Firms doing business in foreign institutional environments face pressures to gain social acceptance (commonly referred to as legitimacy) and difficulty in evaluating market information, both of which undercut firm performance. In this article, the authors argue that firms can design governance strategies to deal with foreign institutions to secure both social acceptance and firm performance. Using a Chinese sample of manufacturers that export products to various foreign markets through local distributors, the authors develop and test a model that bridges the effects of institutional environments and governance strategy on channel performance. Specifically, they find that firms can use two governance strategies, contract customization and relational governance, to deal with both legitimacy and efficiency issues and to safeguard channel performance. Thus, international channel managers are advised to maintain an integrated management of legitimacy and efficiency in foreign marketing channels.
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