The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004

We construct estimates of external assets and liabilities for 145 countries for 1970-2004. We describe our estimation methods and key features of the data at the country and global level. We focus on trends in net and gross external positions, and the composition of international portfolios. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories accounting for this discrepancy.     

External liabilities and crises

We examine the determinants of external crises, focusing on the role of foreign liabilities and their composition. Using a variety of statistical tools and comprehensive data spanning 1970–2011, we find that the ratio of net foreign liabilities to GDP is a significant crisis predictor. This is primarily due to the net position in debt instruments—the effect of net equity liabilities is weaker and net FDI liabilities seem, if anything, an offset factor. We also find that: i) breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction; ii) the current account is a powerful predictor; iii) foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings; and iv) a parsimonious probit containing those and a handful of other variables has good predictive performance in- and out-of-sample. The latter result stems largely from our focus on external crises sensu stricto.     

Is foreign direct investment a safer form of financing?

It has been common to attribute financial crises to short-term capital inflows, while foreign direct investment (FDI) is seen as a safer form of finance. The relationship between crises and the composition of capital flows is particularly relevant at present because the flow of capital to Latin America is becoming increasingly dominated by FDI. This paper asks whether the composition of capital inflows and of the stock of foreign liabilities is relevant for financial crises, be it their frequency, depth, or length. It explores the possible role of FDI as a benign form of external liability relative to other classes of liabilities, reviewing both analytical and empirical arguments.     

Understanding bilateral exchange rate volatility

This paper develops an empirical model of bilateral exchange rate volatility. We conjecture that for developing economies, external financial liabilities have an important effect on desired bilateral exchange rate volatility, above and beyond the standard optimal currency area (OCA) factors. By contrast, industrial countries do not face the same set of constraints in international financial markets. In our theoretical model, external debt tightens financial constraints and reduces the efficiency of the exchange rate in responding to external shocks. We go on to explore the determinants of bilateral exchange rate volatility in a broad cross section of countries. For developing economies, bilateral exchange rate volatility (relative to creditor countries) is strongly negatively affected by the stock of external debt. For industrial countries however, OCA variables appear more important and external debt is generally not significant in explaining bilateral exchange rate volatility.     

Liabilities of origin and its influence on firm's corporate social performance? A study of emerging market multinational corporations

This study draws upon the institutional-based view to examine how home country institutional voids affect the corporate social performance (CSP) of emerging market multinational corporations (EMNCs). We propose that home country institutional voids of EMNCs are positively related to CSP. We also argue that EMNCs' internationalization and visibility will further augment the above relationships. We tested our hypotheses using a sample of 89 EMNCs from 10 countries from 2009 to 2018 and found support for our arguments. Our findings show that EMNCs use CSP to overcome the liabilities of origin due to their home-country institutional voids. Internationalization and visibility increase the challenges of origin liabilities and EMNCs respond by enhancing their CSP. Our research adds to the existing knowledge base on institutional voids within the realm of international business.     

Decomposing the U.S. external returns differential

We decompose the returns differential between U.S. portfolio claims and liabilities into the composition, return, and timing effects. Our most striking and robust finding is that foreigners exhibit poor timing when reallocating between bonds and equities within their U.S. portfolios. The poor timing of foreign investors-caused primarily by deliberate trading, not a lack of portfolio rebalancing-contributes positively to the U.S. external returns differential. We find no evidence that the poor timing is driven by mechanical reserve accumulation by emerging market countries; rather, it is driven almost entirely by the poor timing of rich, developed (mainly European) countries. Finally, while poor foreign timing appears to be persistent across subsamples, other terms in our decomposition (the composition and return effects and U.S. timing abroad), as well as the overall differential, are sometimes negative, sometimes positive, and usually indistinguishable from zero.     

Strategic Commitment and Timing of Internationalization from Emerging Markets: Evidence from China,India, Mexico,and South Africa

In a study of 257 new ventures from China, India, Mexico, and South Africa, we find support for the mediating effect of strategic early internationalization on international sales intensity. We argued that when new ventures from emerging markets internationalize early and with commitment, the legitimacy they acquire helps them overcome liabilities of newness and foreignness. We develop a typology of international new ventures that, based on strategic intent and timing of internationalization, distinguishes strategic early internationalizers from persistent, serendipitous, and long‐term internationalizers. We show that strategic early internationalization accounts for over half of the explained variance in international sales intensity and either fully or partially mediates the effects of managerial knowledge and market orientation on international sales intensity.     

Social Media Firm Specific Advantages as Enablers of Network Embeddedness of International Entrepreneurial Ventures

Combining internalisation theory and internationalisation networking literature we study how international entrepreneurial ventures use social media to internationalise. Our qualitative study reveals the governance mechanisms and learning that are part of a dynamic process. We explain how firms leverage their own social-media capabilities and bundle them with the capabilities of foreign partners, which they leverage to create new social-media capabilities to grow internationally. Firms leverage social-media capabilities to become embedded within emerging and strategic networks, a position that is central for firms to mitigate threats of opportunism and bounded reliability and to overcome liabilities connected to smallness, newness, and foreignness.     

Borrowing Without Debt? Understanding the U.S. International Investment Position

Sustained large U.S. current account deficits have led some economists and policymakers to worry that future current account adjustment could occur through a sudden and disruptive depreciation of the dollar and a sharp drop in U.S. consumption. Two factors that, to date, have cast doubt on such concerns are the stability of U.S. net external liabilities and the minimal net income payments made by the United States on these liabilities. We show that the stability of the external position reflects sizable capital gains stemming from strong foreign equity markets and a weaker dollar—conditions that could be reversed in the future. We also show that while minimal U.S. net income payments reflect a much higher measured rate of return on U.S. foreign direct investment (FDI) assets than on U.S. FDI liabilities, JEL Classification F21     

From grassroots to international markets: A qualitative study of marginalized entrepreneurs in India

Much of the growing literature on international entrepreneurship focuses on how positive circumstances, such as having prior international experience, business networks, or formal institutions lead to international entrepreneurial action and overlooks the role more challenging circumstances might play. In this study, we extend and refine challenge-based entrepreneurship theory to explore what influences international entrepreneurial action undertaken by marginalized entrepreneurs in an emerging economy. Despite widening economic and social disparities in emerging economies, little is known about entrepreneurs who have traditionally been “left behind.” Our findings suggest that these marginalized entrepreneurs have not only a set of liabilities but also advantages, including creative problem solving and perseverance, as well as local knowledge and networks. To spur the first-person international opportunity belief associated with international entrepreneurial action, an intermediary with resources and networks is needed to offset the liabilities. These intermediaries act as gatekeepers, helping some marginalized entrepreneurs but holding back others.     

‘Expect the unexpected’: Implications of effectual logic on the internationalization process

International entrepreneurship literature has indicated that entrepreneurs often increase international activities along unexpected lines of reasoning without having a precise goal, resulting in “unplanned” internationalization. We argue that “unplanned” internationalization does not necessarily involve non-logical decisions; but, entrepreneurs can follow an effectual rather than causal logic and may base their decisions on the affordable loss principle rather than on the maximization of expected returns. Based on five case-studies, we discuss the implication of effectual decision-making on the internationalization process. We find that switching from causal to effectual logic allows firms to rapidly increase the level of commitment in the foreign market and could assist in overcoming liabilities of outsidership and, therefore, successfully increase the level of commitment in the foreign market.     

Foreign currency exposure and balance sheet effects: A firm-level analysis for Korea

If firms match the currency composition of their liabilities with that of their assets or income, a currency depreciation will have an ambiguous effect on investment of firms holding foreign debt. Using Korean firm-level data, we first find evidence of currency matching. We then show that foreign debt has a significant negative balance sheet effect on firm investment following a depreciation, once foreign assets and exports are controlled for. The balance sheet effect is particularly severe for firms subject to financial constraints. The inclusion of foreign assets is important for identifying the balance sheet effect separately from the competitiveness effect.     

Capital liberalization and the US external imbalance

Differences in financial systems are often named as a prime candidate for the current state of global imbalances. This paper focuses on cross-country heterogeneity in access to international financial markets that derives from the presence of capital controls and argues that the process of capital liberalization over the past decades can explain a substantial fraction of US net external liabilities. We present a simple two-country model with an internationally traded bond, in which capital controls are reflected in the presence of borrowing and lending constraints on that bond. In a US versus the rest of the world (RoW) scenario, we perform experiments that are largely consistent with countries' liberalization experiences. A reduction in the RoW's controls on capital outflows and/or a tightening in the RoW's borrowing constraint enable the US economy to better insure against consumption risk relative to the rest of the world, and therefore decrease its motives for precautionary asset holdings relative to the rest of the world. As a result of these asymmetric shifts in countries' barriers to capital mobility, the US runs a long run external deficit.     

The age-effect of financial indicators as buffers against the liability of newness

This paper builds on the liabilities of newness literature to suggest that accounting information is important for new firms. Using a sample of over 30,000 companies followed during their first 7 years of existence, we find evidence that financial indicators mitigate the liability of newness and that this buffering effect is stronger the younger the organization. These results represent three primary contributions to the literature. First, our conceptualization of accounting measures as indicators of external (creditworthiness enhancing legitimacy) as well as internal (targets for management) buffers to the liabilities of newness provides a novel way of viewing these constructs and explains why they are important to new firms despite their uncertainty and opacity. Second, we theoretically justify and empirically validate that these constructs are more important the younger the new firm is, which runs counter to the common wisdom of these constructs in the entrepreneurship literature. Third, we identify buffers against failure for new firms that are generalizable across industries.     

Bringing Nordic Slush to Asia: Entrepreneurial internationalization of an NGO as a social movement

We explore the internationalization of Slush, an entrepreneurship-promoting NGO from Finland that expanded to Japan, China, and Singapore. We incorporate the social movement theory that allows revealing special mechanisms of NGOs’ internationalization. We show, first, that international opportunity development of internationalizing NGOs is triggered by the shared dissatisfaction with societal conditions. Second, their collective resource mobilization enables networks and learning in foreign markets. Third, internationalizing NGOs overcome internationalization liabilities through building their social identities. We also offer a model of NGO internationalization that incorporates the social movement theory. Overall, our study broadens internationalization research by bringing a non-business theory into it.     

MNEs and development: a review and reconceptualization

In this paper, we review and critique two prominent theories in the international business and international economics literatures regarding the role of multinational enterprises (MNEs) in host country development: the “spillovers” perspective on the impact of MNE investment in host countries and the liabilities of foreignness (LOF) view that specifies the constraints MNEs must overcome to succeed in local, developing country markets. We then propose an alternative conceptualization of MNE-host country relations in which MNEs and local nongovernmental organizations (NGOs) pursue collaborative relationships that make a positive, collective contribution to host country development and to MNE and NGO strategic goals in ways that neither sector is positioned to do alone.     

Everyday talk and convincing conversations: Utilizing strategic internal communication

When managing organizational identity, great attention is often paid to external stakeholders while internal stakeholders receive far less consideration. However, organizational identity lives somewhat enigmatically at the intersection of the attitudes of all organizational stakeholders, not just those in the external environment. Moreover, employees are positioned to serve as either ambassadors of the organization or as liabilities depending on the way they speak about the organization to those both within and outside their workplace. Employees regularly discuss their work experiences with those outside the organization and frequently do so using social media, potentially reaching large audiences. This article describes the process through which everyday talk within the organization shapes its identity while wielding powerful effects on external perceptions. We highlight several common errors leaders make that promote negative everyday talk, along with suggestions on how to successfully manage identity through strategic communication and managerial processes. We also discuss the theoretical and pragmatic effects of everyday talk.     

Reappraising liabilities of foreignness within an integrated perspective of the costs and benefits of doing business abroad

Several international business scholars have elaborated upon Hymer's [Hymer, S. H. (1960). The international operations of national firms: A study of direct investment. Unpublished Ph.D. dissertation, MIT, Cambridge, MA] costs of doing business abroad through the liability of foreignness notion. While this research has made important contributions, there is need for more conceptual refinement and synthesis due to the vastly increased scale and scope of MNE operations in recent years. Consequently, this study attempts to more precisely delineate the liabilities of foreignness component of costs of doing business abroad from other costs/liabilities that arise from the increasing complexity of global business. Further, we synthesize both the costs and benefits of cross-border operations that accrue to the foreign subsidiary into an integrated conceptual framework, and advance 11 theoretical propositions on how those impact its competitive dynamics. We illustrate these notions through a longitudinal case study on the operations of Ford Motor Company in India over the past 80 years.     

Export intensity of foreign subsidiaries of multinational enterprises: The role of trade finance availability

We examine the relationship between the role of trade finance availability and the export intensity of foreign subsidiaries of multinational enterprises (MNEs). In developing our hypotheses, we draw upon insights derived from “new” internalisation theory (international business literature) and international trade finance (international economics literature). We empirically test these hypotheses using survey data compiled from subsidiary managers in six ASEAN countries, supplemented with host-country level data. We conceptualise, empirically test, and establish that the subsidiary-level capability in combining and utilising internal and external debts is an important subsidiary-specific advantage to support export intensity. We find that subsidiaries employ intra-firm loans from MNE internal capital markets and, to some extent, bank loans from external financial institutions to boost their export intensity. Subsidiaries may have concerns about foreign exchange risks, but the use of appropriate foreign exchange risk management is positively associated with export intensity. We discuss the implications of our findings for theory and practice.     

The impact of industry 4.0 on the 2017 version of the Uppsala model

The emergence of Industry 4.0 offers firms internationalization opportunities employing digital platforms and emerging technologies. Relying upon the Uppsala model as applied in light of a firm case study, we contribute to the validity of the Uppsala model 2017. We respond to the counterpoint by Coviello, Kano, and Liesch (2017) to the Uppsala 2017 model, answering the question, What is the impact of Industry 4.0 on the validity of the 2017 version of the Uppsala model? This study builds on a qualitative research methodology through a single case study of Delivery Hero, a global service provider firm. We adopt an extensive longitudinal approach to understand a startup firm’s digital business concept and business evolution, including its internationalization paths. We conclude that the mechanisms of the Uppsala model are valid, but their characteristics have changed by digital and globalized value-adding processes. The dynamic capabilities possessed by the founding entrepreneur turn out to constitute a critical micro foundation for the firm’s international business success. Our findings explain these change mechanisms, illustrating the stepwise progression process led by entrepreneurial decision-making. Industry 4.0 technologies have changed the very manner by which ?rms arrange their value-adding activities with their business stakeholders in course of the firm’s internationalization. By relying on reasonable business targets, algorithms, and data management systems, real-time market monitoring enables international startup firms to learn and adopt local identities faster, thereby efficiently alleviating liabilities of foreignness.