Liability of foreignness as a barrier to knowledge spillovers: Lost in translation?

Multinational corporations (MNC) search increasingly for lead market knowledge and technological expertise around the globe. We investigate whether their subsidiaries gain access to these valuable sources of host country knowledge to the same degree as domestic rivals. We develop a theoretical framework for “why” and “how” a lack of embeddedness and legitimacy (liability of foreignness) may translate into additional obstacles for foreign subsidiaries. We test these hypotheses empirically using a broad dataset of more than 1100 firms in Germany. We find that MNCs can compete on an equal footing with host country competitors when it comes to generating impulses for innovations from universities. They are significantly challenged by liabilities of foreignness, though, when host country customers are involved. The disadvantages are especially pronounced when the host country industry is at the technological forefront. We suggest that the disadvantages arising from liability of foreignness in the host country are especially relevant when promising lead customers have to be identified and their tacit and often unarticulated impulses have to be transferred, understood and prioritized. Management recommendations are developed on the basis of these results.     

International offshoring of services: A parity study

Conventional wisdom suggests that firms engage in international offshoring of services primarily to reduce wage costs associated with a given service activity. Drawing on international business research on the costs of doing business abroad (CODBA), liability of foreignness (LOF), and institutional theory, we investigate the factors that contribute to the location choices for services offshoring activity, including wage differentials between the home and host countries. We find that consistent with a parity perspective but contrary to conventional expectations, a country is more likely to be a destination of services offshoring as the average wage of a country increases. We also find that education level and cultural similarity are significant drivers of offshoring location choices, again consistent with a parity perspective. This study contributes to debates about the economic impact of services offshoring by showing that firms locate offshoring facilities in destinations that are closer in wages to the home country and those with higher education levels and cultural similarity.     

Overcoming the liability of foreignness without strong firm capabilities — the value of market-based resources

The concept of “liability of foreignness” — the costs of doing business abroad — has been known and discussed since the mid-1970s. At the core of these discussions is the role that firm capabilities play in overcoming or limiting these costs. This raises the question of how firms with inappropriate, limited or constrained capabilities relative to their host environment overcome the liability of foreignness. This paper focuses on the subsidiaries of “emerging multinationals” and how they manage the demands of a technologically and economically highly developed host country. A host location with sophisticated markets and well-developed institutional infrastructure may be a highly challenging environment for firms that have grown their organizational capabilities in less developed contexts. This paper explores that situation and considers how resources available on the market — for example through supplier inputs — assist subsidiaries to benefit from their presence in a munificent location. Despite the acknowledged limitations of a transaction-based approach, this paper presents evidence that purchasing knowledge provides an accessible strategy for overcoming some liabilities of foreignness.     

Employer Attractiveness in Latin America: The Association Among Foreignness,Internationalization and Talent Recruitment

Rapid economic development is provoking a skilled talent shortage in Latin America, causing firms to compete intensely for scarce talent (Manpower Group, 2011). While foreign-headquartered firms may bear a “liability of foreignness” (Zaheer, 1995), the question remains whether this alleged liability extends to attracting workers in the Latin American context. We propose an interactionist model grounded on person–organization fit and marginalization theories. Our model, which distinguishes between foreignness and internationalization, argues that they interact with marginalization variables to impact employer attractiveness. Our multi-level analysis of 76,191 individual evaluations of 80 firms within five Latin American countries supported hypotheses that members of marginalized groups based on gender, education, and income were relatively more attracted to foreign headquartered and more international firms. Our findings contribute to an emerging body of evidence suggesting that the impacts of foreignness and internationalization are not necessarily monolithic across all contexts.     

Regional economic stress as moderator of liability of foreignness

In this paper we develop optimized localization strategies for multinational firms to overcome their liability of foreignness by adding a regional dimension within a country. We explore conceptually whether economic stress in a region has a mitigating or reinforcing effect. We test this analytical framework empirically on the highly internationalized German car market and find that intra-national regions under economic stress are more promising markets for foreign car manufacturers as the effects of liability of foreignness are significantly lower there.     

Liability of ecosystem integration and internationalisation of digital firms

The widespread emergence of digital firms has important implications for international business theory. In this paper, we argue that because of systematic cross-industry differences in the local ecosystems digital firms need to develop in foreign markets, they will face differential costs and challenges of what we term liability of ecosystem integration (LoEI). The nature of the LoEI differs from both traditional concepts of the liability of foreignness (LoF) and the liability of outsidership (LoO). Rather than reflecting the need to overcome economic or psychic distance by learning about the host country (as with LoF) or investing in relationship-specific knowledge (as with LoO), overcoming LoEI requires investments in catalysing the co-development of a local ecosystem involving users, complementors and institutional actors specific to each business. We show how the level of LoEI a firm faces depends on the characteristics of its industry and its business model along three dimensions: the level of integration with local users, complementors, and institutions. These characteristics impact both firm's success in internationalisation and the level of concentration in the global market.     

The Impact of Vicarious Experience on Foreign Location Strategy

MNEs can learn from the foreign investment experiences of other firms when evaluating their own foreign entry strategies. We argue that other firms' experiences reduce investment barriers arising from formal and informal institutional environments in host countries that are dissimilar from an MNE's home country, thereby encouraging new entry. Our empirical analysis of foreign entries by Japanese public manufacturing firms over more than a thirty-year period indicates that the prior experiences of other firms in a host country mitigate the negative effect of formal and informal institutional distance on entry decisions: as other firms' experiences in a host country increase, a firm is less deterred by greater institutional distance from entering the country. We also find that the distance-mitigating effect of other firms' experiences in different industries is less significant when a larger body of same-industry firm experience exists in a country, implying a substitution effect between different types of vicarious experience.     

Do exits proxy a liability of foreignness?: The case of Japanese exits from the US

Progress in understanding the liability of foreignness requires accurate measurement of this concept. This paper investigates whether exits of foreign affiliates from a given host market provide a reliable measure. We tackle this question by investigating 32 exits of Japanese manufacturing affiliates from the US. Our goal is to assess the extent to which exits are driven by a liability of foreignness and thus whether exits can serve as a reliable measurement of this liability. We find that less than half of our exits are attributable to a liability of foreignness. We conclude that while the data confirm a liability of foreignness for Japanese early entrants into the US, the presence of many other motives for exit suggests caution when inferring such a liability from exits, especially when exit costs are low.     

Liability of foreignness to competitive advantage: How multinational enterprises cope with the international business environment

An expanded and holistic conceptualization of the liability of foreignness (LOF) is presented that goes beyond the traditional foreign subsidiary–local firm dyad in the host country. Taking the strategy process perspective, we contend that this liability is the aggregated effect of the firm's interaction with all elements of the international business environment (IBE), not merely in the initial entry mode decisions but throughout its foreign operations. Viewing the antecedents and consequences of this liability holistically, we argue that accurate reading of the complex and volatile IBE, formulation of a compatible strategy and its effective implementation together contribute to good performance. As the resource-based perspective suggests the degree to which firms develop such tacit skills, differentially affects their performance. Firms that excel in these environment-reading skills and are agile enough to quickly adapt to its changes can transform this liability into a competitive advantage.     

Does innovation lead to global orientation? Empirical evidence from a sample of Italian firms

This paper analyses the relationship between innovation at firm and industry level, and the global vs regional strategy of multinational enterprises (MNEs). Based on data from a sample of large Italian manufacturing firms, the analysis shows that technological assets affect a firm’s ability to overcome the liability of (regional) foreignness: the extent to which MNEs can exploit their firm-specific technological advantages is greater within their home region, but they also exploit them outside it. Furthermore, the results show that a firm’s foreign (outside the home country) and global sales (outside the home region) are higher, the greater the technology intensity of the industry in which they operate. These findings suggest that, although MNEs tend to operate regionally rather than globally, their strategic orientation is contingent upon firm- and industry-specific factors. Managers need to take the potential for globally exploiting R&D investments into account, even if it may not be equally successful within and outside the home region, and may be constrained by a number of inter-regional barriers.     

Coping with liability of foreignness: Different learning engagements of entrant firms

Much has been written about how international firms create and sustain firm-specific advantages that offset their liability of foreignness. Less attention has been devoted to the question of how international firms reduce their liability of foreignness. It is the contention of this study that as a consequence of managerial discretion, such as willingness to undertake local adaptation, international firms familiarize with foreign markets at different paces. The data from a sample of 494 international firms from Sweden, Denmark, and New Zealand suggest that entrant firms' learning engagement, i.e., the effort and ability to learn how to conduct business in a foreign environment, varies considerably. In particular, adoption of standardized international business routines and unwillingness to adapt products and marketing practices to local markets seem to be associated with a low learning engagement. The data also indicate that a large proportion of the entrant firms has been engaged in preentry learning.     

How to identify liabilities of foreignness and assess their effects on multinational corporations

This article examines the liabilities of foreignness construct and discusses key methodological and research design issues facing liability of foreignness researchers. After reviewing past studies and more recent liabilities of foreignness research, I discuss definitional issues related to this construct. I then present a two-part research framework designed to first help identify a specific liability of foreignness in a focal country, and then help identify factors that minimize the effects of that specific liabilities of foreignness. I also discuss multinational management issues at the corporation level that likely affect liabilities of foreignness experienced at the foreign subsidiary level.     

Syndication and Foreignness: Venture Capital Investments in Emerging and Developed Markets

This paper aims to understand when foreign and domestic firms have different likelihoods of syndication in venture capital investments. Although current theory may imply that foreign firms face the liability of foreignness that constrain their syndication opportunities, empirical studies provide quite mixed evidence. To address this issue, this study emphasizes the contingency roles of settings, experience, and reputation. In particular, I argue that foreign firms are more likely to syndicate, compared with domestic ones, when focal investments are less mature, or when local markets are colder and less capitalized. However, the difference in syndication between foreign and domestic firms decreases when they accumulate more experience or when they acquire higher reputation. I find empirical evidence from a sample of venture capital investments in China, UK, and the Netherlands. Theoretical and practical implications are discussed at the end.     

股票市场中的外来者劣势研究

作为一个重要的研究主题,外来者劣势已经吸引了学者和实践者的广泛关注。但是,关于外来者劣势的研究大多集中于产品市场,而关于股票市场中外来者劣势的研究较缺乏。鉴于外来者劣势会影响公司在股票市场中的绩效,因而有必要理解并克服股票市场中的外来者劣势。因此,选取股票市场中的外来者劣势作为研究对象,以期在某种程度上丰富已有研究。 基于信息不对称理论和合法性理论,检验信息缺失和合法性缺失对外来者劣势的直接影响。借鉴已有研究,探讨制度质量、行业类型和交叉上市对信息缺失和合法性缺失与外来者劣势关系的调节效应。依据理论分析,提出研究假设并建立概念模型。选取2005年至2013年在海外上市的145家中国公司为样本,通过SPSS软件对相关假设进行实证检验。 研究结果表明,信息缺失和合法性缺失对外来者劣势产生显著的正向影响,即当在海外证券交易所缺失信息和合法性时,公司会遭遇外来者劣势;制度质量显著减弱合法性缺失对外来者劣势的正向影响,行业类型对合法性缺失与外来者劣势的正向关系具有显著的强化作用,而对信息缺失与外来者劣势的正向关系具有显著的弱化作用,交叉上市显著增强信息缺失和合法性缺失对外来者劣势的正向影响。 根据研究结果从弥补信息缺失和合法性缺失两方面给出降低外来者劣势的策略指导,建议选择制度质量较高的东道国和高科技公司聚集的交易所来弱化外来者劣势,研究结果对在海外上市时遇到外来者劣势的公司管理者具有一定的指导借鉴意义。     

The micro-foundations of the returnee liability: The interpersonal challenges of returnee entrepreneurs in Kenya

Although it is known that returnee entrepreneurs can contribute to technological and economic upgrading in their home countries, there is also evidence of a returnee liability where returnee entrepreneurs perform worse than locals. Apart from mismatches between home and host country institutional environments, this liability is argued to stem from interpersonal factors like cultural difficulties and the diminished social capital of returnees at home. Using interviews exploring the experiences of twenty Nairobi-based technology-enabled returnee entrepreneurs, we theorize the micro-foundations of the returnee liability: mismatched expectations, cultural tension and mutual suspicion. Returnees who sent remittances while abroad expect locals to support their return and entrepreneurial vision, but locals expect continued financial support. Returnees who had become more individualistic while fending for themselves in Western economies experience tension with the collectivism of locals, even while they seek to readjust to their home culture. The suspicion of returnees about unethical local business practices and frustration about locals’' apparent inability to value proposed innovations further complicate the ability of returnees to access local knowledge and networks. We discuss how the community support addresses these micro-foundations of the returnee liability and thus help developing countries better benefit from the knowledge and innovations of their returnees.     

Where business networks and institutions meet: Internationalization decision-making under uncertainty

Both business networks and institutional forces are relevant to firm internationalization but they have seldom been studied together. We investigate under what circumstances firms are more likely to adopt non-predictive strategy in light of the influence of the business networks, the institutional forces, and the home market background affecting their internationalization. Based on survey data from 758 small and medium-sized enterprises (SMEs) from Brazil, China, Poland, Italy, and Sweden, our results support the effects of formal institutional distance and cultural differences on the use of non-predictive strategies by SMEs in internationalization decisions, as well as the contingency effects of business network stability and of having an emerging market background. We integrate research on the liability of foreignness and the liability of outsidership and find that business network stability is critical. It does not moderate the relation between cultural difference and NPS adoption but attenuates the negative relation between institutional distance and NPS adoption, indicating that the liabilities of foreignness and outsidership play different roles in internationalization.     

Survival of the foreign subsidiaries of TMNCs: The influence of business group affiliation

We investigate the survival rates of the foreign subsidiaries of multinational firms from India to test if affiliation to a business group affects a subsidiary's survival chances. Business group affiliation is an important organizational attribute of firms in emerging economies. Business groups are complex organizations with heterogeneous resources that evolve along with changes in the institutional environment of a firm's home country. We examine how business group affiliation and the development stage of the host country jointly influence the survival chances of foreign subsidiaries. Our results show that business group affiliation does not have an independent influence on a subsidiary's survival rates, but it does have a contingent effect, where the contingency emerges from the development stage of the host country. Our findings thus have implications for the theory of TMNCs, and business group strategy in emerging economies.     

Is there a liability of localness? How emerging market firms respond to regulatory punctuations

In the 1990s, emerging economies all over the world deregulated, privatized and liberalized their domestic markets. These regulatory punctuations caused radical institutional changes for emerging market firms (EMFs). We argue that, for EMFs, regulatory punctuations created a liability of localness, parallel to the liability of foreignness that firms face when they go abroad. Whereas liability of foreignness comes from the differences caused by changing one's geographic place from ‘here’ to ‘there’; liability of localness comes from changing one's point in time from ‘then’ (pre-exogenous regulatory shock) to ‘now’ (post-exogenous regulatory shock). In both cases, firms incur additional costs, and the ones that survive are ones that best develop strategies for coping with “being in a strange land”. We apply our arguments to the Mexican banking industry, which was privatized and liberalized in the 1990s.     

Host-country Headquarters of U.S. Firms in China: An Empirical Study

Recent studies show that large multinational enterprises (MNEs) adopt an organizational unit, called host-country headquarters (HCHQ), in key foreign countries (Ma and Delios, 2010; Ma, Delios and Lau, 2013). In this study, we examine the factors that are associated with the establishment of an HCHQ by US firms in China. We hypothesize that an HCHQ is associated with both firm-specific factors and host country-specific factors. We find that an HCHQ is associated with the firm's scope diversification and degree of internationalization, and the strategic importance of foreign host country and subsidiary diversification in that host country. The findings are based on archival data of U.S. Fortune 500 firms. The findings add to the understanding of an important organizational structure of large U.S. firms in China, and possibly to MNE structures more widely in key foreign countries.     

Diaspora Ownership and Homeland Firms' Internationalization

Although the contribution of diaspora to international business is becoming more evident, little is known about the channels used by individual firms to benefit from diaspora. In this paper, we propose equity ownership as a form of connection between the homeland firms and diasporans (i.e. diaspora members). Specifically, we draw on the literature on diaspora combined with an owners-as-resources perspective to theorize about how diaspora owners can affect the homeland firm's internationalization. We suggest that the anticipated entry costs deriving from the liability of foreignness faced by homeland firms explain how the impact of diaspora owners varies depending on entry mode. Finally, we compare diaspora owners to other types of foreign owner which we argue have lower levels of motivation and ability to help homeland firms to internationalize, and contribute relatively less to their internationalization than diaspora owners. We test and confirm our predictions using data on 2608 domestically controlled Indian firms and their internationalization in 2006–2012.