Mitigating liabilities of foreignness: Defensive versus offensive approaches

Yadong Luo, Oded Shenkar, Mee Kau Nyaw

Research output: Contribution to journalArticle

118 Scopus citations

Abstract

Finding effective mechanisms that can overcome liabilities of foreignness (LOFs) is the central issue in the study of LOFs. This study proposes that such mechanisms comprise defensive options and offensive options. Defensive mechanisms include contract protection, parental control, parental service, and output standardization. Offensive mechanisms include local networking, resource commitment, legitimacy improvement, and input localization. Using China as an analytical setting, this study emphasizes two prominent yet distinct mechanisms: contract protection and local networking ("guanxi" in Chinese). Contracts and guanxi mitigate the LOF via different paths: Contracts negate LOFs by safeguarding invested resources, curtailing operational uncertainty, and reducing coordination costs, whereas guanxi neutralizes LOFs through increasing indigenous adaptability, improving organizational legitimacy, and heightening cooperation with the local business community. Our analysis of 92 sample MNEs in China suggests that contracts and guanxi exert different influences on the consequences of LOFs. Contracts reduce production and marketing costs but do not stimulate sales revenues. Guanxi, however, enhances sales revenues but does not reduce production and marketing costs. This study also documents that contracts and guanxi operate as complements in overcoming LOFs.

Original languageEnglish (US)
Pages (from-to)283-300
Number of pages18
JournalJournal of International Management
Volume8
Issue number3
DOIs
StatePublished - Oct 17 2002

Keywords

  • Contract
  • Liability of foreignness
  • Networking

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Strategy and Management

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