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The pulse of liability of foreignness: dynamic legitimacy and experiences effects in the German car market

  • Kaiser, Ulrich
  • Sofka, Wolfgang

Globalization has provided many companies with new opportunities for growth and efficiency. This requires them to operate successfully across cultural and social borders. These can be stumbling blocks to internationalization and have been found to cause frequent errors and delays for multinational companies. Such liabilities of foreignness are persistent in nature. We investigate the causes behind these detrimental effects. We identify two major factors conceptually: a lack of legitimacy in the host country on the demand side and a lack of responsiveness on the side of the multinational corporation. We test these hypotheses empirically using a comprehensive sample of the German car market, which is especially suitable due to its established domestic producers and international competitors. Our results suggest that the two factors interact. For less experienced customer groups, we find that legitimacy is the dominant factor behind the effects of liability of foreignness. As customer experience increases, liability of foreignness caused by a lack of responsiveness becomes more of an issue.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-70.

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Date of creation: 2006
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Handle: RePEc:zbw:zewdip:5464
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  1. Sofka, Wolfgang, 2006. "Innovation Activities Abroad and the Effects of Liability of Foreignness: Where it Hurts," ZEW Discussion Papers 06-29, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  3. Sofka, Wolfgang & Schmidt, Tobias, 2006. "Lost in Translation: Empirical Evidence for Liability of Foreignness as a Barrier to Knowledge Spillovers," ZEW Discussion Papers 06-01, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Petersen, Bent & Pedersen, Torben, 2002. "Coping with liability of foreignness: Different learning engagements of entrant firms," Journal of International Management, Elsevier, vol. 8(3), pages 339-350.
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  8. Gurhan-Canli, Zeynep & Maheswaran, Durairaj, 2000. " Determinants of Country-of-Origin Evaluations," Journal of Consumer Research, University of Chicago Press, vol. 27(1), pages 96-108, June.
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  14. Pinelopi Koujianou Goldberg & Frank Verboven, 2004. "Cross-country price dispersion in the euro era: a case study of the European car market," Economic Policy, CEPR;CES;MSH, vol. 19(40), pages 483-521, October.
  15. Verboven, Frank, 2002. "Testing for 'Monopoly' Market Power When Products Are Differentiated in Quality," Manchester School, University of Manchester, vol. 70(1), pages 115-33, January.
  16. Belk, Russell W, 1988. " Possessions and the Extended Self," Journal of Consumer Research, University of Chicago Press, vol. 15(2), pages 139-68, September.
  17. Ingemar Dierickx & Karel Cool, 1989. "Asset Stock Accumulation and Sustainability of Competitive Advantage," Management Science, INFORMS, vol. 35(12), pages 1504-1511, December.
  18. DeYoung, Robert & Nolle, Daniel E, 1996. "Foreign-Owned Banks in the United States: Earning Market Share or Buying It?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 622-36, November.
  19. Tobias Schmidt & Wolfgang Sofka, 2005. "Lost in Translation - Empirical Evidence for Liability of Foreignness as Barriers to Knowledge Spillovers," Industrial Organization 0512012, EconWPA.
  20. Luo, Yadong & Shenkar, Oded & Nyaw, Mee-Kau, 2002. "Mitigating liabilities of foreignness: Defensive versus offensive approaches," Journal of International Management, Elsevier, vol. 8(3), pages 283-300.
  21. Douglas Dow, 2006. "Adaptation and performance in foreign markets: evidence of systematic under-adaptation," Journal of International Business Studies, Palgrave Macmillan, vol. 37(2), pages 212-226, March.
  22. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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  1. Studies on the automobile industry
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