Liability of foreignness challenges for firms in internationalisation

1. Introduction

This study aims to investigate the following research question; how does the liability of foreignness create challenges for firms in internationalisation? This research question contributes to understanding the challenges of how a multinational corporation's inherited cultural and institutional managerial-governance presents a challenge for themselves to enter foreign markets. As well as stating key arguments supporting the research question, counter arguments are also presented to adhere to a objective review of the essay. However the main argument presented evolves around a corporations managerial-governance and its need to increase knowledge and experience towards the managers in charge of expanding operations cross-border, to be able to mitigate the liability of foreignness. If such liability is managed properly it could begin to mitigate our understanding of cross-border culture and institutional differenties, which would increase the collaborative convenience for multinational corporations to conduct export and import activities with each other.

The essay is structured to first examine the included literature in a literatury review, before analysis of the literature are compiled into arguments and perspectives which either support the research questions or not. Finally a self-reflection on the content of this essay is included, and a conclusion are provided to summarize the findings of the essay.

2. Literature review

Through thorough research of eight different peer-reviewed articles, key studies related to the subject matter were found eligible to bring perspective into this essay. A research paper authored by Ro et al. (2024) focused on how the US automobile industry and its peoples ‘out-group-biassed-thoughts’ is a liability for foreign car manufacturers when entering the US market; and with a focus on how the term ‘asset of foreignness’ can become an amplifier when achieving a presence in this part of the world. Another source of inspiration aimed to understand the advantage of foreignness in a digital world, where Zhou (2024) found that foreign corporations could leverage the world-wide-web as a method to enhance their presence, in a market where the citizens are akin to the products sold by this non-domestic enterprise. Choudhury et al. (2024) brought a more in-depth analysis on how the institutional structure of the US had become a liability for foreign corporations in terms of legal proceedings and the outcome of such. Common social identifiers termed ‘in-group’ which are domestic citizens, and ‘out-group’ a term used to categorise people from other parts of the world, as well as empirical findings concluded that the legal courts in the US exhibits some sort of nationalism towards domestic corporations, which for the United States could become a liability in terms of attracting foreign investments. However, the reasoning for the legal courts biassed leaning towards these in-group corporations remains unclear, and needs to be researched further if changes are to be provided to this phenomenon.

Moreover, this essay has also included research from the eastern part of the world. An example from this area is shown in the following paper from Haytor and Edgington (2021) where the authors investigate Japanese owned Panasonic's market-entry into China with a time-period that stretches from the late nineteen-eighties into the twenty first century. Their findings serve as an interesting read into the several challenges of adaptation to local parts of China's very diverse psychographic and demographic living conditions. Key solutions and challenges presented in this paper were focused around interaction with people living in more rural areas to understand their needs, as well as antagonistic views from the local governments which made it difficult for Panasonic to dissolve their domestic competitors' imitation of their products. While liability of foreignness is an well-researched phenomenon in the areas of China, Japan and the US; challenges of this occurrence have also been well-sought out in parts of the world where the psychic distances would have seemed more intertwined. However, within the metal and mining industry of Brazil, foreign corporations are challenged by the local partiality toward domestic firms. The Cyrino method to measure the aspects of psychographic differences within multinational collaborations, found that local stakeholders and influencers of Brazil expressed desire of continuous evolvement around the ESG-regulatory agenda as well as asseverate a feeling of being economically exploited by these foreign mining and metal corporations. But at the same time, the authors of this research paper Bueno et al. (2024) are keen to mention some endogeneity in the findings, possibly caused by missing data on the amount of return of equity earned in favour of these non-domestic corporations.

To separate the literature a bit, then as well as research papers from different world-areas are included, so is contrasting industries; and with an aim to understand the luxurious fashion industry and its opportunities in the global market, the article authored by Milanesi et al. (2024) provides valuable insights into how the opposite aspects of liability can create challenges for a corporation, concisely the phenomenon called liability of localness. In this case the researchers found that a luxurious fashion brand can draw on the positive image of their country of origin to expand to other markets, but at the same time, these corporations are facing challenges in terms of hiring entrepreneurial minds with a global focused mindset. These challenges are implicitly made aware of in a separate article by Jeong et al. (2024). An article which chose to focus on how to connect cross-border market participants, and how corporate analysts play an intermediate role in the global capital market. According to the study, multinational enterprises should reside people with analytical minds in foreign markets to mitigate their challenges in achieving interest on their foreign portfolio investments. However only 60% of the world's corporations in the period from 1987 to 2007 were listed on any stock exchange, which makes it relevant to conduct a contemporary study to understand the impact of analysts residing cross-border.

Finally, a shorter article by Cuervo-Cazurra (2011) with a focus to investigate how a firm's home country's values and culture, influences a corporations opportunities for growth in a host country, exemplifies that expanding to host countries of similar institutional structure in regards to economic, security, political and migrational characteristics, would according to the study, serve in favour of less challenges and by that mitigate a corporations liability of foreignness.

3. Argument and perspectives

3.1 Key argument

The key argument presented to the author of this essay, revolves around the aspects of managerial-governance in relation to a corporation's efforts to expand their operations cross-border, and by that becoming a multinational enterprise. The task of governing cross-border operations seems to be taken for granted by several of the corporations analysed in the researched papers, and seen as an implicit part of expanding to foreign markets. This is not a sustainable method to obtain continuous growth in other markets, and arguably a go-to-market aspect managers could benefit to view as an explicit part of expanding cross-border, to mitigate their challenges in another country. To support this perspective, evidence from the article by Choudhury et al. (2024) shows curiousness on why these corporations aren’t aligning their go-to-market expectations towards knowing that competitive firms in a host country, unless otherwise experienced first-hand, always have the home-court advantage in terms of conception of their like-minded fellow citizens. Furthermore, empirical data gathered in the article from Ro et al. (2024), about the foreign identity of international car manufacturers located in the US and these corporations challenges to get their buyers to continue purchasing in times of crises, supports evidence of liability of foreignness compared to their domestic located competitive counterparts.

3.2 Counterarguments and alternative perspectives

Despite that foreign car brands in the United States, as mentioned above can experience challenges to persuade their local buyers that their quality is good enough in times of crises, some of the ways the same international car manufacturers would be able to use their foreignnes as an asset, is by promoting the positive impact their brand can have on the local societies compared to their domestic competitors. Another counterargument which support the acceptance of foreignnes is when multinational corporations choose to applicate their services to adjacent markets with similarity in regards of institutional structure, cultural pshycographics as well as geographical distances. If such a country where presented with similar products through online sales, the corporations could mitigate any challenges they might have according to the research paper authored by Zhou (2024). Moreover, another article by Milanesi et al. (2024) explains the asset of foreignness luxury brands experience, when they want to expand globally, because of the effect their country of origin have by being known as the birth place of similar luxury brands; which provides these brands with a competitive advantage because of the implicit understanding in the market, that companies from such countries are offering quality products.

This essays research shows that there indeed are some validity in the contrasting viewpoints to the liability of foreignness an international corporation might experience. These counterarguments are by the author of this essay presented when, an enterprise choose to expand to similar markets of their own in terms of institutional and cultural similarities. However, despite such contrary view points of the research question, all eight researched articles in this essay, illustrates how challenges for a foreign firm is positively measured, when entering into foreign markets. The fact that these research papers either implicit or explicit mentions challenges of providing relevant market knowledge as well as growth methodologies to managers in charge of a foreign expansion, to conduct proper decision making and navigate in another country, makes the research question valuable to have in mind for all international based corporations.

3.4 Self-reflection on the outcome

With a critical view on the analysed literature, key viewpoints, and empirical findings of the literature at hand, shows that a corporation's challenge to manage liability of foreignness is somewhat due to lack in choosing to manage this phenomenon to the needed extent. Furthermore it seems that multinational corporations are experiencing difficulties acquiring the proper amount of knowledge, to navigate their decision making processes, related to cross-border activities. However, by indulging in research papers which brings viewpoints from contrasted industries, the challenges the liability of foreignness create, would arguably differ from industries to industries depending on the psychographic demand of the product.

Despite the mentioned differencies the liability of foreignnes create across markets and industries, this research paper wants to clearly state that the phenomenon liability of foreignness does create challenges for corporations which wants to expand beyond their domestic borders. And it is the authors perspective that to mitigate such challenges, the management-team in each multinational corporation have an opportunity to increase their focus on educational efforts to enlighten managers into these foreign challenges. With todays in-depth and broad literature, first-hand experience and educational material available to the market, it should be no challenge for corporations to mitigate the challenges the research questions creates.

4. Conclusion

To summarize the key arguments drawn from the literature review and how the arguments supports the research question of this essay; the eight research articles reflects that managerial-governance in international corporations could benefit from indulging themselves in contemporary learnings regarding how to manage liability of foreigness, when in the proces of entering into foreign non-adjacent markets. Lack of first-hand experience of the cross-border countries an enterprise wants to engage themselves into, is the primary reason for the challenges they encounter when approaching their beach-head market of such country. However, some of the literature also shows signs that the asset a company have in being foreign can be used to counter the liability, and meet the demands of buyers in foreign markets.

Furthermore the research included in this essay is contemporary of the present, but with a perspective back into the nineteen-eightees, which provides the reader with a comprehensive view of the challenges the research question presents. Similarly, it is important to be aware of the different aspects the research questions implicitly represents. One of these is the capabilities of a corporation, when entering international markets, another is the impact, or lack thereof, these international corporations have when trying to capture awareness in foreign markets. Hence it should be clear that the challenges which lies within the liability of foreignness, are important for international corporations to manage, for them to expand in a more effective maner.

5. Reference list

Bueno IM, Sheng HH and Bortoluzzo AB (2024) 'Liability of Foreignness in Metals and Mining Companies in Brazil', Latin American Business Review, 25 (2), doi: 10.1080/10978526.2024.2387358

Choudhury A, Jandhyala S and Nandkumar A (2024) 'Economic nationalism and the home court advantage', Strategic Management Journal, 45 (10).

Cuervo-Cazurra A (2011) 'Global strategy and global busness environment: The indrect and indirect influences of the home country on a firms global strategy', Global Strategy Journal, 35 (1): 382-386, doi: 10.1111/j.2042-5805.2011.00035.

Hayter R and Edgington D (2021) 'Panasonic in China: A Search to Overcome the Liability of Foreignness', Asia-Pacific Journals, 22 (1), 58-83 doi: 10.1080/10599231.2021.1866401

Jeong Y-C, Yu J and Ryu W (2024) 'Connecting Cross‐Border Market Participants: The Intermediary Role of International Analysts in Global Capital Markets', Journal of management studies, 61 (6): 2535-2569, doi: 10.1111/joms.12988

Milanesi M, Runfola A and Guercini A (2024) 'Exploring the internationalization pathways of luxury SMEs: is there an asset of foreignness?', International Marketing Review, 41 (3): 806-826, doi: 10.1108/IMR-08-2023-0174

Ro S, Kim D, Lamont BT and Maslach D (2024) 'Foreign identity and organizational crises: Evidence in the U.S. automobile industry', Journal of World Business, 59 (6), doi: 101582

Zhou N (2024) 'Advantage of foreignness in a digital world: role of long tail users', Multinational Business Review, 32 (3): 323-342, doi: I 10.1108/MBR-11-2023-0184