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