The Dynamic of Assets and Liabilities of Foreignness

Researchers have recognized that foreign firms possess both advantages and costs in operating in host countries. The extant literature suggests that the liability of foreignness can be gradually overcome as a foreign subsidiary learns more about the host country environment and develops better connections to local business networks. Based on a longitudinal case study of the Chinese management software industry, however, we find that even over the long term foreign firms continue to face difficulties in accessing some important potential country-specific advantages to overcome liability of foreignness. We develop a framework to explain why and how local firms more successfully access country-specific advantages at home because of their local complementary knowledge, local relationships, and home-focused strategies and understand the dynamic of assets and liability of foreignness. These findings have important implications for the persistence of liability of foreignness and for established MNEs wishing to compete in emerging markets as well as helping to explain the emergence of strong competition from local firms in emerging economies.