Overcoming the Liability of Foreignness by Zaheer - Article Example

Journal article review: “Overcoming the liability of foreignness” Name Professor Institution Course Date Journal article review: Zaheer, S 1995, Overcoming the liability of foreignness, Academy of Management Journal, Vol. 38, No.2, pp. 341-363 Introduction In the recent years, globalization has increased significantly as companies cross boarders to market and create brand equity about their products. However, not all companies which enter foreign markets succeed as the international markets have numerous challenges. Some of the challenges companies face is the different social, economic and political factors. Some of the social factors include culture, population and attitudes of the consumers in these countries. On the economic trend, companies face challenges like social status and economic fluctuations. Political factors facing many companies include corruption, favoritism and patronage, and political instability. For that reason, international business experts call on international companies to offer their foreign subunits some company-specific advantage which are on the basis of managerial or organizational capabilities. Therefore, this paper will review Zaheer’s article “Overcoming the liability of foreignness” and advise managers on the best practices in an international environment of a business. Journal article review: Overcoming the liability of foreignness The journal article “Overcoming the liability of foreignness” argues that multinational companies are at inconvenience than the local companies in reference to foreign country operations. It claims that this liability of foreignness is a fundamental assumption which drives theories and operations of the multinational companies. In the article, Zaheer (1995, p.341) categorized the basis for liability in foreignness as the geographical distance between parents country and the host countries, unfamiliarity of cultural aspect of the local environment and host nation business environment. Liability of Foreignness sources Zaheer confirms that LOF normally take place and takes that opportunity to explain its sources in the host markets. While the past studies depend on the cost strategy to clarify the hurdles to effective foreign market activity faced by foreign enterprises, this article explains that the reasons which cause extra cost. In so doing, the author uses the argument as the start to determine prospective strategies aspects. The article has gone ahead to lay bear the causes of LOF. According to Zaheer (1995, p.342) domestic customers will less likely to purchase foreign goods compared to the local ones. This argument is anchored on various thoughts which hold that the reputation and expertise of a foreign company is generally influenced by its parent nation’s environment, market peculiarities, consumer taste and preferences differ among nations, domestic consumers often have the “home bia” and host-country prejudice normally exist and it is against the country of origin of the foreign venture. Fundamentally, liability of foreignness is considered a double-edged sword because foreign companies are strangers within a new global market; however host-nation customers also undergo some level of uncertainty when they come across a new product and service in the market. In a nutshell, the foreign corporation and the consumer from the host nation are both confronted with the asymmetric distribution of the pertinent information resulting in a suboptimal state of affairs for the both parties. According to Zaheer (1995), company-oriented argument for the LOF Technological advances and the ideological change has led to “globalization” and massive business opportunities. However, competition taking place between companies for the new customers does not happen in a borderless planet. The article advices companies to globalize their business operation to attain knowledge, responsiveness and efficiency. When the company-specific resource is used, attaining competitive advantage becomes easy. As globalization raises the level of income through trade and foreign exchange, customers become capable of buying not only domestic goods products but also “global” products which results in great diversity. However, the process can only be achieved through massive marketing as foreign companies do back at their parent country. This is an indication how companies operating in foreign markets only needs to promote their products on how they can meet the consumer needs in terms of consumer taste and preferences. Business international researchers have all along made statements about multinational enterprises which are based in abroad face many challenges like for instance the environmental change, that is from the political, economic and cultural differences, and the need to have good communication network across the geographical area. Foreignness being the major problem has contributed to the assumption of having many theories about the multinational enterprise. Therefore, it has been suggested that in order to be able to overcome the problem of foreignness and to have a successful competition with other local firms, it is the duty of Multinational enterprise to offer their subunits with managerial or organizational capabilities. Saheer (1995, p.441) also argued on the need to have organizational capabilities and firm-specific resources so as to give to their firms’ sustainable and competitive advantage. However this theory states that in order for multinational enterprises to conquer the problem of foreignness they should be able to import capabilities found from the parents of the organizational practices. Particularly if the branches are in a competition where the products are undifferentiated in terms of brand name, cost advantages and superior technology have little or no role to perform. Solution to Liability of Foreignness In order to conquer the liability of foreignness and be in a competition with other local firms, an enterprise of a multinational should be able to offer its foreign subunit some capabilities and resources specifically to the firms (company-specific internal advantages) or try to copy some successful strategies used by other local firms. The cost that has led to the problem of the foreignness does not point directly to the choices of the MNE they need. A Multinational enterprise might try all means to lower directly the price of coordination by offering self- rule to a foreign branch while letting it to pretend to be a local firm through, for example, paying all value adding processes while in the foreign area. Also the parent may decide to pay for the distance-related prices through the premium attached to the brand name manufactured from the local country. Researchers learning organization and international strategy have identified several industry-specific factors that have contributed to the level of local responsiveness needed by an MNE branch, that could as a result influence the degree at which the subunits is similar to the local firms. Saheer (1995, p.345) stated that MNE branches in industries that are multi domestic might be in a position to local isomorphism than globally industries. Generally, company-specific advantages are normally deduced from the usual foundation of competitive advantages like the cost savings attained from economies of scope and economies of scale. Zaheer (1995, p.346) also believed that the company can also achieve company-specific advantages or taking advantages of cost advantages at their location. Also competitive advantage can be developed by organizational resources like being able to transfer or to learn managerial skills and fundamental practices over a multinational program. In the trading of foreign exchange, the goods are not differentiated commodities, and therefore trading can take place as long as the customer is satisfied with the product. In the big and multinational banks the technology used is generally standard, because of the three important and common global technology suppliers to the organization. Thus, the move of firm-specific organizational or managerial skills in organizational routines is going to be vital in compensating for the problems encountered by the foreignness. In further arguments, Zaheer (1995, p.346) was clear on the exchange between these two factors of international company’s performance and argued that the company- specific gains can pay off for the extra costs. After reporting that the liability of foreignness actually exist in global markets, Zaheer (1995, p.343) imply that the multinational companies can partly recompense for the inadequacy of the local information by means of factors like the scale, the large capital from the parent company, or the organizational or managerial skills, including by engaging global network that facilitate it to link up with international information flows. Methods used in the research To justify his research question, Zaheer conducted a research in the foreign exchange halls in New York, US and Tokyo, Japan to assess the room practices and performance. In the research, room practices were considered the independent variable while performance was the dependent variable. Various data collection methods were used in the research such as observation, interview and survey. The sample population of 28 trading rooms where considered with 13 being in New York while 15 being in Tokyo (Zaheer, 1995, p.348). These trading rooms belonged to 8 Japanese and 8 western banks. In the study, questionnaires were administered to every foreign-exchange traders in all trading rooms. However, separate and different were given to the executives of these trading rooms, who were interviewed afterwards. The aggregated responses from the traders were employed in the assessment of the research questions. Even though, the entire sample comprised of just the 28 trading rooms, 198 respondents tool part and their response seemed free from bias. Within the 28 rooms, 198 participants returned their questionnaires representing an average of 79 percent rate of response. 63% response was from New York whereas 92% were from Tokyo Japan (Zaheer, 1995, p.349). During the process the research controlled variable to ensure there was no overlap. Findings Zaheer (1995) measured the liability of foreignness based on practices and performances of companies making an entry into a new market. In this cross-sectional research in a sample population of subsidiaries Japan and the US, Zaheer (1995) established that the foreign companies were less profitable and effective compared to the local companies. Building on his work Zaheer (1995) analyzed the survival of the new banks based on the trading rooms and the established liability of foreignness has changed in the recent. He concluded that in the initial two years of entry, the rates of survival of foreign-owned and host-country trading rooms were the same. The situation show the liability of the new company is primarily nearly has a similar magnitude to that of foreign. However, for the subsequent years, i.e. ten to fifteen years, the trading rooms which are operated by the foreign banks have the high rate to exit compared to the locally owned. The results were summarized on the tables to make it easy for interpretations. Strength and weakness of the research methods The strength of this research was that effective sampling was employed in collecting data. The strength of this method is that it decreases human bias within the sample. Unbiased random sampling is always vital for researchers and scholars in making informed decisions based on the outcome of the study. For instance, Zaheer (1995, p.348) claims that he set an interview with the executive of the trading rooms after returning of questionnaires from companies. To safeguard the research from bias interpretation, the research created separate questionnaires; one for employees and for the head of the trading rooms (Zaheer, 1995, p.349). The strength of the sampling method is that creating sample is simple. The researcher used 28 large trading rooms; 13 being in New York while 15 being in Tokyo The researcher was also able to eliminate biasness because everyone is given equal chances of being selected as respondent. The strength of the study and method is that the sampling was succeeded by an interview to verify whether what trading room heads had written was consistent with questions about practices and performance of foreign firms in foreign markets. Observation and interview are advantageous in research because, the research get first hand information. Nevertheless, the research does not escape weaknesses which are always associated with sampling, observation and interview. Sampling considers a small portion of the entire population to make decisions; meaning few people is considered for responses. The reality is that many people which work with other firms were left out hence the decisions by few can reflect what the entire industry thinks. Another weakness which is a reality is that not everybody returned the questionnaire as shown by the outcome of the research. Conclusion This article has is a result of the research on the liability of foreignness. In the process, the author Zaheer found the presence of a liability of foreignness within the competitive industries. Some of the risks companies face is the lack of knowledge about culture, taste, preference, economy and politics. A research carried out in the trading rooms of foreign exchange where imported capabilities and local isomorphism were analyzed. The outcomes holds that the company internal and specific advantage which can be carried by foreign companies to the new location can be an efficient way they can reduce the liability of operating in the foreign market. Some of the company specific advantages can be cost strategies, differentiation of products and effective marketing. References Zaheer, S 1995, Overcoming the liability of foreignness, Academy of Management Journal, Vol. 38, No.2, pp. 341-363 Read More