Advantage and Disadvantage of Foreignness and Foreign Direct Investment
41 Pages Posted: 3 Apr 2017
Date Written: April 2, 2017
We analyze how a firm’s country of origin affects its investments in a host country. Viewing the country of origin as a resource, we explain the advantage (disadvantage) of foreignness, i.e., the relative benefit (liability) a subsidiary of a foreign firm enjoys over domestic firms when its country of origin is liked (disliked) by individuals in the host country. We find that separating government-based from consumer-based advantage and disadvantage results in diverging predictions: whereas the government-based advantage induces the firm to invest more to benefit from incentives, the consumer-based advantage induces the firm to invest less to maintain foreignness; whereas the government-based disadvantage induces the firm to invest less to reduce risks, the consumer-based disadvantage induces the firm to invest more to localize.
Keywords: advantage of foreignness, disadvantage of foreignness, country-of-origin, resource-based view
JEL Classification: F23
Suggested Citation: Suggested Citation