Liability of foreignness (LOF), often characterized as the costs of doing business abroad, has boverseas incurs, which a local firm would not. It has been further elaborated that these costs may arise from at least four, not necessarily independent, sources: (1) spatial distance (travel, transportation and coordination costs), (2) unfamiliarity with local environment, (3) discrimination faced by foreign firms and (4) restrictions from the home country. She also contends that though LOF may vary by industry or country, foreign firms, all else being equal, will have lower profitability than local firms and perhaps even a lower probability of survival.

The traditional view of LOF thus is in terms of simple dyadic home–host country pair analyses, which bring out the disadvantages suffered by the MNE subsidiary relative to a local firm. The principal frame of reference is the host country’s environment. Therefore, different MNE subsidiaries experience varying degrees of LOF in respective host countries. The traditional view also presents a rather static picture that may be more applicable to the initial market entry. Such dyadic comparisons neither focus upon the MNE as a whole nor enable a facile consideration of the complexities and interdependencies of the present-day IBE beyond the initial market entry. The effect of the global meta-environment that shapes and affects the host country’s policies is also not considered nor is the effect of multilateral trade agreements or regional economic blocks. It is difficult for the dyadic comparison methodology to take account of multiple host country environments in the context of an MNE’s globally dispersed operations. The subsidiary’s ability to leverage the parent MNE’s worldwide strength, experience, R&D and perhaps its brand equity also needs to enter the analysis. Moreover, the LOF does not remain constant after the initial entry. While costs due to spatial distance and a relatively stable factor like culture may be fixed, those arising out of factors like government regulations may vary over time. Similarly, longer experience in that environment and development of suitable internal skills to cope with it might also help reduce that liability.

The traditional methodology somewhat lacks the ability to address those issues adequately. However, if the frame of reference is shifted to the IBE as a whole and not just to the host country’s environment, then a more realistic appraisal is possible. The LOF in this case would still be the costs of doing business abroad but more specifically the additional costs incurred in interacting with all the elements of the IBE once the firm ventures abroad. Those also include costs incurred in acquiring and developing the skills needed to read and deal with the intense complexity and volatility of the IBE. Even domestic firms might incur some of those costs because the prevailing IBE affects all firms, MNE as well as domestic. While it directly affects the MNEs, it also affects domestic firms indirectly, because the domestic business environments exist within an overarching IBE. For instance, a local, purely domestic firm in China would still need to consider the prevailing IBE to formulate an appropriate strategy against its rival—a US subsidiary in China—because the latter’s strategy is more directly shaped by the IBE. Moreover, because the Chinese government could be expected to analyze the IBE while evolving its policies and regulations that affect both entities, the local Chinese firm can scarcely ignore it in its analysis. This frame of reference and methodology would make analyses realistic and truly reflective of the intricacies of the IBE. More importantly, it would facilitate an effective, real-time and contemporaneous analysis of the dynamically changing IBE.

This expanded conceptualization of LOF will also be applicable to all situations in a generic manner rather than being narrowly confined to the traditional dyadic view. The following examples may help illustrate this point. (1) The LOF is incurred by a US subsidiary operating in Sweden with respect to its local Swedish rival (the traditional LOF view). This LOF might, however, vary over time due to experience gained by the subsidiary or due to changed conditions that affect the two entities differently. (2) The extent of LOF incurred by the same US subsidiary with respect to the same Swedish rival would differ from the previous case, if the US subsidiary has had prior experience of operating in Norway. This is based on an extension of the Uppsala model’s argument of experience in a culturally proximate country. (3) The extent of the LOF incurred by two US subsidiaries operating in Sweden would be different if one of them has had extensive experience in worldwide operations while the other has had only limited experience. (4) The LOF incurred by two US subsidiaries in Sweden, with identical levels of prior experience, would still be different in case where one of them develops better skills and internal processes for coping with the IBE. (5) The LOF incurred by two US subsidiaries in Sweden that are identical in size and experience would still vary in case where they adopt different entry modes.

This expanded and generic conceptualization of LOF would also obviate the necessity for having two separate terms that distinguish the traditional understanding of LOF from a so-called liability of foreign operations (the additional costs of doing business abroad). The paper, hereafter, adopts this enhanced LOF and proceeds to carry out a holistic examination of its antecedents and consequences to see how MNEs might mitigate this LOF through development of appropriate skills and intra-firm routines.een broadly defined in literature as additional costs that a firm operating in a market.

"QUESTIONS"

Q: Which types of foreign affiliations have been described in the case above? Explain.

Q: Would any type of foreign investment facilitate the resolution of short comings present in the case? Explain.

Q: Suggest and elaborate the role of Developed economies in channelizing business through international relations.