Wei, Song and Xie (2020) showed, in a survey of 238 Chinese firms, that management innovation raises firm performance through two mediating channels — organisational efficiency (the rational perspective) and business legitimacy (the fashion perspective) — with the efficiency channel stronger, and CEO shareholding shifting the balance between them. The paper explicitly leaves open three linked issues: whether management innovation also promotes political legitimacy, the government's generalized perception of a firm that confers institutional benefits such as protection and access to crucial resources, and through what mechanism; whether the reported relationships survive designs that can settle temporal direction and dynamic development (the evidence is cross-sectional); and whether they hold under objective rather than purely perceptual indicators. No study has yet tested the management-innovation-to-political-legitimacy channel, and no longitudinal or objective-measurement validation of the efficiency and legitimacy channels exists, so the question remains open.

Background

Management innovation is the invention and implementation of management practices, processes, structures, or techniques that are new to the organisation (Birkinshaw, Hamel and Mol, 2008) — for example a new incentive system, a redesigned organisational structure, or an ERP (enterprise resource planning) system — as distinct from technological or product innovation. Two rival perspectives explain why such innovations might affect firm performance. The rational perspective treats them as substantive responses to performance gaps: adopting firms repair misfit organisational routines and raise operating efficiency. The fashion perspective (Abrahamson, 1996) treats them as symbolic acts: firms adopt fashionable management practices to signal conformity with prevailing management norms and thereby gain legitimacy. In institutional theory, legitimacy is a generalized perception that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions (Suchman, 1995); a legitimate firm finds it easier to win resources and survive.

Wei, Song and Xie (2020) tested both channels simultaneously on cross-sectional survey data from 238 Chinese firms collected in 2013 (Chinese firms are primarily adopters rather than inventors of advanced management practices, making China a natural setting for the rational-versus-fashion question). Management innovation was measured with a 13-item manager-reported scale; organisational efficiency and business legitimacy — stakeholder acceptance and positive evaluations by business constituencies such as customers and suppliers — with 4-item scales; firm performance with a 7-item self-reported scale comparing the firm to its competitors. Stepwise-regression mediation analyses (the standard Baron–Kenny procedure of sequentially testing whether an intermediate variable carries a predictor's effect to an outcome) showed that management innovation positively affects both organisational efficiency and business legitimacy, and both in turn positively affect firm performance, with the efficiency channel stronger (regression coefficient 0.34 versus 0.18 on performance). CEO shareholding — the fraction of firm equity held by the chief executive, which aligns the CEO's interests with owners' — strengthened the effect of management innovation on efficiency but weakened its effect on business legitimacy, consistent with owner-managers having less need for symbolic legitimacy building.

The paper closes by identifying what this account cannot yet establish. First, its legitimacy evidence concerns business legitimacy only. The authors distinguish business legitimacy from political legitimacy: political legitimacy is the government's generalized perception of the firm and can provide institutional benefits such as protection and access to crucial resources, whereas business legitimacy is judged by business constituencies with different criteria and priorities. Whether management innovation also promotes political legitimacy — and through what mechanism — is untested. Second, because the data are a single cross-sectional survey, the estimates cannot settle causal direction (for example, efficient or legitimate firms may adopt more management innovation) or the dynamic development of the relationships; longitudinal evidence is called for. Third, all core constructs are measured by perceptual survey indicators, which may be discrepant from reality, so the conclusions await verification with objective indicators.

Problem Statement

The problem, as posed by Wei, Song and Xie (2020) in the discussion of their findings, is to complete the account of how management innovation matters for firm outcomes in an emerging-economy institutional environment, along two linked components:

  1. The unexplored political-legitimacy channel. Management innovation was shown to promote business legitimacy — acceptance and positive evaluation by business constituencies — but its effect on political legitimacy, the government's generalized perception of the firm, which can provide institutional benefits such as protection and access to crucial resources and is judged by criteria and priorities distinct from those of business constituencies, remains unexplored. Establish whether management innovation promotes political legitimacy, and identify the mechanism through which such an effect operates (or provide evidence that no such effect exists).

  2. Validation of the established channels under designs the original study could not use. The original estimates rest on a single cross-sectional survey of 238 Chinese firms with manager-reported perceptual measures for all core constructs. Determine whether the management-innovation-to-efficiency and management-innovation-to-business-legitimacy relationships and their links to firm performance, including the CEO-shareholding contingencies, all hold together under designs that permit causal interpretation of temporal direction and dynamic development and under objective rather than solely perceptual indicators of the constructs.

The two components serve one scientific objective — a complete, causally credible account of the efficiency-versus-legitimacy workings of management innovation.

References

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