Overcoming the Liability of Foreignness

The  liability of foreignness is the primary challenge of entering and  succeeding in overseas markets. It is the inherent disadvantage foreign  firms experience in host countries because of their non-native status.  There are two ways this liability can emerge:

  • Different  formal and informal institutions govern the rules in different  countries. Local firms are familiar and versed with these, whereas  foreign firms need to learn the rules quickly to run their business  effectively. However, some of the rules can be in favour of local firms.
  • Typically,  in the era of globalization, consumers are expected to not discriminate  against foreign firms. However, international firms are regularly  discriminated against, either formally or informally.

With  these significant circumstances and odds, how do foreign firms crack  new markets? The solution is to deploy overwhelming resources and  capabilities so that, after offsetting the liability of foreignness,  there is still some competitive advantage.

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Despite  the common belief that every firm should expand internationally, the  actuality is that not every firm is prepared to tackle the challenges  that come with it. Venturing overseas too early may be harmful to the  firm’s overall performance, especially when the margin for error is  minimal, as is the case with smaller firms. Two underlying factors (2×2  framework) that lead some firms motivated to go abroad, while other  firms are content to remain local:

  • The size of the firm
  • The size of the domestic market

Enthusiastic Internationalizer:  These are large firms in a small domestic market. These firms are  likely to exhaust opportunities in a small country quickly. Considering  Nestlé of Switzerland, their food products’ demand is somewhat limited  given Switzerland’s small population (seven million). As a result, most  of Nestlé’s sales and employees are outside of Switzerland (Peng, 2016).

Follower Internationalizer:  These are small firms in a small domestic market. They often follow  their larger counterparts, such as Nestlé, to go abroad as suppliers.  Other small firms may similarly venture abroad, not to directly supply  larger firms, but expand beyond the domestic market’s inherently limited  size. A considerable number of small firms from small countries such as  Austria, Denmark, Finland, New Zealand, Singapore, Sweden, and Taiwan  are active overseas (Peng, 2016).

Slow Internationalizer:  These are large firms in a large domestic market. In comparison to  enthusiastic internationalizers, these firms’ overseas activities are  usually slower. For example, Wal-Mart’s pace of internationalization is  more gradual than its two global rivals based in relatively smaller  countries, Carrefour of France, and Metro of Germany (Peng, 2016).

Occasional Internationalizer:  These are small firms in a large domestic market confronted with a  relatively weak resource base and a large domestic market. In the United  States, many small firms are not compelled to go abroad but can be  identified as “occasional internationalizers” if they have any  international business.

According to the model, the ability of the firms in an industry whose  origin is in a particular country (e.g., South Korean automakers or  Italian shoemakers) to be successful in the international arena is  shaped by four factors:

(1) their home country’s demand conditions

(2) their home country’s factor conditions

(3) related and supporting industries within their home country

(4) strategy, structure, and rivalry among their domestic competitors.