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

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  • Tobias Schmidt

    (ZEW Mannheim)

  • Wolfgang Sofka

    (ZEW Mannheim)

Abstract

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.

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File URL: http://128.118.178.162/eps/io/papers/0512/0512012.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 0512012.

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Length: 28 pages
Date of creation: 21 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpio:0512012

Note: Type of Document - pdf; pages: 28
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Web page: http://128.118.178.162

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Cited by:
  1. Kaiser, Ulrich & Sofka, Wolfgang, 2006. "The pulse of liability of foreignness: dynamic legitimacy and experiences effects in the German car market," ZEW Discussion Papers 06-70, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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