The Fruits of Legitimacy:Why Some New Ventures Gain More from Innovation Than Others

Abstract

This article examines rewards to product introduction by new ventures. The authors argue that the new ventures that gain the most from innovation are those that adopt strategies that give them legitimacy in the eyes of stakeholders. New ventures can gain legitimacy by creating associations with established entities; such associations can be internal or external to the firm. The authors test these ideas by examining the stock market gains of all products introduced between 1982 and 2002 by all public firms in the U.S. biotechnology industry. The results show that new ventures that acquire legitimacy externally by forming alliances with established firms gain more from their new products than new ventures that do not form such alliances. Among new ventures that do not form alliances, those that acquire legitimacy internally by creating a history of product launches or by hiring reputed executives or scientists gain more from their new products than those that do not. In relative terms, it pays more to have introduced a new drug before than to have a reputed executive on the firm's board; in turn, adding a reputed executive pays more than adding a reputed scientist to the firm's board. Finally, although new ventures can gain from either external or internal legitimacy, pursuit of external legitimacy by firms that already have internal legitimacy leads to lower rewards to innovation.

Credibility and legitimacy in policy-driven innovation networks: resource dependencies and expectations in Dutch electric vehicle subsidies

“…It mainly originates from past publication records (Baruch and Hall 2004;Bozeman and Corley 2004;Lee and Bozeman 2005). Scientific credibility demonstrates that applicants are able to work with the latest scientific ideas in the field (Rao, Chandy et al 2008), and thus can contribute to developing cutting edge technology. Scientific credibility is strongest for knowledge institutes and is a resource that makes this type of actor an attractive consortium partner.…”

“…This perspective argues that actors try to control their environment in order to gain access to crucial resources. One of these crucial resources is legitimacy (Hannan and Freeman 1989;Pfeffer and Salancik 2003;Rao, Chandy et al 2008), which can be defined as a social judgment of acceptance, appropriateness, and desirability (Scott 1995). Legitimacy is a prerequisite for organizations to gain access to certain resources needed to fulfill organizational aspirations (Cyert and March 1963).…”

“…From a resource dependence perspective this means that voicing credible positive expectations about an emerging technology can contribute to legitimizing the allocation of resources for further development of the technology. This legitimacy partly depends on the credibility of the voiced expectations (Berkhout 2006) and characteristics of the actor that voices these expectations (Deeds, Mang et al 2004;Rao, Chandy et al 2008). Voicing credible expectations can thus be seen as a strategic action to gain access to crucial resources.…”

“…Deeds et al (2004) and Rao et al (2008) form notable exceptions, but their studies are limited to firms only, while we study consortia that consist of firms and knowledge institutes such as universities. Further, much of the empirical research concerning the role of expectations and their credibility in innovation dynamics relates to effects on entire scientific and technological communities (van Lente and Rip 1998;Bakker, Van Lente et al 2011).…”

Cognitive Legitimacy, Resource Access, and Organizational Outcomes

“…Previous authors have studied different aspects of the legitimacy process, from the strategic actions that favor organizational legitimacy (Aldrich & Fiol, 1994;Suchman, 1995;Zimmerman & Zeitz, 2002;Li, Yang, & Yue, 2007;Rutherford & Buller, 2007;Rao, Chandy, & Prabhu, 2008;Lamberti & Lettieri, 2011;Riquel & Vargas, 2013); through the theoretical classification of legitimacy types (Scott, 1995;Suchman, 1995); to the relationship between legitimacy-development strategies and organizational goals (Bansal & Clelland, 2004;Alcantara, Mitsuhashi, & Hoshino, 2006;Barreto & Baden-Fuller, 2006;Tornikoski & Newbert, 2007;Low & Johnston, 2008;Mitra, 2009;Díez-Martín, Prado-Román, & Blanco-González, 2013a).…”