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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.


External Corporate Governance Mechanisms: Linking Forces to Behaviors  

G. Tyge Payne and Curt Moore

Corporate governance research has a long and varied history, having evolved from a broad number of scholarly disciplines, including sociology, law, finance, and management. Across these various disciplines, it is maintained that governance is essential to corporate success, as it provides strategic and ethical guidance to the company. While research has largely focused on internal mechanisms through which governance is enacted (such as ownership arrangements, board structures, managerial rewards and incentives, etc.), external forces and mechanisms are increasingly important to modern businesses. External corporate governance mechanisms emanate from outside the organization and support forces that promote governance structures, processes, and practices by top executives and board directors. Institutions, industries, markets, networks, and strong individual external stakeholders all work to influence corporate governance decisions and behaviors both directly and indirectly. The external forces induce mechanisms that influence desirable behaviors or intervene when internal mechanisms are compromised or ineffective. Recent literature on external governance mechanisms can help scholars and practitioners develop a better understanding of this important area of inquiry, and future research should consider three broad suggestions to move the field forward: differentiating between forces and mechanisms; recognizing unique stakeholders, boundaries, and levels of analysis; and improving empirical designs to better recognize and understand what factors matter in instituting governance adjustments and behavior changes.