When foreignness becomes a liability: the effects of flawed institutional environments on foreign vs. domestic firm performance in emerging markets

Abstract

Weak institutions in emerging markets expose foreign firms to increased liabilities of foreignness. At the same time, foreign firms have firm-specific advantages compared to those of their domestic competitors. Based on a holistic perspective of the institutional environment in emerging markets, the present study explored the conditions under which the institutional environment prevents foreign firms from fully exploiting these advantages. The article proposes measures of institutional logics to capture the fundamental institutional structures in emerging markets and firm-specific abilities to control its flawed environment. To test our assumptions, we used data from the World Bank Enterprise Survey on 12,782 firms from 35 emerging markets. The results confirm that complex environments affect firm performance negatively, both for domestic and foreign firms, but the liabilities of foreignness exceed the firm-specific advantages of foreign competitors only in the most complex environments.