DO LABOR LAWSUITS REPRESENT A LIABILITY OF FOREIGNNESS FOR FOREIGN SUBSIDIARIES OPERATING IN THE UNITED STATES?

Abstract

Most theories of foreign direct investment (FDI) assume that foreign subsidiaries will beat a disadvantage relative to their domestic counterparts for a variety of reasons such as information asymmetries, distance impeding decision making and communication, and local biases. Most studies of international business focus on sources of advantage foreign investors must posses to overcome whatever disadvantages exist. Understanding liabilities of foreignness could uncover ways to reduce exposure to disadvantages and improve management of FDI. This study examines a specific disadvantage - labor lawsuits as a liability for foreign subsidiaries operating in the United States (US). Foreign firms often employ different Human Resource practices than those commonly used in the US and compliance with complex American labor laws and regulations may be especially difficult for foreign managers. Consequently, foreign subsidiaries may face more labor lawsuits than their domestic counterparts. This paper used Poisson and Negative Binomial regression to test if 486 subsidiaries of British, German and Japanese owned subsidiaries operating in the US had more labor lawsuits brought to judgement than a matched sample of US owned firms. Empirical results for federal and state lawsuits indicate that foreign subsidiaries faced significantly more labor lawsuits. Foreign subsidiaries whose parent firms had more US operations and who used American top officers faced fewer lawsuits while foreign subsidiaries with Human Resource (HR) professionals on location actually faced more labor lawsuits. Implications of these findings and avenues for future research are discussed.