Liability of country foreignness and liability of regional foreignness: Their effects on geographic diversification and firm performance

Abstract

The costs of inter-and intra-regional diversification have been widely discussed in the existing international business literature, but the findings are mixed. Explanations for the mixed findings have important managerial implications, because business managers have to estimate accurately the costs of doing business within and across regions before they make their internationalization decisions. To explain the existing mixed findings, this study differentiates between liabilities of foreignness at the country and regional levels, and explores the joint effects of liability of country foreignness (LCF) and liability of regional foreignness (LRF) on the performance of internationalizing firms. Using data from 167 Canadian firms, we find that LCF may not necessarily be negatively correlated with intra-regional diversification, but LRF is positively correlated with inter-regional diversification. LCF moderates the relationship between LRF and inter-regional diversification, and also mediates the relationship between intra-regional diversification and firm performance. LRF mediates the relationship between inter-regional diversification and firm performance. Missing one or more of these variables may result in different cost estimates. Identification of the relationships between these variables helps to improve the accuracy of estimating the costs of doing business aboard.

Zoom in, zoom out: Geographic scale and multinational activity

“…In recent years, some IB scholars have begun to point out that such country border-based analysis may contain systematic biases and that important benefits and costs may be overlooked. These analyses attribute all spatial variation to country border effects and treat the subnational context as homogeneous (Ma et al, 2013;Qian et al, 2013). In practice, there are contexts where variation across national borders is suppressed so that the regional or supranational context becomes more important (e.g., the European Union) and others where the subnational context is quite heterogeneous (e.g., Quebec within Canada).…”

“…Countries with significant cultural diversity like India often witness LOF effects at the subnational scale (Beugelsdijk & Mudambi, 2013). LOF effects have also been established at the supranational (regional) scale (Qian et al, 2013).…”

“…One stream has begun to zoom in and use finer geographic units, i.e., city-or provincebased clusters (intra-national regions), to examine MNEs' location advantage (Beugelsdijk, McCann, & Mudambi, 2010;Chan, Makino, & Isobe, 2010;Goerzen, Asmussen, & Nielsen, 2013;Ma, Tong, & Fitza, 2013;Porter, 1994Porter, , 1998. In the second stream, researchers zoom out, coining the term ''regionalization'' (Rugman & Verbeke, 2004;Rugman 2005) to argue that MNEs use supranational regions, like the European Union (EU) and NAFTA, rather than individual countries to define the primary geographic scope of their businesses (Qian, Li, Li, & Qian, 2008;Qian, Li, & Rugman, 2013;Rugman & Verbeke, 2007). These new advances in IB also echo findings from international economic geography, which suggest that a simple home-host country dichotomy is no longer sufficient to capture the complexity of international production, trade and especially of innovation (Fujita, Krugman, & Venables, 1999;Iammarino & McCann, 2013;Meyer, et al, 2011).…”

Language ability and entrepreneurship education: Necessary skills for Europe’s start-ups?

“…Holt 2008). Nowhere are these skills more paramount than for online 'born-globals' (see Bell et al 2004;Isenberg 2008;Knight and Liesch 2016) as they are seen as the means to boost initial competitive edge vis-à-vis rivals and reduce liabilities of foreignness (Qian et al 2013;Zaheer 1995;Zaheer and Mosakowski 1997). Hence, a better understanding of the cultural concepts and ideologies relating to language capability and entrepreneurial education is necessary for both professional and academic practitioners (see Andersen and Rasmussen 2004;Brannen et al 2014;Engelen Heinemann and Brettel 2009;Fredriksson Barner-Rasmussen and Piekkari 2006;Kulkarni 2015;Roy Sekhar and Vyas 2016;Swift and Wallace 2011).…”

Explaining the effect of rapid internationalization on horizontal foreign divestment in the retail sector: An extended Penrosean perspective

“…As an example, Penrose (1959) highlights differences between countries (e.g., differences in regulatory systems) that affect firms' domestic-versus-international expansion (Pitelis, 2007). Similarly, regional strategy theory (Rugman, 2005;Rugman & Verbeke, 2004) suggests that firms expanding outside their home region must cope with the liability of inter-regional foreignness, which exceeds the liability of intraregional foreignness encountered when firms expand internationally within their home region (Qian, Li, & Rugman, 2013;Rugman & Verbeke, 2007). Because expansion into less familiar market areas requires greater input of managerial resources to obtain and evaluate information (Penrose, 1959), firms expanding internationally within their home regions require fewer managerial resources than firms expanding outside their home regions.…”