Explain the concept of liability of foreignness and discuss

Explain the concept of liability of foreignness, and discuss how it might affect the balance between the costs and benefits of international diversification.

Solution

The term Liability of Foreignness tells about the incremental costs the firms will have to incur if operating outside the home country when compared to costs incured by the local firms. It is all about the costs associated with activities in a foreign country.

Some of the liabilities for a firm going multinational are:

1. Information availability will be higher for the local firms than the foreign firms.

2. It is imperative that the goverment and also some of the local buyers and suppliers treat the local firms in a superior way than the foreign firms.

3. There could be some regulatory issues for foreign firms in a country thus making it difficult for foreign companies to do business.

4. The subsidaries majorly face foreign exchange risks.

5. Local companies generally have favoured acces to the local resources compared to foreign ones.

Benefits of International diversification which are to be compared with the liabilities are:

1. Diversification to a well suited country increases the consumer base and thus can greatly increase the revenue of the company.

2. There will be greater availability of funds and thus financial strength can be increased.

3. Larger size can result in reduction of costs due to economies of scale.

4. Reduction in transportation costs.

5. Access to the technology and resources of the foreign firm.

6. Access to new markets increases interaction with many firms and hence helps the firm to improve networking which can lead to knowledge transfer.