Liability of Foreigness

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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.: +1-972-883-2372; fax: +1-972-883-6164. E-mail address: (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 2 5 3 ( 0 2 ) 0 0 0 6 7 - 4


D. Sethi, S. Guisinger / Journal of International Management 8 (2002) 223–240

environment, incurs costs and disadvantages on venturing abroad can easily be appreciated. Several studies have explored the nature and effect of many of those disadvantages, be they on account of cultural differences, host government policies, political risk or other similar factors. Such attempts, however, represent only isolated snapshots of the phenomenon and have failed to view this liability holistically. Most research has conceived LOF in the constricted dyad of foreign subsidiary–local firm operations. Traditionally, all disadvantages incurred by the former in the host country’s environment have been loosely clubbed under this ‘‘umbrella’’ term. The traditional conceptualization presents a somewhat static and constricted view that is unable to explain all the costs of doing business abroad incurred by multinational enterprises (MNEs), either on an enduring basis or in the context of multicountry operations. Consequently, this narrow focus on only some restricted elements rather than upon a fully delineated whole does not allow a proper perspective of the phenomenon. The costs arising out of unfamiliarity and discrimination in the host country’s environment are not the only costs incurred by an MNE once it ventures abroad. Interaction with the extreme complexity and volatility of the international business environment (IBE) itself imposes many other costs upon MNEs. Such costs arise not only out of reading the IBE incorrectly but also from not formulating and implementing a strategy that is compatible with it. Moreover, these costs are incurred not merely at the time of the initial entry into a foreign market but can persist throughout the duration of the firm’s foreign operations. This paper uses the term reading colloquially to include scanning, interpretation, synthesis and analysis. There is ample evidence of such costs, both empirical...
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