Reputation and Political Legitimacy: ITT in Chile, 1927–1972

Abstract

The literature on multinational corporations argues that a foreign firm can legitimize its activities, improve its reputation in a host country, and reduce the risk of hostile actions by the host government (including expropriation) by approaching and incorporating influential members of the domestic elite in its business. By using the concept of obsolescing political legitimacy, we argue that this legitimating strategy can lead to a loss of reputation and eventual illegitimacy when the host country undergoes significant social and institutional changes. When these changes take place, the domestic society can perceive that the multinational benefited from a previous social and institutional order increasingly considered as illegitimate. Under these circumstances, the new order will question the legitimacy of the multinational's operations, increasing the risk of expropriation. We illustrate our hypothesis with the case of the political strategies of the International Telephone and Telegraph Company (ITT) in Chile in the twentieth century.

Political connections, the liability of foreignness, and legitimacy: A business historical analysis of multinationals’ strategies in Chile

“…Several scholars maintain that by legitimizing its operations in this way, a foreign MNC would reduce potential hostile actions by the domestic government (Boddewyn & Brewer, ; Hillman & Wan, ; Kostova et al, ), but other scholars maintain that such interpretation wrongly assumes a stable political environment in which the elite’s status is not contested (Bucheli & Kim, ; Feinberg, Hill, & Darendeli, ; Stevens, Xie, & Peng, ). This point has been corroborated by empirical studies showing that when firms create links with a country’s elite in order to legitimize their operations and avoid hostile actions from the government, these links become a liability and a source of delegitimation if the elite is overthrown or replaced by an opposing political group coming to power through elections, referenda, coups, or revolutions (Bucheli & Kim, ; Bucheli & Salvaj, ; Darendeli & Hill, ; Leuz & Oberholzer‐Gee, ; Siegel, ) or if the composition of the elite is modified due to changes in the country’s economic structure (Sun, Mellahi, & Thun, ). These studies point to the following inconsistency: once the dynamic nature of politics is included in the analysis, the empirical evidence does not support previous studies that proposed that the creation of links with the domestic elite acted as a buffer against challenges to legitimacy, as had been argued in Boddewyn and Brewer (), Hillman and Wan (), and Kostova et al ().…”

Toward a legitimacy-based view of political risk: The case of Google and Yahoo in China

“…We expect that a positive endorsement from a government may be seen as desirable when that government is perceived as legitimate, increasing the firm's legitimacy in the eyes of society in a manner consistent with Proposition 2. However, if the government itself is perceived as illegitimate, the benefit a firm derives from gaining the government's seal of approval may be reduced (Bucheli and Salvaj, ; Kobrin, ). This suggests that the positive relationship between a firm's legitimacy in the eyes of a government and its legitimacy in the eyes of society proposed in Proposition 2 could weaken when society perceives that government's legitimacy to be low.

Proposition 3: The positive relationship between a firm's legitimacy in the eyes of the government and its legitimacy in the eyes of the public weakens when the government's legitimacy is low .

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“…Which members of society are most influential may depend on the nature of the political system in question. More authoritarian governments tend to be responsive to a smaller circle of politically connected elites (Bucheli and Salvaj, ; Langevoort, ). More democratic governments may be responsive to a larger set of interest groups, ranging from the media, to industry lobbyists, to the broader civil society (Brewer, ; Putnam, ).…”

Legitimacy Spillovers and Political Risk: The Case of FDI in the East African Community

“…Political risk is a worldwide phenomenon, but it is particularly pervasive in developing countries (Khanna and Palepu, ). Although political risk has numerous antecedents, researchers taking a legitimacy‐based view (LBV) of political risk have increasingly begun to consider the relationship between firms’ legitimacy and the political risk that they face (Bucheli and Kim, ; Bucheli and Salvaj, ; Stevens, Xie, and Peng, ). However, like much of the extant research on political risk, these legitimacy‐based works have focused primarily on explaining a firm's political risk in a given host country context based on its own actions or attributes in that context.…”