Entry Modes and Liability of Foreignness Effects: Evidence From Russian Firms on the German Market

Andrei Panibratov,Konstantin Nefedov,Natalia Ribberink

doi:10.15388/omee.2018.10.00006

Andrei Panibratov, Konstantin Nefedov + Show 1 more

Open Access

https://doi.org/10.15388/omee.2018.10.00006

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Abstract

Foreign subsidiaries are at a disadvantage as compared to domestic enterprises, which is especially the case for emerging market firms in more developed economies. In this paper we apply liability of foreignness (LOF) concept to address the issue of these disadvantages. We consider LOF effects associated with equity vs. non-equity entry modes for Russian firms when penetrating the German market. The paper presents the results of a pilot study of 41 subsidiaries of Russian firms operating in different regions of Germany. Our results show that investors are more concerned about information, customers and partnerships, which can be explained by preeminent reliance on their own resources, while exporters appeared to be driven mostly by image considerations indicating minor interest in other characteristics of the host market. Although both exporters and investors experience significant negative effects from the lack of proper institutional and business knowledge on the host market, these effects vary for equity and non-equity entry modes. We suggest instruments to mitigate these effects, including cooperation with institutional agents, which is especially important for FDI strategy.

Highlights

The phenomenon of additional costs which firms face when doing business abroad is one of intensively discussed topics in academic literature (Zaheer, 2002; Nachum, 2010; Kudina, 2012)
Germany as a target market amongst developed economies plays a key role for Russian investments
The industrial spread of Russian investors is mainly represented by the financial service sector (18% of OFDI stock), followed by the energy sector, IT/software and transport/logistics sector (14% each)

Summary

Introduction

The phenomenon of additional costs which firms face when doing business abroad is one of intensively discussed topics in academic literature (Zaheer, 2002; Nachum, 2010; Kudina, 2012). Since the first widely recognized formulation of this problem in Hymer’s dissertation in 1960 and later on in his book (Hymer, 1960, 1976), this phenomenon has received considerable attention from academic community and resulted in a massive array of concepts aimed at its operationalization: “costs of doing business abroad” (Hymer, 1960, 1976); “liability of foreignness” (LOF) (Zaheer, 1995); “liability of emergingness” (Madhok & Keyhani, 2012); and even some imitative concepts departing from the original field and content of the term, such as “liability of origin” (Kolk & Curran, 2016); “liability of privateness” (Bhanji & Oxley, 2013), to name a few. There is a growing number of Russian firms venturing abroad and attempting to expand outside their region encompassing mainly post-communist countries They have little experience, are not always able to predict the problems they might face in host markets, cannot successfully explore their ‘Russian’ image, and do not have any guidelines on how to overcome challenges related to foreignness. Russian firms experience very similar challenges to other emerging market firms penetrating a developed market

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