German market, the American retailer Walmart introduced standards of conduct for its employees similar to those in the USA. However, these standards caused a stir in Germany. Following court proceedings, some of the standards of conduct had to be withdrawn. The loss of reputation has certainly also contributed to Walmart’s withdrawal from the German market (Haas 2010).

The Danish-Swedish food company Arla lost around 1.5 million euros in daily sales in several Muslim countries as part of a boycott. The reason for the boycott was that a Danish newspaper had printed caricatures of Mohammed (Manager Magazin 2006).

Based on the examples, it becomes clear that a company’s behavior in a foreign market can be fatal in its home country, but a company’s home country can also be fatal to its activities in a specific country of its operations.Such problems can never be completely avoided. Therefore, careful observation is necessary in order to be able to adopt a targeted communication strategy in case of a problem.

Refrences

Haas, Sibylle (2010): Lieben erlaubt. (Süddeutsche Zeitung). Available at:https://www.sueddeutsche.de/karriere/urteil-lieben-erlaubt-1.507325. Retrieved on: 20.12.2020.

Handelsblatt (2012): Ikea entfernt Frauenbilder aus seinem neuen Katalog. Available at: https://www.handelsblatt.com/unternehmen/handel-konsumgueter/saudi-arabien-ikea-entfernt-frauenbilder-aus-neuem-katalog/7203066.html?ticket=ST-16759584-a5gdWPZ6rNbFBatrGzWD-ap1. Retrieved on: 20.12.2020.

Hofstede, Geert (1997): Cultures and Organizations: Software of the Mind. New York, McGraw-Hill.

Manager Magazin (2006): Dänischer Konzern büßt Millionenumsatz ein. Available at:https://www.manager-magazin.de/unternehmen/artikel/a-398911.html. Retrieved on: 20.12.2020.

Stevens, Charles E./ Xie, En/ Peng, Mike W. (2016): Toward a Legitimacy-Based View of Political Risk: The Case of Google and Yahoo in China. In: Strategic Management Journal, 37. p. 945-963.

Suchman, Mark C. (1995): Managing Legitimacy: Strategic and Institutional Approaches. In: The Academy of Management Review, Vol. 20, No. 3. p. 571 – 610.