The fruits of legitimacy: why some new ventures gain more from innovation than others

Chandy, R, Rao, R and Prabhu, J C (2008) The fruits of legitimacy: why some new ventures gain more from innovation than others. Journal of Marketing, 72 (4). pp. 58-75. ISSN 0022-2429

Abstract

This article examines rewards to product introduction by new ventures. The authors argue that the new ventures that gain the most from innovation are those that adopt strategies that give them legitimacy in the eyes of stakeholders. New ventures can gain legitimacy by creating associations with established entities; such associations can be internal or external to the firm. The authors test these ideas by examining the stock market gains of all products introduced between 1982 and 2002 by all public firms in the U.S. biotechnology industry. The results show that new ventures that acquire legitimacy externally by forming alliances with established firms gain 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 legitimacy internally by creating a history of product launches or by hiring reputed executives or scientists gain more from their new products than those that do not. In relative terms, it pays more to have introduced a new drug before than to have a reputed executive on the firm's board; in turn, adding a reputed executive pays more than adding a reputed scientist to the firm's board. Finally, although new ventures can gain from either external or internal legitimacy, pursuit of external legitimacy by firms that already have internal legitimacy leads to lower rewards to innovation.