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The Liability of Foreignness  

Jesper Edman

The liability of foreignness—or LOF—is the additional cost that multinational enterprise (MNE) subsidiaries face relative to local competitors in foreign markets. The LOF arises in the form of unfamiliarity costs, relational costs, and discrimination costs in host country markets. Because these costs are unique to foreign firms, the LOF constitutes a difference in both kind and degree that distinguishes the MNE from other organizations. LOF has been addressed from a wide array of theoretical perspectives, including internalization theory, institutional theory, the resource-based view, network theory, cross cultural management, and organizational identity. The antecedents of LOF can be found in inter-country distance and dissimilarity, country-specific institutional arrangements, as well as firm-level experiences. Scholars have traced the implications of LOF to many of the critical attributes of the MNE, including internationalization patterns and country selection, entry mode choice, subsidiary performance and survival, localization strategies, and the development of firm-specific advantages. As such, the LOF constitutes one of the foundational assumptions of the international business domain.. Several research gaps and controversies remain in the LOF literature. LOF is often used as a catch-all term for the MNE’s disadvantages and costs in general, rather than the extraordinary costs faced by foreign-owned subsidiaries. Although numerous works invoke LOFs in their overall framing and theoretical argumentation, few studies explain the mechanisms behind the extraordinary costs facing subsidiaries. Empirical measurement of LOFs is rare, with many works using inter-country distance and institutional voids as proxies for LOF. Conceptually, LOF is often confounded with proximate but nonetheless distinct constructs, including the liability of newness, the liability of origin, and the liability of emergingness. A critical issue for extant and future work is to clarify the scope, boundary conditions, and operationalizations of LOF.


Subsidiary Governance and Strategy in the Multinational Enterprise  

Niall O'Riordan, Paul Ryan, and Ulf Andersson

Corporate governance is concerned with how firm performance may be affected by how the organization is governed. Corporate governance is a multifaceted concept that ranges in scholarly interest from the composition of boards to ownership and relational issues of power dependency, control, and decision-making within an organization. International business (IB) researchers have employed multiple theoretical lenses across institutional, resource dependency, and agency theories to examine corporate governance in the multinational enterprise (MNE). As the organizational form of the MNE shifted from hierarchical to heterarchical, and responsibility for sourcing market and innovation knowledge was increasingly devolved to competent subsidiaries, governance arrangements in the MNE came under increased scrutiny. Much IB research into corporate governance examined the balance of power within the MNE and how decision making is influenced by both headquarters (HQ) and its subsidiaries. A parent-subsidiary governance dilemma became apparent around the degree of freedom and control that HQ should leverage over its foreign subsidiaries to maximize the survival and performance of these economically, culturally, and politically dispersed units. Agency theory and resource dependence theory were to the fore in examining the parent-subsidiary dilemma around how control over decision-making scope and processes shaped subsidiary governance around the strategies and operations with the MNE governance architecture. In essence, subsidiary governance and strategy can be seen to represent two sides of the same coin. Subsidiary governance and strategy become complex issues the minute we step outside the hierarchical domain and allow for subsidiaries to have a greater contributory role in the MNE. As a subsidiary is mandated to pursue certain activities in the environment where it has been located, it also is granted some autonomy to strategize around its assigned activities and responsibilities. Opportunities may surface through the embeddedness of its activities in the local environment and the resources this can provide to the subsidiary and MNE. Acting on these opportunities by taking initiatives can result in increased influence and an elevated role in terms of mandate gain and enlarged responsibilities. The issue of subsidiary governance first emerges in relation to how the subsidiary strategy is aligned or not aligned with HQ strategy. Subsidiary managers can decide to solely perform their assigned mandate, or they can choose to generate a resource endowment that may help them become indispensable for HQ, but crucially to guarantee their own survival. The mechanisms available to subsidiaries to achieve this strategic aim are evidenced via initiative taking, seeking autonomy, increasing their role, appropriating power and influence, and embedding themselves in the local and internal environments. In this chapter we approach corporate governance from the perspective of the subsidiary (subsidiary governance) and examine the relationship between subsidiary governance and what we determine to be the prime elements of subsidiary strategy. We respectively define subsidiary governance as the gamut and interplay of control and operations around which management strategize and subsidiary strategy as a process of continuous, deliberate upgrading of knowledge and capabilities to thrive and survive. IB literature on MNE subsidiary governance and strategy to date is incomplete insofar as there are disparate steams of research that warrant integration into a grand theory of subsidiary governance and strategy.