Liability of Foreigness

Journal of International Management 8 (2002) 223 – 240

Liability of foreignness to competitive advantage: How multinational enterprises cope with the international business environment
Deepak Sethi*, Stephen Guisinger 1
University of Texas at Dallas, P.O. Box 830688, Richardson, TX 75083-0688, USA

Abstract 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. D 2002 Elsevier Science Inc. All rights reserved.
Keywords: Liability of foreignness; International business environment; Competitive advantage

1. Introduction Forty years after the path-breaking contribution by Hymer (1960), the notion of liability of foreignness (LOF), though widely acknowledged in scholarly works, still eludes precise theoretical delineation. The fact that a firm, accustomed to functioning in its home country

* Corresponding author. Tel.: [phone]; fax: [phone]. E-mail address: [e-mail] (D. Sethi). 1 Deceased. 1075-4253/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved. PII: S 1 0 7 5 - 4

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