From plan to plant: effects of certification on operational start-up in the emergent independent power sector.

In this paper, we study the transition from planned venture to operational start-up in the emergent independent power sector. Planned ventures face tremendous obstacles in assembling the resources necessary to begin operations; we hypothesize and show that formal certification from authorized actors increases the likelihood of making this transition. Moreover, we find that the effects of certification are contingent on the legitimacy of the sector as a whole: Certifications have a stronger effect on start-ups when sector legitimacy is low than when it is high. This research helps us understand a rarely studied organizational transition--from entrepreneurial intention to actual operations--within nascent sectors. It directs attention to the legitimating effects of formal certification, highlights the importance of a multilevel approach to legitimacy, and contributes to the growing rapprochement between entrepreneurial studies and institutional theory.

Key words: entrepreneurship; institutional theory; legitimacy; certification; new organizational forms; alternative energy

Introduction

Research on the failure and success of preoperational new ventures in nascent sectors is sparse. Understanding the obstacles that impede planned ventures from reaching operational start-up is particularly important because the failure or success of early pioneers can have a lasting impact on the evolution of emergent sectors (Stinchcombe 1965, Tushman and Anderson 1986, DiMaggio and Powell 1991). Yet empirical research on entrepreneurship in new sectors typically focuses on organizations that are already operational, overlooking the transition from business plan to start-up (see Carroll and Khessina 2005, Kuilman and Li 2006, for notable exceptions). Past theoretical work on new sectors suggests that planned ventures face tremendous obstacles in assembling the resources necessary to begin operations, i.e., in going "from plan to plant." In particular, the legitimacy deficit of planned ventures in new sectors impedes their ability to acquire and organize the resources necessary to produce and distribute a product or service (Hargadon and Douglas 2001), resulting in a high rate of failure to commence actual operations (Aldrich and Fiol 1994, Aldrich 1999).

In this paper, we study the transition from planned venture to operational start-up in the emergent independent power sector and explore the role of legitimacy at the level of both the individual organization and the organizational form. In his influential analysis of legitimacy, Suchman (1995, p. 572) distinguished between strategic legitimating actions, in which organizations "instrumentally manipulate and deploy evocative symbols in order to garner societal support," and institutional processes that transcend the actions of any single organization and affect entire sectors, or forms of organizations. Strategic legitimating actions include ceremonially adopting legitimated formal structures or obtaining endorsements from central institutional actors. Institutional or sector-level processes include increasing density (e.g., availability) and integration into existing legal orders that make organizational forms seem more natural and taken for granted. In this paper, we examine how these two types of legitimating processes affect a new venture's ability to reach operational start-up in a nascent sector.

At the organizational level, we focus on a specific type of strategic legitimating action: Obtaining external certification. We define certification as a process in which a central institutional actor with authority or status formally acknowledges that a venture meets a particular standard. Past research on the relationship between certification and venture performance largely ignores preoperational ventures in new sectors and pays little attention to the legitimating impact of certification. Instead, research on certification generally focuses on the information it provides about individual or organizational quality. For instance, Spence (1974) linked the signaling ability of certification to its cost, such that those unlikely to meet the certification criteria are also unlikely to bear its costs. Others argue that certification reveals "information about otherwise hidden [emphasis added] organizational attributes and behaviors" (King et al. 2005, p. 1092). This line of reasoning suggests that the value of a certification is fundamentally derived from its ability to provide information about organizational quality that would otherwise be difficult to observe. In addition to its information value, we believe that there is also significant symbolic value to certification that does not depend on its information content (Zott and Huy 2007). In the case of preoperational new ventures that have little in the way of observable production processes and that lack a performance track record, we reason that the symbolic value of certification and the legitimacy that it imparts can in fact be more important than the information it provides about actual organizational attributes.

In their discussion of the emergence of new sectors, Aldrich and Fiol (1994) distinguish between cognitive legitimacy, or the degree to which knowledge about an organizational form is widespread, and sociopolitical legitimacy, which refers to the extent to which key stakeholders, opinion leaders, government officials, and the general public accept a new organizational form as appropriate and right (see also Scott 1995 and Suchman 1995). The legitimacy of new organizational forms has also been of central concern in organizational ecology. Focusing on cognitive legitimacy, Hannan and Freeman (1989, p. 133) argue that the "rarity of a form poses serious problems of legitimacy" and that legitimacy increases as a form becomes more common. Baum and Powell (1995, p. 530), meanwhile, emphasize the importance of sociopolitical legitimacy at the form level and call for analyses that take into account how "embeddedness in relational and normative contexts influences an organizational form's legitimacy by signaling its conformity to institutional expectations." Building on this prior work, we reason that the legitimacy of an organizational form is likely to have a significant impact on the ability of new ventures in a nascent sector to acquire the necessary resources to reach operational start-up.