Categorizing the Liability of Foreignness: Ownership, Location, and Internalization‐Specific Dimensions

Abstract

Plain language summaryThis study explains the different types of additional costs faced by multinational firms when they invest abroad. We identify product adaptation cost, discrimination cost, governance cost, and appropriation hazard as important sources of the difficulties that multinationals face. We then link each of these costs to different dimensions of cross‐national distance, including economic, cultural, demographic, political, and administrative distance. Finally, we show that the importance of these different distance dimensions differ when multinationals invest abroad for different reasons including market seeking, efficiency seeking, knowledge seeking, and natural resource seeking.Technical summaryThis study bridges the literature on the liability of foreignness (LoF) and cross‐national distance. Following the ownership‐location‐internalization paradigm, we categorize the LoF into three dimensions: ownership‐specific LoF, location‐specific LoF, and internalization‐specific LoF, each of which reduces a specific advantage of the multinational firm. We first define the three dimensions of the LoF and then argue that each dimension is related to different types of costs. We further explain that different types of costs are associated with different dimensions of cross‐national distance, and firms face different types of the LoF and associated costs when they conduct different types of foreign direct investment. We test these hypotheses in the context of Chinese listed firms investing abroad, finding support for most of the predictions. Copyright © 2016 Strategic Management Society