Overcoming the Inherent Sources of Liability of Foreignness : Measuring and Compensating the Disadvantage of Being Foreign
The established theories on the performance of the foreign firm in host country markets raise a puzzle: on the one hand, foreign ventures may be more likely to possess certain advantages that could help them outperform local competitors. On the other hand, foreign ventures suffer a disadvantage stemming from their unfamiliarity with the host market conditions, so-called liability of foreignness. Thus, certain questions arise about the severity of the foreigners disadvantage and the use of compensating factors to overcome the liability of foreignness in order to understand the factors that moderate a company's foreign market activity. In this thesis I apply the concept of information asymmetries to explain the alien status of foreign ventures and the existence of liability of foreignness. I identify strategic instruments that could be used to overcome the separate reasons of the home biased selection behavior of host consumers and the resulting competitive disadvantage of foreign ventures. Developing a new theoretical explanation for the relationship between the liability of foreignness and a firm's ability to overcome the inherent sources causing this disadvantage gives an opportunity to identify and understand the separate sources of the stranger status more in detail. In particular, I can show an advantage for new ventures to handle this barrier, which facilitates understanding the phenomenon of international entrepreneurship. Relying on the questions that constitute the research focus of this thesis and the performed empirical proves I can make the following contributions. Even though several researchers mention the advantages of MNEs in host markets, foreign ventures still face a significant competitive disadvantage in host country markets when competing with domestic companies. On the contrary, there exist instruments that allow firms to handle the inherent sources of the foreigners' liabilities and to overcome the disadvantage. Relying on the knowledge about information asymmetries and instruments to resolve this problem I could identify strategic instruments that are helpful to reduce the firms' degree of liability of foreignness. The instruments are: - Scanning activities of foreign ventures that are helpful to identify and adopt local market peculiarities and host consumer preferences. In this way foreign ventures can decrease the firm-based reasoning for the liability of foreignness.- Scanning advantages of young ventures in host country markets. Young ventures adapt more easily to the new environment and customize the firm products according to the host market peculiarities.- Foreign ventures' communication of the product characteristics is helpful to reduce the lack of awareness and the uncertainty of host consumers. In this way firms can actively decrease the consumer-based reasoning for the existence of liability of foreignness.- Finally, environmental factors, for example economic stress, force host consumers to scan foreign product characteristics. In this way host consumers adopt knowledge about the foreign product and, subsequently, reduce the degree of liability of foreignness. As result, liability of foreignness is not an unchangeable barrier confronting foreign ventures. There exist instruments that can help companies to overcome it. From a managerial perspective it is important to understand that differences of the degree of liability of foreignness exist, e.g., regional differences within host markets. Economically depressed regions may be more accessible to foreign producers. Furthermore, the inherent sources as well as instruments to overcome these reasons of liability of foreignness are especially important for managers of new ventures that enter foreign markets immediately after firm establishment. As the separate sources have different implications for entrepreneurs, they require customized instruments to handle the resulting liability. On the one hand, the research results show that young ventures possess an advantage compared to mature ones, which is helpful to overcome the firms' lack of knowledge about host consumer preferences and adapt to local peculiarities. Therefore, it is easier for new ventures to overcome the liability of foreignness. On the other hand, relying on firm assets that force firm efficiency could hinder new ventures to enter successfully into foreign markets immediately after firm establishment. In this way, liability of foreignness is a stronger barrier for young firms than for their mature competitors. These results imply that firms do not have to identify the one perfect strategy to overcome liability of foreignness but much more that they have to find the right balance between certain strategic tools and the given organizational settings to ensure that all potential reasons for the disadvantage are taken into account before setting up their foreign market activity.
Year of publication: |
2008
|
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Authors: | Zimmermann, J?rg |
Publisher: |
Universit?t Augsburg / Wirtschaftswissenschaftliche Fakult?t. Betriebswirtschaftslehre |
Subject: | Unternehmen | Auslandsgesch?ft | Wettbewerbsf?higkeit | Wettbewerbsstrategie | Internationalisierung | Multinationales Unternehmen | Lernen | Lernvorteil junger Unternehmen | Liability of Foreignness | Internationalization | International Entrepreneurship | Learning Advantage of Newness | Multinational Enterprise |
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