Liability of Foreigness

Decent Essays
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
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Click and Harrison (2000), for instance, followed the financial performance of over 3000 US firms over a 14-year period to provide empirical evidence that an increase in the extent of multinational operations of US corporations actually brought about erosion in their value. Their arguments, however, are based only on an accounting and economics-based perspective and do not take into account the strategic compulsions due to which MNEs might often be constrained to accept such costs in order to follow their rivals into foreign markets due to oligopolistic rivalry. The financial issue of firm value thus cannot be divorced from the strategic issue of foreign market entry. This paper seeks to examine LOF through the relatively underexplored lens of strategic management, departing from the usual transaction-cost economics perspective, because it enables a more realistic and continuous appraisal of the effect of the IBE on MNE operations. Anecdotal evidence also abounds about such costs, with even established MNEs often incurring huge losses in their foreign operations. Ricks (1993) and Knight (1995), for instance, provide lucid accounts of blunders in international business. However, do those anecdotes really reinforce the LOF argument? Or, alternatively, are they getting confounded with mistakes that even domestic firms could make in their
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