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A firm's legitimacy becomes a critical issue during an organizational crisis. Blending social identity theory (SIT) and institutional theory, I explain why legitimacy is more difficult to maintain for foreign firms than domestic firms. Specifically, I argue that foreign firms are likely to suffer a greater loss in legitimacy from an organizational crisis because of their legitimacy characteristics and foreign identity. In building the discussion about foreign firms' legitimacy characteristics, I argue that foreign firms face severe restrictions in establishing cognitive legitimacy due to constituents' identity-based bias toward foreign firms. As a result, domestic firms and foreign firms develop differing properties of legitimacy. When an organizational crisis strikes a foreign firm, this ex ante legitimacy property and the magnified foreign identity reinforce each other to result in more damage to legitimacy for foreign firms. Moreover, an organizational crisis that strikes a foreign firm is likely to have a stronger negative spillover effect on other foreign firms within the same industry. The proposition and hypotheses in this study were empirically tested using the recall data of 10 automakers in the US automobile industry between 2006 and 2013. The legitimacy of a firm was measured using two constructs from prior studies: tenor of media and volume of media (Pollock & Rindova, 2003). A total of 15,019 newspaper articles were analyzed using Linguistic Inquiry and Word Count (LIWC) software to estimate tenor of media, and additional 469 news articles were used to estimate volume of media. Lastly, this study employs GEE to test the ten hypotheses. The results suggest that foreign firms are indeed at a higher risk of losing legitimacy not only from their own crises but also other foreign firms' crises. More specifically, an organizational crisis results in a harsher legitimacy setback for a foreign firm than a domestic firm. Furthermore, when a foreign firm faces a crisis, its negative effects seem to spread only to other foreign firms, whereas domestic firms may even benefit from the foreign firm's crisis. There was no negative spillover affecting domestic firms either from a foreign firm's recall or domestic firm's recall. Therefore, the empirical results point to the existence of the identity-based liability of foreignness.
institutional theory, legitimacy, liability of foreignness, product recall, social identity theory, spillover
Date of Defense
July 24, 2014.
A Dissertation submitted to the Department of Entrepreneurship, Strategy, and Information Systems in partial fulfillment of the requirements for the degree of Doctor of Philosophy.
Includes bibliographical references.
Bruce T. Lamont, Professor Directing Dissertation; Chad H. Van Iddekinge, Committee Member; David Maslach, Committee Member.
Florida State University
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