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Top2. Liability Of Foreignness
New entrants to a foreign market face LOF. Hymer (1960/1976) laid out his argument for the LOF forty years ago. Local firms enjoy better information about their country, economy, language, laws, politics, etc. than the foreign firms. Without the information, foreign investors incur additional operating costs. A similar argument has been made by Buckley and Casson (1976), Dunning (1977), Caves (1982), and Hennart (1982). Kindleberger (1969) focused on the spatial distance between the parents and their subsidiaries. Buckley and Casson (1976) related LOF with unfamiliar political, legal, social, cultural, economic/competitive and governmental environment. In sum, operation in a foreign country will entail higher costs than operating in the home country (Hennart, 1982, p. 2).
Zaheer (1995) classified sources of the LOF into the following categories: (1) spatial distance between home and host countries, (2) unfamiliarity or lack of roots in a local environment, (3) host country environment, and (4) home country environment. Matsuo (2000) listed three sources: (1) difficulty in establishing a new organization while facing cultural and language barriers in the host country, (2) unfamiliarity with economic and political regulations or the host country and (3) difficulty in communicating with the parent company because of spatial distance.