An Ethnographic Study of New Venture and New Sector Legitimation: Evidence from Moldova

This study explores the process of legitimation of international new ventures from an emerging economy and the effect such ventures have on the process of creation and legitimation of a new industry in that economy. It is a longitudinal ethnographic case study. Following an inductive theory building approach, data were collected over an eleven year period via in-depth interviews, participant observations, and unobtrusive data. Data reveal three different contexts in which legitimation takes place: legitimation of the new industry and of the new venture domestically and internationally. A new venture drives the process of industry legitimation by achieving legitimacy threshold first nationally at meso and micro levels as well as internationally. The challenge therefore for such a venture is to establish legitimacy in the absence of any precedents at the organization, industry or international levels. Unless at least one new venture achieves legitimacy threshold in a new industry there is no possibility for that industry to become institutionalized. The authors advocate for further research at the intersection between legitimation, international entrepreneurship and emerging markets in order to further advance the emergent theory. The data suggest that in order for an international new venture to achieve cognitive legitimacy and socio-political legitimacy in an emerging industry located in an emerging economy, and successfully internationalize, it shall (i) design a robust business model targeting both internal and external stakeholders, (ii) engage in persuasive argumentation invoking familiar cues and scripts, (iii) engage in political negotiations promoting and defending incentive and operating mechanisms, and (iv) overcome the country-of-origin effect by pursuing technology legitimation strategy. Governments and NGOs may wish to see new industries emerge but they lack the means and mandate to establish and lead them themselves, instead rely on enabling actions, such as investment in capacity building. However, building capacity for an as-yet non-existent industry in an emerging economy may prove to be counter-productive, driving a brain drain of qualified workers who are forced to migrate to find suitable work. Our work leads us to speculate about whether there may be a role for investment in programmes of industry legitimacy building in pursuit of public policy objectives. The study puts forward a process model of new industry legitimation. The model theorizes the process of change from an initial condition in which an industry does not exist to a final condition in which it is institutionalized. The model addresses the case where the initial catalyst is the formation of an international new venture that is the seed for the birth of the industry. Since both the new venture and the new industry lack cognitive and socio-political legitimacies, the model theorizes temporal emergence of these at organizational and industry levels, leading ultimately to institutionalization. Introduction In this longitudinal ethnographic case study research we explore the process of emergence of an international new venture (INV) from an emerging economy and the effect an INV has on the process of new industry creation in that economy. More specifically, drawing on legitimation theory, we focus on how an emerging economy INV acquires legitimacy and how this INV contributes to the legitimation of the new industry within which it operates. With this study we aim to contribute to the advancement of the growing international entrepreneurship research field (Coviello et al., 2011). To achieve this aim, we address herein a number of criticisms of the field. The extant international entrepreneurship research suffers from coverage bias (Turcan et al., 2010) by focusing mostly on high-technology INVs from developed economies (Yamakawa et al., 2008). It also suffers from theoretical paucity (Jones et al., 2011) and needs to borrow more actively from other disciplines in order for a robust international entrepreneurship theory to emerge (Turcan et al., 2010). To this criticism, we may add that research on legitimation in international business and research in international entrepreneurship are, respectively, in an embryonic stage (Turcan et al., 2012) and virtually non-existent (Jones et al., 2011). In our quest, we side with Alon and Rottig (2013, p. 487) who suggest that “emerging markets provide an opportunity to examine entrepreneurship in different contexts and forms”. We extend this view by arguing that emerging economies serve as an attractive test-bed for enhancing and advancing international entrepreneurship research field. We define an INV as a new venture that aims to derive profits from international activities right from their inception or immediately thereafter (Oviatt and McDougall, 1994). The emergent nature of the INV and of the new industry suggests that both initially lack legitimacy and credibility (Aldrich and Fiol, 1994). Moreover, uncertain decision-making settings characterize a new industry in which decisions are made under conditions of technology and market uncertainty, as well as goal ambiguity (Aldrich and Fiol, 1994; Turcan, 2008). As to the emerging nature of an economy, the most important criterion defining an economy as emerging is how well it helps buyers and sellers to come together, implying that an emerging economy falls short to varying degrees in providing the institutions necessary to support basic business operations (Khanna and Paleru, 1997). In this paper we explore the legitimation process of MDsoft, an INV from an emerging economy, the Republic of Moldova. MDsoft is in the business of custom software development. Data collection took place over the period of eleven years: 2000-2011. Data were collected using several methods: in-depth interviews with the top management team and founders of MDsoft as well as a number of key stake-holders; participant observations, since one of the authors is the cofounder of MDsoft; and unobtrusive data. Theoretical background The process of new venture emergence can be understood and predicted by viewing it as a quest for legitimacy (Tornikoski and Newbert, 2007). From a legitimacy theory perspective, legitimacy plays a key role in overcoming the liability of newness (Stinchcombe, 1965) and the liability of foreignness (Zaheer, 1995) that shape the behavior of INVs in the early years of their existence (Zahra, 2005). We define legitimacy as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, beliefs, and definitions” (Suchman, 1995, p. 574). In this paper we are concerned with legitimation of both an INV and a new industry within which it operates. At the outset, both lack cognitive legitimacy, defined as knowledge about the new activity and what is needed to succeed in an industry, and socio-political legitimacy, defined as the value placed on the new activity by cultural norms and political authorities (Aldrich and Fiol, 1994). This is what we call uncertain decision-making settings where decisions are made under conditions of technology and market uncertainty, as well as goal ambiguity. In these kinds of uncertain decision-making settings, the possible outcomes of decisions to pursue a new venture and the probability of those outcomes are unknown (Alvarez and Barney, 2005). The first attempt to conceptualize the legitimation of new ventures and new industries was made by Aldrich and Fiol (1994). They explore strategies of legitimation at four simultaneous levels: organizational, intra-industry, inter-industry, and institutional. Even then, their theorizing assumes the presence of emerging competition as well as of sophisticated institutional context as found in developed economies. At the same time, Aldrich and Fiol (1994) do not theorize about the process of (co)-emergence and (co)-legitimation of new venture and new industry. This gap remains in the literature. New ventures seek various legitimation strategies in order to enhance their survival and facilitate the transition to other forms of organizing activities (Delmar and Shane, 2004). Several theoretical perspectives related to new venture legitimation strategies can be identified. For example, new ventures may seek legitimacy via conformance strategy (Suchman, 1995) that aims at achieving conformity within the demands and expectations of the existing social structure in which the venture is currently positioned; in other words, it means to follow the rules (North, 1990). New ventures may also pursue selection strategy (Suchman, 1995) that allows them to select a favorable geographic location where there are organizations that conform to similar rules, norms, values and models and may provide a new venture with legitimacy. An example would be for a software new venture to locate its operations in Silicon Valley, California, US or Silicon Glen, Scotland (Turcan, 2012). Through a manipulation strategy (Suchman, 1995) new ventures may make changes in the environment to achieve consistency between the venture and its environment. When an industry is in the early years of its formation (Santos and Eisenhardt, 2009), it poses additional challenges and pressures on INVs’ quest for legitimacy as there are few or no precedents for the kind of activities they want to found (Aldrich and Fiol, 1994; Navis and Glynn, 2010). In such a context, new ventures may pursue creation legitimation strategy that “...involves developing something that did not already exist in the environment” (Zimmerman and Zeitz, 2002, p. 425), such as new operating practices, norms, values, beliefs, expectations, models, patterns of behavior, and networks. It is theorized that this strategy is especially evident during the introductory stage of new industries (Zimmerman and Zeitz, 2002). The extant empirical research on legitimation of new ventures and new industries highlights a number of symbolic legitimation strategies available to new ventures, such as credibility, defined as personal capability and personal commitment to the venture; professional organizing, defined as professional structures and processes; organizational achievement, defined as partially working products and technologies, venture age and number of employees; and quality of stakeholder relationships, defined as prestigious stakeholders, and personal attention (Zott and Huy, 2007). To the above, INVs may pursue technology legitimation strategy to validate a technology or know-how; market legitimation strategy to better understand the market; operating legitimation strategy to have an optimal organizational gestalt; locational legitimation strategy to overcome the disadvantages of foreignness; alliance legitimation strategy to mitigate the risk of newness and smallness; and anchoring legitimation strategy to intentionally misrepresent the facts (Turcan, 2013). As to the legitimation strategies related to the introduction of an institutional change or the creation of new organizational form or practice, the extant research suggests that in order for a new form or activity to become more of a taken-for-granted practice, or for an institutional change to be instilled, they have to be theorized (Greenwood et al., 2002; Lounsbury and Crumley, 2007; Suddaby and Greenwood, 2005; Vaara and Tienari, 2008; Vaara et al., 2006). The key steps in the process of theorization are problem specification by framing the problem and justification by invoking professionals’ values (Greenwood et al., 2002). If the irregularities are not problematized, then extant theory will not be challenged, and rogue activities will wane or persist in a marginalized fashion (Lounsbury and Crumley, 2007). Theorizing is thus not a momentary act but one that requires sustained repetition to elicit a shared understanding of the problem (Greenwood et al., 2002). In relation to the above, a number of critical legitimation strategies may be available to new ventures: developing institutional vocabularies; bridging diverse stakeholders; theorization of new practices (framing problems and justifying new practices and political negotiations) and change; and institutionalization of new practices (by attaching them to preexisting organizational routines and reaffirming their alignment with stakeholder values on an ongoing basis) (Maguire et al., 2004; Suddaby and Greenwood, 2005). One way to theorize the pursuit of cognitive and socio-political legitimation of a new venture and new industry is via discursive strategies, namely: normalization, authorization, rationalization, moralization, and narrativization (Vaara et al., 2006). When ‘innovations meet institutions’, robust design mediates between institutionalized design and technical innovation (Hargadon and Douglas, 2001). An innovation's design is defined as robust “...when its arrangement of concrete details are immediately effective in locating the novel product or process within the familiar world, by invoking valued schemas and scripts, yet preserve the flexibility necessary for future evolution, by not constraining the potential evolution of understanding and action that follows use” (Hargadon and Douglas, 2001, p. 479). Robust design reduces the uncertainty linked to the new activity, and ensures that the main stakeholders would consider the new activity legitimate. When the venture and the industry are in their early stage of formation, the challenge ultimately lies in finding familiar cues that locate and describe new ideas without binding users too closely to the old ways of doing things (Hargadon and Douglas, 2001). That is, as new technologies emerge, entrepreneurs and innovations must find the balance between novelty and familiarity, between impact and acceptance. Furthermore, new venture conformity to norms and practices will legitimate only to the extent that those norms and practices are themselves legitimate, credible, and valued (Glynn and Marquis, 2004). It may be thus argued that in order to successfully legitimatize the new venture in an emerging new industry, the entrepreneur will have to change and/or create new “structural meaning” (Abbott, 2001, p. 158) of norms, practices and values at macro, mezzo, and micro levels. It could be further argued that successful attainment of the legitimacy threshold “below which the new venture struggles for existence and probably will perish and above which the new venture can achieve further gains in legitimacy and resources” (Zimmerman and Zeitz, 2002, p. 427) will depend on the success of transformations that entrepreneurs will induce at the macro, mezzo, and micro levels. This challenge is further amplified by the emergent nature of the economy within which the new venture emerges. In this study we explore how entrepreneurs of new ventures change and create new structural meaning not only at the macro, mezzo, and micro levels, but also at the international level in an attempt to gain cognitive and socio-political legitimacy in an emerging industry located in an emerging economy. Method Given the scarcity of empirical work regarding the internationalization and legitimation of INVs from emerging economies (Yamakawa et al., 2008) as well as the process of (co)-emergence and (co)-legitimation of new venture and new industry, we use a longitudinal ethnographic case study following a single INV. We employ an inductive theory building approach in which a limited initial set of empirical observations is used to postulate a generally applicable theory which can be tested and refined against subsequent observations (Dyer and Wilkins, 1991). Our interest in this study is to explore the process of legitimation of an emerging economy INV and its impact on the process of industry creation within which it emerges. The case company was purposefully selected following sampling strategies pertinent to inductive, theory building research. We followed an intensity sampling strategy, the logic and power of which lies in selecting information-rich cases that manifest the phenomenon intensely, but not extremely (Miles and Huberman, 1994) and in which the phenomenon of interest is transparently observable (Pettigrew, 1990). The selected case also had to resemble an INV as defined earlier (Oviatt, and McDougall, 1994), and be located in an emerging economy. Based on these sampling criteria, we selected for studying in depth MDsoft as an INV from an emerging economy, the Republic of Moldova. According to various rating agencies (e.g., The World Bank, 2011; The World Economic Forum, 2011), Moldova is considered as an emerging, factor-driven economy making marginal progress in fostering sound macroeconomic management and enhancing an entrepreneurial climate, scoring low on business freedom, investment freedom, corruption and labor freedom, as well as on protecting investors and enforcing contracts. MDsoft started-up in 2000 with 4 people and grew over the span of 5 years in revenue and number of employees on an average of 76% and 58% per annum respectively, achieving revenue of approximately 4 million euros and 260 employees. After a merger in 2006, MDsoft grew in revenue and number of employees on an average of 14% and 15% per annum respectively, achieving a revenue over 32 million euros and approximately 600 employees in 2011. Our data collection and analysis occurred over a period of eleven years: 2000-2011. Data were collected using several methods: in-depth interviews, participant observation and unobtrusive data collection. We interviewed the top management team and founders of MDsoft who were driving the start-up process (six interviews). We also interviewed key stakeholders of MDsoft, e.g., the director of the industry association; the deputy minister of ICT; and two academics from the Moldovan Technical University who were actively involved at that time (2000-2001) in the process of industry creation. We also collected participant observational data since one of the authors of this study was the co-founder of MDsoft. Unobtrusive data (Webb et al., 2000) were collected at length to contribute further to the triangulation of the data that were emerging from the interviews. The unobtrusive data consisted of (i) running records, such as legislative initiatives and bills, and (ii) episodic and private records, such as company sales, financial and organizational records, industry and institutional records, as well as internal memos and e-mails. We created a database for the case to organize and document all collected data, thus contributing to the enhancement of the reliability of the study. To ensure further reliability, the following key activities of the case study protocol were adopted in the present study: negotiating access; writing the history of the case and highlighting the phenomenon of interest by exhausting all secondary sources prior to interviews; validating the history of the company at the first interview; negotiating access to the stakeholders of the company; and negotiating access for follow-up interviews. Transcribed interviews were sent back to interviewees for review and comments were incorporated for further analysis. Along with such multiple sources of evidence (for the purpose of triangulation), the interviewees’ feedback contributed to the construct validity of the study, that is, the extent to which the study captures what it sets out to (Yin, 2008). Explanationbuilding was conducted by describing and exploring the case in narrative form and constantly comparing emergent constructs and theory with the extant literature, thus contributing to internal validity (Yin, 2008). According to Dubin (1978), the very essence of description is to name the properties of things, and the more adequate the description, the greater the likelihood that the concepts derived from the description will be useful in subsequent theory building. Within-case analysis, that is, in-depth study of a single case (Miles and Huberman, 1994), was the basis for developing early constructs surrounding legitimation of MDsoft and of the industry within which MDsoft operated. We then further theorized in an attempt to move to a higher level of (analytical) generalizability, thus contributing to external validity (Yin, 2008). During this process of data analysis we employed theoretical coding (Glaser, 1978) to conceptualize the emerging patterns within the case, and middle-range theorizing (Merton, 1957) to help manage the complexity of the emergent patterns. The sampling strategy adopted, as well as the sampling criteria developed also contributed to external validity of the study.