Effects of Formal and Informal Institutional Differences on Foreign Firms' Legitimacy in the U.S.

Institutional theory emphasizes legitimacy as the key productive resource of firms, but the antecedents and consequences of legitimacy remain underexplored. This study explores the distinct roles of formal and informal institutional differences on the local legitimacy of foreign firms, and examines the performance effects of different types of legitimacy in a local market environment. The results suggest subtle effects on three key local legitimacy dimensions: while media endorsement of foreign firms is influenced by both formal and informal institutional differences, legal actions against these firms are particularly influenced by informal institutional differences, and their credit ratings by formal institutional differences. Such legitimacy consequences are important because they affect subsequent performance expectations when firms make large acquisitions in the local market.