Liability of foreignness: new insights from capital markets

Abstract

Liability of foreignness (LOF) has been one of the central constructs in the field of international business and management. Over the past two decades, a significant body of theoretical and empirical research has accumulated, theorizing on the sources of these LOFs, investigating their magnitude, and prescribing approaches to mitigate these disadvantages. However, much of this research is almost exclusively related to firms expanding their products, services, and operations to other countries as part of their global expansion. The difficulties firms face in foreign product markets is just one dimension of the costs they can face in their attempts to secure resources abroad.

We expand the domain of the LOF construct to include liabilities faced by firms accessing foreign capital markets in light of the increasing integration of capital markets. We identify four sources of LOF in capital markets: regulatory costs, information costs, unfamiliarity costs, and costs arising out of cultural differences. Based on an extensive review of “home bias” in equity markets, we propose four strategies to erase the legitimacy deficits that firms encounter in foreign capital markets: bonding, signaling, adoption of business practices isomorphic with the host country, and certifications and endorsements by third parties. We also offer suggestions for operationalizing and measuring LOF in capital markets as well as several directions for advancing further research on LOF in the context of capital markets.

Citation

Greg Bell, R., Filatotchev, I. and Rasheed, A.A. (2010), "Liability of foreignness: new insights from capital markets", Timothy, D., Torben, P. and Laszlo, T. (Ed.) The Past, Present and Future of International Business & Management (Advances in International Management, Vol. 23), Emerald Group Publishing Limited, Leeds, pp. 293-326. https://doi.org/10.1108/S1571-5027(2010)00000230019