Liability of foreignness and membership in a regional economic group

Abstract

Abstract This study examines the performance of foreign vs. domestic firms in a regional economic group. In particular, we focus on host country and foreign-owned firms in the European Union. Results provide evidence of a liability of foreignness—foreign-owned firms underperform host country firms. However, there is also evidence that liability of foreignness can vary across countries, and that foreign firms can overcome the liability of foreignness in some host countries, even industrialized ones. The results show the moderating effects of the host country and home country environments on the relative performance of foreign firms. Lastly, the results reveal that foreign-owned banks from highly competitive home countries underperform foreign firms from less competitive home countries.