A new overseas market opens and a few foreign companies move in to establish themselves and their products. These early prominent players can play an important role in establishing the legitimacy of their "population". And interestingly, their success can benefit their seeming competitors - those who follow them into the market or who have a lower profile.

This enhancement is the result of legitimacy spillover and it has tangible benefits. Resources can become more available for all members of the population, from high-grade to low-grade, as the community they operate in views them as one group.

Jeroen G Kuilman and Jiatao Li of HKUST developed this concept by showing how it worked in foreign banking in Shanghai from 1847-1935. 1847 saw the establishment of the first foreign bank in the city, which was British-owned, while 1935 market the silver crisis and the decline of Shanghai's fortunes. In between, the city became a major financial centre hosting banks from several countries, providing a contained real-world environment in which to test legitimacy spillover.

The authors were concerned with two key points - the different "grades" of membership in the foreign bank population, and whether legitimacy spillover affected everyone equally.

"Grades of membership reflect both the extent to which organisations fit into a population and their degree of typicality. We used two measures: fuzzy density, which is the sum of the grade of members in a population, and contrast, which is the population's average grade. Together they can be used to investigate whether a firm with a low-grade membership contributes less to the legitimacy of a population than one with a high grade," they said.

Legitimacy spillover is more likely to occur if organisational forms have similar identities, and it can be monitored by the frequency of entries into the population.

Shanghai had banks from 10 countries during the period studied so the authors looked at the rate of entry by each country. The first banks were from Britain and they dominated much of the 19th century. This incumbent subpopulation was considered to be typical and to therefore have a higher grade of membership.

In calculating the grade of membership, the authors looked at the number of banks from each country at each given point in time. Using the fuzzy density approach, if there were four British banks and two Russian ones, each British bank was graded 0.67 (4/6) and each Russian bank 0.33 (2/6). The sum, or fuzzy density, of these would be 2.68 for the British banks (4 x 0.67) and 0.66 for the Russians. Contrast was the average grade of membership combined for the foreign bank population.

With these measurements in hand, it was possible to see how grade of membership affected entry rates. An additional bank in a subpopulation with a grade of 1, or two grades of 0.5, increased the entry rate of foreign banks by 26 per cent. A half-point decrease in contrast from the mean predicted a 19 per cent lower entry rate.

Media reports, which reflect legitimacy in the community, also had an impact. An increase in one point from the mean increased the entry rate of foreign banks by 77 per cent. The authors also conducted tests that showed sub-populations with low grades of membership benefited more from legitimacy spillovers than those with high grades, though this was more related to fuzzy density than contrast. This could be because contrast mattered more in the initial stages of a distinct organisational form than when it was well established.

The findings have interesting implications in strategic management, where it has been argued that firms that are more different from other typical businesses in their population have a lower legitimacy. In fact, these firms may still benefit from legitimacy spillover.

General managers should also take some lessons from the results and consider how legitimacy affects different grades of members in their population, and identify those firms that are prototypical of their industry.

"Such identification should help clarify which companies have the largest roles in generating legitimacy for their industry and which are most likely to free ride on resulting spillovers. Moreover, it may encourage practitioners to devise strategies to further capitalise on such legitimacy spillovers, for example by seeking affiliation with high-grade-of-membership firms," they said.