Exploring the concept of legitimacy in a transition economy : The case of the Swedish banking industry in Latvia

Abstract: This thesis examines the concept of legitimacy and its evolution over time in the context of the banking sector of the transition economy of Latvia, where Swedish banks are the dominant player. After an economic boom starting at the turn of the millennia, which was to a great extent financed by the Swedish banks, the Latvian economy has now completely turned around, in the wake of numerous unanswered signs of overheating and the global economic crisis. Although they acted within legal limits, the Swedish banks and their behavior have become the object of criticism in Latvia as well as in Sweden. To study the evolution of the legitimacy granted by their stakeholders, we make use of Suchman's legitimacy theory and rely on a mix of interviews and secondary data to obtain an overview of the events that occurred and understand what the public opinion is regarding these. We then propose an empirical framework to define the aspects of legitimacy that have been damaged, before suggesting strategies to repair it. Our main conclusions are that cognitive and moral legitimacy are the types that were harmed the most, although some ways exist to repair this damage. The results also show that the processes of legitimation are somewhat different in the case of a transition economy, but that the general public's expectations from the banking sector remain similar to that of Western countries. Furthermore, it seems pointless to try to seek a scapegoat for what went wrong; instead, it would be more useful to look for means to prevent this type of events from repeating in the future.