The strategies adopted by developed country MNCs to repair their legitimacy in China following legitimacy scandals

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The!strategies!adopted!by!developed!country!

MNCs!to!repair!their!legitimacy!in!China!

following!legitimacy!scandals.!

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MSc.!Business!Administration:!International!Management!Track!

Georgina!Cubrilo!

10827811!

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Date:!29!June!2015!

Final!Draft!

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Supervisor:!Francesca!Ciulli!

Second!supervisor:!Niccolò!Pisani!

Statement!of!originality!

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This!document!is!written!by!Student!Georgina!Cubrilo!who!declares!to!take!

full!responsibility!for!the!contents!of!this!document.!!

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I!declare!that!the!text!and!the!work!presented!in!this!document!is!original!

and!that!no!sources!other!than!those!mentioned!in!the!text!and!its!

references!have!been!used!in!creating!it.!!

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The!Faculty!of!Economics!and!Business!is!responsible!solely!for!the!

supervision!of!completion!of!the!work,!not!for!the!contents.!!

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Acknowledgements!

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I!would!sincerely!like!to!thank!my!thesis!supervisor!Francesca!Ciulli!for!all!

her!help,!feedback!and!guidance,!which!made!writing!this!thesis!possible.!I!

am!truly!grateful!for!her!patience!and!all!her!support.!I!would!also!like!to!

thank!my!family!and!friends!for!their!continued!support!and!belief!in!me!

throughout!my!studies.!!

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Table!of!Contents! Abstract……….5! 1. Introduction………6! 2. Literature!Review………..………..10! 2.1. Legitimacy………..………..10! 2.2. Dimensions!of!Legitimacy!and!Legitimacy!Perspectives!………12! 2.3. Creating,!Maintaining!and!Repairing!Legitimacy….…………..………..14! 2.4. MNCs!and!Legitimacy………..………..15! 2.5. Legitimacy!in!Emerging!Markets:!The!Case!of!China……….………....17! 2.6. MNC’s!Strategies!to!Repair!Legitimacy!in!Emerging!Markets…………..19! 2.6.1. Strategic!Perspective……….21! 2.6.2. Institutional!Perspective………..24! 3. Methodology………27! 3.1. Research!Design………27! 3.2. Case!Selection……….28! 3.3. Data!Collection………..….31! 3.4. Data!Analysis………...33! 4. Results……….35! 4.1. GSK………35! 4.2. Nestlé………...40! 4.3. KFC………42! 4.4. Cross!case!Analysis………..………50! 5. Discussion………..………...52! 6. Conclusion………62! 7. References………64!

Abstract! With!an!increasing!number!of!developed!country!Multinational!Corporations!(MNCs)! setting!up!operations!in!emerging!markets!such!as!China,!it!is!not!uncommon!for! legitimacy!scandals!to!occur!due!to!the!heterogeneity!in!expectations!of!MNC!behavior! between!developed!and!emerging!markets.!Legitimacy!is!an!essential!theme!relating!to! the!survival!of!an!MNC!within!an!institutional!environment!as!it!ensures!that!MNCs!have! access!to!all!the!necessary!resources!for!their!operations;!therefore!it!is!of!upmost! importance!for!MNCs!to!repair!legitimacy!following!scandals.!This!thesis!therefore! investigates!the!strategies!adopted!by!developed!country!MNCs!to!repair!legitimacy,! following!scandals,!in!China.!After!identifying!five!strategies!of!legitimacy!reparation!in! the!literature:!denial,!substantive!management,!symbolic!management,!decoupling!and! isomorphic!adaptation,!a!multiple!case!study!was!conducted!to!explore!which!strategies! are!adopted!by!developed!country!MNCs!in!China.!The!findings!revealed!that!all!of!the! identified!strategies!were!used!and!the!order!in!which!they!were!used.!The!insights! gained!from!the!multiple!case!study!provides!useful!information!for!other!developed! country!MNCs!on!possible!strategies!of!repairing!legitimacy!in!China.! ! ! ! ! ! ! ! ! !

1.!Introduction! Organizational!legitimacy!requires!the!activities!performed!by!organizations!to! adhere!to!society’s!desires!in!terms!of!norms!and!beliefs!(Suchman!1995).!!Legitimacy,! defined!as!“a!generalized!perception!or!assumption!that!the!actions!of!an!entity!are! desirable,!proper,!or!appropriate!within!some!socially!constructed!system!of!norms,! values,!beliefs,!and!definitions”!(Suchman,!1995,!p.574),!is!a!key!theme!relating!to!the! survival!of!a!firm!within!its!industry!and!within!an!institutional!environment!(Beelitz!&! MerkleDavies,!2012).!Legitimacy!is!therefore!crucial!for!Multinational!Corporations! (MNCs)!as!MNCs!have!operations!in!more!than!one!country!and!are!therefore!subject!to! multiple!institutional!environments!(Kostova!&!Zaheer,!1999).!With!MNCs!operating!in! an!increasing!number!of!institutional!environments!there!are!more!risks!of!them! behaving!illegitimately!due!to!the!heterogeneity!in!expectations!of!MNC!behavior!in! different!host!countries!(Kostova!&!Zaheer,!1999).!If!MNCs!are!unaware!of!how!they!are! expected!to!behave!in!a!host!country,!they!may!find!themselves!involved!in!legitimacy! scandals!(Kostova!&!Zaheer,!1999).!News!of!the!scandals!could!reach!across!the!globe,! which!might!seriously!harm!an!MNC’s!survival!and!success!in!an!institutional! environment!(Falkenberg,!2004).!This!emphasizes!the!importance!for!an!MNC!of! correcting!its!activities!following!legitimacy!scandals!whereby!its!stakeholders!perceive! the!activities!as!illegitimate.!It!is!therefore!necessary!to!consider!the!responses!of!MNCs! to!legitimacy!challenges!in!the!countries!they!operate!in!(Kostova!&!Zaheer,!1999).!!!!!!! Among!the!countries!that!MNCs!operate!in,!emerging!markets!have!become! increasingly!important!for!developed!country!MNCs!as!their!home!markets!are! becoming!more!saturated,!thus!by!entering!emerging!countries!these!MNCs!are!able!to! access!markets!consisting!of!extremely!large!populations!such!as!China!(London!&!Hart,! 2004).!With!an!increasing!number!of!MNCs!from!developed!countries!operating!in!

China,!the!maintenance!of!legitimacy!is!becoming!more!challenging!due!to!differences!in! institutional!environments!between!developed!countries!and!emerging!markets! (Kostova!&!Zaheer,!1999).!The!main!difference!is!that!in!emerging!markets,!formal! institutions!are!considered!to!be!weak!compared!to!developed!countries!(Beyer!&! Fening,!2012).!Under!weak!formal!institutions,!law!enforcement!can!be!difficult!leading! to!the!existence!of!lax!environmental,!social!and!labor!regulations!in!emerging!markets! (Cruz!&!Boehe,!2010).!With!lax!regulations!there!are!fewer!incentives!for!MNCs!to! behave!according!to!social!norms!(Khanna!and!Palepu!2000),!which!could!lead!to!MNCs! partaking!in!illegitimate!activities!such!as!bribery,!thus!legitimacy!challenges!in! emerging!markets!can!arise!(Cruz!&!Boehe,!2010).!It!is!essential!for!MNCs!to!overcome! legitimacy!challenges!by!repairing!legitimacy!in!order!to!survive!in!an!institutional! environment!(Beelitz!&!MerkleDavies,!2012).!!!!! A!gap!exists!in!our!understanding!of!the!strategies!adopted!in!response!to! legitimacy!challenges!over!time!by!MNCs!from!developed!countries.!Scholars!have! identified!different!strategies!that!firms!can!adopt!to!repair!their!legitimacy:!denial,! symbolic!management,!substantive!management,!isomorphic!adaptation!and! decoupling!(Ashforth!&!Gibbs,!1990;!Scherer,!Palazzo!&!Seidl,!2013).!Despite!the! identification!of!possible!strategies!to!repair!legitimacy,!the!exact!strategies!adopted!in! emerging!markets!have!not!been!explored,!but!given!the!growing!economic!significance! of!emerging!markets!(Hitt,!Franklin!&!Zhu,!2006),!and!their!institutional!idiosyncrasies,! it!is!crucial!to!address!this!gap.!! This!thesis!will!explore!the!strategies!adopted!by!developed!country!MNCs!to! repair!their!legitimacy,!following!challenges!they!have!had!to!face!in!China’s! institutional!environment,!in!order!to!address!the!gap!in!our!understanding.!!

Thus!the!research!question!is:!How$do$MNCs$from$developed$countries$repair$legitimacy$ following$legitimacy$challenges$in$China?!!This!will!be!answered!through!a!multiple!case! study!design!with,!as!units!of!analysis,!three!developed!country!MNCs!that!have!faced! threats!to!their!legitimacy!or!encountered!‘legitimacy!scandals’!in!China.!The!MNCs!that! will!be!explored!are:!GlaxoSmithKline!(GSK),!a!leading!pharmaceutical!company!from! the!United!Kingdom!(UK),!Nestlé,!a!food!and!beverage!company!with!headquarters!in! Switzerland!and!KFC,!a!fast!food!chain!from!the!United!States!(US).!! The!study!will!explore!the!strategies!adopted!by!these!MNCs!in!order!to!repair! their!legitimacy!after!the!scandals!they!have!undergone.!These!three!MNCs!have!been! selected!for!the!following!reasons.!Firstly,!they!all!have!a!developed!country!as!a!home! country!and!they!have!all!faced!challenges!to!their!legitimacy!in!the!same!host!emerging! country,!China.!Secondly,!the!size!and!the!vast!international!presence!of!the!MNCs! suggest!that!the!MNCs!are!recognized!worldwide!and!must!uphold!their!legitimacy!in! order!for!their!international!operations!to!remain!successful!(Beelitz!&!MerkleDavies,! 2012).!Secondary!data!will!be!collected!to!analyze!each!case!using,!as!sources,! newspaper!articles!and!the!firms’!annual!reports.!As!there!are!many!reliable!accounts!of! the!strategies!adopted!by!the!MNCs!following!the!scandals,!this!provides!sufficient!data! to!answer!the!research!question.!!! This!thesis!aims!to!provide!three!main!contributions!to!the!literature.!First,!it! aims!to!address!the!gap!in!existing!research!of!the!strategies!adopted!by!MNCs!to!repair! legitimacy!in!emerging!markets.!!According!to!extant!literature,!MNCs!from!developed! countries!do!not!have!the!same!regard!for!their!operations!in!emerging!markets!as!their! operations!in!developed!countries,!due!to!weaker!regulations!in!emerging!markets! allowing!MNCs!to!act!irresponsibly!with!little!surveillance!from!formal!regulators!(Tan,! 2009).!Despite!the!lack!of!formal!regulators,!MNCs!face!pressure!from!social!actors!such!

as!stakeholders!and!labor!unions!to!behave!legitimately!(Li!et!al,!2007).!With!social! actors!challenging!the!legitimacy!of!MNCs,!it!is!necessary!for!MNCs!to!maintain! legitimate!in!order!to!survive,!by!remaining!profitable!and!having!access!to!all! necessary!resources!for!their!operations,!in!an!institutional!environment!(Salancik!&! Pfeffer,!1978).!Additionally,!as!much!of!the!existing!literature!focuses!on!legitimacy! challenges!encountered!by!MNCs!from!developed!countries!in!developed!countries! (Quazi!&!O’Brien,!2000;!Yang!&!Rivers,!2009;!Vaara!&!Tienari,!2008;!Joutsenvirta!&! Vaara,!2009),!the!first!contribution!of!this!thesis!will!be!to!append!to!the!incomplete,! existing!literature!surrounding!legitimacy!challenges!faced!by!MNCs!in!emerging! markets.!! Moreover!the!second!contribution!of!this!thesis!will!be!to!explore!the!specific! actions!undertaken!by!MNCs!when!they!adopt!strategies!of!legitimacy!reparation.!As! suggested!by!Vaara,!Tienari!and!Laurila!(2006)!there!is!a!lack!of!knowledge!regarding! the!reconstruction!of!legitimacy,!yet!it!is!necessary!to!increase!our!understanding!of!this! to!better!comprehend!legitimacy!in!organizations.!This!thesis,!therefore!aims!to!provide! insight!into!the!specific!actions!undertaken!by!MNCs!to!repair!legitimacy!in!China,!in! order!to!improve!on!the!lack!of!knowledge!concerning!legitimacy!reconstruction!(Vaara! et!al,!2006).!! Finally!this!thesis!contributes!to!the!literature!by!considering!China!as!a! consumer!market,!as!opposed!to!China!being!considered!a!supply!country.!Many!MNCs! choose!to!set!up!their!manufacturing!operations!in!China!due!to!cheap!labor!costs! (Tybout,!2000),!so!the!legitimacy!challenges!that!arise!for!these!MNCs!consider!China!to! be!a!supply!country.!An!example!of!this!was!the!case!of!Nike,!which!in!1997,!faced! legitimacy!challenges!in!emerging!markets!for!using!child!labor!(Lamin!&!Zaheer,!2012).! As!this!legitimacy!challenge!considered!the!manufacturing!of!an!MNC’s!products,!

emerging!markets!in!this!case!were!considered!to!be!supply!countries!as!opposed!to! being!considered!as!markets!with!consumers.!Yet!as!China!is!an!everegrowing!consumer! market!for!developed!country!MNCs,!it!should!be!considered!as!such!by!assessing!how! MNCs!repair!legitimacy!in!the!eyes!of!consumers.!!!!!!! The!structure!of!this!thesis!is!as!follows:!the!next!section!will!consist!of!the! literature!review,!with!the!aim!of!defining!and!explaining!the!key!concepts!that!will!be! explored!in!this!thesis.!In!particular!the!existing!literature!regarding!legitimacy!and! legitimacy!in!emerging!markets!will!be!discussed!in!order!to!frame!the!theoretical! background!for!the!case!study.!Following!this!will!be!the!method!section!in!which!the! research!design,!data!collection!and!data!analysis!strategy!will!be!explained.!The!results! section!will!follow!the!method!section.!Subsequently!is!the!discussion!section,!followed! by!the!conclusion.! ! 2.!Literature!Review! 2.1!Legitimacy! Legitimacy!is!the!social!acceptance!of!an!organization’s!actions!or!processes! (Scherer!et!al,!2013),!therefore!an!organization!will!be!deemed!legitimate!if!its!actions! and!values!adhere!to!society’s!expectations!of!legitimate!behavior!(Deephouse,!1996).! As!stated!by!Kostova!and!Zaheer!(1999)!there!are!three!features!that!influence! organizational!legitimacy:!‘(1)!the!characteristics!of!the!institutional!environment,!(2)! the!organization's!characteristics!and!actions,!and!(3)!the!legitimation!process!by!which! the!environment!builds!its!perceptions!of!the!organization’!(Kostova!&!Zaheer,!1999,! p66).!! The!institutional!environment!is!a!central!aspect!in!shaping!MNCs’!legitimacy!as! they!determine!the!requirements!that!organizations!must!adhere!to!(Scott,!1987).!!

Institutional!environments!consist!of!both!formal!and!informal!institutions!(Sauerwald! &!Peng,!2013);!these!institutions!have!been!defined!as!‘rules!of!the!game’!(North,!1990,! p.3).!Formal!institutions!are!composed!of!regulations!and!laws,!such!as!business! regulations!and!the!judiciary!system,!that!manage!the!behavior!of!firms!(Beyer!&! Fening,!2012).!Informal!institutions!differ!from!formal!institutions,!as!they!are!social! rules!to!follow,!set!by!social!actors!that!do!not!encompass!state!involvement!(Sauerwald! &!Peng,!2013).!If!an!organization!disregards!the!rules!set!by!formal!and!informal! institutions,!legitimacy!challenges!or!scandals!may!arise!when!organizations!do!not! behave!in!accordance!with!an!institutional!environment’s!perspective!of!legitimate! behavior!(Scherer!et!al,!2013).!A!legitimacy!scandal!can!therefore!be!defined!as!the! actions!of!an!organization!conflicting!with!social!norms;!news!of!which!may!be! broadcast!worldwide!(Jonsson,!Greve!&!FujiwaraeGreve,!2009).!In!order!to!avoid! legitimacy!challenges,!“managers!follow!environmental!cues!to!make!organizations! conform!to!social!expectations.!This!makes!our!organizations!legitimate,!and!from!this! legitimacy!flow!benefits”!(Dart,!2004,!p.415).!However,!if!environmental!cues!are!not! followed!and!legitimacy!scandals!occur,!this!can!create!opposition!to!an!organization’s! behavior!from!various!parties!(Scherer!et!al,!2013).!This!opposition!would!require!an! organization!to!rectify!its!illegitimate!actions!in!order!to!maintain!or!repair!its! legitimacy!(Scherer!et!al,!2013).!It!is!necessary!for!an!organization!to!repair!legitimacy! following!a!scandal,!as!if!an!organization!is!not!considered!to!be!legitimate,!it!may!not! have!access!to!the!resources!required!for!its!operations!(Ashforth!&!Gibbs,!1990).! Legitimacy!is!also!necessary!for!organizations’!to!maintain!‘continued!support!of! constituents’!(Ashforth!&!Gibbs,!1990,!p.177),!therefore!if!an!organization!does!not! behave!legitimately,!the!firm!may!not!survive!in!an!institutional!environment!(Beelitz!&! MerkleDavies,!2012).!

2.2.!Dimensions!of!Legitimacy!and!Legitimacy!Perspectives! ! Different!dimensions!form!the!concept!of!legitimacy.!In!the!existing!literature! three!dimensions!of!legitimacy!have!been!identified:!moral,!cognitive!and!pragmatic! (Suchman,!1995).!Pragmatic!legitimacy!concerns!the!effect!of!an!organization’s!actions! on!its!stakeholders;!if!stakeholders!benefit!from!the!organizations!actions!they!would! deem!the!action!legitimate,!as!this!dimension!concerns!the!selfeinterest!of!stakeholders! (Suchman,!1995;!Dart,!2004).!In!the!interest!of!maintaining!legitimacy,!organizations! must!behave!in!such!a!way!that!their!stakeholders!believe!they!are!benefitting!from!the! organization’s!actions!(Dart,!2004).!Following!a!legitimacy!challenge!whereby!relevant! stakeholders!do!not!believe!they!are!benefitting!from!an!organization’s!actions,!an! organization!would!have!to!behave!in!a!manner!that!satisfies!individuals!that!are! associated!with!the!firm!by!providing!direct!benefits!to!them.!This!can!be!accomplished! by!involving!stakeholders!in!the!making!of!important!firm!decisions!(Palazzo!&!Scherer,! 2006).!! Moral!legitimacy!is!normative!because!it!measures!whether!an!action!of!the! organization!is!considered!to!be!legitimate!morally!(Dart,!2004).!This!is!in!contrast!to! pragmatic!legitimacy!as!moral!legitimacy!considers!whether!an!organization’s!action!is! morally!acceptable!as!opposed!to!whether!stakeholders!benefit!from!the!action! (Suchman,!1995).!If!an!organization’s!moral!legitimacy!were!called!into!question!the! organization!would!have!to!implement!strategies!of!repairing!legitimacy!that!satisfied! the!entire!population!as!opposed!to!only!satisfying!their!own!stakeholders!(Palazzo!&! Scherer,!2006).! The!third!dimension!of!legitimacy,!cognitive!legitimacy,!differs!from!both! pragmatic!and!moral!legitimacy.!Moral!and!pragmatic!legitimacy!can!be!evaluated! discursively!through!the!use!of!conversational!methods;!the!cognitive!dimension!on!the!

other!hand!cannot!(Suchman,!1995).!This!is!because!cognitive!legitimacy!is!‘legitimacy! based!on!comprehensibility!and!legitimacy!based!on!takeneforegrantedness’!(Suchman,! 1995,!p.!582)!therefore!it!is!based!on!the!mentality!of!individuals,!which!cannot!always! be!influenced!through!the!use!of!discursive!methods.! To!repair!organizational!legitimacy!following!legitimacy!challenges,!it!would!be! essential!for!an!organization!to!examine!which!dimension(s)!of!legitimacy!has/have! been!affected.!By!identifying!the!affected!dimension(s)!the!probability,!for!the! organization,!of!appropriately!rectifying!the!wrongdoing!would!increase!by!allowing!the! organization!to!decide!upon!and!execute!suitable!responses!to!the!challenge.! Along!with!the!dimensions!of!legitimacy!the!literature!identifies!two! perspectives!to!legitimacy:!a!strategic!perspective!and!an!institutional!perspective! (Beelitz!&!Merkl,!2012).!The!different!perspectives!have!different!implications!for!the! way!in!which!legitimacy!is!viewed!and!analyzed.!The!institutional!perspective!focuses! on!how!outsiders!perceive!the!organizations!legitimacy;!outsiders’!perceptions!are! often!formed!following!media!coverage!of!scandals!(Suchman,!1995;!Beelitz!&!Merkl,! 2012).!Thus!the!institutional!perspective!requires!organizations!to!behave!in! accordance!with!socially!acceptable!norms!and!values!(Joutsenvirta!&!Vaara,!2009).!In! contrast!to!this,!the!strategic!perspective!considers!the!responsibility!of!management!in! legitimacy;!this!perspective!considers!organizational!strategies!of!restoring!legitimacy! following!a!legitimacyethreatening!incident!(Beelitz!&!Merkl,!2012).!The!strategic! perspective!is!based!on!the!assumption!that!the!use!of!organizational!strategies!to! repair!legitimacy!affects!how!stakeholders!view!the!actions!of!the!organization! (Joutsenvirta!&!Vaara,!2009).!Through!these!strategies,!stakeholders’!opinions!on!the! organization’s!illegitimate!actions!can!be!changed.!

!! This!thesis!will!take!both!perspectives!into!consideration!when!assessing!the! strategies!adopted!by!MNCs!to!repair!their!legitimacy.! ! 2.3.!Creating,!maintaining!and!repairing!Legitimacy! When!entering!new!markets!organizations!must!win!acceptance!for!their! operations!in!those!markets!(Suchman,!1995).!In!order!to!gain!legitimacy!an! organization!must!abide!by!the!rules!of!the!institutional!environments’!in!which!they! operate.!If!an!organization!wishes!to!shape!these!rules,!this!can!be!achieved!through! institutional!entrepreneurship!in!which!organizations!can!create!new!socially! acceptable!legitimacy!beliefs!(Suchman,!1995).!Even!through!institutional! entrepreneurship,!it!is!not!easy!for!organizations!to!establish!legitimacy,!as!legitimacy!is! dependent!upon!the!society’s!beliefs!and!values,!which!is!not!always!easily!influenced! by!an!organization!(O’Donovan,!2002).!Upon!establishing!legitimacy!organizations!must! also!maintain!it!through!adaptation!strategies,!which!consist!in!organizations’!adapting! their!activities!to!be!socially!acceptable,!alternatively!organizations’!adapt!by!copying! the!practices!of!legitimately!successful!organizations!(Scherer!et!al,!2013).!Adaptation! strategies!are!a!common!method!of!maintaining!legitimacy!(Scherer!et!al,!2013).! Additionally,!organizations!can!implement!formal!codes!of!conduct!that!adhere!to! society’s!norms!and!values!in!order!to!gain,!maintain!and!repair!legitimacy!(Patriotta,! Gond!&!Schultz,!2011).!Maintaining!legitimacy!proves!to!be!less!of!a!challenge!for! organizations!than!establishing!or!repairing!legitimacy!as!once!established!legitimacy! becomes!habitual!(Suchman,!1995).!This,!however,!does!not!suggest!that!maintenance! of!legitimacy!is!not!complex!for!organizations’!as!the!values!and!beliefs!shaping! legitimacy!are!subject!to!changes,!thus!organizations’!may!have!to!change!to!adhere!to! external!changes!to!maintain!legitimacy!(Suchman,!1995).!!

Repairing!legitimacy!is!not!too!dissimilar!from!gaining!legitimacy.!Organizations’! adopt!strategies!to!repair!legitimacy!in!responses!to!legitimacyethreatening!events! (O’Donovan,!2002).!The!reparation!of!legitimacy!following!a!legitimacy!challenge!is!vital! to!a!firm’s!survival!(Scherer!et!al,!2013).!It!is!especially!necessary!to!explore!the! strategies!organizations!adopt!to!repair!legitimacy!as!Lamin!and!Zaheer!(2012)!suggest! that!some!strategies!adopted!by!a!firm!may!in!fact!hinder!a!firm’s!reparation!of! legitimacy!or!even!exacerbate!the!legitimacy!challenge.!This!could!occur,!for!example,!if! firms!are!ill!advised!or!do!not!correctly!identify!which!actors!have!been!affected!most! by!the!firms!illegitimate!actions!and!thus!firms!do!not!attempt!to!tackle!restoring! legitimacy!by!focusing!on!the!concerned!actors!(Lamin!&!Zaheer,!2012).!Additionally,! Suchman!(1995)!suggests!that!an!organizations!effort!to!repair!legitimacy!may!not!be! well!received!by!stakeholders,!for!example!if!an!organization!adopts!a!strategy!of! defiance,!stakeholders!may!deem!this!an!unnecessary!protest!thus!further!damaging!the! organization’s!legitimacy.! ! 2.4.!MNCs!and!legitimacy! The!concept!of!legitimacy!is!extremely!important!as,!in!an!increasingly! globalized!world,!MNCs!expand!into!a!magnitude!of!different!countries,!thus!the! number!of!different!institutional!environments!and!societal!environments,!which!they! are!subject!to,!increases!(Scherer!et!al,!2013).!In!the!different!institutional! environments!there!is!an!absence!of!rules!to!follow!in!order!for!an!MNC!to!be!deemed! legitimate,!therefore!corporations!struggle!to!maintain!legitimacy,!as!expectations!of! MNC!behavior!are!not!always!specified!(Scherer!&!Palazzo,!2007).!The!absence!of!rules! for!MNCs!to!abide!by!arises!due!to!globalization!causing!changes!to!institutional! environments!(Scherer!et!al,!2013).!The!changing!institutional!environments!are!a!

result!of!reductions!in!regulatory!power!of!governments;!consequently!regulation!is! becoming!an!essential!task!for!private!and!social!actors,!as!opposed!to!regulatory! actors,!thus!complicating!the!institutional!environment!that!MNCs!operate!in!(Mena!and! Palazzo,!2012).!The!complications!are!further!amplified!due!to!a!lack!of!homogeneity!in! societies’!perceptions!of!legitimate!behavior!across!the!different!institutional! environments!that!MNCs!operate!in!(Pache!&!Santos,!2010).!As!a!result!of!this,!MNCs! aim!to!behave!in!ways!that!adhere!to!accepted!local!standards,!but!some!institutional! environments!lack!regulatory!guidelines,!thus!legitimacy!maintenance!is!difficult! (Scherer!et!al,!2013).!!! !These!complex!conditions!create!difficulties!for!MNCs!that!are!not!faced!by! entirely!domestic!firms!(Marano!&!Tashman,!2011),!because,!unlike!MNCs,!they!do!not! operate!in!many!different!institutional!environments!(Kostova!&!Zaheer,!1999).!In!each! institutional!environment!that!the!MNC!operates!in,!it!is!necessary!to!maintain! legitimacy!in!order!to!ensure!that!the!MNC!has!access!to!all!resources!necessary!for!its! operations!(Salancik!&!Pfeffer,!1978).!The!theory!of!resource!dependence!suggests!that,! for!competing!MNCs,!foreign!markets!(whether!emerging!or!developed)!consist!of! scarce!resources!(Luo,!2003).!As!it!is!already!difficult!for!MNCs!to!obtain!the!necessary! resources!in!foreign!markets,!MNC!subsidiaries!may!be!dependent!upon!parent!firms,! other!subsidiaries!or!local!actors!in!the!host!country!for!resources!(Luo,!2003).!It!is! therefore!vital!for!MNCs!subsidiaries!to!uphold!legitimacy!in!order!to!preserve!good! relations!with!entities!from!which!they!require!resources!for!their!operations!(Salancik! &!Pfeffer,!1978).! !! Furthermore,!globalization!is!increasing!the!level!of!competitiveness!in!markets! thus!increasing!the!complexities!that!MNCs!are!facing!(Luo,!2001).!The!increased!level! of!competitiveness!emphasizes!the!importance!for!MNCs!to!behave!legitimately!in!order!

to!secure!valuable!resources!and!continue!profitable!operations!worldwide,!despite! having!multiple!competitors!(Kostova!&!Zaheer,!1999).! !!!!!! 2.5.!Legitimacy!in!Emerging!Markets:!The!Case!of!China! An!emerging!market!is!defined!as!a!country!that!is!undergoing!reforms!and! economic!development,!in!an!attempt!to!increase!its!economic!growth,!so!that!it!can! emerge!globally!to!become!a!leading!market!player!like!developed!countries!(Peng!et!al,! 2008).!Economic!reforms!occurring!in!emerging!markets!attempt!to!enhance!the! economic!performance!of!these!countries!(Luo,!2003).!!This!is!achieved!through! emerging!markets!transitioning!from!closed!to!open!economies;!this!transition!creates! structural!instability!within!emerging!markets,!despite!the!fast!pace!of!economic! growth!(Luo,!2003).!It!is!this!economic!growth!in!emerging!markets!that!creates! opportunities!for!MNCs!to!expand!and!increase!profits,!thus!this!is!a!factor!that!attracts! MNCs!to!set!up!operations!in!these!countries!(Li,!Yang!&!Yue!2007).!Another!attractive! feature!are!the!government!policies!in!place!in!emerging!markets!that!promote! economic!liberalization!(Li!et!al,!2007).!Indeed,!in!contrast!to!developed!countries!there! are!more!liberal!policies!and!weaker!enforcement!of!formal!rules!and!norms!in! emerging!markets!(Luo,!2003).!As!a!result!of!the!liberal!policies,!an!increase!in!the! number!of!MNCs!setting!up!operations!in!emerging!markets!has!prompted!the!view!in! local!stakeholders!of!MNCs,!from!developed!countries,!being!a!cause!of!environmental! and!social!problems!(Zhao,!Tan!&!Park,!2014).!A!reason!for!MNCs!being!perceived!as! problem!creators!in!emerging!markets!stems!back!to!the!1990s,!as!at!this!time!MNCs! from!developed!countries!were!rapidly!expanding!into!emerging!markets!and!behaving! in!unethical!ways,!due!to!the!loosened!laws!in!place!to!entice!MNCs!to!locate!there! (Zhao!et!al,!2014).!The!local!stakeholders!that!view!MNCs!as!the!reason!for!social!and!

environmental!problems!might!be!antiecorporation!and!thus!they!might!monitor!the! MNCs’!activities!more!closely!than!stakeholders!in!developed!countries!would!do!(Zhao! et!al,!2014).!As!a!result!of!these!negative!associations!with!MNCs,!it!is!to!be!expected! that!MNCs!with!operations!in!emerging!markets!will!at!some!point!come!under!scrutiny! for!their!activities!with!regards!to!environmental,!social!and/or!political!aspects!(Zhao,! 2013).!Additionally,!the!lack!of!competence!within!emerging!markets!to!enforce! regulation!and!laws,!alongside!corruption!and!institutional!deficiencies,!are!all! contributing!factors!to!the!illegitimate!activities!of!MNCs!in!these!countries!(Zhao!et!al,! 2014).!! China,!as!an!emerging!market,!is!known!to!have!an!uncertain!and!in!some!cases! volatile!institutional!environment,!due!to!the!weak!formal!institutions!(Peng!et!al,! 2008).!Peng!et!al!(2008)!suggest!that!a!substitute,!in!China,!for!the!weak!formal! institutions!might!be!the!personal!networks!of!individuals!known!as!‘guanxi’.!Guanxi! emphasizes!the!importance!in!Chinese!culture!of!building!close!relationships!and!using! this!as!an!advantage!in!business!(Peng!et!al,!2008).!!For!developed!country!MNCs!there! can!be!much!confusion!with!‘guanxi’,!as!one!of!its!central!aspects!is!the!giving!of!gifts,! which!can!be!mistaken!by!MNCs’!for!bribes!(Tan,!2009).!With!this!confusion!MNCs! might!be!led!to!believe!that!it!is!acceptable!to!create!‘guanxi’!deals!thus!leading!to! incidents!of!bribery!and!corruption!(Tan,!2009).!! Furthermore,!the!weak!regulations!and!law!enforcement,!which!characterize! China’s!institutional!environment,!are!another!factor!encouraging!corruption!(Tan,! 2009).!MNCs!faced!with!this!imperfect!institutional!environment!in!China,!may!use!the! feeble!legal!system!as!an!excuse!to!behave!in!an!illegitimate!manner!(Zhao!et!al,!2014),! for!example!MNCs’!may!opt!to!market!low!quality!food!products!without!fear!of!quality! checks!taking!place.!!

Despite!China’s!weak!formal!institutions,!there!are!a!number!of!reasons!obliging! MNCs’!to!behave!legitimately!(Li!et!al,!2007).!One!influencing!factor!is!known!as! ‘legitimacy!spillover’!(Li!et!al,!2007,!p.!177),!where!MNCs’!gain!information!on!how!to! behave!legitimately!from!other!MNCs’!that!have!successful!operations!in!China.!This! encourages!legitimacy!in!MNCs!because!the!already!successful!MNCs’!are!managing!to! survive!in!the!hostile!institutional!environment!and!therefore!new!MNCs’!that!view!this! will!opt!to!do!the!same!in!order!to!survive!(Li!et!al,!2007).!Another!factor!influencing! legitimation!is!acceptance!by!social!actors!(Li!et!al,!2007).!Social!actors!in!emerging! markets!act!as!informal!institutions,!these!are!important!in!the!absence!of!formal! institutions!(Sauerwald!&!Peng,!2013).!Informal!institutions!have!expectations!of!what! constitutes!legitimate!behavior!in!MNCs!(Li!et!al,!2007),!these!social!actors!include! customers,!the!Chinese!general!public,!labor!unions!and!watchdog!organizations!that! would!monitor!corporations’!activities!(Li!et!al,!2007).!! Along!with!relevant!social!actors!informally!regulating!the!activities!of!MNCs,!the! expansion!of!media!and!Internet!coverage!also!contributes!to!the!activities!of!MNCs! being!viewed!as!illegitimate!(Zhao!et!al,!2014).!This!expansion!has!proved!a!challenge! for!some!MNCs!in!maintaining!legitimacy!as!the!Internet!can!disclose!an!MNC’s! illegitimate!activities!thus!pressuring!the!Chinese!government!to!take!actions!against! the!MNCs!(Zhao!et!al,!2014).!!!!!! ! 2.6.!MNCs’!Strategies!to!Repair!Legitimacy!in!Emerging!Markets! !!! As!explained!in!the!previous!section,!unstable!institutional!environments! characterize!emerging!markets!(Luo,!2003).!There!are!more!liberal!policies!in!place!in! emerging!markets!and!weaker!regulations!than!in!developed!countries,!however!the! activities!of!MNCs!still!face!monitoring!from!social!actors!(Zhao,!2013).!As!a!result!of!

this,!MNCs!activities!may!come!under!scrutiny,!so!it!is!of!upmost!importance!for!MNCs! to!sustain!legitimacy!(Zhao,!2013).!In!emerging!markets,!it!is!often!difficult!for!MNCs!to! find!solutions!in!order!to!behave!legitimately!under!the!weak!law!enforcement!(Zhao,! 2013).!Given!these!challenges!of!survival!in!emerging!markets,!legitimacy!scandals!can! occur!thus!highlighting!the!importance!for!MNCs!to!adopt!strategies!of!legitimacy! reparation.!The!strategies!are!summarized!in!Table!1,!at!the!end!of!this!section.!! !This!section!will!combine!existing!theories!of!legitimacy!reparation!with!the! literature!on!the!specificities!of!the!institutional!environment!in!China!to!develop! propositions!on!MNCs’!responses!following!legitimacy!threats.!!! Extant!legitimacy!literature!posits!that!in!some!instances!an!organization!may! opt!to!deny!any!involvement!in!illegitimate!behavior!(Ashforth!&!Gibbs,!1990).!As! discovered!by!Lamin!and!Zaheer!(2012)!denial!is!not!a!favorable!response!in!the!eyes!of! stakeholders!if!there!is!sufficient!evidence!to!support!the!accusations!of!illegitimacy,! therefore!adopting!a!strategy!of!denial!can!further!damage!a!firm’s!legitimacy.!An! example!of!an!incident!in!which!denial!caused!damage!to!a!firms’!legitimacy!is!the!case! of!a!large!MNC,!Nike!(Lamin!&!Zaheer,!2012).!When!Nike’s!legitimacy!was!challenged!in! 1997!for!using!sweatshops,!the!MNC’s!initial!response!was!to!deny!any!involvement! with!sweatshop!labor.!This!proved!to!be!ineffective!as!Nike!continued!to!face! accusations!of!illegitimate!behavior!thus!undermining!the!MNC’s!claims!and!the! legitimacy!of!the!MNC!(Lamin!&!Zaheer,!2012).!! As!denial!is!not!a!desirable!response!to!legitimacy!challenges,!organizations!may! adopt!a!defiance!strategy!(Ashforth!&!Gibbs,!1990),!which!involves!questioning!the! accuser!to!undermine!the!claims!of!conducting!illegitimate!activities!(Ashforth!&!Gibbs,! 1990).!Individuals!affected!by!an!organization’s!illegitimate!actions!can!also!perceive! defiance,!along!with!denial,!negatively,!which!in!turn!would!not!help!restore!an!

organizations!legitimacy.!It!may!be!perceived!negatively!because!stakeholders!may! believe!that!defiance!is!an!unnecessary!protest!from!a!firm!in!trouble!(Lamin!&!Zaheer,! 2012).!In!China,!given!the!importance!of!relationships!in!business,!if!the!public!or!other! business!partners!were!to!discover!that!an!MNC!had!engaged!in!strategies!of!denial!and! defiance!to!repair!legitimacy,!this!might!be!perceived!as!being!disrespectful!given!the! MNCs!evident!disregard!for!trust!in!business!relationships!through!denial!of!allegations.! This!could!further!damage!the!legitimacy!of!the!MNC.!!! ! Proposition$1:!MNCs!are!likely!to!avoid!complete!denial!of!allegations!of!illegitimate! activities!and!defiance!in!China! !! If!strategies!of!denial!and!defiance!are!not!adopted!by!an!organization!in!order!to! reeestablish!legitimacy,!the!other!possible!strategies!an!organization!can!use!depend! upon!whether!legitimacy!is!viewed!from!a!strategic!or!an!institutional!perspective! (Beelitz!&!Merkl,!2012).!! ! 2.6.1.!Strategic!Perspective! The!strategic!perspective!considers!how!legitimacy!can!be!established!through! strategies!employed!by!organizations’.!The!strategic!perspective!involves!an! organization!admitting!publically!to!the!occurrence!of!illegitimate!activities!(Suchman,! 1995).!There!are!two!types!of!strategic!legitimacy!management:!symbolic!and! substantive!(Ashforth!&!Gibbs,!1990).!! ! When!a!firm!adopts!substantive!management,!it!changes!its!activities!in!order!to! reeestablish!legitimacy!and!to!demonstrate!that!it!is!actively!trying!to!alter!its!

illegitimate!actions!to!ones!that!are!deemed!socially!acceptable.!This!type!of! management!requires!evident!changes!to!the!structure!of!the!organization,!along!with! changes!to!the!organization’s!goals,!so!that!stakeholders!believe!the!organization!is! actively!making!a!change!in!order!to!cease!the!prior!illegitimate!activities!(Ashforth!&! Gibbs,!1990).!In!China,!actors!that!are!opposed!to!MNCs!setting!up!operations!there,! may!monitor!MNCs!activities!more!closely!than!they!would!in!developed!economies!(Li! et!al,!2007),!therefore!for!MNCs!aiming!to!repair!legitimacy,!it!would!be!effective!to! adopt!strategies!of!substantive!management.!A!reason!for!this!is!that!if!certain!actors! closely!monitor!MNCs’!activities,!these!actors!would!be!aware!of!the!strategic!changes! that!organizations!are!pursuing!to!be!legitimate,!therefore!this!might!give!MNCs!a!better! chance!of!repairing!legitimacy.!!! An!example!of!substantive!management,!identified!by!Scherer!et!al.!(2013),!is! that!of!moral!reasoning,!which!involves!open!discussion!between!the!organization!and! its!stakeholders!(Palazzo!and!Scherer,!2006;!Scherer!et!al.,!2013).!This!discursive,! conversationebased!method!of!repairing!legitimacy!intends!to!develop!a!solution!to! legitimacy!challenges!that!satisfies!both!the!stakeholders!involved!and!the!organization,! by!considering!all!advantages!and!disadvantages!of!the!other!party’s!position.!This! strategy!generally!allows!for!the!reparation!of!moral!legitimacy!(Scherer!et!al.,!2013).!In! China!the!concept!of!‘guanxi’!emphasizes!the!importance!of!close!relationships!and! personal!ties.!MNCs!with!knowledge!of!this!might!choose!moral!reasoning!as!a!method! of!repairing!legitimacy!as!through!discursive!methods,!relationships!can!be!created!and! perhaps!salvaged!following!crises.!! $ Proposition$2:!MNCs!are!likely!to!adopt!substantive!management!strategies!to!repair! legitimacy!in!China!!

! Symbolic!management,!instead,!aims!to!keep!stakeholders!content!by!appearing! to!adopt!strategies!that!adhere!to!social!norms.!This!suggests!that!through!symbolic! management,!the!organization!does!not!change!its!illegitimate!actions,!but!it!portrays!its! changes!by!making!it!appear!as!if!its!actions!were!in!line!with!social!requirements!for! legitimate!behavior!(Ashforth!&!Gibbs,!1990).!There!are!various!methods!by!which!an! organization!can!make!it!appear!to!the!public!that!they!are!no!longer!engaging!in! illegitimate!activities.!An!organization!can!achieve!this!by!setting!goals!for!future!action! that!stakeholders!view!as!legitimate!(Ashforth!&!Gibbs,!1990).!This!would!enable!an! organization!to!gain!support!from!stakeholders,!however!the!organization!may!not! actually!pursue!these!goals!and!instead!they!may!continue!to!pursue!goals!resulting!in! the!occurrence!of!illegitimate!activities!(Ashforth!&!Gibbs,!1990).!! Another!symbolic!management!approach!consists!in!an!organization! withholding!information!from!stakeholders!so!that!the!latter!believe!the!organization’s! actions!are!legitimate.!Following!a!legitimacy!scandal,!symbolic!management!is!the!most! commonly!used!method!for!an!organization!to!separate!the!organization!from!the! legitimacyethreatening!event!(Beelitz!&!Merkl,!2012).!!! Furthermore,!under!the!symbolic!management!category,!Scherer,!Palazzo!and! Seidl!(2013)!identified!strategic!manipulation.!This!consists!in!the!manipulation!of!the! perceptions!of!stakeholders!and!other!actors!operating!in!the!MNC’s!same!societal! environment,!to!make!it!appear!as!if!the!organization’s!actions!were!legitimate!(Oliver,! 1991).!An!organization!can!try!to!shape!societal!expectations!through!the!use!of! advertising!and!other!tools!(Scherer!et!al,!2013).!An!example!of!an!MNC!that!used!this! strategy!is!Enron!in!2003.!Following!allegations!of!fraud,!Enron!publically!announced! new!sustainability!policies!but!never!followed!through!with!them!(Scherer!et!al,!2013).!

As!this!came!to!light!it!was!evident!that!the!adoption!of!this!strategy!had!failed!for! Enron.!With!antiecorporation!activists!in!institutional!environments,!it!is!likely!that! strategic!manipulation!will!be!unsuccessful!at!repairing!legitimacy!(Scherer!et!al,!2013).! In!the!case!of!China,!as!in!other!emerging!countries!(see!section!2.5),!MNCs!face! opposition!from!local!stakeholders.!This!opposition!would!suggest!that!MNCs!have!their! activities!monitored!by!stakeholders!that!are!opposed!to!corporations!(Scherer!et!al,! 2013),!therefore!actions!of!strategic!manipulation!would!not!be!well!received!in! emerging!markets.! ! Proposition$3:!MNCs!are!unlikely!to!adopt!symbolic!management!strategies!to!repair! legitimacy!in!China.!! ! 2.6.2.!Institutional!Perspective! The!institutional!perspective!considers!whether!outsiders!view!the!organization! to!be!complying!with!social!norms!and!institutional!practices!of!legitimate!behavior! (Beelitz!&!Merkl,!2012).!!When!an!organization’s!practices!comply!with!social!norms,! the!organization!will!be!deemed!legitimate!(Beelitz!&!Merkl,!2012).!An!example!of!an! institutional!perspective!strategy!is!decoupling,!in!which!an!organization!admits!to!the! illegitimate!activity!but!separates!itself!from!the!action!(Elsbach!&!Sutton,!1992).!For! example,!an!organization!may!use!an!individual!as!a!scapegoat!to!blame!for!the! legitimacy!scandal,!thus!this!individual!would!have!to!take!responsibility!for!the! illegitimate!activities!(Elsbach!&!Sutton,!1992).!The!firm!will!proceed!to!cut!off!ties!with! or!suitably!punish!the!individual!for!partaking!in!illegitimate!activities!(Lamin!&!Zaheer,! 2012).!Through!the!adoption!of!this!decoupling!strategy!a!firm!is!likely!to!no!longer!be! associated!with!the!cause!of!the!legitimacy!problem,!thus!this!is!an!effective!method!of!

restoring!legitimacy!(Lamin!&!Zaheer,!2012).!Decoupling!could!be!an!effective!strategy! for!MNCs!in!China,!for!example!if!an!MNC!uses!a!supplier!as!a!scapegoat!for!the! legitimacyethreatening!event,!the!MNC!could!then!decide!to!separate!or!‘decouple’!itself! from!the!event!by!terminating!business!with!this!supplier;!leading!to!the!breaking!of! ‘guanxi’.!‘Guanxi’!emphasizes!the!importance!of!close!relationships!in!business!in!China! and!is!a!central!feature!relating!to!Chinese!business,!in!order!for!MNCs!to!be!successful! in!China!it!is!important!to!maintain!strong!relationships!with!suppliers!or!other! business!partners!(Tan,!2009).!In!Chinese!culture,!the!breaking!of!‘guanxi’!would!be! deemed!a!serious!matter!but!if!an!organization!was!to!do!this,!it!might!portray!to!the! public!that!the!organization!is!making!a!serious!effort!to!repair!its!illegitimate!activities.!! ! Proposition$4:$MNCs!are!likely!to!adopt!a!decoupling!strategy!to!repair!legitimacy!in! China.! ! Scherer,!Palazzo!and!Seidl!(2013)!identified!another!strategy,!which!falls!under! the!institutional!perspective!category!of!establishing!or!reestablishing!legitimacy.!This! strategy!is!isomorphic!adaptation!and!it!features!frequently!in!legitimacy!literature,!as!it! is!widely!believed!to!be!an!effective!strategy!of!establishing!legitimacy!(Suchman,!1995;! Deephouse,!1996;!Kostova!&!Zaheer,!1999).!Isomorphic!adaptation!consists!of!an! organization!acting!in!accordance!with!societal!expectations!by!changing!its!processes! to!adapt!to!the!institutional!environment,!therefore!isomorphic!adaptation!is!‘simply! adapting!to!the!environment’!(Scherer!et!al,!2013,!p.260).!This!strategy!is!adopted!by! MNCs!to!maintain!or!repair!cognitive!legitimacy!(Scherer,!Palazzo!&!Seidl,!2013),!as! cognitive!legitimacy!requires!stakeholders!and!society!to!appreciate!the!organization’s! existence!by!viewing!the!activities!of!an!organization!as!being!legitimate,!(Lamin!&!

Zaheer,!2012).!An!organization!will!therefore!alter!its!practices!in!order!for!society!to! approve!its!activities!(Scherer!et!al,!2013).!Lamin!and!Zaheer!(2012)!however!suggest! that!cognitive!legitimacy!is!not!often!challenged,!as!it!is!difficult!to!measure!society’s! acceptance!of!an!organizations!existence.!Despite!this!dimension!being!difficult!to! measure,!developed!country!MNCs!might!choose!to!use!isomorphism!as!a!strategy!of! repairing!legitimacy!in!China!as!legitimacy!depends!upon!institutional!distance!(Jensen! &!Szulanski,!2004).!Between!emerging!markets!and!developed!countries!there!is!a!large! institutional!distance!suggesting!that!the!institutional!environment!in!China!differs! substantially!from!the!institutional!environment!in!developed!countries!(Jensen!&! Szulanski,!2004).!The!larger!the!institutional!distance!the!more!benefits!accrue!from! isomorphic!adaptation!thus!increasing!legitimacy!(Jensen!&!Szulanski,!2004).!There!are! more!benefits!for!MNCs!from!adapting!isomorphically!in!China!because!with!the! institutional!environment!differing!so!much!from!that!of!the!MNCs!home!country,!it!may! be!difficult!for!MNCs!to!distinguish!what!constitutes!legitimate!behavior.!Therefore! MNCs!alter!their!practices!to!mimic!other!successful!MNCs!in!China!thus!allowing!them! to!fit!into!the!institutional!environment!hence!increasing!a!MNCs!chance!of!survival!in! China!(Jensen!&!Szulanski,!2004).!!!!!!!!!!! ! Proposition$5:$MNCs!are!likely!to!adopt!strategies!of!isomorphic!adaptation!to!repair! legitimacy!in!China.! ! Table!1:!Potential!strategies!of!repairing!legitimacy!!

Perspective* Strategy* Example(s)*

! 1.!Denial!&!Defiance! Denying!allegations!or!

questioning!the!accusers! claims!

Strategic!Perspective! 2.!Substantive! management! Moral! Reasoning! MNC!making! evident!changes! to!organization’s! practices! ! 3.!Symbolic!management! ! Strategic!manipulation!

Institutional!Perspective!! 4.!Decoupling! Using!scapegoats!to!remove! association!with!the!cause!of! illegitimate!activity! ! 5.!Isomorphic!adaptation!! Adoption!of!practices!in!line! with!the!institutional! environment! ! ! 3.!Methodology! This!section!will!discuss!the!methods!adopted!in!this!thesis!by,!firstly!explaining! the!research!design.!Then,!the!cases!will!be!introduced!and!the!reasons!for!choosing! these!specific!cases!will!be!explained.!This!will!be!followed!by!a!description!of!the!data! collection!along!with!a!brief!explanation!of!how!the!data!collected!will!be!analyzed.!! 3.1.!Research!Design! This!thesis!will!explore!different!strategies!adopted!by!MNCs!from!developed! countries,!with!operations!in!China,!to!repair!their!organizational!legitimacy!following! legitimacy!challenges!they!have!had!to!face!in!the!Chinese!institutional!environment.! The!research!question!is:!How$do$MNCs$from$developed$countries$repair$legitimacy$ following$legitimacy$challenges$in$China?! This!research!question!aims!to!provide!insight!and!bridge!the!gap!concerning!the! responses!of!MNCs!to!the!frequently!occurring!issue!of!legitimacy!challenges!in! emerging!markets.!The!research!will!attempt!to!answer!the!question!by!combining!two! perspectives!of!legitimacy,!strategic!and!institutional,!in!order!to!analyze!how!an!MNC! attempts!to!repair!legitimacy.!

Given!the!nature!of!the!question!the!study!uses!a!qualitative!method!by!adopting! a!multiple!case!study!design.!The!research!question!posed!asks!‘how’!MNCs!repair! legitimacy!in!relation!to!contemporary!eventse!legitimacy!challenges;!therefore!using!a! case!study!is!appropriate!(Yin,!2013).!As!the!question!asks!how!MNCs!repair!legitimacy! in!emerging!markets,!quantitative!analysis!is!not!required!as!this!thesis!builds!upon! existing!theories!and!observations!of!MNC!strategies,!and!this!phenomena!would!be! difficult!to!quantitatively!assess!(Yin,!2013).!Additionally,!as!the!focus!is!on!exploring! contemporary!events!that!cannot!be!manipulated,!case!studies!are!appropriate!(Rowley,! 2002).!The!cases!selected!for!this!thesis!are!similar!with!the!MNCs!all!originating!from! developed!countries,!with!substantial!operations!in!China,!and!a!large!international! presence,!so!we!would!expect!the!MNCs!to!adopt!similar!strategies!of!repairing! legitimacy;!therefore!we!would!expect!the!cases!to!be!literal!replications.!This!thesis! will!connect!theories!from!previous!studies!with!observations!from!the!selected!cases! to!illustrate!the!strategies!adopted!by!developed!country!MNCs’!in!China.! ! 3.2.!Case!Selection! The!case!studies!are!explanatory!in!nature!as!the!aim!is!to!refine!and!suggest! propositions.!As!the!propositions!are!created!from!analyzing!existing!theory,!a! deductive!approach!is!adopted.!The!cases!were!selected!by!searching!for!MNCs!from! developed!countries!that!have!faced!legitimacy!threats!in!China.!The!following!table! introduces!and!presents!a!profile!of!the!three!MNCs!selected!for!this!study.! ! ! ! ! ! !

Table!2:!Profile!of!the!selected!MNCs!! MNCs* Industry*in* which*the*MNCs* operate* Number*of* Countries* the*MNC* operates* in*(2015)* MNC’s* fullFyear* revenue* (2014)* Year*of* MNC’s* entry* in* China* Legitimacy* challenge* faced*in* China* GSK! Pharmaceutical! 115! £23.01! billion! 1908! Bribery! Nestlé! Food!&!Beverage! 197! $100.08!

billion! 1908! Selling!milk!containing! melamine! !

KFC! Fast!food! 118! $23!!

billion! 1987! Selling!products! contaminated! with!cancer! causing!dye! ! ! ! The!first!case!that!will!be!explored!is!the!case!of!GlaxoSmithKline!(GSK),!a! leading!pharmaceutical!company!from!the!United!Kingdom!(UK).!In!September!2014,! after!a!15emonth!investigation,!GSK!was!found!guilty!of!involvement!in!a!bribery! scandal!in!China!for!which!it!faced!fines!of!$490m.!It!was!discovered!that!the!MNC’s! subsidiary!in!China!had!been!using!bribery!in!order!to!distribute!certain!medical!drugs! more!widely!across!the!country,!thus!increasing!profits!for!GSK.!The!incident!brought! GSK’s!legitimacy!into!question,!and!as!a!large!MNC!with!operations!in!multiple! countries;!it!was!of!great!importance!for!GSK!to!repair!its!legitimacy!in!China.!!! The!second!case!that!will!be!explored!concerns!a!food!and!beverage!MNC!from! Switzerland,!Nestlé.!In!2005,!Nestlé!was!accused!of!selling!milk!in!China!that!did!not! meet!local!quality!requirements.!In!particular,!Nestlé’s!milk!was!found!to!contain! excessive!amounts!of!iodine!that!could!prove!a!health!risk!to!individuals!that!consume!

that!milk,!especially!young!children.!As!many!young!children!consumed!the!milk!being! sold,!this!created!much!opposition!to!Nestlé!from!the!Chinese!population.!China’s! citizens!deemed!Nestlé’s!actions!illegitimate;!therefore!it!was!necessary!for!Nestlé!to! adopt!strategies!in!order!to!repair!legitimacy.!! The!third!MNC!that!will!be!explored!is!KFC,!a!fast!food!retailer!from!the!United! States!(US)!whose!products!were!found!to!contain!a!carcinogenic!red!dye!known!as! Sudan!1!in!2005.!KFC!and!KFC’s!parent!company!‘YUM!’!had!the!legitimacy!of!their! activities!questioned!following!the!discovery!of!the!red!dye,!and!as!KFC!is!continually! expanding!in!the!Chinese!market,!it!was!mandatory!for!action!to!be!taken!to!repair! legitimacy!to!allow!KFC!to!continue!its!expansion!and!survive!in!China.!!! The!cases!selected!are!appropriate!as!the!legitimacy!scandals!all!occurred! relatively!recently!to!the!conduction!of!this!research,!yet!not!too!recent!that!there!have! been!no!annual!reports!or!newspaper!articles!produced!with!information!concerning! the!incidents.!It!is!important!that!the!cases!are!all!relatively!recent!as!qualitative!data! focuses!on!contemporary!events.!Additionally,!necessary!data!to!analyze!the!cases!is! easily!accessible!in!sources!such!as!newspapers!articles!and!company!annual!reports.! !!!! Another!reason!for!the!selection!of!these!three!cases!is!that!all!three!MNCs!are! from!developed!countries,!the!UK,!Switzerland!and!the!US,!and!they!all!have!substantial! investments!in!China.!These!cases!are!relevant!as!it!gives!us!insight!into!how!developed! country!MNCs,!all!with!extensive!international!presence!and!with!operations!in!over! 100!countries,!repair!their!legitimacy!in!emerging!markets.!The!international!presence! of!GSK,!Nestlé!and!KFC!suggests!that!the!MNCs!are!recognized!worldwide!and!therefore! news!of!any!illegitimate!activities!is!likely!to!spread!all!over!the!world!via!the!media.! This!could!disrupt!operations!of!the!MNCs’!subunits!in!other!countries,!as!well!as!in! China,!if!individuals!are!opposed!to!the!firms’!actions.!It!is!therefore!important!that!the!

MNCs’!adopt!strategies!to!repair!legitimacy!before!their!irresponsible!actions!affect! their!profitability!worldwide.!! A!final!reason!for!the!selection!of!these!MNCs!is!that!this!thesis!aims!to!produce! the!same!results!from!the!cases!(literal!replication).!As!the!MNCs!are!all!from!developed! countries!with!operations!in!China,!we!would!therefore!expect!similarities!in!the! strategies!adopted!by!the!MNCs!to!repair!legitimacy.!If!similarities!emerge!from!the! cases!this!will!make!for!ease!of!comparison!between!the!different!strategies!adopted.!! The!unit!of!analysis!in!this!research!will!be!the!MNCs’!subsidiaries!in!China,!as! they!have!had!to!face!the!legitimacy!challenge!and!repair!their!legitimacy!in!this!market.! Given!that!there!is!only!a!single!unit!of!analysis,!this!will!be!a!holistic!multiple!case! study.!It!is!beyond!the!scope!of!this!paper!to!analyze!the!effect!of!the!legitimacye challenging!incidents!on!the!MNCs’!global!legitimacy.!Much!of!the!secondary!data! available!focuses!solely!on!the!response!of!the!MNCs!in!China.!! ! 3.3.!Data!Collection! This!qualitative!research!will!be!conducted!through!the!collection!and!use!of! secondary!data.!Secondary!data!will!be!collected!from!newspapers!and!firms’!annual! reports.!The!sources!of!secondary!data!are!listed!in!table!3.!Secondary!data!will!be!the! only!type!of!data!collected!for!this!study,!as!there!is!a!vast!amount!of!insightful!data! available!on!the!cases.!In!addition!the!multiple!sources!of!secondary!data!provide! different!perspectives!on!the!responses!of!the!MNCs!to!repair!their!legitimacy!in!China.! Reay!and!Hinings!(2005)!suggest!that!the!use!of!secondary!data!alone!is!sufficient!if! there!are!many!available!representative!documents!to!study.!Table!3!displays!all!the! sources!of!secondary!data!used!in!the!analysis.!!!!! !

!! Table!3:!Sources!of!secondary!data! MNC* Home* country* Newspapers* * Chinese* Newspapers* Annual*

Reports* Other*news*sources* Timeframe*

GSK! The!Guardian! ! BBC!News! ! The! International! Business! Times! Shenzen!Daily! ! BioSpectrum! Asia!! 2014! Slogan1_! ! The!New! York!Times! July!2013e December! 2014! Nestlé! Deutsche! Pressee Agentur! ! Associated! Press! Financial! Wire! Xinhua!General! News!Service! ! Beijing!Morning! post! ! Shenzen!Daily! 2005/2006! Business! Week2_! March! 2005e! October! 2008! KFC! USA!Today! Xinhua!General! News!Service! ! Beijing!Morning! post! 2005/2006! Agence! France! Presse3_,! ! SinoCast4_,! ! AFX! International! Focus5_! March! 2005e! March! 2006! ! The!use!of!newspapers!allows!the!actions!and!responses!of!the!company!and!its! stakeholders!on!the!issue!to!be!identified.!To!gain!more!insight!on!the!incidents!and!the! strategies!of!the!MNCs,!it!is!useful!to!use!multiple!newspapers,!with!different!political! orientations!(left!wing!or!rightewing),!and!both!from!the!firms’!home!countries!and! !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1_{!An!online!international!news!provider!} 2_{!An!international!business!news!website!provided!by!Bloomberg!} 3_{!French!agency!of!international!news!!} 4_{!Newspaper!reporting!China’s!business!headline!news!} 5_{!A!London!financial!news!agency!that!reports!real!time!international!news!}

from!China,!in!order!to!compare!and!investigate!the!similarities!and!differences! between!the!information!provided!on!the!incidents!and!following!the!incidents.!Also,! the!firm’s!annual!reports!will!be!used!as!sources!because!they!provide!detailed!accounts! of!the!incidents!and!the!MNCs’!responses!following!the!incidents.! ! The!data!will!be!collected!in!the!timeframe!from!the!time!the!incidents!occurred! up!until!the!present!day.!This!will!guarantee!that!any!changes!to!the!MNCs’!strategies!to! repair!legitimacy!or!any!developments!involved!relating!to!the!incident!will!be!included! in!the!data!analysis,!ensuring!that!all!MNC!strategies!will!be!considered!in!the! formulation!of!propositions.! In!order!to!ensure!the!validity!and!reliability!of!the!results,!various!actions!will! be!undertaken.!Multiple!sources!of!available!evidence!will!be!used!to!guarantee! accuracy!of!the!propositions!that!will!be!suggested.!Additionally!explanations!will!be! provided!in!relation!to!patterns!that!emerge!in!order!to!ensure!internal!validity!(Yin,! 2013).!To!ensure!reliability!all!processes!performed!will!be!documented!in!order!for! them!to!be!repeated!(Rowley,!2002).! ! 3.4.!Data!Analysis! Following!the!data!collection,!the!next!step!will!be!the!analysis!of!data.!The!data! analysis!will!be!conducted!using!computer!software!NVivo,!which!is!specifically! designed!to!analyze!qualitative!data.!The!method!of!analysis!in!NVivo!is!known!as! thematic!analysis.!Thematic!analysis!involves!assigning!themes!to!the!data,!in!this!case! the!codes/themes!are!constructed!from!existing!literature!on!the!strategies!adopted!by! organizations!to!reestablish!their!legitimacy,!therefore!a!deductive!approach!is!adopted.! The!codes!created!are!selected!by!the!researcher!in!order!to!identify!common!patterns! in!the!data,!these!are!presented!in!Table!4.!The!codes!help!to!clarify!and!create!an!

understanding!of!certain!events!or!phenomena!and!they!also!allow!for!identification!of! the!actions!of!actors!involved!in!what!one!is!researching!(Ryan!&!Bernard,!2003).!Using! NVivo!ensures!there!will!be!little!researcher!bias,!this!is!because!NVivo!systematically! analyses!data.!! ! Table!4:!Codes!for!strategies!adopted!by!MNCs!to!repair!legitimacy!! Codes* Description* Denial! “Attempts!to!avoid!the!issue...!concealment!and! intransigence”!(Lamin!&!Zaheer,!2012,!p.53)! ! Defiance! “When!a!firm!challenges!the!assertion!that!it!needs!to! take!additional!action!and!forcefully!questions!its! portrayal!as!an!unsympathetic!or!“bad”!company”!! (Lamin!&!Zaheer,!2012,!p.51)! ! Substantive! Management! “Involves!real,!material!change!in!organizational!goals,! structures,!and!processes!or!socially!institutionalized! practices”!(Ashforth!&!Gibbs,!1990,!p.178)! ! Symbolic!Management!! “Rather!than!actually!change!its!ways,!the!organization! might!simply!portrayeor!symbolically!manage!them!so! as!to!appear!consistent!with!social!values!and! expectations”! (Ashforth!&!Gibbs,!1990,!p.180)! ! Decoupling! “Firm!implements!a!corrective!action!in!response!to! specific!allegations!by!distancing!itself!from!the!source! of!the!problem,!such!as!suspending!or!terminating!a! contract!with!a!specific!factory”!! (Lamin!&!Zaheer,!2012,!p.50)! ! Isomorphic!Adaptation! “Corporations!can!change!their!organizational!practices! and!adapt!to!societal!expectations”! (Scherer!et!al,!2013,!p.263)! ! ! After!the!data!has!been!coded,!a!database!is!created!of!all!the!coded!data!that!has!been! used!for!each!of!the!cases.!The!database!contains!all!the!coded!data!in!a!chronological!

order!in!order!to!assess!the!sequence!of!strategies!adopted!by!the!MNCs!and!to!assess! whether!any!patterns!emerge!from!the!coded!data.! ! 4.!Results! !! The!results!of!the!data!analysis!for!each!MNC!is!illustrated!chronologically!in!this! section,!the!chronological!order!makes!for!ease!of!comparison!between!the!sequences! of!strategies!adopted!by!the!three!MNCs’!at!repairing!legitimacy.!The!results!will!be! displayed!for!each!MNC!individually,!following!this,!there!will!be!a!cross!case!analysis! that!explores!the!similarities!and!differences!in!the!strategies!adopted!by!the!MNCs.! ! 4.1.!GSK! In!January!2013,!GSK!faced!accusations!of!bribery!in!China,!after!having! previously!stated!that!corruption!was!not!tolerated!in!the!MNC’s!work.!The!claims! suggested!that!GSK!had!been!bribing!hospitals!and!doctors!in!an!attempt!to!increase!the! MNC’s!pharmaceutical!drug!sales!in!China,!the!claims!brought!the!legitimacy!of!GSK!into! question.!Formal!investigations!by!the!Chinese!government!into!the!bribery!accusations! began!in!July!2013.!At!the!time!of!the!launching!of!the!investigation,!before!GSK!was! found!guilty!of!bribery,!the!MNC’s!initial!response!was!to!adopt!a!symbolic!management! strategy.!The!strategy!involved!GSK!suggesting!that!the!MNC!would!not!tolerate! corruption!and!would!thus!support!the!Chinese!government!in!its!investigations.!By! offering!support!to!the!government,!GSK!attempted!to!repair!legitimacy!in!the!eyes!of! the!Chinese!government!as!well!as!the!Chinese!general!public.!The!MNC,!at!this!point! had!not!admitted!to!any!involvement!in!bribery!and!therefore!it!was!not!known! whether!the!claims!were!true!or!not.!In!a!Chinese!newspaper,!GSK!stated:!

“GSK$will$fully$support$the$Chinese$Government’s$resolution$to$root$out$corruption$ and$will$actively$reform$GSK’s$original$business$and$operating$procedures$in$China”$ (GSK$pledges$to$reform,$2013).* $ In!August!2013,!early!into!the!investigation,!four!of!GSK’s!executives!in!China!were! arrested.!There!were!reporting’s!of!the!arrests!in!foreign!newspapers,!such!as!the!New! York!Times.!As!this!newspaper!did!not!originate!from!GSK’s!home!country!or!from! China,!it!was!it!evident!that!news!of!the!bribery!scandal!was!spreading!around!the! globe.! “The$police$in$Shanghai$have$arrested$a$British$investigator$who$specialized$in$ advising$foreign$investors$on$fraud,$cheating$and$other$business$risks$in$China”$ (China$Arrests$British$Adviser$Hired$by$GlaxoSmithKline,$2013)$ ! As!news!of!the!scandal!was!reaching!other!countries!this!was!damaging!to!the! legitimacy!of!GSK,!along!with!the!legitimacy!of!the!CEO.!In!order!to!repair!this! legitimacy,!the!CEO’s!response!on!August!31st,!2013,!was!to!deny!any!knowledge!of!the! illegitimate!activities.!The!use!of!a!denial!strategy!came!before!the!government!official’s! results!on!whether!the!bribery!claims!were!true;!therefore!the!public!were!still!unaware! of!the!outcome.!! “The$chief$executive$of$GlaxoSmithKline$has$insisted$the$British$drugs$group$had$no$ knowledge$of$the$alleged$bribery$scandal$which$engulfed$the$company$ in$China$before$the$police$arrested$four$of$its$senior$Chinese$executives”$(GSK$chief$ denies$knowledge$of$scandal,$2013).$ ! In!order!to!support!the!CEO’s!decision!to!deny!knowledge!of!the!scandal,!GSK! announced!that!they!had!held!an!internal!investigation,!the!results!of!which!were! negative!for!any!activities!related!to!bribery.!As!the!internal!investigation!results! showed!no!accounts!of!bribery!this!was!a!denial!strategy.!In!denying!the!accusations! even!following!internal!investigations,!GSK!aimed!to!prove!to!the!Chinese!public!and!

government!that!they!were!investigating!the!matter,!thus!showing!that!they!were!taking! the!accusations!seriously!in!an!attempt!to!repair!legitimacy.! $ “GSK$declaring$that$a$fourTmonth$internal$investigation$into$allegations$of$bribery$ and$corruption$in$China$found$‘no$evidence$of$corruption$or$bribery$in$ our$China$business”$(GSK$chief$denies$knowledge$of$scandal,$2013).$ !! In!September!2013,!some!results!from!the!formal!investigation!were!released!and!the! extent!of!GSK’s!involvement!in!bribery!was!beginning!to!come!to!light.!As!this!occurred! it!was!apparent!that!GSK!had!adopted!a!decoupling!strategy,!news!of!which!was!only! made!public!in!September!2013.!However,!the!decoupling!strategy!was!adopted!a! month!earlier!and!led!to!the!previously!mentioned!arrests!of!four!executives.!The! decoupling!strategy!involved!the!MNC!blaming!scapegoats!for!the!occurrence!of!the! legitimacy!scandal,!when!in!fact!it!was!not!the!fault!of!certain!individuals,!but!the!fault! of!the!MNC.!! “In$yet$another$shocking$revelation$made$by$the$Chinese$police$in$ the$GlaxoSmithKline$(GSK)$bribery$scandal,$news$reports$by$Xinhua$allege$that$the$ Chinese$arm$of$GlaxoSmithKline$(GSK)$coTordinated$the$$489$million$ bribery$scandal$rather$than$a$select$group$of$individuals”$(China$Police:$GSK$ orchestrated$bribery,$2013)$ ! The!use!of!scapegoats!was!an!attempt!to!separate!GSK!from!the!scandal,!yet!GSK’s!use!of! scapegoats!became!public!thus!causing!further!damage!to!the!MNCs!legitimacy.!The! actors!targeted!by!GSK’s!use!of!scapegoats!were!government!officials!investigating!the! claims;!the!decoupling!strategy!was!not!targeted!at!the!general!public!as!GSK’s!use!of! this!strategy!only!became!public!through!the!formal!investigation!and!not!through!GSK! publicizing!this.!!! $ “the$pharma$giant$had$tried$to$blame$the$individuals”$(China$Police:$GSK$ orchestrated$bribery,$2013)* !!!

The!conclusion!of!the!15emonth!investigation!found!GSK!to!be!guilty!of!bribery!in! September!2014.!When!the!investigation!ended!GSK!adopted!strategies!of!symbolic! management.!GSK!apologized!publically!through!statements!in!widely!circulated! newspapers!about!the!findings.!The!apologies!were!aimed!at!all!the!doctors!and! patients!involved,!as!well!as!the!Chinese!government!and!public.!The!strategic!action!of! apologizing!meant!that!GSK!had!to!admit!to!the!bribery,!and!symbolize!through!an! apology!that!the!MNC!understood!the!damage!they!had!caused!and!that!the!actions! were!illegitimate.!In!order!to!reach!out!to!those!affected!and!repair!the!damage,!GSK! issued!apologies.! “GSK$plc$sincerely$apologises$to$the$Chinese$patients,$doctors$and$hospitals,$and$to$ the$Chinese$Government$and$the$Chinese$people.$GSK$plc$deeply$regrets$the$damage$ caused”$(Matthew,$2014)$ $ $“GlaxoSmithKline$has$made$a$groveling$apology$to$"the$Chinese$government$and$ the$Chinese$people”$(Pratley,$2014)$ $$! GSK’s!2014!annual!report!displayed!use!of!many!legitimacyerepairing!strategies.!The! initial!strategy!used!in!the!annual!report!was!symbolic!management.!GSK!stated!that! steps!were!being!taken!to!rectify!the!challenge;!this!made!it!appear!as!though!the!MNC! was!going!to!change!its!ways! “We$have$taken$steps$to$comprehensively$rectify$the$issues$identified$at$GSKCI,$ including$changing$engagement$activities$with$healthcare$professionals$and$ expanding$our$review$and$monitoring$of$invoicing$and$payments”$(GSK,$2014)$ $ Following!this,!further!use!of!symbolic!management!was!identified!in!the!annual!report.!! By!agreeing!to!pay!large!fines!of!$490million!for!the!bribery,!GSK!symbolized!that!it!was! taking!full!responsibility!for!the!illegitimate!activities.!This!effort!manipulated!social! actors,!such!as!the!Chinese!public,!into!believing!that!the!MNC!was!legitimate.!This!is! because!paying!the!fines,!not!only!portrayed!GSK!in!a!more!positive!light,!but!could!also! be!considered!a!legitimate!action,!thus!helping!to!repair!the!MNC’s!legitimacy.!!

“We$validated$that$the$amounts$paid$in$the$final$settlement$of$this$liability$were$ consistent$with$the$ruling”$(GSK,$2014).$ !!! The!second!evident!strategy!of!legitimacy!reparation,!from!GSK’s!2014!annual!report,! was!substantive!management.!GSK!stated!the!action!that!had!already!been!taken!to! change!the!organization!following!the!verdict.!GSK’s!active!changes!targeted!legitimacy! reparation!for!the!government,!the!Chinese!public!and!all!stakeholders.!! “Many$actions$have$already$been$implemented$by$a$new$management$team,$ including$enhanced$procedures$for$monitoring$the$use$of$third$party$suppliers$and$ local$financial$transactions.$The$Committee$will$continue$to$monitor$progress$in$ the$related$investigations$closely$until$they$are$concluded.”$(GSK,$2014)$ $ “In$2014,$we$also$strengthened$our$internal$investigations$team$to$create$three$ regional$hubs$to$provide$a$consistent$approach$to$investigations$across$the$group,$ allowing$us$to$respond$more$quickly$and$consistently$to$emerging$issues.$We$have$ enhanced$our$approach$to$independent$business$monitoring$to$detect$abnormal$or$ inappropriate$financial$flows$better$within$Europe$and$Emerging$Markets”$(GSK,$ 2014)$ $ Another!example!of!substantive!management!that!was!displayed!in!the!annual!report! was!moral!reasoning.!GSK!stated!that!discussions!had!taken!place!between!the! Department!of!Justice!and!the!Serious!Fraud!Office,!in!order!to!assess!the!allegations! and!come!to!a!joint!understanding.!Moral!reasoning!opts!to!create!a!solution,!through! the!use!of!discussions!with!important!social!actors,!to!the!legitimacy!challenge.!! “We$discussed$the$status$of$investigations$opened$by$the$DoJ$and$SFO$with$the$ Audit$&$Risk$Committee,$the$Board$of$Directors,$management$and$inThouse$general$ counsel.$In$addition,$we$engaged$directly$with$the$Group’s$external$advisors$to$ corroborate$our$understanding”$(GSK,$2014).$ $ The!final!strategy!that!was!evident!from!the!Annual!Report!was!that!of!isomorphic! adaptation,!in!which!the!MNC!tried!to!adapt!organizational!practices!to!be!in!line!with! society’s!expectations.!GSK’s!implementation!of!new!governance!models!would!suggest! to!the!public!and!to!stakeholders!that!the!MNC!was!trying!to!adapt!to!meet!societies! values,!which!would!thus!contribute!to!the!reparation!of!legitimacy.!!!!!!

“In$China$we$have$implemented$a$new$Governance$model,$increased$dedicated$ Compliance$resources$and$put$in$place$additional$controls$and$monitoring$local$ ways$of$working$and$financial$transactions.”$(GSK,$2014)$ $ “We$continue$to$believe$that$with$robust$compliance$systems$and,$by$working$ closely$with$local$governments,$our$presence$in$these$markets$can$help$improve$ access$to$medicines$and$broader$healthcare”(GSK,$2014).$ $ 4.2!Nestlé! In!2004!standards!for!the!quality!of!consumer!foods!and!drinks!were!tightened! in!China!following!a!scandal!in!which!young!children!died!from!contaminated!powdered! milk.!Following!the!tightening!of!these!standards,!Nestlé!came!into!the!legitimacy!firing! line!in!March!2005!for!the!high!iodine!content!found!in!the!MNC’s!milk.!The!first! strategy!identified!in!Nestlé’s!attempt!to!repair!legitimacy!was!a!hybrid!between!denial! and!symbolic!management.!On!June!1st_{!2005!the!Xinhua!General!News!Service!} newspaper!published!statements!suggesting!Nestlé!had!misled!consumers!by!supplying! false!information!on!Nestlé!products.!This!strategy!could!be!seen!as!denial,!as!Nestlé! provided!false!information!suggesting!their!products!were!of!no!threat,!however!high! iodine!content!is!linked!to!health!problems.!This!strategy!did!not!assist!Nestlé’s!attempt! to!repair!legitimacy!as!it!was!reported!about!negatively!in!the!Chinese!newspaper.!! “Nestlé’s$failure$of$taking$action$is$suspected$of$providing$consumers$with$false$ information,$who$could$ask$for$compensation$for$buying$the$milk$powder”$(Nestle$ China$defends$infant$milk$powder,$2005).$ $ Succeeding!the!failure!of!this!attempt!to!repair!Nestlé’s!legitimacy,!Nestlé!continued!to! use!a!symbolic!management!and!denial!strategy.!Nestlé!apologized!publically!for!their! products!being!below!the!expected!Chinese!standards,!however!the!apology!was! followed!by!denial!of!the!illegitimate!action!being!a!health!threat.!This!was!a!strategy! that!opted!to!make!it!appear!to!the!public!that!Nestlé!was!innocent!of!causing!harm!

through!the!illegitimate!actions.!Nestlé!apologized!in!June!2005;!a!week!after!the!MNC! had!provided!misleading!information!to!consumers.!! “Nestle$AG,$the$world’s$biggest$food$and$drink$company,$has$apologized$for$ violating$government$limits$on$iodine$content$in$infant$formula$sold$in$China,$ although$it$denied$posing$a$health$risk”$(Excess$Iodine$Found$in$Nestle$Powder,$ 2014).$ $ “Nestle$apologized$to$Chinese$consumers$for$high$iodine$levels$found$in$the$powder$ last$Monday”$(Nestle$replacing$milk$powder$products$in$China,$June$2005).$ ! ! The!failure!of!the!MNC’s!symbolic!management!strategies!to!repair!legitimacy!required! Nestlé!to!adopt!another!strategy.!The!next!strategy!adopted!by!Nestlé!was!substantive! management,!in!which!Nestlé!made!an!attempt!to!rectify!the!problem!by!replacing!the! products!found!to!contain!high!levels!of!iodine.!This!strategy!portrayed!to!the!public! that!Nestlé!was!trying!to!make!amends!for!its!illegitimate!actions.!Nestlé!took!3!months! from!the!first!accusations!in!March!to!offer!refunds!and!to!replace!the!products.!The! offering!occurred!months!after!the!initial!claims!of!illegitimate!activities,!but!it!aimed!to! target!all!those!that!were!affected!by!the!excess!iodine!in!milk!Nestlé!sold!in!China.!The! removal!of!the!product!from!sale!and!the!offering!of!refunds!portrayed!that!Nestlé!was! actively!making!a!change!to!rectify!the!problem.!! “Swiss$food$and$drinks$group$Nestle$is$currently$replacing$or$offering$refunds$for$its$ Chinese$brand$Jin$Pai$Growing$3TMilkPowder,$which$was$found$to$contain$levels$of$ iodine$surpassing$Chinese$standards”$(Nestle$replacing$milk$powder$products$in$ China,$2005)$ ! In!2008!Nestlé!again!faced!another!legitimacy!scandal!regarding!high!levels!of! melamine!in!its!milk.!This!suggested!that!Nestlé’s!previous!substantive!strategy!of! removing!tainted!products!from!sale!in!China!was!in!fact!a!symbolic!management! strategy.!The!MNC!made!it!appear!as!though!it!was!making!an!active!change,!however! Nestlé!did!not!maintain!the!changes!for!very!long!and!the!MNC!found!itself!involved!in!