Understanding liability of foreignness in an Asian business context: A study of the Korean asset management industry

Abstract

This study provides an in-depth understanding of the liability of foreignness (LOF) in an Asian business context. Based on previous literature, we distinguish the two distinct cost components that comprise LOF: The cost of foreignness and the cost of multinationality. Whereas the former refers to the costs incurred by foreign firms when they develop location-specific advantages in a host country environment, the latter refers to the costs associated with an MNC’s multinational operation, more specifically, transferring firm-specific advantages from the home country (or elsewhere) and adapting them to a particular host country context. Based on this distinction, we investigate whether and how persistently each of these costs exists in an Asian business environment. Our data on the Korean asset management industry support the presence of both costs, resulting in lower performance increase of foreign firms relative to local ones from utilizing location- and firm-specific advantages, respectively. Furthermore, in our study setting, compared to the cost of foreignness, the cost of multinationality persists longer in the market, suggesting that the latter is more difficult and takes a longer time for MNCs to mitigate than the former. Our results provide important insights into detailed aspects of strategic challenges confronted by MNCs in the Asian business context from which they can derive effective strategic responses.