The Notion of Legitimacy and Its Acquisition in a Cognitive Business Environment

By Kyj, Myroslaw J. | Journal of International Business Research, July 1, 2011 | Go to article overview

The Notion of Legitimacy and Its Acquisition in a Cognitive Business Environment


Kyj, Myroslaw J., Journal of International Business Research


ABSTRACT

Multinational firms must continually work to maintain their legitimacy within their host environments. This is a particularly difficult task in environments where the rule-of-law was absent or very tenuous such as in regions of the former USSR. This paper reviews the legitimacy and relationship literature and relates it to the cognitive environment faced by Cargill's entry into the Ukrainian agricultural market. The factors contributing to Cargill's success in entering business networks within the agricultural sector are presented against the backdrop of existing theory concerning the nature of business relationships. A matrix is proposed for understanding the relationships that are likely to emerge under different environmental conditions found in Ukraine's emerging market.

INTRODUCTION

On January 25, 2006 Andreas Rickmers, President of Cargill Ukraine, wrote to Franklin Lavin, the Under Secretary for International Trade of the U.S. Department of Commerce, in support of Ukraine's request to be granted "market economy" status for the purposes of U.S. anti-dumping legislation. Market economy status was critical for Ukraine's struggling economy since with respect to trade with the U.S. it promised two important results. It would remove the Soviet era Jackson- Vanik amendment restricting trade with the USSR that carried over to its successor states and allow greater access of Ukrainian steel to U.S. markets. Added bonuses of market economy status included improved trade prospects with the EU and a smoother path for WTO membership that Ukraine eventually achieved in 2009. With so much at stake, a favorable recommendation from a major American company was highly prized.

Cargill had been active in Ukraine since 1991, the year the USSR collapsed and Ukraine declared independence, with the establishment of a joint venture with a Ukrainian agricultural research institute in the city of Dnipropetrovsk. Despite the large size and variety of Cargill's global footprint, its Ukrainian venture started out modestly with the objective of developing grain hybrids and varieties suitably adjusted to Ukrainian climate conditions. Cargill's representative in Ukraine, working from an unobtrusive upper story office in the capital city, Kiev, initially assessed the business climate and investment opportunities. The low profile kept the company from attracting the immediate attention of avaricious bureaucrats and organized crime clans masquerading as business enterprises. At this time, Ukraine and the rest of the former constituent republics of the defunct Soviet Union were generically referred to in the western press as "the wild, wild East". The business landscape was uncertain as large state enterprises passed into private ownership in mysterious "privatization" processes. Business in the consumer segment was characterized by numerous petty merchants operating from outside stands hawking clothing from Turkey or used automobiles from Germany.

In a period of fifteen years, Cargill had not only succeeded in establishing itself in the Ukrainian market but had secured an enviable degree of legitimacy where its recommendations were sought by high levels of government and it was largely free of capricious conduct by local entities. The letter to Secretary Lavin noted that among the critical concerns for Cargill in Ukraine was the prompt refunding of value added tax (VAT) on agricultural commodities. The standard practice in Ukraine had been to delay VAT refunds so that foreign companies typically had to hire local lawyers to secure their refunds. The lawyer fees typically ran 25% - 30%; a ruinous amount in low margin markets such as Cargill' s grain trading especially if months passed with the VAT remaining frozen. Of course the lawyers, judges and bureaucrats were all in cahoots and made a living within a system of contradictory laws and regulations. This paper will trace the history of Cargill' s venture in Ukraine and specifically address how it acquired a high degree of legitimacy, a factor that allowed it to thrive, despite an opaque legal environment and the capricious rulings of the national courts. …

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