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Firms, particularly new ventures, face great challenges from uncertainty surrounding, availability of resources, technological feasibility, market needs, institutional legitimacy, and adoption of innovations (Aldrich & Fiol, 1994; Carroll & Hannan, 2004). Information technology firms, particularly those focusing on E-business, are facing more challenges in the era of Internet of Things (IoT) (Li, 2013; Li & Zhou, 2013; Li, Xu, & Zhao, 2015, 2018; Oliverio, 2018; Viriyasitavat & Martin, 2017; Wang, Chaudhry, & Li, 2016; Xu & Duan, 2018; Xu, He, & Li, 2014; Xu, 2011, 2016; Xu, Liang, & Gao, 2008; Xu, Xu, & Li, 2018). Existing literatures have attribute these challenges to many factors, such as adapting to new products, technologies or services, access to needed resources, capital or markets, immature institutional environments and the lack of legitimacy (Aldrich & Fiol, 1994; Stinchcombe, 1965). Specifically, Stinchcombe and March (1965) point out the liability of newness that firms have to overcome at their initial stage. As firms grow, they face new challenges, including the anomalies, miscues, imitation failures, and innovations. External shocks threaten the legitimacy of firms, even the most secure ones especially if such misfortunes either arrive in rapid succession or are left unaddressed for a significant period of time (Suchman, 1995).
Among many resources, legitimacy is the one that a firm must to acquire for survival (Zimmerman, 2002). According to Scott (1995), legitimacy is “a condition reflecting cultural alignment, normative support, or consonance with relevant rules or laws” (p. 45). It is asocial judgment of acceptance, appropriateness, and/or desirability (DiMaggio & Powell, 1991). Scott (1995) categorizes legitimacy into cognitive legitimacy, normative legitimacy and regulative legitimacy. Legitimacy is vital for firms to survive and develop. Proper strategy can help firms acquire and enhance their legitimacy. Furthermore, the proper legitimacy will help firms improve their performance.
According to Van de Ven and Poole (1995), firms evolve through a predetermined sequence of stages, named the life cycle model. The stages in a life cycle are viewed as representing a linear progression, while each stage exhibits different integral complementarities among variables such as strategy, structure, and decision-making methods (Miller & Friesen, 1984). The transformation from one stage to another of firm frequently results from upheaval, such as a crisis of leadership during the start-up period (Van de Ven & Poole, 1995). Although most firms seek several types of legitimacy simultaneously, different legitimation strategies are needed at each stage (Suchman, 1995). Therefore, firms should implement proper legalization strategy and obtain the proper legitimacy at each stage.
Legitimacy has been identified as a critical issue for new ventures and mature firms (Aldrich & Fiol, 1994; Hunt & Aldrich, 1996), but previous studies of legitimacy for firms mainly focus on one stage in their life cycle. Accordingly, this paper applies the theory of cooperate life cycle to explore what the proper legitimacy that firms should obtain to increase their performance at their development stages. We develop a research model and run an empirical test on 496 IT firms. The results show that cognitive legitimacy, normative legitimacy, and regulative legitimacy play different roles across the life cycle of firms. We also find that proper strategy at the three stages in firms’ life cycle can help them acquire and enhance the appropriate legitimacy. Furthermore, the proper legitimacy will help firms improve their performance. The findings are proved by a case study on 58.com, a leading classifieds information provider in China. This paper makes contributions to management literature by extending the theory of legitimacy for firms and providing guidelines for firms to obtain the proper legitimacy at each stage of their life cycle.