A qualitative case study of MNE legitimacy

Abstract

Purpose – An international joint venture (IJV) helps multinational enterprises (MNEs) overcome the “liability of foreignness.” However, in the presence of institutional voids, MNE’s overreliance on the local partner can result in the MNE unwittingly becoming involved in a corporate scandal. The purpose of this paper is to discuss the causes, impacts and outcomes on the MNE’s legitimacy following a corporate scandal. Design/methodology/approach – Using secondary data, this paper presents a qualitative case study of the Fonterra-Sanlu milk-powder scandal in China. Findings – The paper identifies the institutional voids that contributed to the scandal. It also examines the effects of the scandal on the MNE’s legitimacies and evaluates the appropriateness of its actions in China during the formation, erosion and repair stages of its legitimacy. Research limitations/implications – It contributes to legitimacy literature by discussing the importance of MNE’s active commitment when entering the emerging market. It argues that the building of pragmatic legitimacy is not sufficient, and explains why attendance to moral obligations is part of building moral and cognitive legitimacy. Originality/value – This unique case study of a corporate scandal offers deep insights into how, what and why questions regarding how the three forms of legitimacy are necessary for improving IJV performance by MNEs operating in emerging economies. It particularly highlights the importance of moral legitimacy as a mechanism for overcoming institutional voids.