Lost in Translation Empirical Evidence for Liability of Foreignness as Barriers to Knowledge Spillovers

29 Pages Posted: 17 Jan 2006 Last revised: 14 Apr 2011

See all articles by Tobias Schmidt

Tobias Schmidt

Deutsche Bundesbank - Research Center

Wolfgang Sofka

Tilburg University; CentER; CIR

Date Written: 2006


Entering host country networks of knowledge flows (new competencies, innovative technologies, and lead-market knowledge) is a major rationale of multinational firms for investing abroad. Foreign firms find it difficult to overcome cultural and social barriers which make their foreign engagements more strenuous and error prone (liability of foreignness). In our analysis we break down the complex mechanisms behind knowledge spillovers and identify conceptual links with liability of foreignness. We hypothesise that liability of foreignness acts as a filter for foreign firms, restricting their access to host country knowledge. We use a broad sample of roughly 1,000 firms in Germany to empirically test the existence of liabilities of foreignness in leveraging knowledge spillovers. Our particular setting allows us to distinguish between upstream (suppliers, academia) and downstream (customers) liabilities of foreignness. We find that multinational firms can compete on an equal footing with host country rivals when it comes to generating impulses for innovations from suppliers and academia. They are significantly challenged by liabilities of foreignness, though, where customers are involved. We suggest that the frictional losses from a lack of social and cultural embeddedness (liability of foreignness) in the host country are especially relevant when promising lead customers have to be identified and their tacit and often unarticulated impulses have to be transferred, understood and prioritised.

Keywords: Liability of foreignness, knowledge spillover, globalisation, trivariate probit

JEL Classification: F23, O31, O32, D83

Suggested Citation

Schmidt, Tobias and Sofka, Wolfgang, Lost in Translation Empirical Evidence for Liability of Foreignness as Barriers to Knowledge Spillovers (2006). ZEW - Centre for European Economic Research Discussion Paper No. 06-001. Available at SSRN: https://ssrn.com/abstract=874972 or http://dx.doi.org/10.2139/ssrn.874972

Tobias Schmidt (Contact Author)

Deutsche Bundesbank - Research Center ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

Wolfgang Sofka

Tilburg University ( email )


CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE

CIR ( email )

Warandelaan 2
Tilburg, 5000 LE

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