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.
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.