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THE EMERGENCE OF THE BROADBAND INTERNET ACCESS MARKET: THE IMPACT OF COGNITIVE AND SOCIOPOLITICAL LEGITIMACY ON MARKET ENTRY AND DENSITY by PATRICK L. SCHULTZ, B.S.M.E., M.S. A DISSERTATION IN BUSINESS ADMINISTRATION Submitted to the Graduate Faculty of Texas Tech University in Partial Fulfillment of the Requirements for the Degree of DOCTOR OF PHILOSOPHY

Copynght © 2002 by Patrick L. Schultz

ACKNOWLEDGEMENTS

While this dissertation lists only one author, any work of research of this size is inevitably the outcome of a process that includes intense collaboration with a few key individuals, valuable interaction and feedback with many others less directly tied to the research but still critical to the result, and ongoing support and encouragement from a wide array of people who had an important impact on the completion of the project. Without the assistance of this community in which I found myself, this dissertation could not have been accomplished. In recognition of their contributions, I wish to express my gratitude to these people who gave so much in the interest of my success. A number of individuals deserve to be recognized for their assistance directly in my graduate studies and dissertation proposal research. First and foremost, I wish to thank the members of my dissertation proposal committee—Kimberly Boal (chair), James Hoffman, Dara Szyliowicz, and Ronald Bremer—for their guidance and insight during this project. Their support and encouragement has been essential to the progress I have made over the last few months. In particular, I wish to recognize the impact that Kim Boal has had, as a dissertation committee chair and academic advisor, in my development as a student and researcher. He has consistently been supportive and enthusiastic about my interests in the field, and his wisdom and insight about the world have always been an inspiration. His influence has been immeasurable, both on my work on this dissertation and in many other areas both personal and professional, and I owe him a tremendous debt. I consider it a privilege to call him a colleague and a friend.

Furthermore, I wish to recognize the contribution made by Howard Aldrich, who generously devoted his attention to my ideas for this dissertation at a crucial, initial point in the process. His ideas significantly aided my progress on the proposal, and his suggestions and support gave me the confidence to submit it to the INFORMSOrganization Science Dissertation Proposal Competition where it was among the finalists. I also wish to recognize the assistance given by Marvin Washington, who provided critically important feedback on the proposal and the final dissertation. The generosity of those outside my formal committee in providing comments and advice has been inspiring and very much appreciated, and has made this a much better project as a consequence. While less directly associated with my dissertation research, other members of the faculty at Texas Tech University have also provided assistance to me during my time as a graduate student. Two in particular I wish to note for the special roles they played during my time as a doctoral student. Jerry Hunt has been a tremendous influence and a valuable guide for a naive doctoral student; he helped show me how a former engineer could find his way in a new world of research and academia. Alex Stewart, now at Marquette University, provided much of my guidance early on as a doctoral student; his personal support during that time was greatly appreciated and helped sustain me during many trying times. These professors and many others devoted more time to me out of their busy schedules then they needed to, and I am forever thankftil to them for the knowledge and the wisdom they have imparted to me.

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I am also indebted to a number of my fellow doctoral students who shared their personal lives with me along the way to completing their doctoral programs. I am especially thankful for following Terry Rock as a student; his interest in me and his encouragement helped ease my socialization into a strange new world. Among those who went through with me, Mark Hoelscher, Kevin Kennedy, John Davis, and Phil Stetz have had the greatest impact on me and I consider them all close friends. Of all the doctoral students I have known, my highest regard goes to George Dodge. He stood out as the best among us all, and he was my first true mentor as a doctoral student. My deepest thanks go to my friends and family in Texas, and elsewhere, who helped shape me as a person, and who provided the most encompassing love and support to me over the years. I would like to acknowledge the assistance of Norma Eltringham, who over the years has treated me less as a family friend and more like one of her own children. I would also like to thank my grandfather Kenneth Hung, whose influence on me from a very young age lead me to see learning and scholarship as important in life. In addition, my parents, Pam and Larry Schultz, also encouraged me to pursue my interests and dreams—while also reminding me of the ultimate purpose of my studies—and continued to assist me throughout the process. However, my greatest thanks goes to the two people closest to me in my life—my wife Rody, who continued to act as my most faithful and enthusiastic supporter even when it seemed like the project would never be complete, and our daughter Madison, who provided the most important motivation of all.

IV

TABLE OF CONTENTS

ACKNOWLEDGEMENTS

ii

ABSTRACT

ix

LIST OF TABLES

xi

LIST OF FIGURES

xii

CHAPTER I.

INTRODUCTION

1

II.

REVIEW OF THE LITERATURE

10

Tradidonal Views of Legitimacy

10

The Cognitive and Sociopolitical Legitimacy of Emergent Industries

12

Cognitive Legitimacy

12

Sociopolitical Legitimacy

15

Cognitive or Sociopolitical Legitimacy, or Both?

18

Further Developing the Legitimacy Concept

20

Cormecting Legitimacy with Action, Change, and the Creation of New Ventures

20

Schemas are designs for action, not the action itself

25

Resources can have multiple meanings

26

Schemas are transposable

26

Multiple, intersecting structural influences

27

Unpredictability of resource accumulation

27

Operafionalizing the Legitimation Concept

28

Hypotheses

31

Density-Dependent Legitimacy and Competition Effects on Market Entry Rates

31

Cognitive and Sociopolitical Legitimacy and Market Entry Rates

34

The influence of cognitive legitimacy on market entry rates

35

The influence of sociopolitical legitimacy from industry evaluations on market entry rates

37

The influence of sociopolitical legitimacy from regulatory sources on market entry rates

39

Combining Density-Dependent and Cognitive and Sociopolitical Legitimacy Effects on Market Entry Rates

III.

41

Note

43

RESEARCH METHODS

46

Background of the Study

46

Data Sources and the Measurement of Variables

50

Density-Based Measures of the Population—Market Entry, Legitimacy, and Competition

50

Media-Based Measures of Legitimacy

54

Data sources for media-based measures of legifimacy

54

Measuring cognitive legifimacy

57

Measuring sociopolitical legitimacy

58

Reliability of content analysis measures

60

Control Variables

62

Model Specification and Stafisfical Tools

VI

63

IV.

Notes

68

DATA ANALYSIS AND RESULTS

75

Testing Hypothesis 1—The Density-Dependent Model of Entry Rates

75

Testing Hypotheses 2 and 3—Cognitive and Sociopolitical Legitimacy and Entry Rates

76

Combining the Effects of Cognitive and Sociopolitical Legifimacy in a Model of Market Entry Rates

78

Tesfing Hypotheses 4 and 5—Combining Density With Cognitive and Sociopolifical Legitimacy in a Model of Market Entry Rates

79

Combining the Effects of Cognitive and Sociopolitical Legifimacy

V.

With Density in a Model of Market Entry Rates

81

Control Variable Models

82

Notes

83

DISCUSSION AND CONCLUSION

87

Implications for Theory and Practice in Management and Organization Science Applying the Density-Dependence Model in Emergent Populafions Cognifive and Sociopolitical Legitimacy Processes In Emergent Populations

87 88 89

Multiple measures of legitimacy, and direct and indirect influences on entry rates

89

Legifimacy and information exchange

93

Legitimacy and entrepreneurship

96

Methodological Implications

98

Limitafions and Direcfions for Future Research

99

Conclusion

102 vu

BIBLIOGRAPHY

104

APPENDIX

116

Vlll

ABSTRACT

Building on the literature in the fields of population ecology and institufional theory, this dissertation attempts to extend our understanding of how legifimacy contributes to the creation of new organizational populafions. Aldrich and Fiol (1994) observed that a fundamental problem facing innovators and entrepreneurs in nascent industries is the lack of legitimacy of new technologies, firm strategies, and organizafional forms which could be used to obtained needed resources and support. Population ecologists have observed that both legitimacy and compefition, operationalized as first and second order forms of the population density, affect the pattern of organizational foundings. Since the measurement of legitimacy and competition depends on the presence of a population's density, existing research has focused on established organizational populations rather than emergent ones. Less attention has been directed to examining the processes related to the creation of a fiiture new organizational populafion, even before the first organization is founded (e.g., development and testing of new technologies, prospecting for investors, lobbying of government regulators, etc.). This study combines a traditional populafion ecology approach (the use of population density as a representafion of legitimacy) with a content analysis approach which examines both cognitive and sociopolitical dimensions of legitimacy using news media-based measures. Both the density-dependent measures of legitimacy and competition as well as media-based measures of cognitive and sociopolifical legitimacy were combined in a model of market entry in the broadband

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Internet access provider industry in Texas from 1993 to early 2000. Despite the fast pace of development of the Internet as a valuable information, entertainment, and commercial resource, the methods used to provide access to it confinue to develop and evolve; their legitimacy continues to develop as consumers, incumbent and start-up telecommunications companies, investors, and regulators learn about, use, and promote new technologies. The study found significant support for both the density-dependent measures of legitimacy and competition as well as the media-based measures of cognitive and sociopolifical legitimacy, demonstrating the complex nature of the influence of legitimacy on foundings as well as its role in the emergence of new organizafional populations.

LIST OF TABLES

1. Summary of Models and Hypotheses

44

•)

Summary of Variables

70

3.

Negative Binomial Regression Coefficients for the Relationship Between Market Entry Rate and Independent Variables: Broadband Access Providers in Six Largest Cities in Texas, January 1993 to April 2000

84

4.

Summary of Hypothesis Tests

85

5.

Likelihood Rafio Tests and Model AICs Comparing Selected Statisfical Models

86

XI

LIST OF FIGURES

1. Legitimacy-Competition Model of Density Dependence 2.

3.

4.

5.

45

Market Density, Entries, and Exits Across Six Largest Cities in Texas, By Month

71

General Media Coverage of the Industry Contributing to Cognitive Legifimacy, By Month

72

Media Coverage of Industry Evaluations Contributing to Sociopolitical Legifimacy, By Month

73

Media Coverage of Governmental and Regulatory Influence Contribufing to Sociopolitical Legifimacy, By Month

74

6.

Market Density, Entries, and Exits in Ausfin, By Month

117

7.

Market Density, Entries, and Exits in Dallas, By Month

118

8.

Market Density, Entries, and Exits in El Paso, By Month

119

9.

Market Density, Entries, and Exits in Fort Worth, By Month

120

10. Market Density, Entries, and Exits in Houston, By Month

121

11. Market Density, Entries, and Exits in San Antonio, By Month

122

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CHAPTER I INTRODUCTION

The highly dynamic, technologically-driven competifive environment confronting organizations today requires greater interest in and a research focus on the subject of industry creation and entrepreneurship. The rise of the personal computer industry in the late 1970s and early 1980s was a significant landmark in the history of commerce, and the subsequent emergence of related technologies involving the Internet has fueled waves of new forms of business centered on telecommunications and information systems. Along with this, financial markets and governmental regulators have struggled in evaluating these newly emerging industries. Aldrich and Fiol (1994) observed that a fundamental problem facing innovators and entrepreneurs in nascent industries is the lack of legitimacy of new technologies, firm strategies, and organizational forms which could be used to obtained needed resources and support. In order to fully understand how new populations of organizations emerge, a clearer understanding of how the institutional environment influences entrepreneurial activity in the earliest periods of industry formation must be achieved. The purpose of this study is to set out a number of explanations for how different dimensions of legitimacy influence the dynamics of activity in new organizational populations and to propose ways in which these concepts can be measured and the relafionships between them tested, in a way which advances established research in insfitutional theory and organizational ecology.

As many organization theorists have observed, the concept of legitimacy plays a central role in explanations of stable organizational behavior. Legitimacy is found in explanations involving the constraints provided by perceptions of feasibility and acceptability, desirability, and appropriateness of organizafional forms and strategies. The impact of legitimacy has been described as coming from the "taken-for-granted" character of an organizafional form (Berger and Luckman, 1967; Zucker, 1977; Meyer and Rowan, 1977), the value or worth of the form to organizational members and the community (Selznick, 1949, 1957; Zald and Denton, 1963), and the approval and sanction of other social entifies (DiMaggio and Powell, 1983; Rowan, 1982; Stinchecombe, 1968: 150-151) or formal regulation and law (North, 1990; Scott, 1995: 35-37; Weber, 1978). Institutional theory and organizational ecology have substantially benefited from the understanding and use of legitimacy. For instance, ecologists utilize legitimacy to explain the pattern of organizafional founding and failure rates over time (Hannan, 1991; Hannan and Carroll, 1992; Hannan and Freeman, 1987; Hannan and Freeman, 1988). This tradition in organization theory has inspired a large stream of research, and produced a number of valuable insights and findings. On the other hand, legitimacy has also been of primary concern to insfitufional theorists as well. As Scott (1995: 45-47) pointed out, instimtional theory identifies legifimacy by the degree to which organizations conform to regulatory or legal pressures, a shared sense of value or expectation, or socially constructed categories of meaning. Like organizational ecology, insfitufional theorists have produced a considerable amount of research in these areas, although individual

researchers tend to focus on one of the areas described rather than on integrafing different perspectives. Both institutional theorists and population ecologists share an interest in how the social environment of organizations affects the character or composition of organizational groups (i.e., industries, populations, or fields). Despite this shared interest in the legitimacy concept, both institutional theory and organizafional ecology differ in their views of the legitimacy concept and how that concept appears in empirical research. The result has been a schism between the two theorefical traditions on a concept that each field shares (Carroll and Hannan, 1989a, 1989b; Zucker, 1989; Hannan, Carroll, Dundon, and Torres, 1995; Baum and Powell, 1995; Hannan and Carroll, 1995). Much of the concern centers on accurately portraying the complexity of the legifimacy concept, and the difficulty in measuring it and its influence on population processes. From the ongoing debate and commentary in the literature, a number of observations can be made about how they approach legitimacy. First, the true complexity of the legitimacy concept has not been fully explored, particularly its multidimensional character. This has been particularly problematic in the organizational ecology literature, where the density of an organizafional form (the number of instances of a particular organizational form in existence at a certain fime) is used as an indicator of the legitimacy of that form. In most studies, legifimacy refers simply to "taken-for-grantedness." Baum and Powell (1995) noted that legifimacy is a multidimensional concept, and many factors beyond density can contribute to legifimacy. Delacroix and Rao (1994) claimed that density itself is subject to a number of

independent factors, each with their own dynamics and effects on the organizational population. Second, each field of research has observed that the other has missed a critical step in analyzing the impact of legifimacy: each has not effectively operationalized the legifimation concept despite its importance. For instance, while population ecology and institutional theory make substanfial contributions to the understanding of organizations, the exchange between Carroll and Hannan (1989a, 1989b) and Zucker (1989) resulted in a realization that research in both fields typically do not direcfiy measure legitimacy and instead rely on inferences drawn from other more readily observable phenomena (Schneiberg and Clemens, forthcoming). For ecologists, more direct measurement of the legifimacy concept is avoided because of a belief in its ftindamentally unobservable character (Carroll and Hannan, 1989b) and the assumpfion that it is controlled by easily observed measures of organizational density (Hannan, 1989, 1991). For insfitutionalists, legitimacy of organizational practices are explained by the effects of macro-level actors or events on the adoption of activities at lower levels of analysis. Finally, the concept of legitimacy lacks a strong connection to action and change. This occurs because of the highly abstract nature of the elements involved and the emphasis on explaining stability, conformity, and order (Hybels, 1995; Sewell, 1992). However, the emergence of legitimacy is critical to the emergence of new organizational forms or strategies, and it is crifical in understanding the problems associated with entrepreneurial behavior and strategic acfion (Aldrich, 1999; Aldrich and Fiol, 1994). The generafion of legifimacy is a crucial aspect of the social environment in which

entrepreneurial activity must take place, and innovators take an active role in changing existing industry structures and formulating new organizational practices. The creation of new technologies, organizations, and industries is fundamentally rooted in entrepreneurship and strategic choice; a greater understanding about the legifimafion process would highlight how it creates stability in organizational populations while also making entrepreneurial activity possible as well. This study contributes to this debate in a number of ways. Initially, different dimensions of legitimacy identified in the literature will be discussed. Building on the framework initially presented in Aldrich and Fiol (1994) and fiarther developed in Aldrich (1999), the legitimacy concept will be discussed in terms of its cognifive and sociopolitical properties. The problems entrepreneurs and managers face in building legitimacy within the context of an emergent industry will be highlighted. Potenfial ways of operationalizing those attributes of legitimacy will also be identified, and theoreticallybased jusfifications for those measures will be offered. By separating legitimacy into component dimensions, each can be independently assessed for its effect on organizational populations. Finally, these new measures of legitimacy will be included in an ecological model of new market entry in the emerging broadband Internet access market. Ultimately, the paper's contribufion is in further unbundling the legifimation concept in organizational activities, uncovering the dynamics of each of its underlying processes, and showing that legitimacy not only fosters stability in social activities but also creates the opportunity for change and the rise of new organizafional populations.

The broadband Internet access industry provides an appropriate arena to conduct research and build understanding in this area. The Internet access industry is a relatively new industry compared to ones typically studied in organizational research. The Internet has only become a widespread, public phenomenon since 1993 when software was created that facilitated access to it for non-technical users. Once that event occurred, an industry concerned with providing network infrastructure and customer access to the Intemet began to emerge. Despite the fast pace of development of the Intemet as a valuable information, entertainment, and commercial resource, the methods used to provide access to it continue to develop and evolve; their legitimacy continues to develop as different groups learn about, use, and promote different technologies. Thus, the Intemet access market provides a useful context in which to study the process of legitimation and its influence on macro-level organizational phenomena. The Intemet access market is divided into a number of different segments, making the entire industry difficult to characterize simply. Over the short history of public use of the Intemet and the World Wide Web, a variety of ways to connect to public informafion networks have been devised. Intemet backbone providers, or nafional service providers, serve as points of connecfion between different networks and provide high speed access to the Intemet to other companies that operate networks at smaller, regional levels. The type of Intemet service most people are familiar with is provided by companies called Intemet service providers, or ISPs. ISPs essentially operate at the retail level of the market, providing Intemet access services to end-users typically in the form of dial-up

modem access through personal computers. As of the fall of 2000, there were over forty backbone providers and over seven thousand ISPs operafing in the United States (Boardwatch Magazine, 2000). In addition to dial-up Intemet access, other forms of connecting to the Intemet have become increasing popular. Since dial-up access requires the use of personal computers, the difficulties associated with setting up and configuring computing systems makes connecting to the Intemet a sometimes daunting task. Both businesses and consumers face challenges in Intemet access in this form; large businesses frequently maintain large and expensive information systems functions to manage these systems, while many consumers are left on their own to manage their connection. A product/service combination that has arisen to address the difficulties involved in PCmediated Intemet access consists of dedicated Intemet PCs, electronic devices that funcfion only to provide Intemet service without the general purpose capabilities of computers. These devices are known by various names, including network computers, net PCs, and intemet appliances. Larry Ellison of Oracle Corporafion introduced the concept and first prototype of a simple and easy to use, network-capable electronic device in Febmary of 1996 (Moschovitis, 1999). Another form of access designed to simplify Intemet connections as well as fiirther integrate Intemet use into everyday consumer life is interactive television, which uses cable or telephone connections to allow Intemet access through tradifional television sets. Video game consoles also allow for easy Intemet access without the complication and expense of traditional personal computers as ;11 as providing Intemet-based entertainment to users. As of 2000, all new video game wel

systems have some provision for network connectivity and Intemet browsing. Going into the future, other increasingly popular methods of accessing information on the Intemet using devices such as cellular phones, and personal digital assistants are being established. Finally, other forms of access are based primarily on the ability to provide higher speed coimections to information on the Intemet. Like dial-up access, such products and services provide connections through personal computers, but they do so at many times the speeds traditionally available. These types of connections are increasingly popular because of the greater sense of interactivity that results, increases in productivity provided, and the range of future applications that will become viable as a result of the higher rates at which data can be delivered to the end user. Because of these higher data transfer speeds, these forms of Intemet access are called broadband connections. Broadband connections are available in a variety of forms, frequently idenfified by such terms as cable modem access and DSL (short for digital subscriber lines), which are the most developed and prevalent technologies. No one form of broadband Internet access is clearly dominant over the others, and none of them match the market share held by traditional dial-up services. This study will focus on the emergence of legitimacy for broadband Intemet service since the inception of the industry in 1993 to eariy 2000 and its effects on the level of entrepreneurial activity as seen in rates of market entry. In the chapters that follow, these ideas and the plan for the study are described in detail. The sections which follow include: (a) a review of tradifional views of legitimacy, including the distinction between sociopolifical/normative and cognitive perspectives on

legitimacy, including the development of hypotheses proposing how these dimensions of the legitimacy concept can extend the tradifional ecological model of founding, (b) a description on how the legifimacy concept can be operationalized using content analytic measures and then used in empirical organizafion research, and (c) a report of the significant statistical results found and a discussion of the implications of the study.

CHAPTER II REVIEW OF THE LITERATURE

In this section, different views of legitimacy that have appeared in the sociological and organizational theory literatures will be presented, along with apparent weaknesses that have been identified. Further discussion will highlight how legitimacy can be more clearly understood and directly observed, along with applicafions in understanding the legitimacy of new organizational forms and firm strategies. This section will conclude by showing how this new understanding of legitimacy can be applied in understanding the emergence of new organizational populations.

Traditional Views of Legifimacy Established views in organization theory recognize the relationship between the legitimacy of organizational forms and strategies and the behaviors of firms in an organizational population. The behaviors that appear to be influenced by legitimacy include domains of organizational activity, operating processes, and the outputs of organizational pursuits (Dowling and Pfeffer, 1975). The problem of achieving and maintaining legitimacy for many organizations affects the emergence of new firms, firm failures, and organizational change. In particular, the relationship between legifimacy and firm behaviors has received attention from two dominant theoretical traditions in organization theory, institutional theory and population ecology, where the basic

argument is that legitimacy affects firm foundings, failures, and change through perceptions of feasibility and acceptability, desirability, and appropriateness. The impact of legitimacy has been described as coming from a basic recognition and acceptance of an organizational form or behavior (Berger and Luckmann, 1966; Zucker, 1977; Meyer and Rowan, 1983), the perceived value of the form to organizafional members and the community (Selznick, 1949, 1957; Zald and Denton, 1963), and the approval and sancfion of other social enfifies (Meyer and Scott, 1983; DiMaggio and Powell, 1983). The first form of legifimacy achieves its authority by its unquestioned character in the minds of individuals, and thus has its roots in the processes of social cognition and knowledge representation. Legitimate organizational forms confront managers and entrepreneurs as an objective fact or mle in guiding appropriate behaviors. The latter two examples of legitimacy depend largely on the influence of shared values in creating and sustaining organizafional behavior. In these cases, organizafional actors contend with a moral dimension of legitimate organizafional forms, making them appear as appropriate when measured against the values held by entities in the social environment. These two sets of examples demonstrate that the legitimation process consists of different dimensions, each of which act together to influence the creation of new firms, the adoption of new technologies, and the direction of change in existing operations; these two dimensions are labeled here as cognitive and sociopolitical legitimacy.

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The Cognifive and Sociopolifical Legifimacy of Emergent Industries In past syntheses of the legitimacy literature from Aldrich and Fiol, problems in establishing legitimacy were identified as critical issues facing entrepreneurs in both the establishment of new ventures as well as in the creation of new industries (Aldrich and Fiol, 1994; Aldrich, 1999). Entrepreneurs establishing new firms in untested markets face a number of problems in their start-up phase; these problems can be collectively characterized as a lack of both cognifive and sociopolifical forms of legifimacy: Among the many problems facing innovating entrepreneurs, their relative lack of legitimacy is especially crifical, as both entrepreneurs and cmcial stakeholders may not fully understand the nature of the new ventures, and their conformity to established institutional mles may sfill be in quesfion. We capture these problems by using the term legitimacy in two related senses: (a) how taken for granted a new form is and (b) the extent to which a new form conforms to recognized principles or accepted mles or standards. (Aldrich and Fiol, 1994: 645-646) In framing the problem facing entrepreneurs in emergent industries, its cognitive, normative, and political aspects are highlighted, and the importance of entrepreneurs and managers as active participants in the process of establishing legitimate status for both the firm and the industry is described.

Cognitive Legitimacy The need for cognitive legitimacy on the part of new ventures centers on the problem of ignorance and uncertainty regarding their existence and the novelty of their form. Aldrich offered the following definifion of cognitive legifimacy: Cognitive legitimacy refers to the acceptance of a new kind of venture as a taken for granted katuTQ of the environment. The highest form of cognitive legitimacy exists when a new product, process, or service is

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accepted as part of the sociocultural and organizational landscape. (1999:

Cognitive legitimacy deals with how people make sense of and understand the workings of their worid; it is a relatively passive characteristic describing the acceptance of social behavior due to its necessity or inevitability (Suchman, 1995: 582). The generafion of that knowledge, and its perpetuation, occurs through the interactions of individuals together over time. The construction of order and stmcUire in society depends on shared understanding and meaning drawn from the repetition of action and interacfion among individual actors (Berger and Luckmann, 1966). Zucker noted that conformity and stmcture is attained "because otherwise his actions and those of others in the system cannot be understood" (1991: 83). The characterisfic of taken-for-grantedness that describes the existence of cognifive legifimacy produces a condifion in which the emergence of legitimated behaviors effectively makes others almost impossible because they are unthinkable (Suchman, 1995: 583). Cognifive legitimacy is thus both a powerful quality to possess and a difficult obstacle to overcome, since it rests on models which define reality and the extent in which some phenomena are even plausible to individuals. In a social world that is complex and uncertain, routinized pattems of behavior, and consequently the legitimacy those pattems take on among social actors, are based on a history and a body of shared knowledge that makes the workings of the worid understandable and predictable. A new organization faces a difficult battle for survival because customers, suppliers, investors, and even potential employees do not have even a basic understanding of the reason for the firm's existence, its technological operafions and reliability, and its potential for value creafion in the marketplace. In fact, the lack of a

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reputation or consistency with more easily understood and routine business forms calls into question the survivability of the firm and generates a level of mistrust (Aldrich and Fiol, 1994: 650). In a sense, entrepreneurship must contend with perceptions of illegitimacy, because new venture activities may lack meaning within existing collective explanations of the environment, producing uncertainty and skepticism in the minds of stakeholders. These difficulties are compounded in situations in which new firms are involved in technological routines and competencies that are also new and untested. These organizational behaviors are unique to the extent that they do not exist in other organizations to a significant degree, and thus require new knowledge for their development and use (Aldrich, 1999: 228-229; Anderson and Tushman, 1990). Routinization of behavioral pattems is the first sign of the institutionalization of social behavior; over time those pattems become an objective feature of the environment of the individuals involved and take on an unquestionable, inevitable character (Zucker, 1977; Tolbert and Zucker, 1996). Social knowledge is systematically organized in the form of mental models called cognitive schemas (Fiske and Taylor, 1991); schemas can stmcture different types of social knowledge (for instance, schemas may exist defining individual roles or the appropriate sequence of events in a process). Organization-specific schemas arise as individuals come to a common understanding regarding behavior pattems while interacfing within the organizafional context (Jelinek and Litterer, 1994; Klimoski and Mohammed, 1994). Those behavior pattems are cognitively legifimate in that they fit into the actors' established mental models of the operafion of the social worid; actions outside

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of those mental models lack legitimacy in that they have no fit in the exisfing models and are thus incomprehensible. Entrepreneurs have to create organizafional schemas that demonstrate that the firm corresponds to shared conceptions of proper organizational fianctioning, making the firm comprehensible in the minds of both potenfial organization members as well as extemal entities. Indeed, the image Aldrich created is that entrepreneurs in the beginning stages of population formation are involved in a competition for the ultimate legitimate organizational form: "Early on, founders within a population implicitly compete to have their approach taken for granted, appealing to potential customers, investors, and others to accept their versions" (1999: 235). Entrepreneurs are thus engaged in a competitive stmggle for valuable resources as well as the collective process of establishing and perpetuafing the legitimacy of their business strategies, technologies, and the industry as a whole.

Sociopolitical Legifimacv New firms in new populations must also establish ties to entifies in the environment which go beyond shared representations of organizational form. Such requirements call for sociopolitical as well as cognifive legitimacy: Sociopolitical legitimacy is the acceptance by key stakeholders, the general public, opinion leaders, and government officials of a new venture as appropriate and right. Sociopolitical legifimacy has two components: the moral value of an acfivity within cultural norms, and acceptance of an activity by political and regulatory authorities. (Aldrich, 1999: 247)

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In this formulation of the legitimacy constmct, the claim is that systems of values characterisfic of the social system, arising out of the interaction between social actors, govem the behavior of individuals and organizations within it. This has clearly been a major focus of past research, and reflects the concems about interest and agency in legitimation phenomena (Scott, 1987), both in how social actors are constrained by the institutional environment or how they constrain others in pursuing their own goals. In one definition of the concept. Parsons (1960) stated that legitimation is primarily concerned with the approval or judgement of acfion in light of socially defined values; legitimafion effectively joins systems of social values with systems of social action. In organizafions, responding to extemal demands rooted in a social value system results in a change process in which achieving legitimafion means taking on value and becoming firmly embedded in the system itself (Selznick, 1949, 1957; Zald and Denton, 1963). Berger and Luckmann (1966: 92-93) noted that the funcfion of legitimafion is to integrate objecfivated social knowledge into meaningful forms (like shared concepfions of organizafional activity and their social value) such that they explain and jusfify the exisfing social order. Sociopolifical legitimacy depends on a posifive evaluafion of an organization or its activifies, and an organization gains legifimacy when it makes a contribufion to stakeholders based on criteria rooted in the system of values an beliefs operating in the environment. Those positive judgments can center on a number of factors involving the organizafions. Organizations are evaluated on the social and economics ment of their domain of acfivity, the consequences of their actions, as well as the methods and

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procedures used in producing those outcomes (Dowling and Pfeffer, 1975; Suchman, 1995). For instance, organizational activities are legitimate to the extent that they produce results that are consistent with socially constmcted notions of worthiness (e.g., high economic or ethical value), and by the degree to which the processes used are considered useful (e.g., scientific or rational). Therefore, it is incumbent upon entrepreneurs and managers in new ventures to demonstrate that the firm contains organizational systems that are consistent with basic principles of organizational functioning (thus showing that the firm has the level of managerial control over operations expected from a properly functioning organization) while also showing that the novelty of the firm produces a competitive advantage arising from new and untapped opportunities for growth in an emergent market or from the application of a technological breakthrough in its products, services, or operations (thus demonstrating that the untested aspect of the organization is actually an outcome of reasonable and acceptable pracfices directed at valued outcomes). The need for sociopolitical legitimacy highlights the importance of the normative and regulative influences arising out of the social environment and the network of relationships in which organizations are embedded. In responding to a complex and uncertain environment and recognizing the necessity for drawing on the resources of critical constituencies, organizations behave in ways that gain approval and recognifion from important insfitutional actors (Meyer and Rowan, 1977; Rowan, 1982; DiMaggio and Powell, 1983; Scott and Meyer, 1983). Entrepreneurs must seek out the support of parties such as the customers and suppliers with which they must directly deal with, technologists and financial evaluators who influence public opinion, and govemmental

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regulators who represent a variety of interests at work in society. Legifimation involves recognition and approval not only from superordinate and peer-level sources but from subordinates as well (Weber, 1947/1922), and can be applied to the state as well as any form of organizational system: "In addition every such system attempts to establish and to cultivate the belief in its 'legifimacy' " (Weber, 1947/1922: 325).

Cognifive or Sociopolifical Legifimacv. or Both? While the discussion thus far has addressed cognitive and sociopolifical legitimacy separately, it is cmcial to recognize that both must be examined together in order to gain a clear picture of the legitimation process. Berger contrasted normative and cognitive perspectives like this: "They do not only tell people what ought to be. Often they merely propose what is" (1969: 29). Similarly, Jepperson noted that the quality of "taken-for-grantedness" is separate from sociopolitical evaluation: "one may subject a pattem to positive, negative, or no evaluation, and in each case (differently) take it for granted" (1991: 147). Meyer and Rowan stated that established mles goveming social behavior may derive from the endorsement of public opinion or law, but may also simply be taken for granted (1977). Organizational ecologists also make a clear disfinction between cognifive and sociopolifical aspects of legifimacy (Haiman and Freeman, 1988: 28; Hannan et al., 1995: 511), although they have been crificized on how they measure and empirically test them (Baum and Powell, 1995; Zucker, 1989). While legifimation processes in social systems have both sociopolifical and cognitive elements, each produces an image of legitimacy that is distincfive but also tied

to the other. This comprehensive view of legitimacy is evident in the following definition offered by Suchman: "Legitimacy is a generalized perception or assumption that the acfions of an entity are desirable, proper, or appropriate within some socially constmcted system of norms, values, beliefs, and definifions" (1995: 574). It reflects a basis in individual-level perceptions or beliefs, but is also rooted in collecfively-based notions of justification, explanation, or desirability of the legifimated phenomena, creafing guides and/or constraints on social behavior. The achievement of legitimate status in society confers the qualifies of meaning, persistence, and stability in social relafionships, and both the active and passive support of societal members, all of which feature cognitive and sociopolitical components. The sociopolitical dimension of legitimacy arises out of an active and posifive support or acknowledgement of organizational acfivity, with desirability, values, and interests as the criteria for evaluation; the cognitive dimension is more of a basic or passive form of understanding of organizational acfivity, grounded in characteristics such as feasibility, necessity, or inevitability. While new ventures may need the support of powerful actors in order to ensure survival, normative approval by these entifies may be blocked by a lack of understanding of the new form regarding their instmmental and social value. Although the sociopolifical legitimacy of new ventures is essenfial for survival, Aldrich notes problems surrounding cognitive legitimacy may be more significant for entrepreneurs forming new and untested ventures. He hints that perhaps cognitive legitimacy problems occur prior to sociopolitical legitimacy problems, because without first establishing a consistently shared knowledge of the enterprise's form and activities the firm will have difficulty

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gaining and maintaining support of key stakeholders (1999: 231). In this, Aldrich echoed Berger and Luckmann's statement that knowledge precedes values in legitimation (1966: 94).

Further Developing the Legitimacy Concept Legitimacy is a widely used theoretical concept, as demonstrated by its utility in both institutional and organizational ecology research. However, despite its utility and the convergence around recognition of both its cognitive and normative aspects, many critics have identified shortcomings in its use. This section will identify suggestions on how those shortcomings can be effectively dealt with.

Connecting Legitimacy with Action, Change, and the Creafion of New Ventures Many researchers have noted that work on legitimacy and legifimafion, as on most topics generally focusing on the production and reproduction of stmcture in society, makes only a poor connection with action and change. The abstract character of the legitimacy concept—its image as a superordinate, controlling force affecting the behaviors of actors—disconnects itfi-omthe actions and interests of the individuals that serve to create it in the first place (DiMaggio, 1988: 9-10; Hybels, 1994: 18). The concept depicts a state essential for the attainment of social order, rather than a process in which instittitional stmctures emerge and are sustained or discarded. Since legitimacy is frequently evidenced by stability of forms or behaviors, it is closely connected to the notion of stmcture; here too it finds little connection with action because the language

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itself—the use of words such as "stmcture" and "organization"—works against it. Theorizing how order is established in organizational fields gives the impression that action and agency lack causal influence and makes a focus on change difficult (Sewell, 1992: 2). This arises from its emphasis on explaining the consistency and persistence of social pattems; consequently, the imagery created is one of constraint on action. Theorizing of this type is particularly problematic when trying to explain entrepreneurial phenomena. Aldrich and Fiol observed that entrepreneurial behavior may seem "foolish" because of the difficulties facing those who create novel forms and technologies (1994), but this is only tme when such behavior is interpreted from a theoretical perspective that overemphasizes stmcture and stability. DiMaggio noted that institutional theory research has produced a significant body of research recognizing that organizational phenomena can frequently be explained as the outcome of a process in which interests are unknown to individuals or that individuals are unable to act in their interests (1988). For instance, in sittiations where the taken-forgrantedness character of organizational activifies is so extreme that alternatives never arise (Zucker, 1977), or where stmcttires and the interests underiying them are stable over fime and exist in strong instittitional but weak technical environments (Meyer, Scott, and Deal, 1983), explanafions that downplay interest and agency are sufficient. However, DiMaggio went on to argue that without more attention to the influence of agency in change, researchers would be limited in their ability to explain the emergence of new organizational forms and pracfices (1988: 11).

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What is required is an acceptance of a paradox between action and order in social systems (Bosworth and Kreps, 1986); in doing this, organizations can be viewed both as systems of action, moving toward some different futtire state but affected by the past, and as systems of order, stmctures which influence current behaviors but which are always in a state of reconstmction. For instance, Fombmn (1988) argued that organizational ecology research can benefit by recognizing that organizations can aggressively engage in activities designed to facilitate learning and innovation or competitive imitation, highlighting managerial initiafive and strategic change, while Van de Ven and Gamd (1994) showed that organizations can also operate in an environment that places limits on those activities through historically determined, path-dependent processes. In contrast to an impression of only conformity and limitations on acfion, an alternative image is created where existing stmcture is often enabling as well and constraining (Wittington, 1992). Managers of organizations frequently attempt to manipulate and control legitimation processes in order to gain cognitive and sociopolifical support. In doing so, they may engage in a number of strategies involving both substantive and symbolic means of influence (Aldrich and Fiol, 1994; Ashforth and Gibbs, 1990; DiMaggio, 1988; Pfeffer, 1981; Suchman, 1995). The use of advertising, recmiting or co-opting third party organizafions for collective action, the development of standards bodies and industry trade associations, the development of reputation and positive impressions through management of information are all concrete examples of how management can influence the legitimation process. Entrepreneurs and those using new technologies or

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organizational practices face an even greater challenge since their novelty results in fewer existing bases of support. Even with this challenge, the social context in which legitimacy arises and is constmcted provides an opportunity for enterprising organizations and entrepreneurs: "Social contexts, from this perspecfive, represent not only pattems of established meaning, but also sites within which renegotiations of meaning take place" (Aldrich and Fiol, 1994: 649). Social context constrains activity by providing definitions and directions for acfion in existing areas of organizational activity, but that context is dynamic and ever-changing, enabling activity by creating a means in which interests and agency are developed. Through their own activities and the process of social constmcfion, innovators can offer new knowledge and meaning associated with organizational activity that may develop into changes in legitimacy. The social context provides an arena in which shared meanings are negotiated over time, thus allowing the emergence of new forms of organization and firm strategies and the legitimafion of new organizational populafions. The most widely known theoretical conttibution addressing the problem of agency and stmcttire is the stmcttiration theory of Giddens (1979, 1984), where he noted that it is important to recognize the "duality" of both the action of the individual agent as well as the stmcttiral constraints on that action. Stmcttire is the collection of mles and resources that individuals have at their disposal; through their own actions, guided by those resources and mles, individuals reproduce that stmcttire over time and space. Those mles and resources provide a guide for current individual behavior, making individuals knowledgeable agents in reproducing social stmcttire. But that knowledgeable character

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also allows individuals to change and modify those guides. This logic avoids the deterministic flavor Giddens found in much social science theorizing and which he wished to avoid (1984: 227). This duality of social stmcttire was further developed and clarified by Sewell (1992), where the nature of mles and resources are disfinguished by separating them into material and virtual components of social stmcture. The virtual aspect of stmcture is manifest in the concept of schemas or mles, which are identified as generalized procedures used in social life and which constitute the cognifive underpinnings of social action. Resources are the material aspects of stmcture, and serve as a source of power in social interacfions. The degree in which resources have power and value depends almost enfirely on the schemas involved in their use. Sewell described it like this: If resources are effects of schemas, it is also tme that schemas are effects of resources. If schemas are to be sustained or reproduced over time—and without sustained reproduction they could hardly be counted as stmcttaral—they must be validated by the accumulation of resources that their enactment engenders. (1992: 13) The material and virtual components of stmcttire are thus characterized by: (1) resources that are the product of the schemas associated with them, and (2) schemas that become substantiated by the production of resources. By further explaining the composition of stmcttire, Sewell provided a way in which agency can play a role in change. What needs to be recognized is that individuals are both agents for acfion and change as well as for stasis and order; stmcttire plays a paradoxical role in both interpretations (Bosworth and Kreps, 1986). Existing organizafional stmcttires often present enabling as well as constraining influences on

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roufines and practices (Whittington, 1992: 707). In recognizing this, social stmctures can be viewed simultaneously as systems of action as well as of order. Giddens noted that agents are at some level knowledgeable about the schemas that inform their actions. This knowledge regarding schemas and their use allows individuals a certain level of freedom in the actions they ultimate choose to perform. Hybels (1994, 1995) observed that this contrasts with the phenomenological tradition and the focus on cognitive legitimacy, in that the "taken-for-grantedness" of a pracfice is not so absolute in terms of perpetuating that practice over time. Thus, the present form of social stmcture combined with individuals engaged in social interaction automatically creates a situation in which the transformation of existing social stmctures becomes possible. Change can occur even in the presence of legitimate social practices, as an endogenous outcome of the process of creafing and recreating stmcture; the following sections, drawing substantially from the insights provided by Sewell (1992: 16-19) and Whittington (1992), describe five principles that show how such change can occur. Schemas are designs for action, not the acfion itself Schemas are cognitive stmcttires defining procedures for behaviors in social interacfions. They are designs or templates for action rather than the action itself, and exist as ideas or concepts. However, these schemas can never fully specify the acttial behaviors required in real social interaction, and thus are always only partially descripfive of acttial practice (Namenwirth and Weber, 1987: 8, 18). This lack of complete specificity in providing meaning and direction in social action provides a way in which individual descretion can influence organizational routine and practice.

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Resources can have multiple meanings. As stated earlier, resources draw their value and influence from the schemas used to give them meaning. However, the distinction drawn between resources and schemas means that the meaning of resources is never completely unambiguous (Sewell, 1992: 19), since different people could employ different schemas in assessing the value and power of a particular resource. The importation of new employees into organizations produces a situation in which divergent and conflicting meanings can be present within an organization. This is particularly tme when the organization or the industry is new, where new members are unlikely to have very similar views of the situation. Organizafion managers can exert their control over social stmctures by manipulating and exploiting multiple meanings given to resources to promote the legitimacy of their own acfions (Whittington, 1992: 706). Sewell (1992) noted that the problem of different interpretations of resources is indicative of the influence of agency in changing social stmctures. Schemas are transposable. Schemas were described eariier as generalizable procedures used in producing social action. As generalizable concepts, schemas can be used in a wide range of contexts; they are thus tt-ansposable between numerous social sittiafions and find uses beyond their inifial purposes (Sewell, 1992: 17). Fligstein noted that the emergent stmcture of new markets often are borrowed from existing but related markets (1996: 665); part of what is transferred to emergent markets is a shared understanding regarding effective social relations and strategic actions (659-660). In times where appropriate firm strategies or organizational forms do not exist, such as in newly forming organizafional populations, analogous schemas are imported from

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established populations to aid in making sense of an uncertain and ambiguous sittiation (Leblebici, Salancik, Copay, and King, 1991: 340). Multiple, intersecting stmcttaral influences. Organizafion members are faced with a variety of sttiicttaral influences on their behavior, some of which may be conflicting or without an obvious criterion for selecting one over another. Sewell noted that capitalist social stmctures draw on both a substtiicttare of private ownership and profit and one of labor organization (1992: 19), both of which have differences in the operating schemas and resources being used. Whittington noted that managers and workers, as whole individuals and not simply as organization members, operate out of a number of sociallybased stmctures, such as community, economic, and political among others (1992: 705). Organizations themselves may operate across the boundaries of different social stmctures. Thus, organization members have a number of different influences on their actions, but can also draw upon different social influences to justify novel organizafional activities. Unpredictability of resource accumulafion. As Sewell pointed out, the fact that schemas can be transposed from other social arenas or extended beyond their original purposes means that their capacity for resource accumulafion is never certain (1992: 18). This is particulariy problematic in emergent organizational populations, where a crifical problem is the lack of proof regarding the viability of new organizafional stmctures, strategies, and technologies (Aldrich and Fiol, 1994). Since the reproducfion of schemas depends on the level of resources they create, it is apparent that some schemas will be

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differenfially selected over others based on their success in that process or less successful schemas will be modified.

Operationalizing the Legitimation Concept Beyond the problem of connecting legitimacy to action and change, another crifical issue in research on legitimacy is the problem of properly operationalizing the concept and observing it and its effects on organizational forms and behaviors. This difficulty arises both from the logic often used in describing legitimafion and the problem of actually directly observing legitimacy phenomenon: A key problem with the dual concepts of legitimacy and institution lies in the fact that both are evident from the stability of pattems of social relation, yet each is said to foster stability. (Hybels, 1995: 242) In order to avoid problems in adequately specifying legitimacy while maintaining its theoretical usefulness, it must be recognized as cmcial to the stability of organizational forms and behaviors but at the same time remain separate from them. The nofions of cognitive and normative legitimacy described earlier are part of an effort toward this end; legitimacy is conceived as the recognition or evaluation of social behavior, whether cognitive or normafive in nature, while institutions are the objects of that evaluation. Hybels noted that both population ecologists and instittitional theorists have not extensively attempted to operationalize the legitimation constmct (1994: 1); this is quite a surprising observation since legitimacy is a key concept in both research traditions (Hannan and Carroll, 1992; Suchman, 1995). This sittiafion is the cause of much tension between the two fields. In particular, institutional theorists claim that ecologists do not

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measure legitimacy or competition; they simply use different formulations of density to represent both, without empirical support for its relafionship to either constmct (Zucker, 1989).' Baum and Powell have suggested that it is not necessary to measure legifimacy directly, only that legitimacy be measured differently than density (1995: 530). Indeed, cognitive and normative aspects of legitimacy may have different dynamics, and each of those may influence density differently. However, the ecologists responded by observing that institutional theorists also frequently do not measure legitimacy directly. As Carroll and Hannan (1989b) claimed, there is no well-established method for measuring legitimacy in either population ecology or insfitutional theory. They noted that more direct measures of legitimacy may be significantly more difficult to implement and may suffer from validity and reliability problems, but more importantly may lack the historical scope needed for assessing effects on organizational forms and behaviors. Baum and Powell call attenfion to content analysis as one established method which achieves the need for an historical scope and a means for measuring legitimacy separately from density (1995: 530-531). They note that detailed media coverage exists on a wide range of industries, and cite a number of references where content analysis has been used to sttidy the context of social acfion. Indeed, Hybels (1994) has shown the effecfiveness of operationalizing legitimacy through the media-based content analyfic measures in looking at founding rates in the biotechnology field. Content analyfic measures of legitimacy are valid when one notes that the stmcttire and coordinafion of social action, provided by the presence of legitimacy, occurs despite the limitations of space and time (Giddens, 1979: 203-204, 1984: 182-185). Modem communicafion media

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makes this sort of integration possible; rather than face-to-face interaction, all that

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needed for the establishment of cognitive and sociopolitical legitimacy is the ability to ttansmit communication content across space and to store that content over time. The content of texts can be read for the underlying schemas that produced them; they are manifestations of the prevaling shared schemas held those that produced them (Sewell, 1992). As Sewell pointed out, texts are resources in that they are produced by schemas but are also used to reproduce and perpettiate those schemas. Terreberry (1968) claimed that legitimacy is infimately tied to informational exchange regarding resources; information exchange within an industry is frequently composed of knowledge about favorable organizational activities, resulfing in a greater willingness to transfer resources. Press coverage in the media serves as the arena in which this information exchange occurs, introducing and perpetuating schemas that inform organizations of the legifimacy of various activities (e.g., organization form and strategic behaviors). Hybels noted that the media plays a critical role in the legitimation of businesses and other organizafions "by defining and evaluating grounds for the actions of enttepreneurs, managers, regulators, and investors" (1994: 59). The media's reporting of and influence on the activities of investors is particularly strong evidence for media-based legitimacy measures, since financial and investment news content is a strong influence on the evaluation of organizational pracfices and resource allocation decisions.

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Hypotheses The hypotheses proposed in this sttady essentially form three basic models of legitimacy-competition effects on population phenomena, and build on the theoretical tradition in population ecology and institutional theory regarding the concept of legitimacy. The first hypothesis establishes an ecological model of market entry rates based on the insights provided by the density-dependent model of legitimacy and competition dynamics in organizational populafions (Hannan and Carroll, 1992). Taking a cue from past research extending the legifimacy concept, the second group of hypotheses (hypotheses 2 and 3) attempts to identify the underlying cognifive and sociopolitical components of legitimacy by testing the relationship between cognifive and sociopolitical legifimacy, measured using non-density-based variables, and entry rates. Finally, the third model presents a cognitive and sociopolitical legitimacy model of market entry incorporating both multiple measures of legifimacy and population density variables into a more comprehensive model of population entry and founding processes.

Density-Dependent Legitimacy and Competition Effects on Market Entry Rates One of population ecology's major contributions to the understanding of organizations is the pnnciple of density dependence. Ecological research has built substantial support for the relationship between organizational founding rates and the density of organizations in the environment. The model that has received the most attention is the density dependence formulation of competition and legitimacy effects on population founding and failure initially developed by Hannan, Freeman, and Carroll

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(Hannan and Freeman, 1987 and 1988; Carroll and Hannan, 1989a; Hannan and Carroll, 1992). In this model, both legitimacy and compefition are operationalized as forms of organizational density, where both processes determine the pattems of founding in the population. Initial increases in the number of firms in an emergent populafion are seen as contt-ibuting to the legitimacy of a new organizational form. Increasing levels of organizafional density are a sign to potenfial entrepreneurs that opportunities exist and that resources are flowing to new firms; thus, as density increases the rate of founding initially increases along with it. At higher levels of organizafional density, the number of firms in the population begins to compete for increasingly scarce resources. High levels of organizational density signal to potential entrepreneurs that opportunifies are being competed away by the large number of firms already in the environment. As the density of firms increases, competition over the available resources in the environment causes the rate of founding to decrease. The outcome of both legitimation and competifion processes in an organizational population is an inverted U-shaped relationship between the rate of founding or introducfion and population density. This relationship is depicted graphically in Figure 1. Support for this relafionship between founding and density has been reported in many organizational populations, including labor unions (Hannan and Freeman, 1987), newspapers (Carroll and Hannan, 1989a; Delacroix and Carroll, 1983), breweries (Carroll and Swaminathan, 1991; Carroll and Wade, 1991; Carroll, Preisendoerfer, Swaminathan, and Weidenmayer, 1993), New York life insurance companies (Budros, 1994), Toronto day care centers (Baum and Oliver, 1992; Baum and Singh, 1994), national automobile

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industt-ies (Hannan et al., 1995), and trade associafions (Aldrich, Zimmer, Staber, and Beggs, 1994). The density dependence model inifially proposed for foundings and failures in organizational populations has applications in understanding other analogous phenomena in organizations. The effect of organizafional density on a variety of factors in organizations or organizational populations has been reported by researchers. Hybels (1994) looked at the effect of firm density on the rate of legitimafion observed in press coverage of the biotechnology field. Singh and his colleagues examined the effects of extemal legitimacy and organizafional density on the rates of a number of forms of organizafional change (Singh, Tucker, and Meinhard, 1991). While each of these sttidies used rate measures based on phenomena other than organizational founding, the density measures used were based on the total number of organizations operating in the population. Institutional theorists have extended both the types of changes observed as well as the form of density operating within an organizational populafion. Fligstein (1991) studied the antecedents of change in diversification strategies among firms; the percentage of firms employing particular strategies (essenfially a form of density) was used as an independent variable. Palmer and his colleagues examined the adoption of multidivisional stmctures as a fianction of economic, polifical, and institutional variables; among the institutional variables was a measure of the prevalence of the muhidivisional form among firms in the sample group (Palmer, Jennings, and Zhou, 1993). The analogy between the density dependent processes described by organizational ecologists and other phenomena is taken to its furthest extent in the work by Haveman

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looking at diversification and market entry (Haveman, 1993). She proposed that the dynamics of legitimation and compefition described by population ecology also apply to change in existing organizations, such as firm entry into new product markets: Extt-apolating from the original model of the founding process to the situation of diversification into new markets, the number of organizations operating in any market (market density) should affect both the perceived legitimacy of that market and the level of compefition in that market. (Haveman, 1993: 594) The analogy with the traditional dynamics of founding and failure is effective on two counts. First, the expansion into new domains through diversification and market entry is concepttaally similar to the entrepreneurial activity of founding. Second, new entrants to a market both contribute to the legitimacy of the market and to compefifion within that market. The key is that market entry introduces a new element to a population (market density, rather than organizational density) that contributes to the dynamics of legitimacy and compefition, regardless of whether it is the result of a new organizational founding or the diversification of an existing firm. Hypothesis 1: The market entry rate has an inverted U-shaped relationship with the market's population density. Hypothesis la: The legitimacy of a population positively affects the rate of market entry. Hypothesis lb: Competition effects within a population negafively affect the rate of market entry.

Cognifive and Sociopolitical Legitimacy and Market Entry Rates As discussed previously, several researchers have pointed out some difficulties associated with using density as an indicator of legitimacy. The density within a

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population embodies a number of different factors that combine to form the overall legitimacy in the industry. Legitimacy is a multidimensional concept, involving both cognitive and sociopolifical elements (Aldrich, 1999; Aldrich and Fiol, 1994; Baum and Powell, 1995; Suchman, 1995). "Taken-for-grantedness" is descripfive of the emergence of cognitive legifimacy, and depends on socially constmcted knowledge or understanding of firm stmcttire or acfion. Cognitive legitimacy signals the basic acceptance of organizational phenomena, rather than the value or approval of that phenomena. Their value depends on the approval or sancfion of social entifies which interact with those organizations. This form of legitimacy is identified as normative or sociopolifical in nature, and it describes the extent in which organizational phenomena conform to accepted mles and the degree to which they are viewed as appropriate. The influence of cognitive legitimacy on market entry rates. Cognitive legitimacy represents a form of knowledge or recognition of organizational practices while sociopolitical legitimacy embodies the evaluation or perceived value of a form by society. It is evident that cognitive and sociopolifical legitimacy have disfinct conceptualizafions, and the implication is that they each have different effects on the legitimation process in organizafional populations. However, a few researchers have pointed out that the primary measure of legitimacy used in organizational research— organization density—is a constmct which encompasses many facets of legitimacy, and being a single measure does not adequately distinguish between cognifive and sociopolitical legitimacy. Baum and Powell (1995: 536) advocated moving away from using only density measures to the explorafion of other methods of assessing legitimacy.

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Delacroix and Rao (1994) identified three separate processes that are bundled within the concept of organizafional density: reputafion, vicarious leaming, and infrasttiicttire. The organizational density of an industty is reflective of the current state of each of those processes at a particular time. The consequence of this view is that while density is fi-equently used as a measure of the "taken-for-grantedness" of an organizational phenomenon (and thus its cognitive legitimacy), what is really being measured is a mixture of both cognitive and sociopolitical influences on a particular industry. As indicated earlier in this chapter, this criticism is not at all limited to ecological research; research in the insfittitional tradition also suffers from this weakness, and an ongoing challenge within the field of organizafion sttidies is to devise measures of cognifion and culture that more effectively distinguish between different legitimation processes and their effects on organizafional density (Baum and Powell, 1995: 530; Schneiberg and Clemens, forthcoming). Aldrich and Fiol (1994: 648) noted that cognifive legitimacy can be assessed "by measuring the level of public knowledge about a new acfivity." Public knowledge and understanding of new organizational activities reflects the underlying shared schemas that form the basis of cognitive legitimacy (Sewell, 1992). This echoes the claim made earlier in this chapter, based on work by Baum and Powell (1995) and Hybels (1994), that analysis of public media coverage of an industry may be an effective way of measuring legitimacy since it is central in both disseminating knowledge about new practices and influencing the behaviors of individual actors, like potenfial investors or entrepreneurs. As media coverage of a particular organizational activity increases, such interested actors

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should become more aware of the profit or opportunity potenfial available. This should motivate the founding of new organizations or the introduction of new products to take advantage of those opportunities. The argument here is that as the cognitive legitimacy of a particular market increases, through the overall level of public discourse among actors in a particular market, the number of entrants into that market should also increase: Hypothesis 2: The cognitive legitimacy of a market positively affects the market entry rate.

Aldrich suggested that sociopolitical legitimacy can be measured by assessing the acceptance or evaluation of an organizational pracfice by polifical and regulatory authorifies, key stakeholders, and the public (Aldrich, 1999: 247; Aldrich and Fiol, 1994: 648). Measurement of sociopolifical legifimacy is slightly complicated by its nature as the collective evaluation of organizational practices by numerous interested social entities. Acceptance and evaluafion can stem from the degree in which the pracfice conforms to expectations regarding organizational activity, which might include the perception that the organization has sound management pracfices and appropriate business strategies or that it operates in a way that is consistent with ethical standards or legal regulafions. In cases of populafions of profit-seeking businesses, financial organizafions may be key stakeholders in the evaluafion of organizations and the reputation of the industry (Delacroix and Rao, 1994). The influence of sociopolifical legitimacy from industry evaluations on market entry rates. Delacroix and Rao (1994) noted that organizational density was partly reflective of the reputation of the industry among interested social actors. Density

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demonstrates the reputafion of the industry to observers, including both awareness and respectability of organizafions and strategies in a population. For instance, in the case of emergent industries new entrants must establish a positive evaluation and approval of their stt-ategies and product offerings to consumers and investors. The reputation generated in this process builds familiarity with the industry among interested parties and allows them to generate evaluafions of both individual organizafions and the industry as a whole. Cmcial to this part of the sociopolifical legifimafion process is the role of financial news coverage in the exchange of knowledge and information regarding organizational activities. As indicated eariier, Hybels (1994) noted that financial news coverage should be particularly important since it affects individuals perceptions of the appropriateness of firm strategies and consequently the allocation of resources among social entities and the level of entrepreneurship in the industry. Financial news coverage regarding investment in the market, particularly in enttepreneurial activity and new product development, should tend to signal to social actors whether there are opportunities available in the market. Indications in the media of rising consumer demand or public interest in investing in the area, corporate interest in developing new products or in building relafionships with other firms that are already in the market, and the availability of venture capital for investment in the market should have a positive impact on the level of market density. On the other hand, media coverage of the possibility or actuality of bankmptcy or other modes of failure in the market, or of a shakeout or overall downtum in the prospects of the industry, should negatively effect the level of product density in the market.

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Hypothesis 3a. The sociopolitical legitimacy arising from positive industry evaluations positively affect the market entry rate. Hypothesis 3b. The sociopolitical legitimacy arising from negafive industry evaluations negatively affect the market entry rate.

The influence of sociopolifical legitimacy from regulatory sources on market entry rates. Govemmental or other regulatory factors influence organizations by consttaining or releasing resource flows to them, monitoring and licensing their activifies, and altering competitive relationships in organizational populations (Baum, 1996: 95-96). Because of their powerful influence on organizational forms and practices, these factors are frequently included in research smdies. For instance, Hannan and Freeman's (1987, 1988) work on labor unions examined the effect certain laws had during different historical periods on founding and failure rates. Edelman (1990, 1992) focused on the influence the legal environment of the time had on the diffiision of due process practices and equal employment opportunity stmctures in organizations. Singh et al. (1991) looked at the influence different laws had on the founding and failure of nonprofit charitable organizations in the city of Toronto. Beyond the effects of laws during particular fime periods, researchers have sought other measures to assess the connection between regulatory factors and legitimacy. In the sttidy conducted by Singh et al. (1991), the further effects of organizational certification by regulatory entities were also analyzed. Baum and Oliver (1992) found that the relations between licensed day care facilifies and govemment and community agencies influenced founding rates. The resources available to those agencies through budget allocations also impacted founding rates.

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Rather than looking at fime period or relational effects stemming from regulatory entities, the interest here is in how knowledge of govemmental involvement and potential or acttial regulation influences legifimacy, and subsequently the entry rate into the market. Media coverage of such events as congressional hearings, executive speeches and statements, and departmental or agency activities or regulafions of commercial activifies all contribute to the sociopolifical legifimacy of the industty. However, govemment and regulatory agencies can both support an organizational populafion as well as limit or restrain it. For instance, the research cited eariier on Toronto nonprofit organizations reported that during the eariy 1970s regulatory activities fostered the emergence of new organizafions, but regulatory actions later that decade reversed those effects (Singh et al., 1991; Tucker, Singh, Meinhard, and House, 1988). In situations where a new industty or organizafional form is emerging or seeking to become established, govemmental attention can positively influence legitimacy and density, since such actions give approval and stature to the emergent industry as well as signals the govemment's willingness to advance or support it (Aldrich, 1999: 230). For instance, Budros (1992) found that the passage of a cmcial piece of legislafion provided legitimacy to the fledgling New York state life insurance industry and positively affected organizational entries. In the field of Intemet commerce, govemmental agencies and legislative activity in the United States have predominately served to facilitate online commercial activity. Laws such as the National Communications Competifion and Information Infrastmcture Act and the Intemet Tax Freedom Act serve to promote business on and access to the Intemet, and the Nafional Informafion Infrastmcture

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initiative brought attention to the potential of informafion systems and widespread Intemet access (Moschovitis et al, 1999). Thus, the expectafion is that: Hypothesis 3c. The sociopolitical legitimacy arising from govemmental interest in a particular market positively affects the market entry rate.

Combining Density-Dependent and Cognitive and Sociopolifical Legifimacy Effects on Market Entry Rates The discussion of Hypotheses 2 and 3 sought to expand the understanding of the concept of legitimacy by identifying its underlying cognitive and sociopolitical components and the effect of each on market entry rates. By combining both aspects of legitimacy with density-based indicators of legifimacy, the populafion ecology model of density-dependence can be extended with a more complete understanding of the impact of both cognitive and sociopolitical legitimacy on the process. As stated earlier, the legitimacy-competition model of density dependence claims that density works in two processes affecting the vital rates in a population. The process of legitimation is based on the view that early increases in density reflect the establishment of the viability and appropriateness of organizational activities; thus, density is proposed as posifively affecting founding or entry rates. On the other hand, competifion is based on the observation that ftirther increases in density contribute to a scarcity of resources allocated among a large number of firms; in this case, density is viewed as negatively affecting founding rates. The need to accommodate density dependence as both a negative and positive fiinction has been accomplished traditionally

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using curvilinear ftincfions of density; this perspecfive forms the basis of Hypotheses la and lb discussed previously. However, if density does indeed reflect an underlying multidimensional legitimafion process in the industry, and if cognitive and sociopolitical legitimacy can be effectively measured by looking at the discourse and content of media coverage of the industry, then these measures should continue to be significant even when assessed simultaneously with density-based measures. Measures of cognitive and sociopolitical legitimacy should be related to market entry rates due to their value in transmitting information about emergent forms of organizations or strategies, while density should remain related to entry rates both as an indicator of actual activities in the population and as a measure of the competition among market participants. Hypothesis 4. The legitimacy and competition effects of population density, as well as cognitive legitimacy, are related to market entry. Hypothesis 5. The legifimacy and competition effects of population density, as well as sociopolitical legitimacy, are related to market entry.

Table 1 summarizes the hypotheses proposed in this study. In the following chapter, the broadband Intemet access market will be identified as an area in which to test these different hypotheses, the use of content analysis as a method of data collecfion will be presented, and the measurement of both population density and legitimacy variables will be discussed.

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Note To be fair to organizational ecologists, the use of density is extremely common among more biologically-oriented ecological researchers; the centrality of populafion density, and the related concept of abundance, is evidenced by the wide variety of methods they have developed to estimate it (Krebs, 1989). Also, Deephouse (1996) showed that increases in isomorphism (which is the adoption of similar forms and sttategies by organizations, and is thus conceptually similar to organizational form density) result in increased organizational legitimacy.

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Table 1. Hypotheses

Summary of Models and Hypotheses Dependent Variable

Independent Variables

DENSITY-DEPENDENT LEGITIMACY AND COMPETITION EFFECTS ON MARKET ENTRY RATES Hypothesis la

Entry rate.

First-order form of populafion density.

Hypothesis lb

Entry rate.

Second-order form of populafion density.

COGNITIVE AND SOCIOPOLITICAL LEGITIMACY AND MARKET ENTRY RATES Hypothesis 2

Entry rate.

Cognitive legitimacy of the product market.

Hypothesis 3

Entry rate.

Sociopolitical legitimacy of the product market (based on analyses of regulatory and industry evaluations of the market).

COMBINING DENSITY-DEPENDENT AND COGNITIVE AND SOCIOPOLITICAL LEGITIMACY EFFECTS ON MARKET ENTRY RATES Hypothesis 4

Entry rate.

Density-dependent legitimacy and compefifion; cognitive legitimacy.

Hypothesis 5

Entry rate.

Density-dependent legitimacy and compefifion; sociopolifical legitimacy.

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CHAPTER III RESEARCH METHODS

Background of the Smdv This smdy investigated the impact of cognitive and sociopolifical legifimacy on the rate of new market entrants in the broadband Intemet access industry. The processes underlying the emergence of new industries have received relatively little research attenfion compared to other areas of organizational research, and the rise of e-commerce and Intemet business provides a historically convenient and interesting case to study. While only a small part of the wide range of activities collectively known as electronic commerce, the Intemet access market is a cmcial element in that phenomenon since it provides essential infrastmcture required for electronic transactions to take place (Bama, Pinnell, Shutter, and Whinston, 1999; Colecchia, 1999; Organizafion for Economic Cooperation and Development, 1997). While the Intemet access market itself consists of many different elements, some of which are clearly still emerging in the marketplace, the focus of this study is on the inttoduction and legifimacy of organizafions providing services in the six largest cifies in Texas based on the two key technologies associated with high-speed, broadband Intemet access between 1993 and the first quarter of 2000: cable modem and digital subscriber line access (also frequently referred to as DSL). Broadband cable access is a technology that produces a very high-speed Intemet connection over the coaxial and fiber opfic cable infrastmcture used to deliver cable television. Intemet access is provided through the existing cable television wiring present

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in most residences. The technology consists of both the connection service as well as specialized equipment, such as a cable modem and networking hardware, used to cormect the user's personal computer to the cable company's network. Cable access avoids the use of copper telephone lines used in dial-up services in order to provide data transfer speeds many times faster than normally available. Because of this, cable access is typically offered by cable system companies (e.g., AOL Time Wamer, AT&T Broadband, Cox Communications, etc.). The primary compefition for cable access in the broadband market is digital subscriber line, or DSL, which is a high-speed access method that extends the technology in tradifional telephone lines and hardware. Digital signals forming the user's connection to the Intemet are ttansferred over standard copper telephone lines available in nearly every home and office. Unlike dial-up modem connections, DSL allows the simultaneous use of both Intemet access and normal telephone services while additionally providing up to fifty times faster data transfer rates. The technology combines both the network connection service as well as required hardware, such as a special DSL modem and networking interface cards, used to make the linkage between the user's personal computer and the wall telephone jack. DSL technology is largely based on existing telephone communication technology and is thus typically offered by the regional Bell operating companies (e.g., SBC Communicafions, Verizon, etc.), although other types of companies are increasingly offering the service. Although cable access technology has a large lead over competing broadband technologies in the number of customers, the recent growth rate of DSL adoption

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indicates that it is still a highly viable technology for high-speed Intemet access. Furthermore, a preliminary examination of accounts of the industry in the business and trade press, a review of public utility commission publications on the broadband industry, and informal discussions with trade association and public ufility commission staff members revealed that these two technologies are the dominant competing forms of broadband access to consumers. More recent wireless and satellite technologies sfill have a long way to go, in terms of both technological development as well as market share growth. A characteristic of all broadband access technologies is significant support by large, well-funded corporations with significant interests in building telecommunications infrastmcture and establishing their dominance in the industry. In addition, the industry receives a tremendous amount of attenfion from regulatory entities interested in controlling the deployment of broadband services. However, the legitimacy of broadband Intemet access in general is still emerging, as evidenced by the variety of new firms founded to provide new broadband services and the overwhelming proportion of Intemet users who still connect through traditional dial-up modem services (Boardwatch Magazine, 2000: 13). Since legifimacy of the broadband access market has been and still is being negotiated among business and consumer users, service providers, technologists and industry experts, financial analysts, regulators, and other interested social actors, the broadband Intemet access industry provides an ideal setting to study the effects of legitimacy on the emergence and development of new forms of organizafional activity.

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The best evidence for the development of legitimacy in the Intemet access market over time is to be found in the business press and mass media, since it is in that fomm that the attenfion of all these parties meet in understanding and evaluating new technologies, organizational forms, and business strategies. As presented earlier, content analysis is a methodology that is ideally suited to the measurement of legitimacy as seen in communication content as it unfolds over time. Since communication is a major aspect of social interaction, content analysis can be a valuable tool for analyzing problems rooted in social interaction since it is specifically oriented toward communicafion content (Weber, 1990: 10). Content analysis methods can be used to study a variety of research questions involving communication content; the particular use advocated here uses content analysis to assess the social, polifical, cultural, economic or other contextual antecedents of communication content (Riffe, Lacy, and Fico, 1998: 9). The assumpfion is that communication systems (such as the mass media or business press) serve as a means in which organizational communities create, share, and perpetuate shared conceptions of facts and meanings regarding social acfion (Gerbner, 1969: 123). Content analysis can thus be used to simply descnbe trends in communicafion content (Holsfi, 1968: 610), to examine aspects of culture and cultural and social change (Berelson, 1954: 503; Franzosi, 1997; Holsfi, 1968: 634; Tarrow, 1989), to trace the development of scholarship and research interests in scienfific fields (Berelson, 1954: 491; Duncan, 1991; Whaples, 1991), to assess the focus of attenfion of various social groups (Kleinnijenhui, Ridder, and Rietberg, 1997; Weber, 1990: 9), as well as to operationahze the legitimacy of organizational forms and entrepreneurial behaviors (Hybels, 1994: 83-85).

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The following sections describe what data sources will be used that are appropriate for drawing inferences on the legifimacy of the Intemet access market and its effects on the level of new product and service introductions in the industry, how the content analysis procedures employed will be used to produce variable measures, and what statisfical models and tools will be employed.

Data Sources and the Measurement of Variables Using a variety of data sources, an extensive data collecfion effort was conducted to constmct the history of the broadband Intemet access industry and the provision of broadband services in Texas. The variables to be measured and analyzed in this study are divided into two primary groups. Population variables are those that are commonly used in organizafional ecology research. These variables are used to constmct the history of entries and exits of broadband service providers in the population in each of the six largest cifies in Texas from its beginning.'^ Legitimacy variables are those which utilized a content analysis procedure to measure cognitive and sociopolitical legifimacy. Both population and legitimacy variables are summarized in Table 2. In all cases, variables are measured over time in monthly time intervals, beginning with January 1993 and going through April 2000, yielding a total of 88 observed time periods.^

Density-based Measures of the Population—Market Entty, Legitimacy, and Competition There are two basic population variables that are used in this sttidy: the market entry rate and the market density. Since the sttidy covers the six largest cifies in Texas

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(Ausfin, El Paso, Dallas, Fort Worth, Houston, and San Antonio), each of these variables is measured at the level of the city in each month between 1993 and eariy 2000. The market entiy rate is the measure of the level of founding used in this sttidy and is indicative of the current level of entrepreneurship in the industry. It is defined here by the number of broadband service entries (offering either broadband cable or DSL access) that occurred in each of the six cities each month. The market density is the total number of acfive market participants in each city in each month. Following past practices in the literamre, the market density is modeled using both first- and second-order forms to reflect both legitimacy and competition processes in the population. Since both the entry rate and the density are measured at the level of the city, each city observed in this study has its own market entry rate and market density which may differ from the same measures in the other cities. Therefore, although scope of the study encompasses 88 monthly time periods between January 1993 and April 2000, the measurement of the population variables involved 528 observations (88 months X 6 cifies). Since no single source exists documenting the number of broadband compefitors in the populafion, a number of sources were used to determine the history of entries and exits in the industry, including various regulatory, tt-ade, and news sources. The first task in this data collection effort involved generating a list of broadband service providers in the state of Texas. The Report to the 77th Texas Legislature on the Availability of Advanced Services in Rural and High Cost Areas from the Texas Public Utility Commission provided information about the number of broadband service providers and

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the broadband cable operators active in each city (Public Utility Commission of Texas, 2001). Service providers were also required to file documents with the public ufility commission every year on the type of services offered and the areas of service availability. Although these sources do not provide a complete record of the population, this information was used to generate a list of service providers for further investigafion. Produced by the U.S. Departtnent of Commerce and the Department of Agriculttire, Advanced Telecommunications in Rural America provided some information on the broadband cable and DSL providers across the U.S. (National Telecommunications and Information Administration and the Rural Utilities Service, 2000), while CED Magazine provided a much more comprehensive list of broadband cable and national DSL service providers (CED Magazine, 2001). After generating a list of broadband service providers for further study, a comprehensive search of news sources and company informafion on each provider produced a record of the entries and exits in each of the six Texas cities studied. The Lexis-Nexis database of news articles was used to idenfify announcements of new service introductions or withdrawals from service. Lexis-Nexis was ideal for this purpose because of its coverage of both national and local news sources and its ability to access the full text of articles. When an article was found which identified a market entry, it was examined for the date of service inception and the locafion in which broadband access was made available; when no specific date was indicated, the article publicafion date was used to indicate the month in which the market entry occurred. Company informafion was also used to identify new market entries; the use of company web sites to promote

52

products and services to the public and to communicate to extemal stakeholders about firm activities facilitated the search for informafion about market entries. Frequenfiy, firms published press releases announcing market entry events on their web sites; some firms also released such information in their financial statements. In addifion to the web sites of individual companies, the Internet Archive was also used to identify changes in information on company web sites that occurred over the years, or even to access corporate sites that no longer exist due to termination of the business. When announcements from company information were found, the text was examined for the date of market entry or exit; when a specific date was not mentioned, the date of the announcement was used as the date of the entry or exit event. Figure 2 depicts the history of acfivity in the broadband market population in the six cifies across Texas.^ The procedure employed in this study identified a total of 55 market entties across the six cities, by 17 companies providing broadband cable or DSL service during the period between January 1993 and April 2000. During the period of this study, no firms had ceased operations in any of the cifies sttidied; subsequent analysis found market exits began in late 2000, outside the scope of this research project. The data is substantially right-censored, but this poses little problem in this context because the focus is on the emergence of this industry. Density effects can be attributed to the emerging legitimacy of this form of business organization because only the eariy history of the population is considered, while sttidies that include both eariy and late historical periods can find density effects that can conftise legitimacy effects with processes of market power or resource partitioning (Baum, 1996: 89-90).

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While the data is right-censored, it does not exhibit left-censoring because the time period sttidied begins years before the first entry acfivity. The first entt-ant began service in May 1996 in Houston. However, much of the entry activity started in late 1998 and continued through eariy 2000. Despite little entry activity in the early period of the sttidy, industty participants were actively engaged in establishing what would eventtially become the broadband access business, including development of the technologies used in providing and using the service, investtnent in the creation of entirely new organizations and the expansion of existing ones and the constmction of technological infrastt^cttire, and the lobbying of both investors and regulators for support in taking advantage of the new opportunities being identified. To get a picture of the extent of industry activity going on before the first market entrant appeared, we must turn to other, non-density-based measures of legitimacy.

Media-Based Measures of Legitimacy Data sources for media-based measures of legitimacy. In examining industries involving the Intemet a number of news and information sources are available for research purposes, many of which are accessible in electtonic form over the network itself as well as other traditional print forms. Online sources of Intemet technology news, such as ZD Net (www.zdnet.com) and CA^^T (www.cnet.com), are popular sources of online news and informafion regarding many industries involved in Intemet business activities.^ Many traditional book publishers also publish works on computer and networking topics, although even a casual browsing of the books available will indicate

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that many are technical in orientation rather than focused on characteristics of the industties themselves. In addition to these sources, there are also many print periodicals that focus on Intemet technology and business activity, like Wired, Red Herring, and Fast Company, while more general interest business joumals (e.g., Business Week, Inc., etc.) also frequently publish articles in this area. With this wealth of information available, a careful consideration of the needs of this study is necessary in choosing the data sources to be used in a content analysis. The selection of documents used as the population of interest depends on hypotheses being tested and the inferences intended by the study as well as the disfribufion of information among content sources (Krippendorff, 1980: 65; Weber, 1990: 42). The informafion necessary to test particular hypotheses may not be evenly distributed among different sources; various online information sources, books, and print periodicals may not all supply the needed information equally well for the purposes of this study. In addition, the needed information must be easily accessible and available over the entire history of the market under study. In measuring legitimacy, the concem in idenfifying the appropriate population to draw content from is dependent on the ability to access informafion about the taken-forgranted character of organizational activifies and the evaluation and approval of those activifies by interested social actors (such as entrepreneurs, investors, regulators, etc.). The content used should thus be a form of media that extensively reports on industry issues and that interested social actors frequently access and depend on for important information on the industry. The ABI/Inform database provided a good source of content

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for analysis in this sttidy, since it contains an extensive index to articles in all areas of business and management as well as access to their ftill citafions and abstracts. The ABI/Inform database covers over 1,800 professional joumals and trade publicafions, effectively covering the majority of available sources of business knowledge that might be relevant in the legitimation process. Beyond the wide range of publications and subjects covered, ABI/Inform also provides access to content going back to 1971, allowing for the collection of data over the enfire relevant history of the industry being sttidied as well as easy to use searching tools which would facilitate access to the information. The disadvantage of using ABI/Inform is that it only provides comprehensive access to article abstracts rather than the full text of the articles themselves, although this problem is minimized by the use of the article abstract as the sampling unit and the fact that the information needed by this study is largely contained in the absttacts making the use of fiill texts unnecessary. To produce a body of text to use in the content analysis, a search for article abstracts in the ABI/Inform database was conducted and a multistage sampling procedure employed, utilizing both stratified and systematic elements. Employing a series of sampling techniques in this manner has been common practice in research using content analysis, and helps capitalize on the characteristics of the content data itself to generate a representative sample. As a starting point in the content analysis, a combination of search terms was chosen to identify published articles on the subject of broadband cable and DSL, or digital subscriber line, access technologies. A separate search was then conducted using the chosen keywords for each month in the period from January 1993 to

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April 2000, generating a list of articles appearing in the database each month on broadband access topics. Finally, in each month every fourth article abstract was systematically selected from the list of articles starting from a randomly chosen point, producing a 25% sample of article abstracts for subsequent analysis. The stratified procedure compensates for variation in the number of articles published in each month, while the systematic procedure facilitates the selecfion of a random sample drawn from a list of article abstracts when the list does not exhibit periodicity in its order (Budd, Thorp, and Donohew, 1967; Krippendorff, 1980; Riffe et al., 1998). This procedure produced a total of 1407 article abstracts for further analysis. Measuring cognifive legitimacy. In any industry, the degree in which organizafions and strategies become taken-for-granted, recognized, and understood by customers and other interested parties is reflected in their level of cognitive legitimacy. In this sttidy cognifive legitimacy is measured by the current level of media coverage of the Intemet access industty since the beginning of the observed history of the industry. The current media coverage at a particular time penod is the total number of articles published each month, identified in the content analysis of the ABI/Inform database as pertaining to the broadband industry or to broadband cable or DSL technologies. Following the guidelines set out by Riffe et al. (1998), the content analysis procedure was formalized in a content coding protocol. The protocol listed all the categories used in the analysis and specified how the coder was to assess the content in each article abstract. The protocol requires the coder to assess each article abstract in each month as to the types of technologies described in the article (broadband cable, DSL, some other

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technology, or not about broadband), whether the article described the industry and the opporttinities for expansion or growth posifively or negatively, and if the article described regulatory interest in broadband. If the article described any form of broadband access technology or the firms engaged in developing and selling the technology it was viewed as conttibuting to the taken-for-grantedness of the industry and counted as increasing cognitive legitimacy. Article abstracts categorized in this maimer were totaled in each month according to time of publication, and that number was taken as the level of cognitive legitimacy in that time period. Figure 3 shows the monthly general media coverage of the broadband industry, including coverage of both broadband cable and DSL technologies, over the time period of the sttidy. The month-to-month level of discourse on broadband technologies and services starts at a low level and steadily increases over time, indicating how broadband increasingly becomes recognized and taken-for-granted among industry observers and participants. Interesfingly, there is some level of discussion about broadband even during the earliest period of the sttidy, albeit at a low level, during a time in which there were no entrants or density in the population. Measuring sociopolitical legitimacy. Three types of sociopolitical legitimacy were examined in this sttidy: govemmental regulation and positive and negative evaluations of the industry. Governmental regulation is measured by the cumulative number of articles showing the media coverage of govemmental regulation of the Intemet access market. This measure should indicate the level of govemmental interest in the industry, and thus is representative of the state's evaluation and approval of the behaviors of firms in the

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market. Positive industiy evaluation is a measure of positive financial evaluafions of the industty, and encompasses investtnent activity, public offerings of equity, industty growth, increasing levels of consumer demand, and venture capital interest. Financial investment coverage is indicative of the legitimacy conferred by positive appraisals of the industry by the investment community. Negative industry evaluation is a measure of negative financial evaluations of the industty, and is suggestive of the perceived potenfial for a downtum in the industry and of potential or actual firm failures. As in the case of cognifive legifimacy, the measurement of the sociopolitical legitimacy variables was guided by the content coding protocol. Each article abstract was examined for descriptions of growth and expansion of the industry or decline and firm failure, as well as any type of regulatory or govemmental activity. Since investment analysis of the broadband industry frequently disfinguished between broadband cable and DSL technologies, each technology was assessed separately for positive and negative industry evaluations. For example, a single article might describe future growth and opporttinity in the broadband cable market but negatively portray DSL; such an article would contribute to both a measure of positive industry evaluations as well as the negative industry evaluations measure. The total number of articles describing the development of the industry positively in each fime period, covering both DSL and broadband cable technologies, is used as a measure of posifive industry evaluafions in that month. Conversely, the total number of articles published each month describing the industry negatively, regarding each form of broadband, is taken as an indicator of negafive industry evaluations. The total number of articles published each month

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describing any form of govemmental activity or regulatory interest in the broadband business were used as a measure of the level of govemmental regulation in the industry. Figures 4 and 5 depict the monthly media coverage of the broadband industry used as indicators of sociopolitical legitimacy. Figure 4 shows both positive and negafive evaluafions of the broadband business in the media. Even as early as 1993, articles appeared which described the opportunifies available in providing broadband access services or growth in the industry, either in terms of growing demand for the service or from increasing levels of investment by organizafions. Posifive evaluations grew at a steady pace over the entire time period in the study. Simultaneously, articles negatively describing the industry and its prospects also appeared and steadily grew in number over time, although the magnitude of negative coverage was never as large and that of positive coverage. Figure 5 shows the number of articles every month describing regulatory concems or interests in the industry. Compared to positive and negafive evaluations, regulatory coverage always appeared at a low level; however, the pattem of coverage showed the discourse of the industry focused on the influence of the Telecommunicafions Act of 1996 and its implications for the broad deployment of telecommunications services. Reliability of content analysis measures. In any study that employs a content analysis methodology, a major concem for the researcher is the reliability of the analysis procedure. Employing a highly reliable procedure enhances the objecfivity of the study by distinguishing content analysis as a method of scienfific inquiry from other methods used to analyze textual data, and insures that the data produced by the procedure is

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consistent regardless of the researcher performing the analysis or when that analysis is performed (Berelson, 1954; Kassarjian, 1977). The formulafion of content categories and coding mles that different researchers can consistently apply is the first step in building a reliable procedure (Kassarjian, 1977; Riffe et al., 1998), and that process is tied to the identification and operationalization of the variables discussed previously. In this section, the focus is on the assessment of how reliably those procedures can be used in acquiring data. The first step in assessing the reliability of a content analysis procedure is selecfing the content material to be used. Since content analysis methods are often used to generate exttemely large data sets, using multiple coders to replicate an entire content analysis study for an evaluation of reliability is usually impracfical. Using additional coders to replicate only subsets of the content used in a study is viewed as sufficient in these circumstances. When choosing the content for addifional coding, Riffe et al. (1998) advocate using a random sampling approach when performing a reliability test. In this study, the author performed the primary content analysis, while a second coder was used to code a subset of the sample for the purpose of checking the reliability of the coding procedure.^ The second step in determining the reliability of a content analysis study is the quanfitative measurement of the degree of consistency between coders. The most common method for determining the reliability of a study is to calculate the percentage agreement between coding judges, which is simply the proportion of agreement between two coders as a percentage of the total number of coding decisions (Kassarjian, 1977: 14;

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Kolbe and Burnett, 1991; Riffe et al., 1998: 127-128). When the proportion of agreement method is used, a reasonable is expectation is that the procedure produces a percentage agreement near 80% or greater between coding judges. If substantially less than 80% agreement is reached, than the reliability of the sttidy has not been established. Often researchers also report a reliability figure for each category coded in addition to an overall measure; such category reliability evaluations are better than an overall measure since aggregating multiple reliability scores may disguise poor performing categories. In this study, none of the categories used had less than 88% agreement between coders, and many categories had over 90% agreement.

Control Variables Three types of control variables were employed to account for other explanations of the growth of the population of broadband access providers. The residential population at the city level (in hundreds of thousands of people) was included to account for demographic factors that might impact market entry. In the course of this study, it was found that companies often cited local populafion level as a consideration for entry into a particular city. The technologies underlying broadband telecommunications services depend heavily on high population density levels. Broadband access is a range-dependent technology; customers can be provided access as long as they reside within a certain service area. Higher resident population levels within the service area allow for greater use of the communications infrastmcttire investment. Annual populafion data was gathered from the U.S. Bureau of the Census.^ Economic variables are frequently used in

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founding and entry rate sttidies as control variables; the GDP growth rate was used to represent national economic conditions while the city-level unemployment rate was used to control for local economic factors. GDP growth rate measures were available from the U.S. Bureau of Economic Analysis on a quarteriy basis, while the unemployment measures were obtained from the U.S. Bureau of Labor Statisfics on a monthly basis.^ Finally, to account for the growing size of the Intemet as a factor in the emergence of the broadband access industty, a measure was included as a control which represents the increase in the number of Intemet users and the amount of information available on the Intemet. The Internet host growth rate is the rate of increase in the number of hosts cormected to the worldwide information network. The measure is based on data provided by the Intemet Software Consortium, and is generated by a methodology that systematically looks for all the machines connected to and assigned an address on the Internet."^ While not representing the number of users of the Intemet, it does represent in a reliable way the number of systems on the network, and thus is a proxy for demand for access to and the amount of information available through the Intemet. Since none of the control variables were available on a monthly basis, well established linear methods were employed to transform the available data into a format suitable for subsequent statisfical analysis.

Model Specificafion and Stafisfical Tools In models where the market entry or founding rate is used as the dependent variable, consideration must be given to the fact that the rate variable is measured using

63

count data. Count data are characterized by having non-negative, integer values; frequently, count data also have many instances of zero or very low values, while high values are rare. When the data collected in a sttidy take this form, linear regression models are not the best choice since the data are not normally distributed. Instances where data are in the form of counting measures are widespread in social and economic research, and stafisfical models are available that more effectively account for the distribution of counting process variables. Typically, count data are modeled using various forms of Poisson regression, where the dependent variable is drawn from a Poisson probability distribution (Greene, 1997: 931; Hannan and Freeman, 1991: 192-194; Long, 1997: 217; Neter, Kutner, Wasserman, and Nachtsheim, 1996: 609). In this application, the rate of market entry Kis assumed to follow a Poisson process, and the probability function is given as follows: Y

/ ( 7 | / / ) = —exp(-//),where r = 0 , 1,2, ... A distinguishing feature of the Poisson distribution is the equality between the mean and the variance of the outcomes Y: E{Y) - Var{Y) = p . A Poisson regression model can be set up where the mean product introduction rate of the ith case is a ftincfion of a set of predictor variables; the typical formulafion of the Poisson regression model is the log-linear model: ^,=EiY,\\,)

= expiX,j3), where i = 0, 1,2, ... n.

64

In this equation, X, is a vector of predictor variables for the /th case and^ff is a vector of regression coefficients to be determined. By using the log-linear model, the mean response is consttained to positive values. With this model, the probability distnbution of the outcomes 7, becomes conditional on the characterisfics of each case as indicated by the predictor variables X, in the data:

/(}:|X,) = ^ e x p ( - ; y , ) . While some studies in the field of organizational ecology have used the standard form of the Poisson regression, most have applied more extended models in their analyses which address some of the restrictions required with its use (Cameron and Trivedi, 1986; Long, 1997). Frequently, data used in practice by researchers feamre dependent variables with variances which exceed the mean; this is called overdispersion and it is the result of unobserved heterogeneity among observations. Unobserved heterogeneity among observations occurs when different cases are not equally likely to produce occurrences of the counted variable; individual observations with the same X may not have the same/^ (Long, 1997: 231). The presence of overdispersion in the data makes the use of the Poisson model problematic; overdispersion produces variances which are larger than the mean, thus violating a key assumpfion of the model. Using a Poisson regression model when there is overdispersion will underesfimate the number of observations at the extremes of the disfribufion (i.e., it will underestimate the number of zeros and the number of large values) and produce overestimates of the significance of the independent variables.

65

A more general extension of the Poisson model called the negative binomial model is frequently employed by researchers when it is necessary to relax assumptions in the Poisson model regarding the form of the mean and variance of the underlying probability distribution. The negative binomial regression model adds a random error term Si to the mean //,; the new mean 1, is now a random variable that takes the following form: A, - exp(X,y5 + £,) = exp(X,y?)exp(f,) = p,S,. The mean of the error term S, is set to 1, so that the expected outcome is equivalent to the Poisson process: EiY,) = E{A) = Eip,S,) = ^,E{S,) = Mr The distribution of Yi is now condifional on both X, and Sr. m | X „ J , ) = A^exp(-A,) = ^ ^ e x p ( - M ) In order to create a regression model that is a function of only the predictor variables X„ then the distribufion of 7, must be adjusted by the probability disfribufion of ^^ (which is typically a gamma distribution): fiY,\X,)=^f{Y,\X„S,)f{S,)dS,. The probability ftinction of 7, now follows a negative binomial distribufion, and takes the following form: f(Y 1X1 =

'^''^

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y",

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In this specification of the negafive binomial model, a is a dispersion parameter indicating the level of overdispersion in the data. When the overdispersion is small, a goes to 0 and the model reduces to the standard Poisson regression model. Tests exist which can indicate the need for the negative binomial regression rather than the Poisson regression procedure (Greene, 1997: 937-939; Long, 1997: 236-237); these tests center on evaluating the hypothesis HQ: a = 0. For an extended discussion of the derivation of the Poisson and negative binomial regression models, Cameron and Trivedi (1986) provide an extensive discussion and comparison of regression models of count data while Greene (1997) and Long (1997) provide more recent and easily accessible reviews of the Poisson and negative binomial models. Software to estimate such models, as well as the companson of different models for differences in fit, is widely available in commercial stafisfical packages such as SAS and Stata (Allison, 1999; Long and Freese, 2001; StataCorp, 2001).

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Notes Boardwatch Magazine (2000) reported that over ninety percent of Intemet users connected through dial-up services, while cable and DSL users amounted to just under five percent. " The cities from which observations of population entries and exits were drawn include Austin, Dallas, El Paso, Fort Worth, Houston, and San Antonio. The assumpfion used here is that the beginning of the retail Intemet access market began in 1993, when the graphical Intemet browser Mosaic was developed by the National Center for Supercomputing Applicafions (Moschovitis et al, 1999). This application resulted in popular interest in the Intemet and its information interface known as the World Wide Web, and motivated firms to provide access to those informafion services. The Wayback Machine at the Internet Archive is a collaborative project, including organizations like the Library of Congress and the Smithsonian Institution, to allow access to web sites that have been published in the past but may no longer be available, either because the information was subsequently updated or because the companies that published them no longer exist. The archive provides a historical record of the informafion that has appeared on Intemet, recording that information for future review. The Wayback Machine at the Internet Archive can be found at http://web.archiye.org/. ^ Figure 2 depicts population activity aggregated across all six cities. For a citylevel depiction of market density, entry, and exit activity, see the Appendix. ^ ZD Net and CNET are only a few of the sources available on the Intemet. A quick search on June 20, 2002, on the Yahoo! web site in the "Computers and Intemet > News and Media" category yielded 262 web sites matching the search term "news" ' For this study the second coder was chosen by selecting an individual with no background in business educafion or in telecommunications technology. In choosing the second coding judge in this fashion, the focus is on the coding procedure rather than the nattire or characteristics of the coder to accurately assess the text being analyzed. The coding protocol, supplemented with additional informafion on the background of the industry and definitions of the technologies and terminology used in the industry, were collected together and used as a instmctional tool or manual to ttain the second coder in the use of the procedure and the meaning of the categories contained in the protocol. ^ Data from the U.S. Bureau of the Census are available online at http://wvvw.census.gov/.

68

Data from the U.S. Bureau of Economic Analysis are available online at http://www.bea.goy/, while data from the U.S. Bureau of Labor Statisfics are available online at http://www.bls.gov/. The data collected by the Intemet Software Consortium are available online at http://www.isc.org/. The idea that measuring the number of hosts connected to the Internet represents to number of machines connected is a simple notion but perhaps a misleading one. There may not be a simple mapping between a host and a physical machine which is connected to the network; a single computer may represent many hosts to others on the Intemet through the use of virtual hosting. However, there is really no distinction between "virmal" versus "real" hosts to those interacfing with or through them on the Intemet.

69

Table 2.

Summary of Variables Variable

Variable Description

POPULATION VARIABLES Market Entry Rate

The incremental number of products introduced in the current time period.

Market Density'

The cumulative number of products introduced since the beginning of the industry.

Density-Dependent Legitimacy

The first order formulation of product density.

Density-Dependent Competition

The second order formulation of product density.

LEGITIMACY VARIABLES Cognitive Legitimacy (General media coverage)

The cumulafive number of articles showing the total media coverage of topics related to the product market.

Sociopolitical Legitimacy (Positive industry coverage)

The number of articles showing the media coverage of positive evaluations opportunities or growth in the market as well as investment in the industry.

Sociopolitical Legitimacy (Negative industry coverage)

The number of articles showing the media coverage of topics related to actual or potential firm failures or a potential shakeout of firms involved in the industry.

Sociopolitical Legitimacy (Govemmental regulation coverage)

The cumulative number of articles showing the media coverage of topics related to govemmental regulation of commercial activity on the Intemet (congressional hearings, execufive speeches and statements, departmental/agency regulations and acfivifies, etc.).

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CHAPTER IV DATA ANALYSIS AND RESULTS

Table 3 reports the negative binomial regression estimates for models of the market entry rate across the six Texas cities between January 1993 and April 2000, while Table 4 reports a summary of the hypothesis test results. Although the data exhibited little overdispersion and the likelihood tests of the estimated overdispersion parameter a proved insignificant,' it was decided to model the heterogeneity in the data by using negative binomial regression instead of the Poisson regression model. Doing so produced a more conservative test of the significance of the parameters, since the tendency of the Poisson model to overesfimate significance levels in the case of overdispersion was avoided. The pseudo R-squared and the AIC of each model are provided in Table 3 as indicators of fit with the data.'

Testing Hypothesis 1—The Density-Dependent Model of Entry Rates Model 1 reports the parameter estimates of the baseline model of densitydependent legitimacy and compefition effects on entry rate, which test the predicfion of an inverted U-shaped relationship between density and entty rates described in hypotheses la and lb. Both the first-order and second-order forms of populafion density are significant at the 0.01 level with parameter estimates in the expected directions, providing support for both legitimacy and competition effects of density. What may be surprising is that even in an emerging industry, the competitive effects of density are sfill

75

observed at a significant level. Model 1 thus provides support for the inverted U-shaped relationship between density and entry rates among broadband access providers, as predicted by the population ecology model.

Testing Hypotheses 2 and 3—Cognifive and Sociopolifical Legitimacy and Entry Rates Model 2 from Table 3 reports the estimates for the negative binomial regression model used to test hypothesis 2; hypothesis 2 stated that the cognitive legitimacy of the population positively affects the market entry rate. The parameter esfimate for cognitive legitimacy, measured by general media coverage of the broadband industry, was positive and significant in its influence on market entry (at the 0.01 significance level), demonsttating the impact of cognitive legitimacy on founding in the populafion. Hypothesis 3 stated that different elements of sociopolitical legitimacy (positive and negative industry evaluafions, and regulatory influence) affected the entry rate into the market. The third regression model reported in Table 3 tested the significance of both positive and negative evaluations in the news media as well as coverage of govemmental influence in the industry on the entty rates. The parameter estimates of the model showed that both positive industry coverage and reporting of regulatory issues positively affected the entry of broadband providers, supporting both hypothesis 3a and 3b with p-values of 0.01, demonstrating the importance of the emergence of sociopolitical legitimacy on the creation of the industry. Also found significant, negative industry evaluafions were negatively related to the market entry rate, supporting hypothesis 3b with a p-value of

76

0.10, and providing evidence for the de-legitimating influence of certain forms of industry discourse. Comparison of the news media-based measures in models 2 and 3 with the density-dependent measures in model 1 is not possible using a likelihood ratio test since the models are not nested within one another.^ However, a comparison criterion that has been useful in many limited dependent variable statistical models (including Poisson and negative binomial regression) is Akaike's Information Criterion, or AIC, which allows one to compare two non-nested models that cannot otherwise be compared using the likelihood rafio test (Cameron and Trivedi, 1998; Long, 1997). The AIC also penalizes the model with the larger number of parameters for the degrees of freedom that are lost; because of this it can be used to supplement the pseudo R-squared in comparing models. All things being equal, the model with the lower AIC is the preferred model. Comparing models 2 and 3 to the density-dependent effects idenfified in model 1, using media-based measures of legitimacy to predict market entty compares very favorably with densitybased measures. Examining models 1 and 2, the model of cognitive legitimacy effects has a higher pseudo R-squared and a lower AIC than the density-dependent model (pseudo R-squared of 0.2257 versus 0.2416; AIC of 292.501 versus 284.846), showing that media-based measures of cognitive legitimacy may fit the data better than density. In models 1 and 3, density variables fit the model better, but media-based measures of sociopolitical legitimacy compare well by having fit measures that are close the densitydependent model (pseudo R-squared of 0.2102; AIC of 300.062).

77

Combining the Effects of Cognifive and Sociopolitical Legifimary in a Model of Market Entry Rates Model 4 simultaneously combines both cognitive and sociopolifical legitimacy measures and tests their effects on market entry. Cognitive and sociopolitical legifimacy from regulatory interest are shown to be positive and significant, with p-values of 0.01 and 0.05. Negative industry evaluations again affect entry rates negafively, with a significance level of 0.01. However, sociopolifical legitimacy stemming from positive industty evaluations is no longer significant when combined with cognitive legitimacy. This may be the result of collinearity between these two measures of legitimacy (the correlafion between the two is 0.85), a problem which could result in the insignificance of one measure of legitimacy even though both are separately highly significant. Again the AIC is useful here, because it can be used to assess the improvement in the model combining cognitive and sociopolitical legitimacy over models that consider each on their own. The pseudo R-squared of model 4 is higher than that of either model 2 (using cognitive legitimacy) or model 3 (using the three measures of sociopolitical legifimacy). However, it is well known that these types of fit measures typically increase when the number of predictor variables increase; a higher R-squared alone is not evidence that the combined model is the better one. Comparing the AICs of each model does give insight into which model is more appropriate because it penalizes against a reduction in parsimony in the model. The AIC of model 4 (AIC = 279.578) is lower than either model 2 or 3, indicating the sociopolitical legitimacy arising from positive evaluafions of the broadband industry should be included in the model. Since the statistical fit of the model improves even though this single dimension of sociopolitical legitimacy becomes

78

insignificant suggests that this variable plays an important but indirect role in influencing the market entry rate; in using multiple measures of legitimacy in the model, the possibility that different forms of legifimacy interact in complex and interesting ways to affect entry rates becomes evident.

Testing Hypotheses 4 and 5—Combining Density With Cognitive and Sociopolitical Legitimacy in a Model of Market Entry Rates The negative binomial regression models 5, 6, and 7 combine both densitydependent effects as well as the media-based measures of cognitive and sociopolifical legitimacy considered separately in models 1 through 4, providing a test for hypotheses 4 and 5. Hypothesis 4 stated that both density variables and the media-based measure of cognifive legitimacy will continue to have the relationships with market entry described in hypotheses 1 and 2, but that those relationships will remain significant simultaneously; hypothesis 4 is tested in regression model 5 described in Table 3. Model 5 combines first and second order density variables and the general media coverage measure of cognitive legitimacy in the broadband industty. Both first and second order forms of density are significant, with the first order measure reflecfing the legitimafing effects of increasing density in the population while the second order variable shows the competitive effects. The parameter estimate for the cognitive legitimacy measure is also positive and significant at the 0.01 level. The significance of density-based legitimacy and competifion variables as well as measures of cognitive legitimacy provide support for the combined effect of both on entry rates described in hypothesis 4. Furthermore, compared to model 1, the effect sizes for the density variable coefficients are reduced in size,

79

indicating that cognifive legitimacy is now accounting for some of the variance in the model previously predicted by population density. Table 5 shows the results of the tests comparing the models combining density-dependent and media-based legitimacy effects with the models which treat their influence separately. Comparing model 5 to model 2 tests the significance of adding density variables to a model with the cognitive legifimacy variable. Both the likelihood ratio test and the comparison of AICs show that the density variables significantly add to the explanatory power of the model. Comparing model 5 to model 1 tests the significance of including cognifive legitimacy in a model with density variables. As before, both the likelihood ratio test and the comparison of AICs indicate that both the news media-based measure of the cognitive legitimacy of the broadband industry and the population density variables should be included in the model. Hypothesis 5 takes both the density-dependent and sociopolifical effects described in hypotheses 1 and 3, and combines their influences in a model of market entry rates. Model 6 from Table 3 tests this hypothesis by including both density-based measures of legitimacy and competition and the three media-based measures of sociopolitical legitimacy as independent variables. Both the density-dependent effects of legitimacy and competition as well as measures of sociopolitical legitimacy are all highly significant, providing support for hypothesis 5. The coefficients for both positive industry evaluations and regulatory coverage are positive and significant (p-values of 0.01 and 0.05), indicating that both are critical in the creafion of the broadband population. The parameter estimates of negative media coverage are also significant but negafive in direction (at the 0.05 significance level), indicating that it remains as a de-legitimating

80

influence. Table 5 shows the results of the significance test companng models 6 and 3. The result shows that adding first and second order forms of density produces a significantly better model of the entry rate into the broadband population. Similariy, companng models 6 and 1 shows that adding the sociopolitical legifimacy measures to the density-dependence model is jusfified.

Combining the Effects of Cognitive and Sociopolitical Legifimacy With Density in a Model of Market Entry Rates Model 7 combines the influence of density with both cognitive and sociopolitical forms of legitimacy. First and second order density variables are significant at the 0.05 level. Likewise, cognitive legitimacy is significant and the direction of the parameter estimate is positive. Negative media coverage of the industry is negatively associated with entry into the population, as was seen in previous models. As in model 4, the effects of collinearity between cognifive legifimacy and positive evaluation measures are seen in model 7, were that component of sociopolitical legitimacy becomes insignificant. Furthermore, compared to previous models, sociopolifical legitimacy stemming from govemmental attention to the industry is also insignificant in this model. However, since the AIC of model 7 is the lowest of the models tested while the pseudo R-squared is the highest, including all the sociopolitical legitimacy measures is justified. The insignificance of the regulatory measure may be explained by comparing its influence relative to the other variables. Regulatory factors may be accounted for in other variables in the model, such as the first order density variable or cognitive legitimacy, which have a greater impact on founding rates. The fact that the parameter estimates of measures of

political activity in the industry become insignificant when density and cognitive legitimacy variables are added suggests potential mediating influences in the relationships between media-based legitimacy measures, density-based legitimacy and competition measures, and the entry rate into the population.

Control Variable Models The parameter estimates listed under Model 0 in Table 3 depict all the control \ariables used in the study, and provide a baseline for the rest of the stafisfical models in the sttidy. Among the control variables, the local residenfial populafion, GDP growth rate, and the local unemployment rate produced significant results, but only in models without populafion density-based variables (models 0, 2, 3, and 4), while growth rate of the size of the Intemet was never significant in any model. When significant, the signs of the parameter esfimates were in the expected directions. Interestingly, the fact that these conttol variables were only significant in models without first- or second-order density measures may indicate that both forms of density mediate the relafionship between demographic and economic conditions and market entry.

82

Notes The dependent variable had a sample mean = 0.104 and a sample variance = 0.143, indicating a close match between the two parameters. P-values of the estimates of the overdispersion parameter a ranged from 0.068 to 0.140, indicating only marginal significance at best. " Any one measure of fit only provides a "rough" guide to the fit of the model (Long, 1997; Long and Freese, 2001). Focusing on a single fitness measure should not be the only method used to assess the performance of a model; such an approach results in the optimization of only one criterion, possibly at the expense of other equally important considerations. Furthermore, most goodness-of-fit measures have weaknesses which prevent them from being completely representative of the adequacy of a particular model. Therefore, the statistical results reported in this study give both the pseudo R-squared measure as well as an information-based measure, Akaike's information criterion, or AIC. Assessment of the fitness of single model or the comparison of multiple models should balance the results of multiple fits criteria, while also considering the theory being tested as well as past research as additional guides. ^ More correctly, these models overlap only in the control variables, but the theorefical variables of interest do not overlap at all. Models that have no shared independent predictor variables are labeled as "stricfiy nonnested" models (Cameron and Trivedi, 1998).

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