Multinational Competitive Disadvantages Essay

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Multinational  corporations (MNCs) have multiple sources  of advantage  that  enable  them  to  expand across countries. However, they also suffer from competitive  disadvantages, i.e., the condition  a firm faces when it creates  lower value for its customers and  lower profits  for itself than  its competitors.  A competitive disadvantage is always in comparison  to a particular  competitor or set of competitors.  Thus, there are two broad types of multinational competitive disadvantage based on two broad sets of comparisons. The first type is the competitive  disadvantage that the subsidiary of an MNC has in comparison  to local firms in a host country. The second type is the competitive  disadvantage  that  the  whole MNC  has against other firms from the home country.

Types

The first type of competitive  disadvantage has been analyzed under  three  related  but not  identical  concepts: cost of doing business abroad, liability of foreignness, and difficulties in internationalization. Initially, building  on  economics,  Stephen  Hymer  uses the term cost of doing business abroad to refer to the additional costs that a subsidiary of an MNC incurs to operate in a host country, which domestic companies do not have to incur. The sources of these additional costs are investments needed to operate at a distance, to deal with unfamiliarity with the economic, political, and social characteristics of the country, or to deal with discrimination by the host government.

Later, building on organization studies, Srilata Zaheer   coins   the   term   liability   of  foreignness. Although  the  liability of  foreignness  was initially equated with the cost of doing business abroad, later thinking moves away from costs and highlights institutional  differences as the  hallmark  of the  liability of foreignness. The sources of liability of foreignness are lack of adaptation  to local institutional  requirements, lack of legitimacy, and lack of membership  of information  networks.

Recently, building on strategic management  thinking, Alvaro Cuervo-Cazurra and colleagues use the term difficulties in internationalization to refer to all sources of competitive disadvantage that subsidiaries of MNCs face. This concept, which includes the cost of doing business abroad and the liability of foreignness, is used to highlight how subsidiaries of MNCs can suffer from multiple  competitive  disadvantages, most of which are not exclusive to MNCs. The separation  of difficulties by their  source results in three sets of competitive disadvantage types. First, the subsidiary of an MNC suffers a disadvantage when it is unable to transfer the advantage provided by its existing resources and capabilities to the new host country. Local competitors have imitated or replicated the source of the advantage  of the MNC, or customers do not  need  the  firm’s products,  resulting  in a foreign operation that is unable to achieve an advantage over local firms. Second, the subsidiary of an MNC will create a competitive disadvantage when some of the resources and capabilities transferred  to the host country become disadvantageous there, because they collide with existing practices and norms.

Alternatively, it is not  the  specific resources  and capabilities but the foreign nature  of the subsidiary of the MNC that becomes a source of disadvantage, because the  government  and/or  citizens  dislike the country  of origin. This latter  source  of competitive disadvantage, which is termed the disadvantage of foreignness, is exclusive to MNCs. Third, the subsidiary of an MNC will face a competitive disadvantage when it  lacks complementary   resources  needed  to  operate in the new country.  It may lack complementary resources to manage at a larger scale, to compete  in the new industry, or to operate in a new institutional environment. Only the latter, identified as the liability of foreignness, is exclusive to MNCs.

The empirical  literature  finds that  subsidiaries of MNCs  tend  to  have lower performance,  efficiency, and  survival than  domestic  firms, especially at the beginning of operations in the host country. However, some studies caution  that this depends on the comparison  drawn, and on whether  competitive  advantages that may compensate  for some of the competitive disadvantages are controlled for.

The second type of competitive disadvantage, the competitive disadvantage of an MNC in comparison to other  firms from  the  home  country,  affects the whole MNC rather  than one or some of its subsidiaries. Initial studies, such as those done by Donald Lessard and colleagues, argue that  MNCs have an advantage  over domestic  companies.  Later studies focus on comparing  not  MNCs to domestic  firms, but  on  comparing   MNCs  with  different  degrees of international presence.  These  studies  find  that MNCs with a limited international presence appear to have a disadvantage in comparison to MNCs with a higher international presence. Lack of experience with  international  markets   reduces   performance until the firm develops such experience as it continues expanding abroad. However, at very high levels of international presence, MNCs also appear to suffer from a disadvantage in comparison  to those with lower international presence. This reflects the challenge of managing a wide array of operations in multiple and distant places.

Bibliography:  

  1. Tamir Agmon and Donald R. Lessard, “Investor Recognition of Corporate International Diversification,” Journal of Finance (v.32/4, 1977);
  2. Alvaro CuervoCazurra, Mary Maloney, and Shalini Manrakhan, “Causes of the Difficulties in Internationalization,” Journal of International  Business Studies  (v.38/5, 2007);
  3. Elhanan  Helpman, Dalia Marin, and Thierry Verdier, The Organization of Firms in a Global Economy (Harvard University Press, 2008);
  4. Stephen H. Hymer, The International  Operations of National Firms: A Study of Foreign Direct Investment (MIT Press, 1976);
  5. Srilata Zaheer, “Overcoming the Liability of Foreignness,” Academy  of  Management   Journal  (v.38/2, 1995);
  6. Georgios I. Zekos, Economics and Law on Competition in Globilisation (Nova Science Publishers, 2008).

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