Dynamics of Globalization: Location‐specific Advantages or Liabilities of Foreignness

Citation

Gammelgaard, J. (2012), "Dynamics of Globalization: Location‐specific Advantages or Liabilities of Foreignness", Critical Perspectives on International Business, Vol. 8 No. 3, pp. 262-267. https://doi.org/10.1108/17422041211254987

The main purpose of this edited volume is to present new research on the topics of location‐specific advantages on the one hand and liabilities of foreignness on the other. Liabilities of foreignness are typically defined as the additional costs foreign companies incur because they are operating in a foreign host country. Some such costs may be caused by geographical distance, such as additional transport costs, but they can also result from legitimacy problems and regulatory restrictions. Location‐specific advantages capture issues like the natural and created resource endowments of the specific host country, including investment incentives, and cluster and spill‐over effects. The ambition of the four editors – Christian Geisler Asmussen, Torben Pedersen, Timothy Devinney and Laszlo Tihanyi – is to present “a cohesive set of papers that not only informs a debate but also provides scholars with a forum within which to push the envelope” (p. xvii). The editors seek to produce this coherency on the basis of the above‐mentioned themes, which are classic areas of investigation in the international business literature. With an impressive selection of nineteen papers, the reader has access to an up‐to date review of these issues, and he or she can dig into the multifarious aspects of these two themes in a variety of contexts.

In the introductory chapter, the four editors argue that the spread of globalization and the increased complexity of international operations have revived interest in these two topics, which have been neglected as research themes for several years. The book contributes to the revitalization of location as a focus point. In moving from resource‐ and market‐seeking argumentations, the editors point to the effects of location‐specific advantages in interaction with “firm‐specific advantages”, especially in cases where companies face liability of foreignness problems. The implication of this triangle of factors is that location‐specific advantages are not necessarily interesting per se. Instead, their complementary and unique interactions with firm‐specific advantages are viewed as the drivers of competitiveness. Liabilities of foreignness are then seen as the factor that diminishes the returns of operations in that specific location.

Sjoerd Beugelsdijk analyzes the relationship and interactions between liabilities of foreignness and location‐specific advantages. He categorizes the approaches adopted in research carried out thus far as it appears in decade award‐winning articles published in the Journal of International Business Studies. One approach is to neutralize the intra‐country differences and, thereby, the effects of location‐specific advantages. Variation then only exists in firm‐specific advantages and, as a result, liabilities of foreignness will be driven not by distance but by the way companies deal with these liabilities. One example of this approach is the Uppsala internationalization model, which focuses on how companies reduce uncertainty and increase commitment over time. The opposite research approach neutralizes company effects, so that variation is associated with different host country contexts. The adaptation regime and the related contingency framework have driven this research, where Kogut and Singh's cultural index serves as an example. In a variation of this research approach, variance is associated with a specific host country. The choice of partner or entry mode is investigated, and transaction cost economics and internalization theory on the one hand, and the integration of knowledge on the other, have been investigated. Kogut and Zander's work exemplify this type of approach. The fourth type of research approach focuses on the macroeconomic level, and investigates differences between host and home countries in dyads. Such research has investigated trade agreements like the WTO, and Giddy and Dufey's work on exchange rates forecasting is an example.

After this point in the book, more focused research is presented. Location‐specific advantages and liabilities of foreignness are investigated in relation to different topics, such as controlling liabilities of foreignness through the establishment of divisional headquarters, the selection of the right partner, especially in emerging or developing countries, or different knowledge creation and management strategies. One specific contribution to existing research is a discussion of the impact of emerging markets, which are proposed to have location‐specific advantages that differ from those of developed markets. The remaining chapters of the book are more typical mainstream, research‐based articles that focus on specific areas.

One general theme selected for investigation is the role and location of regional or divisional headquarters. Phillip Nell, Björn Ambos and Bodo Schlegelmilch analyze how multinational corporations (MNCs) have moved away from the classical M‐form with product divisions to organize activities through regional headquarters. One finding is that geographically oriented divisions can efficiently coordinate activities within regions but not necessarily across regions. This organizational form, therefore, replicates the “silo” problems associated with the classical M‐form. Even though regional headquarters are by the authors suggested to act as bridges towards other units of the MNC, examples from case surveys demonstrate that subsidiary managers bypass their headquarters when approaching other organizational units. The general findings of this survey indicate that decision‐making rights are constantly reallocated between headquarters and subsidiaries, and that countries in regional divisions are continuously regrouped.

In another chapter, Sven Laudien and Jörg Freiling analyze a theme related to efficiency: how regional headquarters can ensure a continual flow of information among units. These authors employ an information cost approach to distinguish between observation costs, i.e. search costs, and communication costs, i.e. transfer costs. In this regard, the location of the regional headquarters becomes relevant, as a location near headquarters reduces observation costs but increases costs related to communication with subsidiaries. The opposite is true if regional headquarters are located closer to subsidiaries, as the distance to headquarters increases. In general, the regional headquarters' ability to combine costs is emphasized.

Finally, Randi Lunnan, Gabriel Benito and Sverre Tomassen survey issues related to the location of divisional headquarters, like legitimacy and acquisitions. They find that Norwegian companies locate divisional headquarters in geographical proximity to headquarters units in order to operate in politically stable environments and resource‐rich areas, and to secure access to a highly educated workforce. Furthermore, they explain how the establishment of divisional headquarters through an acquisition of a local operating unit reduces legitimacy problems. However, this notion is questionable. First, a foreign takeover of a local unit leads to hostility among local stakeholders. Second, acquisitions per se do not reduce the often bounded rational disfavor among foreign investors and local customers that is associated with particular nations of origin.

The book also includes analyses of emerging and developing market firms, and discussions of how liabilities of foreignness and location‐specific advantages are affected by local political intervention and institutions. Ajai Gaur, Vikas Kumar and Ravi Sarathy investigate the liability of foreignness problems experienced by emerging market MNCs, which they suggest differ from those experienced by MNCs from developed markets. Even though governments in emerging markets support the internationalization efforts of their MNCs through subsidies, emerging countries still suffer from a lack of institutions to support efficient, market‐based transactions. Experience with operating in such conditions can be advantageous when entering other emerging markets. However, when entering developed markets, emerging‐market MNCs lack the skills needed to operate in highly capitalistic markets and in industries characterized by intense competition. In particular, obtaining intangible assets is problematic for emerging markets firms.

Svetla Marinova, John Child and Marin Marinov exemplify this situation in their investigation of Chinese firm internationalization. They find that the ability to develop strategic key resources is a key motivation for Chinese firms and that Chinese entrepreneurial managers overcome the disadvantages of being latecomers on international markets through acquisitions, or through partnerships with western companies. These activities ensure access to production and technological know‐how. The Chinese government supports these internationalization processes by dampening restrictions, and through subsidies, tax rebates and investment protection agreements. The Chinese government also uses its bargaining power in its negotiations with other foreign governments. Consequently, the success of these Chinese firms depends on their connections with the political authorities, which are based on personal network relationships and on their not being too autonomous from party control. The authors show that the political standing of firm managers who are members of the Chinese Communist Party is helpful for entrepreneurial processes and development in these companies.

Government intervention is also the focal point of Nigel Williams, Tom Ridgman and Yongjiang Shi's survey of the internationalization of small firms in developing countries, which they exemplify with case insights from Trinidad and Tobago. Local companies in this region continually face transformations in public policies that aim to imitate governmental policy trends in western developed countries but fail to encompass adaptations to fit the local context. The introduction and subsequent removal of support mechanisms for exporters is just one example. Thus, the development of an open economy and the improvement of institutions are viewed as essential for internationalization processes, especially as companies in these countries often suffer from resource constraints and compete for skilled labor with inward foreign investors in the local environment. However, these companies are still dependent on the spillover effects of foreign investment.

These findings correspond to a survey of FDI location determinants in sub‐Saharan Africa undertaken by Satwinder Singh, Kirandeep Dhillon, Florian Kaulich and Weifeng Chen. In these countries, political stability is also found to be a key factor, as is the presence of a local market opportunity. However, these authors suggest that the issue is not just access to low‐cost labor but also the availability of skilled labor. This fact, then, becomes both an advantage and a challenge for the local operating firm in its efforts to become an international firm.

With its focus on location‐specific advantages and liabilities of foreignness, this book offers many interesting insights into globalization effects and internationalization processes. The book is highly recommendable as an up‐to‐date review of these two themes. It also presents numerous relevant findings from both quantitative and qualitative surveys. As such, the book can serve as a reference point for the ongoing debates around these themes.

However, the chapters by Silvia Sedita, Fiorenza Belussi and Gianluca Fiscato on regional innovation systems, by Torben Pedersen, Christine Soo and Timothy Devinney on internal and external knowledge sourcing, and by Nicolai Foss and José Santos on the knowledge system approach seem to only indirectly discuss the issues of location‐specific advantages and liabilities of foreignness. In fact, the vocabulary associated with these two factors is not even used in these chapters, even though they are well written, interesting, and contribute to research.

Furthermore, the book offers no integrated discussion of how issues such as the location of divisional headquarters, different partnering mechanisms in emerging economies, the development of certain countries and knowledge management issues are related. This makes the readings less cohesive, so that the book appears to be a collection of different viewpoints on location‐specific advantages and liabilities of foreignness.

In addition, most articles deal with either liabilities of foreignness or location‐specific advantages – the interaction effects between the two are seldom analyzed. Only the chapter by Beugelsdijk, in which the different research traditions are analyzed for the two topics, seems to adopt an integrated approach. The book therefore lacks new data and conceptualizations on how these two factors affect each other. In addition, the material included in the volume does not appear to respond to the editors' call for research including firm‐specific advantages. Instead, when reading this collection of papers as a “book” – starting with chapter 1 – one has to read through many replications of literature reviews on these two concepts. One example of an interaction effect between liabilities of foreignness and location‐specific advantages could be the German co‐termination system, where employees are elected or selected as worker representatives in managerial and supervisory organs of companies. In a US‐based company, this might be assessed as a liability of foreignness problem when operating in the German market, but it has also been assessed as an institutional system that facilitates innovation, which makes it a location‐specific advantage. Therefore, the stance taken depends on the lens through which the issue is investigated. Another related example is found in the location‐specific advantages of labor rules and regulations favorable to cheap production, which might simultaneously be a legitimacy issue and therefore add additional cost for the foreign firm. In the latter case, the cost is associated with home‐country customers finding such behavior inappropriate. Another question is whether foreign firms can utilize location‐specific advantages in order to decrease problems associated with liabilities of foreignness. The inclusion of firm‐specific advantages in the book's introduction points to the fact that liabilities of foreignness for one firm might be an advantage for another firm. However, aspects other than resource complementarities might be included in such analyses, such as the personal network relationships of MNC managers and how these managers influence decisions made by key actors in the host country. Finally, liabilities of “homeness” might be used to contrast the “foreignness” concept. Local firms do not always have an advantage over foreign firms, as is pointed out by Williams et al. in their analysis of the internationalization of small firms in developing countries.

Critical standpoints – whether they are politically or academically oriented – are seldom adopted in this volume. However, two exemptions are worth acknowledging. First, Sara Melén, Emilia Nordman, Daniel Tolstoy and Deo Sharma present an overview of the literature on international entrepreneurship and how different theoretical approaches have dominated the field. They find that studies focused on the network level have been prevalent in recent years. This chapter is critical in terms of methodological approaches to research. The chapter demonstrates that when one “explanation” for a particular issue becomes prevalent, a high number of replication studies are undertaken and other gateways to the phenomenon are neglected. Notably, when reviewing the leading publications within the international business area, the authors found only one article that used transaction cost theory as a foundation for analysis. Furthermore, they find a tendency to only use “business theories” to explain “business behavior” worthy of mention. An interdisciplinary approach is seldom used, and business‐related theories such as ecological theory and entrainment theory are the only ones adopted. Theories outside the social science sphere are absent.

The second critical chapter is authored by Stephen Kobrin. The chapter covers the transnational transition and the multinational firm, and emphasizes how firms function as actors in international political processes by redefining space and geography in a time where location and economic organization do not necessarily fit with the way geographically sovereign states have traditionally been designed. One aspect in this respect is the increasing importance of non‐territorial actors, such as NGOs, international institutions and multinational firms, in international politics. This is connected with the blurred profiling of private and public companies. For example, the increasing focus on CSR policies is leading companies to take over responsibilities that were previously associated with the state, while the state has begun acting as an efficient profit‐maximization center. Kobrin suggest that these changes might be an outcome of modern communications, the digital revolution and improved transport, which have caused a disintegration of the value chain. For example, the call center for a US hospital does not necessarily have to be located at the hospital, but can be outsourced to Bangalore, India. These developments bring about some critical perspectives on modern international business. One is the responsibility of the MNC as an institution of “authoritative decision makers” in international politics, which was previously the prerogative of sovereign states. With the recent financial crises in mind, questions arise regarding the degree to which states should regulate behaviors of MNCs and the degree to which such regulation is possible in a world where activities are easily relocated. This brings sovereign states into an ethical dilemma when they begin to operate through their state‐owned companies on the edges of these borders. The question then becomes: Who should regulate the regulators? Kobrin takes a standpoint based on his notions that the growing power and authority in the international political system carries inherent responsibilities and duties. He suggests that MNCs, like states and state agents, should be held directly liable for human rights violations.

With the exception of Kobrin's chapter, most of the book follows a mainstream approach and focuses on objective interpretations of theory or data. A critical perspective on the position of policy makers in relation to the utilization of location‐specific advantages or on whether liabilities of foreignness could be interpreted as a neo‐colonial approach when local norms and behaviors suddenly become problematic to the foreign firms are not addressed. Even in cases where the development of emerging and developing economies is analyzed, a political discussion of its implications is not included. Nearest to a political analysis is Marinova et al., who report on government intervention in company policies. They argue that the Chinese state uses its bargaining power vis‐à‐vis foreign states when negotiating terms for takeovers of western companies, and terms favorable to the presence of Chinese firms in Africa. They state that “the role of government in a communist party driven political system is greater than that of governments in developed market‐based societies” (p. 258). However, even though they emphasize this involvement – for example, they stress the importance of company's CEO party membership – they do not discuss whether this is an efficient or better selection mechanism than market selection, or whether companies should be innovative along these lines. In this regard, political involvement is only discussed as a positive contribution to the evolution of firm‐specific advantages.

This book, without a doubt, offers many valuable insights into two classic international business themes. However, the focus in many of the chapters on either location‐specific advantages or liabilities of foreignness highlights the need for future conceptualizations and empirical surveys on the interaction effects of the two. Further politicization around this interaction is also recommendable.