Overcoming the liability of foreignness without strong firm capabilities : the value of market-based resources

Abstract

The concept of “liability of foreignness” — the costs of doing business abroad — has been known and discussed since the mid-1970s. At the core of these discussions is the role that firm capabilities play in overcoming or limiting these costs. This raises the question of how firms with inappropriate, limited or constrained capabilities relative to their host environment overcome the liability of foreignness. This paper focuses on the subsidiaries of “emerging multinationals” and how they manage the demands of a technologically and economically highly developed host country. A host location with sophisticated markets and well-developed institutional infrastructure may be a highly challenging environment for firms that have grown their organizational capabilities in less developed contexts. This paper explores that situation and considers how resources available on the market — for example through supplier inputs—assist subsidiaries to benefit from their presence in a munificent location. Despite the acknowledged limitations of a transaction-based approach, this paper presents evidence that purchasing knowledge provides an accessible strategy for overcoming some liabilities of foreignness.