The "liability of foreignness" (LOF) describes the additional costs that a firm operating in a market overseas incurs compared to the domestic firms. In recent years, researchers have laid the foundation for multiple theoretical approaches that aim to overcome the LOF. However, there is still a considerable research gap concerning actionable strategies MNEs can apply in practice. Building on the work of these researchers, this thesis aims at contributing to the current literature by taking the perspective of institutional theory. In particular, it examines the effectiveness of isomorphic strategies, inter alias, processes of adaption and imitation of legitimated practices, in reducing the LOF.
“We are improving”, said the German chancellor Angela Merkel at the G20 Investment Summit in 2019 as she reported on Germany’s efforts to encourage private investment in Africa. In an interview with the German ARD public television, she mentioned the “promising numbers” of the German investments in Africa; a continent that promised “more chances than risks”. Indeed, although German investments in Africa are still on a low level, Africa’s importance to Germany as an external trade partner has significantly increased. However, these opportunities have considerable costs and risks attached. One cost factor that is crucially important for German multinational enterprises (MNE) in Africa, as it is amplified by institutional distance, is the ‘liability of foreignness’ (LOF).
First of all, I use existing literature to construct frameworks to categorize the cost dimensions of the LOF and several isomorphic strategies. Furthermore, using semi-structured expert interviews, this paper evaluates the effectiveness of adaption strategies employed by German MNEs in Africa for different cost dimensions. I argue that isomorphism, i.e., adaption strategies, are of high importance for the success of German investments in Africa. More specifically, I show that networking, the adaption of formal structures, and the adaption to the institutional environment are effective in reducing the LOF by lowering market entry risks, facilitating knowledge acquisition as well as enhancing legitimacy in the host market.
Table of Contents
1 Introduction
2 Literature Review
2.1 The Liability of Foreignness
2.1.1 Business Impact of the LOF
2.1.2 Deriving a Common Framework
2.2 The Impact of Institutional Distance on the LOF of German MNEs in Africa
2.3 Overcoming the Liability of Foreignness with Isomorphic Strategies
2.3.1 Institutional Theory
2.3.2 Isomorphism
2.3.3 Building a Framework for Isomorphic Strategies
3 Hypothesis Development
4 Methodology
5 Results
5.1 Unfamiliarity and the Lack of Relationships
5.2 Discrimination
5.3 Legal and Political Environment
5.4 Cultural Differences
6 Discussion and Conclusion
6.1 Findings
6.2 Practical Implications
6.3 Limitations and Further Research
Research Objectives and Core Themes
This thesis examines the effectiveness of isomorphic strategies—such as adaptation and imitation of legitimated practices—in reducing the "Liability of Foreignness" (LOF) for German multinational enterprises (MNEs) operating in Africa, addressing a notable research gap regarding actionable strategies in this context.
- Institutional theory and isomorphic pressures
- Frameworks for categorizing LOF cost dimensions
- Networking and formal structure adaptation
- Mitigation of market entry risks and institutional distance
- Qualitative evaluation of practical adaptation strategies
Excerpt from the Book
1 Introduction
“We are improving”, said the German chancellor Angela Merkel at the G20 Investment Summit in 2019 as she reported on Germany’s efforts to encourage private investment in Africa. In an interview with the German ARD public television, she mentioned the “promising numbers” of the German investments in Africa; a continent that promised “more chances than risks” (Ulrich, 2019). Indeed, although German investments in Africa are still on a low level, Africa’s importance to Germany as an external trade partner has significantly increased (Afrika-Verein, 2012). However, these opportunities have considerable costs and risks attached. One cost factor that is crucially important for German multinational enterprises (MNE) in Africa, as it is amplified by institutional distance, is the ‘liability of foreignness’ (LOF). The LOF describes the additional costs that a firm operating in a market overseas incurs compared to the domestic firms (Zaheer, 1995).
In recent years, researchers like Zaheer, Eden and Miller, and Mezias have laid the foundation for multiple theoretical approaches that aim to overcome the LOF. However, there is still a considerable research gap concerning actionable strategies MNEs can apply in practice. Building on the work of these researchers, this thesis aims at contributing to the current literature by taking the perspective of institutional theory. In particular, it examines the effectiveness of isomorphic strategies, inter alias, processes of adaption and imitation of legitimated practices, in reducing the LOF (DiMaggio &Powell, 1983).
Summary of Chapters
1 Introduction: This chapter introduces the growing economic relevance of Africa for German MNEs and defines the "Liability of Foreignness" (LOF) as a critical cost factor in international operations.
2 Literature Review: This chapter reviews existing theoretical frameworks surrounding the LOF and institutional theory, establishing a categorization of cost dimensions including spatial, firm-specific, host-country, home-country, and cultural factors.
3 Hypothesis Development: This section translates the theoretical findings into four testable hypotheses regarding how specific isomorphic strategies (networking, validation, adaptation) can mitigate different dimensions of the LOF.
4 Methodology: The author explains the qualitative research design, justifying the use of semi-structured expert interviews to capture the complex, non-quantifiable nature of the LOF in practice.
5 Results: This chapter presents the empirical findings from the expert interviews, organized by the specific cost dimensions of the LOF and the corresponding adaptation strategies identified by practitioners.
6 Discussion and Conclusion: This final chapter synthesizes the results, confirming three of the four hypotheses, offering practical implications for MNEs, and acknowledging the study's limitations while suggesting avenues for future research.
Keywords
Liability of Foreignness, LOF, Isomorphism, Institutional Theory, German MNEs, Africa, Foreign Direct Investment, Networking, Institutional Distance, Adaption Strategies, Organizational Legitimacy, Market Entry Risks, Qualitative Research, Business Culture, Coercive Isomorphism
Frequently Asked Questions
What is the central focus of this thesis?
The thesis investigates how German Multinational Enterprises (MNEs) operating in Africa can reduce the "Liability of Foreignness" (LOF) by applying isomorphic adaptation strategies derived from institutional theory.
Which theoretical framework does the author use?
The author primarily utilizes institutional theory, specifically focusing on isomorphic pressures—coercive and mimetic—to explain how firms adapt to foreign environments to gain legitimacy and reduce operating costs.
What is the primary research goal?
The main objective is to bridge the research gap between theoretical concepts of the LOF and actionable strategies that companies can use in practice to mitigate the negative impacts of operating in a foreign market.
Which methodology was applied?
The study employs a qualitative research design, conducting semi-structured interviews with experts, consultants, and representatives of German MNEs in Africa to gather in-depth, experience-based insights.
What are the key themes addressed in the main body?
The main body covers the drivers of LOF (such as institutional distance), the categorization of these costs into five dimensions, and the practical effectiveness of networking, seeking validation, and structural adaptation as mitigating strategies.
Which keywords define this research?
Key terms include Liability of Foreignness (LOF), Isomorphism, Institutional Theory, German MNEs, Africa, Foreign Direct Investment (FDI), and Organizational Legitimacy.
How does institutional distance affect German companies in Africa?
The study argues that a large institutional distance between Germany and African countries increases the level of unfamiliarity, discrimination, and relational hazards, thereby heightening the pressure on MNEs to adopt isomorphic strategies.
Why are semi-structured interviews specifically useful for this topic?
They allow for the flexibility required to explore individual company experiences, as many practitioners deal with LOF intuitively without necessarily using the formal academic terminology for their successful adaptation processes.
Does the data support the author's hypotheses?
The data provides support for three of the four hypotheses, particularly those related to networking for unfamiliarity costs, adaptation for institutional/legal environment costs, and structural adaptation for cultural differences.
What is the core takeaway regarding the "strategy mix"?
The author concludes that because the cost dimensions of the LOF are strongly interconnected, firms should maximize their success by utilizing a combination of different isomorphic strategies rather than relying on a single approach.
- Citation du texte
- Julia Kaiser (Auteur), 2020, Overcoming the Liability of Foreignness with Isomorphism, Munich, GRIN Verlag, https://www.grin.com/document/1030632
