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Mitigating liabilities of foreignness: Defensive versus offensive approaches

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  • Luo, Yadong
  • Shenkar, Oded
  • Nyaw, Mee-Kau
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    Abstract

    Finding effective mechanisms that can overcome liabilities of foreignness (LOFs) is the central issue in the study of LOFs. This study proposes that such mechanisms comprise defensive options and offensive options. Defensive mechanisms include contract protection, parental control, parental service, and output standardization. Offensive mechanisms include local networking, resource commitment, legitimacy improvement, and input localization. Using China as an analytical setting, this study emphasizes two prominent yet distinct mechanisms: contract protection and local networking ("guanxi" in Chinese). Contracts and guanxi mitigate the LOF via different paths: Contracts negate LOFs by safeguarding invested resources, curtailing operational uncertainty, and reducing coordination costs, whereas guanxi neutralizes LOFs through increasing indigenous adaptability, improving organizational legitimacy, and heightening cooperation with the local business community. Our analysis of 92 sample MNEs in China suggests that contracts and guanxi exert different influences on the consequences of LOFs. Contracts reduce production and marketing costs but do not stimulate sales revenues. Guanxi, however, enhances sales revenues but does not reduce production and marketing costs. This study also documents that contracts and guanxi operate as complements in overcoming LOFs.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Management.

    Volume (Year): 8 (2002)
    Issue (Month): 3 ()
    Pages: 283-300

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    Handle: RePEc:eee:intman:v:8:y:2002:i:3:p:283-300

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    Related research

    Keywords: Contract Networking Liability of foreignness;

    References

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    1. Anderlini, Luca & Felli, Leonardo, 1994. "Incomplete Written Contracts: Undescribable States of Nature," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1085-1124, November.
    2. Al-Najjar, Nabil I, 1995. "Incomplete Contracts and the Governance of Complex Contractual Relationships," American Economic Review, American Economic Association, vol. 85(2), pages 432-36, May.
    3. Oded Shenkar & Yoram Zeira, 1992. "Role Conflict and Role Ambiguity of Chief Executive Officers in International Joint Ventures," Journal of International Business Studies, Palgrave Macmillan, vol. 23(1), pages 55-75, March.
    4. Nathan Fagre & Louis T Wells, 1982. "Bargaining Power of Multinationals and Host Governments," Journal of International Business Studies, Palgrave Macmillan, vol. 13(2), pages 9-24, June.
    5. J Michael Geringer & Louis Hebert, 1989. "Control and Performance of International Joint Ventures," Journal of International Business Studies, Palgrave Macmillan, vol. 20(2), pages 235-254, June.
    6. Kendall Roth & David M Schweiger & Allen J Morrison, 1991. "Global Strategy Implementation at the Business Unit Level: Operational Capabilities and Administrative Mechanisms," Journal of International Business Studies, Palgrave Macmillan, vol. 22(3), pages 369-402, September.
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    Cited by:
    1. de Jong, Gjalt & van Houten, Jerry, 2014. "The impact of MNE cultural diversity on the internationalization-performance relationship," International Business Review, Elsevier, vol. 23(1), pages 313-326.
    2. Alcantara, Lailani & Mitsuhashi, Hitoshi & Hoshino, Yasuo, 2006. "Legitimacy in international joint ventures: It is still needed," Journal of International Management, Elsevier, vol. 12(4), pages 389-407, December.
    3. Wolfgang Sofka & Joerg Zimmermann, 2007. "Regional Dimensions of Liability of Foreignness: Between a Rock and a Hard Place?," Jena Economic Research Papers 2007-023, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
    4. Sufian, Fadzlan, 2011. "Banks total factor productivity change in a developing economy: Does ownership and origins matter?," Journal of Asian Economics, Elsevier, vol. 22(1), pages 84-98, February.
    5. Sofka, Wolfgang & Zimmermann, Jörg, 2005. "There's no Place Like Home: A Strategic Framework to Overcome Liability of Foreignness in the German Car Market," ZEW Discussion Papers 05-84, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Oetzel, Jennifer & Doh, Jonathan P., 2009. "MNEs and development: a review and reconceptualization," Journal of World Business, Elsevier, vol. 44(2), pages 108-120, April.
    7. Andrew Godley & Haiming Hang, 2008. "Revisiting the psychic distance paradox: international retailing in China in the long run (1840-2005," Economics & Management Discussion Papers em-dp2008-66, Henley Business School, Reading University.
    8. Denk, Nikola & Kaufmann, Lutz & Roesch, Jan-Frederik, 2012. "Liabilities of Foreignness Revisited: A Review of Contemporary Studies and Recommendations for Future Research," Journal of International Management, Elsevier, vol. 18(4), pages 322-334.
    9. Yamin, Mo & Golesorkhi, Sougand, 2010. "Cultural distance and the pattern of equity ownership structure in international joint ventures," International Business Review, Elsevier, vol. 19(5), pages 457-467, October.
    10. Elango, B., 2009. "Minimizing effects of 'liability of foreignness': Response strategies of foreign firms in the United States," Journal of World Business, Elsevier, vol. 44(1), pages 51-62, January.
    11. Buckley, Peter J. & Clegg, Jeremy & Tan, Hui, 2006. "Cultural awareness in knowledge transfer to China--The role of guanxi and mianzi," Journal of World Business, Elsevier, vol. 41(3), pages 275-288, September.
    12. Ulrich Kaiser & Wolfgang Sofka, 2007. "The Pulse of Liability of Foreignness: Dynamic Legitimacy and Experience Effects in the German Car Market," CIE Discussion Papers 2007-01, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    13. Yildiz, Harun Emre & Fey, Carl Felix, 2012. "The liability of foreignness reconsidered: New insights from the alternative research context of transforming economies," International Business Review, Elsevier, vol. 21(2), pages 269-280.
    14. Sofka, Wolfgang & Zimmermann, Jörg, 2008. "Regional economic stress as moderator of liability of foreignness," Journal of International Management, Elsevier, vol. 14(2), pages 155-172, June.
    15. Nachum, Lilach & Keeble, David, 2003. "MNE linkages and localised clusters: foreign and indigenous firms in the media cluster of Central London," Journal of International Management, Elsevier, vol. 9(2), pages 171-192.
    16. Jisun Yu & Sung Kim, 2013. "Understanding liability of foreignness in an Asian business context: A study of the Korean asset management industry," Asia Pacific Journal of Management, Springer, vol. 30(4), pages 1191-1217, December.
    17. Alcantara, Lailani Laynesa & Mitsuhashi, Hitoshi, 2012. "Make-or-Break Decisions in Choosing Foreign Direct Investment Locations," Journal of International Management, Elsevier, vol. 18(4), pages 335-351.
    18. Harvey, Michael & Novicevic, Milorad M. & Buckley, M. Ronald & Fung, Helen, 2005. "Reducing inpatriate managers' 'Liability of Foreignness' by addressing stigmatization and stereotype threats," Journal of World Business, Elsevier, vol. 40(3), pages 267-280, August.
    19. Bunyaratavej, Kraiwinee & Hahn, Eugene D. & Doh, Jonathan P., 2007. "International offshoring of services: A parity study," Journal of International Management, Elsevier, vol. 13(1), pages 7-21, March.
    20. Boehe, Dirk Michael, 2011. "Exploiting the liability of foreignness: Why do service firms exploit foreign affiliate networks at home?," Journal of International Management, Elsevier, vol. 17(1), pages 15-29, March.
    21. Hitt, Michael A. & Franklin, Victor & Zhu, Hong, 2006. "Culture, institutions and international strategy," Journal of International Management, Elsevier, vol. 12(2), pages 222-234, June.
    22. Sethi, Deepak & Judge, William, 2009. "Reappraising liabilities of foreignness within an integrated perspective of the costs and benefits of doing business abroad," International Business Review, Elsevier, vol. 18(4), pages 404-416, August.

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