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The Fruits of Legitimacy

In: Business and Management

Submitted By babu1
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The Fruits of Legitimacy:Why Some New Ventures Gain More from Innovation Than Others
New Ventures play a vital role in the development of any company.In addition,the actions of new ventures may even spur large, incumbent firms into action, thus accelerating the pace of technological change.The new ventures success depend upon their ability to produce new products.Sometimes even amongst the ventures producing the same good they have different fates.One of the difficulties faced by the new ventures is the liability of being new to the business. Potential stakeholders view firms in these industries with skepticism. An important way that new ventures can overcome the liability of newness and increase their gains from new products is by taking actions that provide them with legitimacy in the eyes of stakeholders. new ventures can gain legitimacy by creating associations with more established entities, either external or internal to the firm.

Article Review:
This article is written by Raghunath Singh Rao, Rajesh K. Chandy, & Jaideep C. Prabhu.In this study, the role of a variety of legitimizing actions have been highlighted and empirically tested. In order to legitimize the new ventures in the eyes of the stakeholders different actions can to undertaken.It has also been shown that these legitimizing actions may not always work together. Among internal means of gaining legitimacy, four types of actions has been proposed: historical, scientific, market, and locational.
Actions associated with historical legitimacy convey to stakeholders information about the new ventures’ past business performance.It can be shown if the new ventures have successfully launched other products in the past.Actions associated with scientific legitimacy convey to stakeholders that the new ventures in question have the technological capabilities needed to operate in their industry successfully.This can be achieved by recruiting scientists on their board. Actions associated with market legitimacy convey to stakeholders that the new ventures in question have the market-based capabilities needed to operate in their industry effectively New ventures may achieve this type of legitimacy by, for example, placing on their boards executives who have experience in more established industries. Actions associated with locational legitimacy convey to stakeholders that the new ventures in question derive differential advantage as a result of their geographic location.
In contrast to the several ways new ventures may gain internal legitimacy, one major way they can gain external legitimacy is, through their association with successful and established external entities.This might seem like an easy way but it has downsides too. Because the new venture is likely to be smaller than the alliance partner and thus have less bargaining power, a larger share of the gains from product introduction may go to the partner.
Here based on these theories several hypothesis were set on the article.
For this testing the U.S.biotechnology industry was used because it matched all the needed criteria such as it is an emerging industry with (1) multiple comparable product introductions by multiple new ventures, (2) accurate details on these product introductions, and (3) adequate variation in the sources of internal and external legitimacy.


From the research it was found that everything else being equal, new ventures that acquire external legitimacy by forming alliances with established firms in related industries gained 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 internal legitimacy by creating a history of successful product introduction or by hiring reputed scientists and managers gain more from their new products than those that do not. Finally, although new ventures can gain from either external or internal legitimacy, we find that pursuit of external legitimacy by firms that already have internal legitimacy leads to lower rewards to innovation.
A key implication of the study for managers of new ventures is that if new ventures do not have internal legitimacy, they should form alliances. Conversely, if they have internal legitimacy, they should bring their products to market themselves.It is also suggested that new ventures in emerging industries also need to position themselves to gain more from their new products.

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