The Challenges Faced by Foreign Subunits of Multinational Enterprises by Zaheer - Article Example

Article review Name Institution Date Course Article Review (Zaheer, S, 1995, Overcoming the liability of foreignness, Academy of Management Journal, 38(2):341–363,) Introduction The article focuses on the challenges faced by foreign subunits of multinational enterprises, and then discusses the strategies that might be employed by these establishments to minimize these challenges. Zaheer refers to these challenges as liabilities of foreignness and believes that overcoming these challenges is critical for the success of the enterprises. To determine the most significant liabilities of these foreign enterprises, Zaheer describes a study which she conducted in the banking industry and one which she used to find the most effective strategies that have been proven to be successful for such enterprises. Before discussing the findings of his study, the author describes two theories that have been proposed for the foreign enterprises to adopt for them to overcome the liability of their foreignness and ensure successful competition against the local firms. One theory proposes that multinational enterprises should adopt the firm-specific advantages approach by importing capabilities that are embodied in organizational or managerial capabilities of their parent enterprises. Also proposed is the approach that draws from the institution theory. In this approach, multinational enterprises may attend to the local demands and host country environment and modify their practices so that they are similar to those of the local firms. The author, through the findings of his study, reports that firm-specific advantage, in the form of imported organizational practices, may represent a more effective strategy for the subunits of multinational enterprises as they seek to overcome these liabilities. The author employs rigorous selection processes in the identification of the specific banks to use as she tries as much as possible to represent established international businesses. This was important for the success of the study and the accuracy of the findings. The synopsis The author begins with an engaging discussion of international business and the theories that suggest that multinational businesses face costs that may be associated with the unfamiliarity of the environment. This unfamiliarity may be caused by factors that cut across political, cultural and economic differences as well as the intensive coordination across geographic distances. The article recognises research materials that have discussed this liability of foreignness, noting that this has been the fundamental assumption that has driven theories of multinational enterprise. After highlighting these costs, which she calls liabilities, the author goes ahead to discuss two theories: resource-based views and the institution-based approach which according to her, multinational enterprises may adopt in their subunits to help them compete in the local markets. The resource-based approach, according to the article, stresses the significance of organizational capabilities and firm-specific resources in ensuring sustainable competitive advantage for the foreign establishments. According to these theories, multinational subunits will try to overcome their challenges by borrowing capabilities that are embodied within the organizational practices of their parent enterprises. The author argues that this approach will be particularly effective if these subunits are competing in an undifferentiated product market where other sources of competitive advantages like brand name, factor cost advantage, or a superior technology do not have any significant effects. The article then draws from the arguments of several researchers in institutional theory as well as the research work of international organization theory researchers who believe that multinational subunits will most likely respond to the local demands and host country environments so that their organizational practices will tend to become similar to those of the local firms. Given the two possible strategies that could be adopted by multinational subunits, the author sought to determine the strategy that could best be used by the foreign exchange trading enterprises to remain competitive in their local environment. This industry was a good choice since, as mentioned in the article; organizational capabilities play an important role for the achievement of competitive advantage, as opposed to product-market fit considerations or product differentiation. The study was conducted on paired sample of trading rooms of U.S. and Japanese banks in Tokyo and New York. During the study, local trading rooms were defined as those in banks whose owners were from the country in which they were located while foreign trading rooms were those in banks owned by individuals or firms from countries other than those where the trading rooms were located. To further streamline and focus the study, several organizational practices were eliminated while others adopted. Focus was concentrated on whether the establishments exercised market control or not and whether there were evidences of bureaucratic micro controls in the establishments. Data A total of 28 trading rooms were sampled, 13 of them in New York and 15 in Tokyo. All these belonged to eight Japanese and eight Western banks. The study involved detailed interviewing sessions and questionnaires that were used to collect the data. Basic variables were also checked from the trader’s questionnaires for interpreter reliability as well as the existence of room-level measures for correlation with the responses of the heads of the trading rooms. Results The study revealed that imported firm-specific advantage and local isomorphism have different effects on the liability of foreignness for the organizational practices under investigation. It was also found that foreign trading rooms at distant locations from their parent enterprises that exercised micro controls showed less evidence of the liability of foreignness. Those that practiced market control, on the other hand, did not give the same results. The implication therefore was that multinational enterprises should find strength in maintaining the effective practices of the parent enterprise and minimize imitation of practices of the local enterprises that they may not be familiar with. Critique This article focuses on the challenges faced by subunits of multinational enterprises as they seek to compete in the local markets which may be far away from their parent enterprises. The author employed an intensive study in his attempt to assess these challenges and in his effort to reveal the most effective approach. As seen in the article, she employs vital sampling and control strategies in his study which greatly increases the accuracy of the findings. It was important that the researcher realises the different sources of liabilities of foreignness. As she explains in her article, overseas businesses faces costs that could arise from the unfamiliar environment, from cultural, economic, and political differences as well as from the need to coordinate business across huge distances, among other many factors. Gaur, Sarathy & Kumar (2011) identifies two sources of liabilities of foreignness which include those that are environmentally-derived and firm-based liabilities. The environmentally-derived liabilities have their sources in the host country and home country environments, while the firm-based liabilities are derived from specific characteristics of the firm including the ownership structure, learning, firm-specific resources, and network based linkages (Gaur et al, 2011). Although zaheer does not make this categorisation, she satisfactorily describes the sources and notes their effects on the subunit of the multinational enterprise. Rugman and Sukpanich (2006) also agree that firm-specific advantages bring strength and competitiveness to the multinational enterprises’ subunits. In their work, however, the authors go ahead and discuses the interaction between four proxies of the firm-specific advantages (firm size, knowledge, marketing ability, and industry type) and the performance of the multinational enterprises. Zaheer, however, quickly warns that although her study supported the role of firm-specific advantages over local isomorphism for the multinational subunits to overcome the liability of foreignness, her focus is on those advantages embodied in the imported organizational practices. She further points out that when considerations are shifted to industries where firm-specific advantage is embodied in brand name, technology, or scale, or any other resources that are not organizational capabilities, local isomorphism in organizational practices may be helpful in enhancing subunit performance. But as already mentioned above, Rugman & Sukpanich (2006) found that multinational organizations may find competitiveness in advantages that are not organizational capabilities. According to Spanos & Lioukas (2001), the resource-based approach became increasingly common and acceptable in the 1990s when strategy researchers’ focus about the sources of sustainable competitive advantage for multinational enterprises shifted from the industry to firm-specific effects. This approach, initiated in the mid-1980s (Barney, 1986; Wernerfelt 1984; Rumelt 1984), has become one of the greatest approaches to the analysis of continuous competitive advantage. Zaheer’s article reiterates the importance of this approach by citing several literature materials that discuss this subject. She also stresses the importance of organizational capabilities and firm-specific resources in ensuring sustained competitive advantage for firms. Other researchers have found evidence that firms can overcome the liability of foreignness by linking to resources available locally in their host countries (Chen, 2006). In his work, Chen investigates both intra-firm and inter-firm linkages. He demonstrates that it is important for enterprises to build and maintain local responsiveness and at the same time achieve vertical integration so as to overcome these liabilities. Wu (2008) believes that this responsiveness in the host country should focus on managing human resources. Although Dunning (1988) believes that exploitation of firm-specific advantages leads to the preference for wholly owned subsidiaries that make this exploitation conducive, Chen presents a case where wholly owned subsidiaries are preferred even in the case where exploitation of local resources is the main driver of the investment. Chen believes that the large distances tend to reduce the effectiveness of the subunits if these units will always need to draw support from the parent enterprises. It is fair to argue, however, that as Zaheer states in the article, her findings are applicable to firms where firm-specific advantages are embodied in organizational capabilities. It can also be concluded that the study results presented in the article are accurate for this industry. As Zaheer emphasizes, so long as firms understand the sources of their firm-specific advantages, they may well adopt the approach proposed in this article to achieve the competitiveness of their foreign subunits It is important to state that this article is very informative and has arguments that have been supported by works from other researchers on the topic. The deep analysis of the facts and approaches as well as the detailed presentation of study results is a strong point for the article. The author has also greatly organised the article and has used easy to understand language. Readers of the article may therefore enjoy the simple language and the development of ideas and facts. Also provided is analysis of results as well as discussion of implications of these results that broadens reader’s understanding of the author’s sentiments. The author also suggests the need for further research on the issue of liability of foreignness in different industries and with different types of firms. She proposes that research should address the behaviour of liability of foreignness and whether or not the liability of foreignness declines as the firms gain more experience in their locations. Conclusion Zaheer’s article is a deep analysis of the liabilities of foreignness with an investigation of the possible approaches adoptable by multinational enterprises. The article focuses on the foreign exchange trading in the banking industry and provides results from a study in these establishments. The article’s findings are in agreement with findings of several researchers. The author, however, stresses that the proposal for adoption of the firm-specific advantages for the attainment of competitiveness should be treated with caution. The article has also been properly reported with sequentially flowing ideas that are not difficult to understand. It is recommended for those who want to understand the concepts surrounding the popularised liabilities of foreignness, from the causes of these liabilities to the strategies that might be employed to ensure that multinational enterprises ensure that they remain competitive within their host country environments. List of reference Dunning, JH, 1988, The eclectic paradigm of international production: a restatement and some possible extensions. J Int Bus Stud, 19:1– 31. Chen, T, 2006, Liability of foreignness and entry mode choice: Taiwanese firms in Europe, Journal of Business Research, 59:288 – 294 Wernerfelt, B, 1984, A Resource-Based View of the Firm, Strategic Management Journal, 5(2):171-180. Rumelt, R., 1984, Towards a strategic theory of the firm, in Lamb, R., (Ed.), Competitive Strategic Management, Prentice-Hall, Englewood Cliffs (NJ). Barney, Jay, 1986, Strategic factor markets: expectations, luck, and business strategy, Management Science, 32(10):1231-1241. Spanos, Y. & Lioukas, S., 2001, An examination into the causal logic of rent generation: Contrasting Porter’s competitive strategy framework and the resource-based perspective, Strategic Management Journal, 22(10):907-934. Gaur, AS., Sarathy, R., & Kumar, V., 2011, Liability of foreignness and internationalization of emerging market firms, In Devinney, TM., Pedersen, T. & Tihanyi, L. (eds.), Advances in International Management: The Past, Present and Future of International Business and Management, Volume 24, Emerald, New York, NY. Rugman A. & Sukpanich N., 2006, Firm-Specific Advantages Intra-Regional Sales and Performance of Multinational Enterprises, The International Trade Journal; 4(24). Wu, J., 2008, An Analysis of Business Challenges Faced by Foreign Multinationals Operating the Chinese Market, International Journal of Business and Management, 3(12):169-174 Read More