Liabilities in internationalization and global value chain

In the management and business economics literature, the concept of “liability” is associated to the difficulties, additional costs or probability of failure consequent to a certain condition in which an enterprise finds itself with respect to other competing firms. The type of condition determines the type of liability. For example, the “liability of newness” (Stinchcombe, 1965) hinders newly established enterprises, which thus experience greater mortality than already established firms because they are still unable to compete effectively and enjoy a lesser degree of legitimacy. Instead, one consequence of the “liability of smallness” is that new large-sized enterprises have a greater chance of survival than smaller ones (Freeman et al., 1983; Aldrich and Auster, 1986).

The concept of liability has been widely used in the international business literature (zaheer, 1995; Johanson and Vahlne, 2009) with regard to the conditions of disadvantage that may be associated to operating in a market other than one’s own domestic one. Such issue has been addressed within the theory of multinational enterprise, which maintains that firms doing business abroad face greater costs (Hymer, 1976; Kindleberger, 1969). The reasons for such costs are various, including the foreign country’s language, economy, laws and politics, which all told put a greater burden on foreign firms in comparison to national ones (Hymer, 1976), in that they must sustain additional costs in order to face: 1) the reduced availability of information on how to do business; 2) discrimination from the government, the consumers and/or the suppliers; 3) foreign exchange risk. Moreover, in a multinational network 4) the lines of communications are longer and hence the risks of information loss and/or distortion represent a source of disadvantage in comparison to domestic firms (Kindleberger, 1969).

In the Uppsala School model (U-model) the greater costs of doing business abroad is linked to “psychic distance” (Johanson and Vahlne, 1977), defined as “the sum of factors preventing the flow of information from and to the market. Examples are difference in language, education, business practices, culture and industrial development” (Johanson and Vahlne, 1977, p. 24). This model has been developed beginning with the empirical research conducted on internationalization through a database of Swedish enterprises (Johanson and Wiedersheim- Paul, 1975; Carlson, 1970). Distance imposes a gradual process of internationalization, which is described by a so-called “establishment chain” (Cavusgil, 1980). Such establishment chain proceeds step by step at the same pace as the enterprise’s learning processes (Grandinetti and Rullani, 1996; Forsgren, 2002). The model includes interacting aspects of state and change in the internationalization process. The concept of psychic distance is then compared with that of cultural distance, including measures of the two constructs (Sousa and Bradley, 2006).

The U-model has been compared with other, previously formulated models, starting with internationalization models based on the role of technology and innovation (I-model - Vernon, 1966; Gruber et al., 1967). In this case the power of superior technology developed in the framework of the enterprise’s national base could provide impetus to an express process of internationalization to expand the technology’s market base (Lorenzoni, 1987), and hence the “costs of doing business abroad” lose importance. Later, further criticisms were also levelled at the U-model due to the empirical observation that the predicted gradualism is lacking in phenomena such as “born global” (Knight and Cavusgil, 1996). The role played by outsidership with regard to the relevant networks in internationalization processes has also been subjected to criticism (Vahlne and Johanson, 2013).

The costs of doing business abroad and psychic distance are associated with the concept of the liability of foreignness (LOF), as first defined by Zaheer (1995). The attention here has always been focused on subsidiaries of multinational enterprises. Zaheer links foreignness to the following factors that engender extra costs for foreign subsidiaries in comparison to domestic firms: 1) spatial distance between parent company and subsidiaries; 2) lack of familiarity with the host-country environments; 3) nationalism and lack of legitimacy in the host country (Zaheer, 1995). Differences in culture and language, economic and political regulations, spatial distance and its consequences on communication processes are all sources of LOF (Matsuo, 2000). Although some of these costs must also be sustained by domestic firms, they are substantially greater for foreign firms (Mezias, 2002). This leads to considering other factors that may generate LOF, hence broadening the definition of the construct itself.

The existence of LOF “explained why a foreign investor needed to have a firm-specific advantage to more than offset this liability . . . the larger the psychic distance, the larger is the liability of foreignness” (Johanson and Vahlne, 2009, p. 1412). In recent years the factors generating costs associated with doing business abroad seem to have lost importance in comparison to other factors. Zaheer (2002) focuses on the differences between the “cost of doing business abroad” and LOF, highlighting that the former is an “economic concept”, based on quantification of costs connected to the market and linked to physical distance, while the latter is a “sociological concept”, linked to legitimacy and the relationship between the actor and the host society.

LOF has been object of extensive debate in the literature of the last few decades, as demonstrated by the fact that academic journals have devoted special editions to the issue (see the Journal of International Management, vol. 8, n. 3, 2002). The concept of outsidership consistently emerges from studies of multinational enterprises (Eden and Miller, 2001). LOF is generally subdivided in two types of hazards that foreign enterprises, and not national enterprises, have been found to face in the host market: 1) unfamiliarity hazards, due to a lack of knowledge and experience in the foreign market; 2) discrimination hazards due to the unfair treatment that may be reserved for foreign firms in comparison to local enterprises. While the first aspect is linked to the issue of knowledge and experience, and can be overcome by the enterprise through learning, the second has to do with the attitudes of the actors in the host country and can be tackled by fostering relationships and the ability to develop insidership in the relevant networks.

In recent years the same authors that developed the U-model have examined other aspects associated with the positions of different actors within relevant networks operating in global markets, as such positions may be related to the liability of outsidership (LOO). Markets are

“networks of relationships, in which firms are linked to each other in various, complex and, to a considerable extent, invisible patterns . . . insidership in relevant network(s) is necessary for successful internationalization, and so by the same token there is a liability of outsider- ship” (Johanson and Vahlne, 2009, p. 1411).

Moreover, “relationships offer potential for learning and for building trust and commitment, both of which are preconditions for internationalization” (Johanson and Vahlne, 2009, pp. 1411-1412). LOO affects firms that enter a business environment as outsiders in the relevant networks, without knowing who the business actors are, or how they are connected to each other. In order to overcome LOO it is necessary to become a member of the relevant networks, in other words, become an insider through processes of observation, construction and maintenance of networks (Hilmersson and Jansson, 2012).

The concept of LOO provides a link between the interpretative model of internationalization processes and models studying buyer-supplier relationships in business networks. It has emerged from the Nordic School of Industrial Marketing, in particular the approach of the so-called IMP Group, which studies interactional and relational processes and industrial networks (Hakansson, 1982; Hakansson and Snehota, 1995).

Global value chain literature highlights the importance of transnational business networks, cross-border but often inside the same national groups, overcoming both LOF and LOO, as in the case of overseas Chinese business groups in Vietnam or the Philippines, (and elsewhere), which were tapped by Hong Kong and Taiwanese firms in creating triangle manufacturing networks in apparel and other industries (Gereffi, 1999).

One important aspect regarding the relation between internationalization theory and the study of interactions and networking is the promotion of learning at the inter-organizational level (Hakansson et al., 2009). Access to the relevant networks modifies the costs of doing business abroad, and hence leads to a rethinking of the processes necessary to overcome the underlying liabilities, LOO in particular. The dynamics of learning through dyadic interactions can also take on significant importance for industrial clusters in local systems (Guercini and Runfola, 2015) and probably also in the national contexts in which the enterprises are embedded.

Studying models of business networks in industrial marketing offers some important insights for understanding inter-organizational dynamics within global value chains. In these latter, changes in the relations between industry and distribution leads in the last decades to a strengthening of the power of the distribution side, contributing to the emergence of the distinctive features of the globalization process seen in recent decades (Gereffi, 1994; Humphrey and Schmitz, 2002; Gereffi et al., 2005).

A number of actors, especially in particular industries, emerge and base their activities on the processes of design, marketing and distribution, outsourcing operations. Historically, the issue of internationalization has assumed particular importance in the apparel industry: beginning in the 1980s and continuing throughout the 1990s and better part of the subsequent decade, a global shift of manufacturing occurred from the oldest industrialized countries to the emerging ones, foremost amongst which was China (Jones, 2002).

This global shift in production has not, however, eliminated the presence of developed nations’ enterprises in the textile and apparel industries, both because there remained a number of firms acting as focal enterprises, concentrating their efforts on design, marketing and distribution, and also because some enterprises can continue to carry out an important role as suppliers of semi-finished goods and services to the focal enterprises (also given the variety of different business models adopted). For example, the development of fast fashion in Europe and North America has favoured the search for suppliers to form a “regional supply chain” (Barrientos et al., 2011; Rossi, 2013), in contrast to the “global supply chain” associated with manufacturing in emerging countries, which clearly could not meet the logistics demands of fast fashion (Gereffi and Memedovic, 2003; Guercini, 2008).

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