Liability of Foreignness and Internationalization of Emerging Market Firms

Abstract

Liability of foreignness (LOF) is a well known concept in international business domain. At the core of LOF is the insight that firms face social and economic costs when they operate in foreign markets. Extant literature acknowledges that the ability of firms to overcome LOF in host locations vary, however, it does not discuss the possibility that the LOF itself could vary for different firms at the same location. We extend this literature by examining how a firm’s interaction with the host and home country environments affect the LOF that it faces in foreign markets?

We argue that there are two sources of LOF – environmentally-derived LOF and firm-based LOF. The environmentally-derived LOF has its source in home and host country environments. Firm-based LOF, on the other hand, derives from firm-specific characteristics including ownership structure, firm-specific resources, learning, and network based linkages such as affiliation to a business group. Furthermore, we argue that both the environmentally-derived and firm-based LOF are different for emerging market firms as compared to developed market firms. We develop testable propositions about how environment-specific and firm-specific factors affect LOF and suggest directions for future research.

Keywords: Liability of Foreignness, Internationalization, Emerging Market Firms