Beyond Liability: Startup Preference for Foreign Investors

Abstract

When do entrepreneurs value foreign investors, and when do they shun them? While prior research emphasizes the liability of foreignness in international business, we reveal how the market development stage fundamentally reshapes this dynamic in entrepreneurial finance. Through a novel field experiment with 29,132 British and Indian startups, we demonstrate three striking patterns in entrepreneurs' evaluation of potential investors before any substantive interaction occurs. First, founders in developed markets strongly prefer domestic investors, giving them a 28% higher response rate-suggesting that liability of foreignness creates powerful screening effects at the earliest stages of relationship formation. Second, entrepreneurs in emerging markets show no such bias against investors from developed economies, indicating they recognize the potential value these investors bring through networks, resources, and legitimacy. Third, gender creates systematic variation in these effects: men investors from developed markets can leverage their foreignness as an asset, while women investors from emerging markets face dramatically heightened barriers that magnify their liability of foreignness. Together, these findings advance theory by showing how the market development stage could transform foreignness liability into an advantage of foreignness-but only under specific conditions. Our results resolve conflicting findings in prior research by revealing how institutional context systematically alters international investment dynamics, offering practical implications for entrepreneurs and investors expanding across markets.

Keywords: entrepreneurship, field experiments, global strategy, international businesses, liability of foreignness, networks, venture capital