Overcoming Liability of Foreignness: An Analysis of Early Foreign Investment in China

Overcoming Liability of Foreignness: An Analysis of Early Foreign Investment in China

Haiyang Chen (William Paterson University, USA), Michael Y. Hu (Kent State University, USA) and G. Peter Zhang (Georgia State University, USA)
Copyright: © 2012 |Pages: 13
DOI: 10.4018/978-1-4666-1589-2.ch009

Abstract

This study examines the liability of foreignness (LOF) faced by multinational enterprises (MNEs), and the effects of strategies employed to overcome the liability. Based on a sample of 3,085 Sino-foreign joint ventures formed in manufacturing sectors in China, the authors find that Hong Kong investors, who are often perceived to have lower LOF than investors from other countries, are more actively engaged in strategies to overcome the LOF. Specifically, Hong Kong investors actively adopt strategies to seek local markets, maintain investment flexibility, utilize their competitive advantages in labor-intensive industries, and leverage cooperative synergism to improve their performance. Investors from other countries adopt market seeking and cooperative synergy approach to improve performance.
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2. 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.

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