An emerging theory on local liabilities

The case of Prato is interesting in its evolution and the implications for the study of the relations between global value chains and local system enterprises. Comparison of the international business literature and the case of Prato’s native and immigrant enterprises highlights some types of liabilities strictly associated with the globalization process, immigration and entrepreneurship in local contexts and their relations with global value chains.

The case of Prato clearly underlines that the phenomena associated with the liabilities typical of internationalization processes (LOF and LOO) do not affect only firms outside their national borders, but domestic firms as well. The typical difficulties of foreignness and outsidership are experienced not only by immigrant enterprises, but also by native firms. As we have seen, the literature has already revealed that even domestic enterprises can come up against some of the phenomena associated with LOF (Mezias, 2002), though they clearly affect foreign firms more heavily. However, the case examined herein regards the conditions determining the LOF and LOO impacting both native and immigrant entrepreneurship operating in the same local setting. Such liabilities can hinder both groups and limit their (potential of) competitive capacity. But seen from another angle, these liabilities can be converted to opportunities, if industrial district and global value chain linkages are developed more fully by both Chinese and Italian firms working together in new ways (Guercini et al., 2017).

The conditions in question include the relative unavailability of information on how to do business in local market segments dominated by the other community, problems recruiting suppliers from the other community, asymmetry in interpreting and following the rules defined by the local and national governments of the host country, the effects of policies adopted by the government of the immigrants’ country of origin and asymmetrical regulations on international commerce. Local liabilities do not affect the immigrant and native firms equally in every phase. Today the latter may experience greater difficulty due to both “unfamiliarity hazards”, as they lack knowledge and experience of the possibilities offered by the value chains in which the immigrant firms participate, and “discrimination hazards” (Eden and Miller, 2001), because, due to language and cultural barriers or discriminatory choices against them, they remain outsiders with respect to immigrant community networks (Ong et al., 2016).

Based on the foregoing, we can therefore propose a definition of these types of liabilities, which have not to date been addressed in the literature, but that represent important elements in the case analysed. Local liabilities (LLs) are produced in local contexts where two (or more) separate communities (of persons and firms) exist. The term “local” refers to a social space. The larger is the separation between the communities, the larger are the local liabilities. The phenomenon of LLs stems from the processes of globalization and may arise where situations similar to those in Prato exist. Globalization does not only build “bridges” between distant contexts, it also creates these sorts of liabilities at the local level (Guercini et al., 2017). Anyway, it is only one side of the LLs issue and, as indicated here,

Table 8.4 Liability of foreignness, liability of outsidership and local liabilities

Liabilities

Entry abroad

Local context

Psychic distance

Liability of foreignness

Local liabilities

Link to relevant business networks

Liability of outsidership

Overcoming liabilities

Entry abroad

Local context

Interactions inside the same community

Leveraging on actors of the same community in the target market

Leveraging on the local actors belonging to the same community

Interactions across communities

Leveraging on the easy access to partner of another culture in the country of origin

Leveraging on the growth of externalities in the local context

Source: Author’s elaboration.

globalization indeed can also be a bridge to upgrading in the Prato district, for example if new external markets (like China) are brought into the picture.

Rather than a single liability, LLs constitute a set of liabilities that can be set in relation to both LOF and LOO (Table 8.4). Indeed, local enterprises may be affected as much by “psychic distance” as by the lack of connections to relevant business networks, that is to say, by “outsidership.” For local enterprises LLs determine analogous conditions to those studied with regard to LOF and LOO, without however their operating at the international level. Such conditions impact both immigrant as well as native firms, though their effects may be greater for the former or for the latter depending on the potentials in time of the business network as a market and the values chain to which the firms belong. The equilibrium among the various LLs experienced by one a group or the other also depends partly on other sources of liabilities, such as company size or age (liabilities of smallness and newness). LLs are an effect of globalization that contributes to enhancing the processes of global competitive selection at local level, though, as seen, they also act on enterprises operating only locally.

The emergence of LLs in any business setting is strictly related to the separation between the different communities within that setting. In order to see how the LLs may evolve (or resolve), it is necessary to determine what separates the local communities and how such separation can be overcome. In some respects, separation is a force opposing those that led to the emergence of industrial districts. Although it is a source of liabilities for the immigrant entrepreneur (Waldinger, 1986), given globalization, cross-border community bonds may be more relevant than local ones, by which the effects of LLs also apply to native firms. In order to overcome such liabilities, it should be borne in mind that such “separation” is merely one aspect of the complex process of acculturation, which is accompanied by “integration”, “assimilation” and “marginalization” (Berry et al., 1987), but the condition of “separation” is typical of LLs (Guercini et al., 2017). In the condition of “integration” the LLs tend to be overcome, while in that of “marginalization” and “assimilation” the LLs lose their importance.

The above appeal to the concept of acculturation underscores the complexity of the phenomena at play in LLs. Such phenomena are closely linked to the evolution of the local setting, including, for example, generational transition, which can lead to entrepreneurial behaviours quite distinct from those of the first-generation immigrants, let alone the second and third generations (Baldassar et al., 2015). In the long term, the position of the immigrant community may evolve from one state to another in the acculturation matrix proposed

146 Guercini

Table 8.5 Overcoming “local liabilities”: an adaptation from the Uppsala Model

Liability sources

Tools

Political process

Unfamiliarity

Discrimination

Knowledge, experience Insidership

Learning, experiencing Collaboration, socialization

Upgrading

Economic

Social

Learning about technical processes

Learning about the other culture

Upgrading in the business network in the GVCs Upgrading access to local externalities

Upgrading status in the community and local society Upgrading collaboration and institutions

Source: Author’s elaboration on Johanson and Vahlne (2009), Eden and Miller (2001) and Barrientos et al. (2011).

by Berry and colleagues, and this is one mechanism that can convert LLs to opportunities (Berry et al., 1987). To complicate matters, public policy-makers may promote initiatives aimed at favouring integration between immigrant and native firms, an issue that appears to be ever more important and topical in our societies, and which is also relevant to global value chains and the evolution of business environments.

The subject is also of importance for company policies makers, given the implications of LL effects on business. Overcoming LLs thus becomes an important goal for enterprises that intend to enter foreign economies. What contributions can international business theory make in this regard? Herein we propose a model that adopts the distinction between state aspects and change aspects made in the U-model, both in its original formulation and the more recently re-worked version. In the model’s original formulation, enterprises tackle “psychic distance” (Johanson and Vahlne, 1977, p. 26), and therefore LOF, by comparing market knowledge and market commitment (state aspects) with commitment decisions and current activities (change aspects). Instead, the second version sees enterprises tackling LOO by comparing knowledge opportunities and network position (state aspects) with relationship commitment decisions, learning, creating and trust building (change aspects). On the basis of these two models, we propose a third model that sets forth a process for overcoming the LLs existing between native and immigrant actors, firstly, by exchanging knowledge and experience in order to overcome unfamiliarity, and secondly, through insidership commitment to overcome discrimination through learning, experiencing, socialization and collaboration (Table 8.5).

 
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