Business Model Innovation and Performance of Startups: The Moderating Role of External Legitimacy

Abstract

Business model innovation (BMI) is a key performance driver for startups. Nonetheless, the reality is that new firms with new business models still face survival pressures. New institutional theory shows that legitimacy factors will affect the performance level of new ventures. Legitimacy is an important subject in the field of institution and organization, which refers to the extent to which an individual or organization’s behavior is accepted by the public and reflects the important influence of external institutional forces on the organization. Consequently, this study collected data from entrepreneurs in Eastern China and conducted a regression analysis, which revealed that novelty-based and efficiency-based business model innovation positively affects the performance of startups. Moreover, this study found that different dimensions of external legitimacy have different effects on the relationship between business model innovation and the performance of startups. Regulative legitimacy and normative legitimacy negatively regulate the relationship between novelty-based business model innovation and the performance of startups. In contrast, normative legitimacy positively regulates the relationship between efficiency-based business model innovation and the performance of startups. The study also found that cognitive legitimacy positively regulates the relationship between novelty-based business model innovation and the performance of startups. In summary, the study highlights the importance of considering the influence of different dimensions of external legitimacy on the relationship between business model innovation and the performance of startups. The findings suggest that legitimacy is a crucial factor affecting startups’ ability to improve their performance through business model innovation.