Do Foreign Firms in China Incur a Liability of Foreignness? The Local Chinese Firms’ Perspective

Liability of foreignness (LOF) has been one of the building blocks of multinational enterprise theory development, but we have limited knowledge about the liability of foreignness in the context of multinationals operating in developing countries. This study suggests that in a developing country like China, foreignness may still exist, but its negative impact on foreign firms’ performance may have become insignificant. Local Chinese firms were found to enjoy significant location‐based advantages over their foreign counterparts, contributing to liability of foreignness. However, the adverse effects of liability of foreignness on foreign firms appear to be offset by the foreign firms’ superior firm‐specific and multinationality advantages over local Chinese firms. Further, the location‐based advantages that foreign firms have built up over time further serve to strengthen their overall competitive position in China. © 2014 Wiley Periodicals, Inc.     

Strategic responses to extreme institutional challenges: An MNE case study in the Palestinian mobile phone sector

Besides firm-level resources and industrial influences, firms’ strategies have been related to their institutional contexts. Empirical studies have investigated survival strategies in international environments where institutional voids, barriers and violence have had independent influences.This study is the first to analyse strategies in circumstances that combine all these negative challenges. In the Palestinian mobile phone industry, a surviving MNE has faced not only violence, voids and institutional barriers imposed by three different governments, but also the liability of foreignness and its associated uncertainties.In a highly uncertain environment, it is found that being a MNE brings benefits as well as liabilities of foreignness. Furthermore, this MNE discloses many strategic responses to institutional challenges that are associated with positive outcomes, even in a most extreme Palestinian environment that produces the most propitious circumstances for negative responses and outcomes.     

Corporate name change: Investigating South African multinational corporations' postacquisition performance

It has long been argued a multinational corporation (MNC) needs to be able to leverage the firm‐specific advantages to overcome the liability of foreignness in the host markets so the MNC can enjoy the benefit of internationalization while competing with the indigenous firms in the host market. However, emerging‐market MNCs, which have the nontraditional ownership advantages, such as flexibility and cost‐advantage, may require different international strategies to realize the anticipated profit in their cross‐border acquisitions. This article takes an organizational identity approach to study how the foreign identity of South African MNCs constitutes the source of liability and negatively impacts their postacquisition performance. We find South African MNCs that adopted a corporate name change for their acquired subsidiaries experienced worse postacquisition return on asset than the South African MNCs who did not do so. On the other hand, facing a large economic distance, South African MNCs that facilitate the acquired subsidiary corporate name change enjoy better postacquisition performance.     

Legitimacy and accelerated internationalisation: An Indian perspective

This paper extends the institutional theory perspective by examining the strategic behaviour of founders of smaller service firms in a key emerging economy—India. Building on accelerated internationalisation and legitimacy literature in the emerging market context, we provide a new perspective, emerging market aggressiveness, which explains why founders/managers are not always passive recipients of their environment. Their selections of locations are dependent on the vision and stretch goals of the founder and their ability to gain legitimacy quickly to move that vision to a reality. They do not appear to be limited by their potential liabilities of newness, foreignness, emergingness or outsidership. They adopt committed modes of entry from the outset to build their legitimacy and reduce their liability as an outsider. Using a qualitative multiple case study approach, we demonstrate that managers are able to use proactive, planned and unplanned strategies simultaneously, in order to quickly prepare themselves to take advantage of transient international opportunities, ahead of their competitors in advanced markets.     

The Effect of Cross‐Border Mergers and Acquisitions on Earnings Quality: Evidence from China

Despite the fruitful research on the motives and outcomes of cross‐border mergers and acquisitions (M&As) of Chinese multinational corporations (MNCs), there has been scant research on the impact of cross‐border M&As on corporate governance. In this article, we fill the research gap by exploring whether cross‐border M&As may lead to an improvement in corporate governance of Chinese acquirers. In particular, we examine the impact of cross‐border M&As on earnings quality of Chinese MNCs. We find that the acquisition of a target firm from a developed country leads to a significant improvement on the acquirer's earnings quality. In comparison, the acquisition of a target from an emerging market does not have such an impact. Our results are robust to various corporate governance measures, alternative econometric methods, and controls of relevant firm characteristics and macroeconomic variables. Finally, we show that the effect of cross‐border M&As on earnings quality is more pronounced in non‐state‐owned enterprises (non‐SOEs) that have conducted large M&A deals. Our article offers new insight to the international business literature on latecomer perspective and liability of foreignness. © 2016 Wiley Periodicals, Inc.     

Liability of Foreignness in Fast-Expanding Markets: Evidence from Ghana

In this study, we sought to establish if the idea of liability of foreignness (LOF) also persists in the fast-expanding markets (FEMs) and whether there are certain firm characteristics that can mitigate or accentuate this effect. We utilize data from the World Bank enterprise surveys conducted in Ghana in 2007 and 2013. We operationalize liability as the probability that a firm suffered from a crime in the year under study. We also specify empirical probit and instrumental probit models with controls to answer the above research question. We find that there is LOF in fast-expanding markets, and this effect is robust to different specifications. Given that our liability is crime, we moderate the LOF effect with data on security expenditure. The results still show that even if firms increased their security expenditure, the LOF effect still persisted. The study makes a contribution to the international business literature by testing the LOF effect in a new unit of analysis and is also one of the earliest to operationalize a firm's liability in the form of crime it suffers in its operating environment. © 2015 Wiley Periodicals, Inc.     

Turning a liability into an asset of foreignness: Managing informal networks in Korea

Although foreignness can bring both benefits and costs to a business, much of the literature has focused on the liability of foreignness (LOF), while relatively little attention has been paid to the positive side. Despite the presence of LOFs, foreign companies may accrue some unique advantages from their foreign status, which are referred to as assets of foreignness (AOFs). Drawing upon social-capital theory and institutional theory, this article examines the issue of LOFs versus AOFs in the context of the informal networks in Korea and explores how foreign companies can manage their weaknesses in host-country-specific informal networks to create value from their foreignness. We discuss two practical strategies, reactive and proactive strategies, that can be used by foreign companies. While these two strategies can be pursued in parallel, this article suggests that foreign companies should prioritize pursuing proactive strategies. This article contributes to a more nuanced understanding of the role of foreignness in the international business context and provides practical insights into how foreign companies can leverage their foreign status in developing their own informal networks in Korea.     

Unpacking the effect of strategic ambidexterity on performance: A cross-country comparison of MMNEs developing product-service innovation

This study tests whether strategic ambidexterity improves Product-service innovation (PSI) outcomes for manufacturing multinational enterprises (MMNEs). It also tests successful pathways to develop PSI properly by organizing exploitation and exploration activities. Data from a survey of 338 MMNEs are analysed through Structural Equations Modelling. The sample contains firms from five world regions, including emerging economies. This approach enables contrast to determine cross-country heterogeneity in PSI outcomes. The results show that, to maximise firm performance, PSI must be developed through a sequential Exploitation-Exploration pathway. Although this optimal sequence is consistent across all world regions (except Japan), noticeable contextual differences emerge in the relative importance of exploration and exploitation to firm performance. Our findings show that exploitation (i.e., cost efficiency through PSI design) and exploration (i.e., PSI R&D) capabilities are equally important in emerging economies.     

Choice of markets for initial export activities: Differences between early and late exporters

The behaviour of early exporters not only challenges the perspective of the sequential process of internationalization, but it also questions general concepts in the field of management, such as the liability of newness and the liability of foreignness. This study analyses how firms initiate their export activities and proposes differences between early exporters and other firms. The results of our empirical investigation demonstrate that early exporters begin exporting to a greater number of countries than late exporters. However, in the case of early exporters, those countries are institutionally closer to the country of origin of the firm. Finally, we analyze the role played by financial resources in the choice of markets for those initial exports.     

When do firms choose global cities as foreign investment locations within countries? The roles of contextual distance,knowledge intensity,and target-country experience

Foreign investors generally need to overcome a liability of foreignness stemming from contextual distance between their home country and the target country. We argue that they can limit that liability more easily by investing in a global city rather than elsewhere in the target country. Accordingly, we hypothesize that the contextual distance to a target country has a positive effect on a firm’s propensity to invest in a global city in that country. We also predict that this effect is stronger for investments in knowledge-intensive activities and weaker for investors with more target-country experience in general and target-country experience in global cities in particular. Our hypotheses receive considerable support in an analysis of 11,748 foreign greenfield investments by 1025 manufacturing and service firms during 2008–2012. Our findings suggest that global cities are superior subnational locations for gathering contextual knowledge about target countries and limiting the liability of foreignness.     

The professional service firm (PSF) in a globalised economy: A study of the efficiency of securities firms in an emerging market

This study explores the efficiency of securities firms in Turkey and offers conceptual and managerial insights utilizing data envelopment analysis. Through a sample of local and foreign owned securities firms in Turkey, we examine the impact of liabilities of foreignness (LOF) and localness (LOL) upon knowledge intensive firm efficiency in an emerging market economy. We have extended this approach through our consideration of liability associated with market globalness (LOMG). Our findings indicate the importance of size for firm efficiency with bank affiliation and foreign ownership also having positive effects on efficiency. Our study makes a contribution conceptually, methodologically and empirically to a growing literature on emerging economies. We also make a valuable addition to the limited empirical work conducted on the securities industry to date. Finally, through our contextualization of Turkish securities firms as professional services firms (PSFs), our research extends the narrow focus on law and accounting which currently dominates the burgeoning research strand on PSFs.     

International entrepreneurship, venture capital networks, and reinvestment decisions

Prior research has established that venture capitalists (VCs) may face significant obstacles in financing ventures from emerging or transition economies. Such hurdles are usually attributed to the weaknesses of host countries’ institutional systems, especially regulatory. These institutional pitfalls may thwart VCs’ ability to exit a portfolio company leading to lower returns than expected. Developing this approach, we argue that exit strategies may also be difficult to execute when VCs expand into advanced economies although for different reasons. Thus, we show that both necessity entrepreneurship prevalent in emerging economies and opportunity entrepreneurship prevalent in advanced economies are positively associated with the number of investment rounds received by portfolio companies. In contrast, we establish that VC firm capital and network density are negatively associated with the number of rounds provided to portfolio companies across distinct institutional environments. This suggests that VCs may improve their performance by choosing an appropriate strategy to navigate unfamiliar institutional environments to minimize their liability of foreignness. Finally, we find that the interaction of VC capital and network density is positively related to the number of VCs’ investment rounds. Apparently, resource-rich VC firms may not fully realize the informational benefits of their dense “knowledge networks” due to insufficient collaboration with partners. At the same time, such VCs may no longer enjoy access to free information flows from prospective allies. Hence, network density and superior resources combined may lead to a greater number of investment rounds.     

Dual liability and the moderating effect of corporate social responsibility–Evidence from Belt&Road investment of Chinese firms

Our examination of 796 Chinese firms that invested in the Belt&Road (B&R) region from 2008 to 2015 shows that Chinese firms often encounter liability of foreignness (LOF) and liability of origin (LOR). Our empirical results reveal that larger institutional distance is related to significant performance decrease, which evidences liability of foreignness for Chinese multinationals. Moreover, Chinese firms with concentrated ownership see their financial performance adversely affected after the B&R initiative, which further validates the argument for liability of origin. We found that firms' Corporate Social Responsibility performance (CSR) has a significant, positive “institutional moderating” effect, that is buffering conflicts between Chinese firms and local stakeholders, and projecting a favorable institutional image to mitigate Chinese multinationals' dual liabilities in the B&R region. Firms with better Corporate Social Responsibility (CSR) performance are more likely to avoid political risk. CSR has been a buffering and bridge mechanism in government inefficiency, lower regulatory quality, lower rule of law and less control of corruption and reducing rent seeking behavior.Therefore, investment in CSR and more inclusive ownership schemes may assist Chinese firms' long survival across the B&R region.     

The liability of foreignness reconsidered: New insights from the alternative research context of transforming economies

Institutional theory has been increasingly used to decipher implications of the liability of being a foreign firm. Earlier studies have argued that multinational corporations bear social costs arising from lack of legitimacy and thus need to engage in isomorphism to increase their likelihood of survival. Drawing on insights gained from transforming economies, this study reconsiders the espoused relationships among legitimacy, local isomorphism, and overcoming the liability of foreignness. We argue that idiosyncrasies of transforming economies could engender (1) varying levels of need for gaining legitimacy of local constituents and (2) alternative ways other than local isomorphism for gaining legitimacy from local institutional actors.     

Organizational Expansion to Underserved Markets: Insights from African Firms

Although scholars have highlighted the need for firms to explore and exploit market opportunities in underserved markets to achieve superior performance, emerging‐market firms’ strategic choices and constraints in such environments remains an underexplored area. Drawing on insights from the intra‐Africa air travel sector, we uncovered that the intense competitive pressures on inter‐African routes has intensified both exploration and exploitation activities on the intra‐African market as firms seek to mitigate the competitive effects. We also found that the firms’ exploitation activities have been punctuated by a number of firm‐specific and institutional factors. The theoretical and managerial implications of these findings are discussed. © 2014 Wiley Periodicals, Inc.     

Minimizing effects of ‘liability of foreignness’: Response strategies of foreign firms in the United States

While anecdotal and research evidence exists supporting the difficulties faced by foreign firms in host nation environments due to liability of foreignness, it is clear that many foreign firms have been successfully operating in the U.S. over the years. This study seeks to understand the strategies foreign firms use to cope with liabilities of foreignness in an alien environment and compete successfully with domestic firms, specifically through boundary spanning. Using a sample of 3861 firms in the U.S., we find that foreign firms on the average underperform compared to domestic firms. We also find these firms take a differing strategic posture to cope with the disadvantages of being a foreign firm compared to domestic rivals. Multiple mediation models indicate that once this strategic posture of foreign firms is controlled for, performance differentials do not exist between foreign and domestic firms.     

Liability of Foreignness of Emerging Market Firms: The Country of Origin Effect on Russian IT Companies

Foreign subsidiaries are considered to be at a disadvantage compared to domestic firms in foreign markets. The liability of foreignness (LOF) concept was first attempted in order to address the issue of these disadvantages. Although internationalization of emerging market firms (EMFs) is a very hot topic, there is very little research of LOF of EMFs. In this article, we investigate the sources of LOF and determine the extent of the country-of-origin (COO) effect on Russian IT firms. We also discuss how Russian firms may overcome the LOF, and we propose the mitigation strategies that will help them to decrease negative COO effect.     

Subsidiary-specific advantages for inter-regional expansion: The role of intermediate units

This paper explores the distinctive deployment of resources and capabilities by subsidiaries in order to develop an intermediate role within the MNC. Based on the regional management perspective, we focus on a specific intermediate role—the springboard subsidiary—that helps overcome the liability of inter-regional foreignness. Our results, which are based on a dataset covering 188 subsidiaries, show that the probability of taking on this role is contingent upon experiential knowledge about the target region, as well as a rich knowledge base derived from a wide range of activities and a broad geographical scope. Our findings also show that possession of slack resources does not necessarily mean that a subsidiary will take on this role, as such slack must be combined with experiential knowledge. This paper serves as a first step in helping MNCs plan resource allocation to handle inter-regional expansion.     

Knowledge and Innovation in China: Historical Legacies and Emerging Institutions

The purpose of this study is to provide a critical and historically grounded perspective on the institutional fabric for knowledge generation and innovative activities in Chinese society. Utilizing theoretical and methodological insights from social epistemology, it explores legacies of traditional Chinese perceptions of the utility of scientific knowledge, the balance of exploitation/exploration, the prestige of innovation, and the division of labour in knowledge production and application. It is argued that these legacies have continued to shape emerging contemporary institutions of knowledge and innovation. They contribute to tensions between the search for knowledge and requirements of power; they bias innovative activities towards exploitation; and they constrain creative entrepreneurship in the transitional innovation system.     

The stock market performance of exploration-oriented and exploitation-oriented cross-border mergers and acquisitions: Evidence from emerging market enterprises

This study builds on insights from mergers and acquisitions (M&A) studies and the perspective that stock market performance is affected by the M&A strategies of firms. Past studies show that acquisitions are an effective way to exploit existing knowledge and explore new possibilities. We argue that stock market performance can be a response to exploration/exploitation strategies in the context of cross-border M&As by emerging market multinationals. Based on cross-border M&A data of Chinese multinationals, we find that exploration-oriented acquisitions have worse stock market performance than exploitation-oriented acquisitions. Furthermore, we find support for our premise that acquiring firms can reduce the risk of exploration-oriented acquisitions by having more high-discretion slack resources or by maintaining a high level of equity share of the target firm. In addition, acquiring firms perform better if they conduct exploration-oriented acquisitions in related industries. Our results contribute to a better understanding of exploration and exploitation in the context of M&As.