How does liability of foreignness influence the performance and relocation activities of Dutch companies?

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How does liability of foreignness influence the

performance and relocation activities of Dutch

companies?

Master Thesis

Author: Victor Florin Ciocan Supervisor: Prof. Carsten Gelhard Second Reader: Prof. Arno Kourula Date: 30 June 2014

University of Amsterdam: Amsterdam Business School MSc Business Studies – International Management Word count: 24.488 (excluding tables)

Student number: 10425829

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Abstract

This research aims to identify the role that liability of foreignness (LoF) plays in the performance of Dutch multinational companies (MNCs). In the same time, it tries to analyze the way in which their performance is affected by different factors in the foreign market and the decision of those companies to relocate activities. First, a multiple case analysis of five Dutch-based companies is performed in order to capture the influence that this concept (LoF) has in their activity. The resource based view and the institution based view can explain the way in which those companies manage to overcome the liability of foreignness. Furthermore, there is a presentation of the motives that MNCs have to either close their activities or to relocate. There are different sources of LoF that Dutch companies with activities abroad should try to overcome. Furthermore, the impossibility to transfer firm-specific assets and routines in the foreign market will not trigger a recombination of those capabilities. The underperformance is associated with LoF. Dutch companies relocate because of different reasons and LoF is not the only factor that is affecting their activity. Finally, the failure to reduce LoF and to take cost-reduction measures means that companies will close the abroad operations and concentrate their efforts on more profitable markets. This research contributes to the literature of LoF and in the same time to the concepts of institution based view and resource based view.

Keywords: liability of foreignness, resource-based view, institution-based view, relocation, performance, Dutch

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Acknowledgements

First and foremost, I would like to thank my supervisor, Carsten Glehard for helping me accomplish my Thesis. I did not have the pleasure to have him as my lecturer but I am sure it would have been a valuable experience for me. His support was crucial in developing my research. His insights, continuous interest, enthusiasm and patience helped me conduct and complete this research. For the support I have received in the toughest moment I owe him my gratitude.

I would furthermore like to thank my fellow students who have been very open in discussing different aspect regarding theoretical issues. We have shared ideas and knowledge on liability of foreignness theory and also on the way in which the final format of the thesis should look like. Last, but certainly not least, I would like to thank my family and also friends for the support that I received during my whole period at University of Amsterdam. Their understanding and encouragements helped me pass some difficult moments especially in this long process of writing the final Thesis paper.

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4.4.2. Company: Unilever………..………48 4.4.3. Company: Ahold………..…….….….51 4.4.4. Company: Heineken………..…...53 4.4.5. Company: Rabobank………....………….…..55 5. Cross-case Analysis………...…….……56 5.1. Experience LoF………..…….………….…….56

5.2. Increased Costs due to Spatial Distance……..………....……….…57

5.3. Increased Costs due to Unfamiliarity and Adaptation to Local Environment………...……..……….………59

5.4. Discriminatory Regulation……….………..…...60

5.5. Legitimacy in the Local Institutional Environment from Formal and Informal Perspective……….……….…….61

5.6. Inability to Transfer and make use of stand-alone FSAs and Routines……….…...……62

5.7. Relocation Motivation………..…….63

5.8. Manufacturing versus Services……….….……….64

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5.9. Backshoring………..…….64

6. Discussion………....………65

6.1. Working propositions regarding LoF………...……….…..….65

6.2. Working propositions regarding Institution-based View...….66

6.3. Working propositions regarding Resource-based View..…..………67

6.4. Working propositions regarding Performance and Relocation….….67 7. Conclusions………..70

7.1. Limitations………...……..71

7.2. Scientific relevance and Managerial Implications……….….71

7.3. Suggestions for future research ………...…72

References………...….73

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List of Tables

Table 1: Overview of Dutch MNEs in the study………24

Table 2: Overview of the codes and sub codes, their description and the working propositions to

which they relate……….…….…27

Table 3: Results for the working propositions in this study……….69

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1. Introduction

The last decade brought up some public debate regarding the relocation strategies of multinational corporations (MNCs), since the perception of the Western countries is that jobs were lost in countries which chose to offshore them in lower-wage countries (Cordon,

2011). There is an impressive number of companies that offshore their production and services worldwide and they contribute to this assumption. It is also backed-up by the 2.5 growth rate of the industry to U.S. $300 billion in less than 10 years. These figures are only 10% of the estimated potential that the market has for offshoring activities (NASSCOM-McKinsey, 2005).

There are more than one reason for companies to choose this type of strategy of moving their production facilities to an offshore location. Dunning’s eclectic paradigm (1993) and Vernon’s product life cycle model (1966) contributed to sustain the key principle of multiple IB studies which is internationalization. According to Dunning (1993), firms are looking for three types of advantages when entering a new location: ownership advantages, location advantages and internalization advantages.

There are of course more reasons for companies to offshore their production facilities (Hutzenschenreuter, Lewin & Resler, 2011). It has been found out that transaction costs decrease with offshoring because companies get access to cheaper human resources (Coase, 1937;

Williamson, 1975). From another point of view, companies fear not to be left behind by competition is another reason that motivates the move (Caves, 1980) together with the seeking of a strategic advantage by employing highly-skilled individuals from the host location (Barney, 1991).

The advantage of offshoring in terms of costs and productivity has not been yet widely recognized, although the earlier strategies presented would indicate in this direction. In the U.S. for example, the savings done through offshoring were reduced because of wage inflation. Oil prices have also contributed to the increase with 21% of the cost of freight and 4$ in regards with the cost of product returns, all calculated since 2003 (McKinsey, 2008). All these aspects may force MNCs to seriously take into consideration bringing their offshore activities back to their territories. A recent study done by Boston Consultants Group back in 2012 showed a trend towards relocating production facilities from China back to America for a large number of

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manufacturing companies that had at least $1 billion in annual sales. The increase in labor cost encountered in China also forced 48% of the bigger companies to strongly consider this movement (BCG, 2012).

These relocation strategies started to become something frequent in today’s world of international business. Kinkel and Maloca (2009) conducted a research on 1663 German manufacturing companies which showed a remarkable detail regarding offshoring but also backshoring. The results suggested that in the first four years after offshoring, around 66% of activities were followed by backshoring because of the lack of flexibility, host-location quality problems and also because the international supply chain had deficiencies regarding its supply abilities. Kinkel and Malonca (2009) also suggest that location planning plays a crucial role in offshoring outcome. This study is supported by a following one conducted in 2012 by Kinkel, also on German companies encountered the same results showing that this process is a cyclical one. It is also interesting to know the reason of the increase frequency of relocation of these companies since this is not a cheap process.

Companies choosing to relocate production facilities will face additional liabilities in comparison with local companies in the host-location. Hymer (1976) conducted a study showing the reasons for the increased cost of doing business abroad. The major concerns come from difficulty of managing between distant locations, in an uncommon environment and also having to face both home- and host-country discriminatory measures towards you. The concept of Liability of foreignness was first introduced by Zaheer (1995). It refers to costs that arise due to the fact that a company is considered a foreign entity in a host-country environment. These costs can either be social, political or economic and can represent a real impediment for companies that already entered the different host-country context. Same operational quality is expected to be achieved both home- and host-country through the imitation of the home-location work processes. In the same time the company seeks to take advantage of the lower costs from the host-location (Bunyaratavej, Hahn & Doh, 2007). Success in the same time may be influenced by sector- and firm specific characteristics with liability of foreignness playing a key role in that aspect (OECD, 2006).

Other paths of research suggest that a firm’s ability to successfully transfer routines from home- to host-location is the main driver of firm’s international performance (Hummels et al.,

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2010). If tacit knowledge for example is not being integrated sufficiently this may result in the firm’s poor performance results. The resource-based perspective suggests that the success or failure of the firm’s offshoring process is dictated by its ability to take advantage of its specific assets. Barney (1991) finds that resources and capabilities need to be valuable, rare, inimitable and also organizationally embedded in order to create a strategic advantage, in conformity with the resource-based view theory (RBV). They can be location bound or non-location bound. These resources are characterized by their heterogeneous nature between same industry firms. Strong resources give MNEs a competitive edge. More than that, they need to be able to deal with the institutional environment in the host-location. In order to face the upcoming competition in the host context, companies need to comply to both formal and informal institutional environment. (Peng, 2009).

Taking into consideration the above-mentioned findings, it seems interesting to see what are the factors that influence companies to offshore their activities and how is the liability of foreignness able to dictate the success or failure of foreign subsidiaries. The main research question will be:

How does liability of foreignness influence the performance and relocation activities of Dutch companies?

2. Theoretical Framework

There is more than one good reason why multinational corporations (MNEs) choose to offshore their production and service facilities to other locations such as economies of scale and scope or benefit from location advantages (Porter, 1986; Dunning, 1988). Firms try to combine outsorcing and insourcing locations in order to follow strategies that are reducing costs and also seeking advantages (Rothaermel, Hitt & Jobe, 2006) but in the same time, firms have to deal with the costs of doing business abroad also referred as liability of foreignness (Zaheer, 1995; Bunyaratavej et al., 2007). The next section deals with the theoretical concept of liability of foreignness (LoF) accompanied by the institution based view and resource based view as methods to overcome LoF and explain to the motives of MNCs to relocate their activities to different environments, or back home.

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2.1. Liability of Foreignness: working propositions

Hymer’s (1976) initial concept of cost of doing business abroad (CDBA) was the stepping stone in further developing the theory of liability of foreignness which was studied by many scholars over the years (Hymer, 1976; Zaheer, 1995; Eden & Miller, 2001; Sethi & Judge, 2009). Better access to local information, local government support or the possibility to avoid extra costs enable this concept to be further developed as national firms having a sort of advantage over foreign firms which enter their home-environment.

Zaheer (1995) is the main author that supported this theory and identified the costs of doing business abroad as a result of the “Liability of Foreignness” : ”All additional costs a firm operating in a market overseas incurs that a local firm would not incur.” (Zaheer, 1995, p. 343). The Liability of Foreignness was the main cause explaining why foreign subsidiaries have lower perceived performance than local companies, in a study addressing foreign exchange trading rooms from a set of banks that originated in New York and Tokyo. The study was conducted through interviews and multiple-survey questionnaires. The study also concluded that the trading rooms owned by a foreign bank in the host location had a perceived performance lower that the ones owned by a local bank because they faced a liability of foreignness.

Except Zaheer (1995), other scholars suggest that LoF constitutes only a portion of the bigger concept of the cost of doing business abroad (Eden & Miller, 2001; Sethi & Judge, 2009) which also comprises relative production cost, relational hazards and managing operations at a distance. Eden and Miller (2001) describe the liability of foreignness as “being a stranger in a strange land” (p.4).

Zaheer (1995) also mentions in his paper about other costs such as transportation cost and coordination cost between home- and host-location, also referred to as hazards. One way n which they can be measured is through comparing the performance of the foreign and local subsidiaries but in the same time, foreign subsidiaries can be compared with other foreign subsidiaries pertaining to other companies or to subsidiaries that are acting in the same industry but another location. The reason for which these costs are measured is to find whether they are caused by LoF or by the lack of resources. Not having enough knowledge about the local market or being

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discriminated by the host- or home- country government can be major disadvantages also called unfamiliarity and discrimination hazards (Eden and Miller, 2001).

Zaheer is not the only one who thinks about CDBA and LoF as separate concepts. Sethi and Judge (2009) introduce the term of liability of multinationality (LoM) which comes to add a second dimension to CDBA, the concepts being different in many aspects. First of all, as the firm gets more insights about the host location it is expected that LoF will reduce gradually while on the other hand, LoM will have a continuous existence but with fluctuations as long as the firm has international involvement. LoF is usually generated by differences between subsidiaries and local firms from the host country while the interaction between the MNE and the subsidiaries outside the host-location is the major generator of LoM (Sethi & Judge, 2009).

Sethi and Judge (2009) introduce the concepts of incidental an discriminatory LoF which are almost the same with the one described by Eden and Miller (2001). Treaties and restrictions imposed by the host-country government can result in increased costs and are called discriminatory and on the other hand, the disadvantage created by cultural differences and the weak supplier and buyer networks can reflect a weak level of knowledge about the host-location and is called incidental LoF. In this way, LoF was experienced by Dutch companies that have relocated their operations to a foreign location. Therefore it is expected that:

WP1: MNEs subsidiary lacks value creation due to liability of foreignness when compared to domestic firms.

There are four sources of liability of foreignness identified by Zaheer (1995) that are directed by the enclosed perspectives. The costs derived from transportation and coordinating subsidiaries in different time zones constitute the first layer which is resulted from spatial distance. The outcome of these costs will be reflected in increased coordination costs mainly because of opportunistic behavior at the production location and uncertainty in the economic environment (Williamson, 1985; Williamson, 1991). The probability of inquiring these costs increases if the firm has equity ownership in the foreign location and decreases if there exists a license or export agreement pertaining to the company but the risk is always present (Eden and Miller, 2001).

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WP2: Spatial distance comes with extra costs for MNEs such as transportation, travel and coordinating subsidiaries in different time zones costs.

Because of the fact that the firm is unfamiliar with working in the foreign environment, Zaheer (1995) identifies a second source of liability of foreignness. This has to do more with the cultural differences in regards to human resources that a firm will have to face when it is working in foreign locations. Employees will have a different background and language so business is affected by it (Hofstede, 1980; Shenkar, 2001). Processes will be harder to coordinate in different locations due to language barriers and also the differences that will arise in regards to business norms and the work ethic (Pathak, 1983, p. 133). Although English is an universal business language this may not be applicable if there are complex concepts that need to be explained. In the same time, non-verbal notions will also lose their meaning. It is expected that:

WP3a: MNEs will encounter extra costs due to the unfamiliar environment.

WP3b: MNEs will encounter extra costs due because they have to reorganize the business to fit the host market conditions.

Foreign companies can be affected by nationalistic regulations dictated by the host-environment thus constructing the third source of costs. More than that, a firm might find it difficult to transfer money or technology across borders due to home-country regulations. The last two types of costs can be called discriminatory LoF because they discriminate between nations (Sethi & Judge, 2009; Zaheer 1995). The last assumption about LoF:

WP4a: Discriminatory LoF brings additional costs to MNEs.

WP4b: Global financial problems affecting the host-market in which a company operates will affect the company in the same time.

The above mentioned sources of LoF are expected to be encountered by companies analyzed in the research. It is important to have knowledge about these assumptions because they

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can provide clues about the ways in which they can be resolved. The way in which Dutch companies will choose to relocate activities will be highly influenced by their perceived LoF.

2.2. Institution Based View

The institution-base view has been researched by many authors in the international business literature (e.g., Child and Rodrigues, 2005; Deng, 2009; Kostova and Zaheer, 1999; Meyer et al., 2009; Oliver, 1991; Peng and Khoury, 2008; Scott, 1995; Slangen and Hennart, 2008). The main finding is that “organizations conform to the rules and beliefs systems in the environment because this isomorphism (regulatory, cognitive and normative) earns them legitimacy” (Deng, 2009, p. 75; DiMaggio and Powell, 1983) and in this way enables a better understanding of the institutional environment and also better connections between foreign business and local institutional environment. This detail refers to the “generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed systems of norms, values, beliefs, and definitions” (Suchman, 1995, p. 574).This means, in other words, that there are some “rules of the game” and companies have to adjust in order to comply with them in host countries (Scott, 1995).

The institutional environment has been differentiated into 3 domains by Scott (1995) and Kostova and Zaheer (1999): the regulatory, cognitive and normative pillar. Rules and laws directed to maintain stability and order in a society define the regulatory pillar (Kostova and Zaheer, 1999). Firms that conform to these institutions gain regulatory legitimacy within a market. The cognitive pillar points to “widely shared social knowledge and perceptions of what is typical or taken for granted” (Zhang et al., 2011, p. 227). These values derive from a society’s norms and beliefs and firms need to subscribe to them (Kostova and Zaheer, 1999). Finally, the normative pillar defines the “social norms, values and beliefs that define what is appropriate and right for a society’s member” (Zhang et al., 2011, p. 227). This tests if the goals of a firm are in connection to the wider societal values.

If this argument is to be applied to international business, the institution-base view states that MNEs “internationalization is shaped by the home and host country’s institutional profile”

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(Zhang et al., 2011, p. 227). These profiles can ‘push’ outward FDI and in the same time ‘pull’ inward FDI. Foreign investment can be ‘pushed’ by the home institutional environment (Buckley et al, 2007). A stable business environment in which trade and investment is encouraged can work as an incentive for attracting MNEs. The regulatory domain could provide this through governmental regulations and policies (Deng, 2009). Enterprises will seek stable and secure environments that resemble those from the home country. Corruption and bureaucracy are 2 factors that could affect foreign investment by MNEs in a negative way. On the other hand, these institutional voids can encourage outward FDI (Deng, 2009; Zhang et al., 2011).

Foreign investment is also determined by host country institutional environment (Wang et al., 2011). As Zhang et al. (2011, p.227) better describes, “social constructed systems of rules, norms and cognitive frames in host-environments affect the internal and external legitimacy of MNE’s norm and practices, facilitate or impede the transfer of organization strategies and practices from parent company to affiliate”. In other words, the regulatory, cognitive and normative domains that represent the institutions can ‘pull’ investments inside the host country. A favorable fiscal climate, reputation of host country and openness of government are only some advantages that attract FDI. On the other hand, foreign investment could decrease if local firms are protected by host government or the society has a negative feeling for instance (Zhang et al., 2011).

There is also possible that firms change their practices and standards in order to make it visible for the local institutional environment that they are willing to contribute and fit. (Luo, Shenkar and Niaw, 2002). Firms in Central and Eastern Europe increased their legitimacy through the compliance with transnational norms (Standifird & Weinstein, 2002).LoF can be reduce with the use of a mimetic behavior while it may not disappear if firms are not able to shape around the formal institutional environment.

WP5: Firms that are unable to gain legitimacy in the local institutional environment from both formal and informal perspective will have to face liability of foreignness.

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2.3. Resource Based View

Liability of Foreignness can be approached both from an institution based view as well as from a resource based view (Yildiz & Fey, 2012). It is a good strategy to bring in the new subsidiary from the host-environment the specific resources that the firm has already in the home-location (Zaheer, 1995). These resources can create a competitive advantage by overcoming economies of scale and scope (Porter, 1986) or by reducing costs in the new location (Dunning, 1988).

The resource based view supports the idea that exploiting capabilities that are rare, valuable, inimitable and hard to substitute gives the possibility to create a sustained competitive advantage over the long term. The resources of the firm can be described as: “all assets, capabilities, organizational processes, firms attributes, information, knowledge, etc.: controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness.” (Barney, 1991, p.101). Resources are imperfectly immobile heterogeneously distributed among firms thus are hard to be transferred entirely and they create a real competitive advantage only if they continue to exist in the firm even after competition is not longer willing to replicate them (Barney, 1991).

Bukley and Casson’s (1976) internationalization theory introduced the concept of resource based view in international business environment. MNC’s are willing to internalize markets for intangible assets in order to increase their value and also use firm-specific advantages and country-specific advantages to create economies of scale and scope (Cave, 1996; Rugman, 1981; Rugman & Verbeke, 2001). Kirka et al. (2011) and also Lu and Beamish (2001) show in their studies that LoF can be reduced by the transfer of assets across borders thus the increased multinationality of the firm creates an increased level of performance. The main idea is that firms must persevere and seek to create a strategic advantage through the internalization of multinational activities.

The firm-specific advantages can be either location advantage and non-transferable in the home country but also transferable across international markets (Verbeke, 2009).

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Home-based resources can create competitive strengths which are further developed in competitive advantages for the firm. The location advantages are strongly connected to the home-environment and are very important for the development of some specific strengths (Porter, 1990). Wells (1968) demonstrated that replication of success depends in some way of country-specific knowledge in the home location while Dunning (1980) connects ownership endowments with the home-location.

These type of advantages can be split in location-bound, which means that they cannot be transferred and non-location bound, the ones discussed earlier. The firm’s ability to recombine resources together with stand-alone resources and local best practices are considered to be hard to transfer across borders by Verbeke (2009).

Knowledge is considered to be a resource that need to be transferred in order to contribute to the competitiveness of the firm. There are several types of knowledge like Knowledge about marketing strategies, institutional environment or technology. These transferrable assets can also be divided into recombination capabilities, standalone or firm specific routines. The success or failure of the firm in the host-location can be highly influenced by its ability to transfer FSAs. In the same time, the transfer process can be burdened by the LoF. Lu and Beamish (2001) conducted a study on 164 companies in Japan and showed that the internationalization process has to face some additional costs at the beginning due to deficiencies in resources and capabilities but performance increases once the firm establishes connection with local partners and makes additional investments. The liability of foreignness was reduced n some companies while not all were able to overcome this aspect because their standalone assets were not transferred efficiently.

WP6: The MNC’s inability to transfer and make use of standalone assets from home-location to host-location is associated with LoF.

The success of a firm’s internationalization process also depend on the transfer of routines which are described as a “relatively complex pattern of behavior ... triggered by a relatively small number of initiating signals or choices and functioning as recognizable unit in a

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relatively automatic fashion”(Winter, 1986: 165). An organization operating through rules, strategies, procedures and technologies is said to make a good use of routines (Levitt and March, 1988)

Routines are location-specific and thus hard to transfer. Routines imply a greater amount of tacit knowledge than standalone assets and that is why they are hard to be implemented in the foreign location. Hu (1995) found out in a study made on the hotel groups in Hong-Kong that they faced difficulties in transferring their quality of services to the US market because this implied higher costs with employees. They had to come with different solutions like in house-training for example. Routines are so hard to transfer also because the occurrence of LoF.

WP7: The inability to transfer firm specific routines from home- to host-location is associated with the liability of foreignness.

Stakeholders receive the most amount of value when a firm is able to merge location-bound and non-location location-bound assets with the new capabilities that have been acquired. The new resources need to fit into the new context in the foreign location and diffuse through the assets already held there, thus a deeper understanding of marketing and technology techniques being required (Verbeke,2009). Recombination capabilities are describes by scholars to be the most difficult to transfer due to LoF.

2.4. Relocation Strategy

The relocation of foreign activities comes only when companies do not succeeds to reduce their LoF (Broedner, Kinkel & Lay, 2009). The lack of know-how, lack of capacity or skilled personnel may act as a barrier standing in front of internationalization and this aspect is the most visible in the case of manufacturing companies (Fillis, 2001; Baird, Lyles & Orris, 1994). Costs of operating abroad increase due to the opportunistic behavior to which the firm is exposed but also due to other factors like the uncertainty of the economic environment and high coordinating costs (Williamson, 1991),resulting in relocation (Kinkel, 2012). The incapacity to reduce LoF

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will always be translated into increased costs, leaving the company no choice but to relocate its activities.

WP8: The inability to reduce the liability of foreignness is the trigger for firms to relocate their activities to another country.

2.5. Manufacturing and Services

The nature of the company can give a possible explanation to the choice of relocation by the firm. It does matter whether it is a service or a manufacturing company. Manufacturing firms allocate more funds to plants, inventory and equipment while on the other hand, service companies put an accent on the investments one in people (Erramilli & Rao, 1993). In the same time, entry mode is also influenced by the nature of the company in what concerns the risk level (Brouthers and Brouthers, 2003). Their study done on 419 Dutch companies revealed that investment risks and environmental uncertainties had an influence on manufacturing companies locating in Central Eastern European while behavioral uncertainties and asset specificity counted more for service companies. As a small conclusion that can be drawn from here is that it is easier to relocate employees than an entire manufacturing plant thus service firms will have to face an easier decision when it comes to relocation than manufacturing firms.

WP9: It is much easier for firm that offshore services abroad to relocate in comparison with those that offshore production facilities.

2.6. Backshoring

The phenomenon of backshoring is yet to be discovered and researched better by scholars. Kinkel and Maloca (2009) conducted a survey on 1663 German companies in the manufacturing sector in regards to their offshoring and also backshoring activities. The results struck interesting insights, with more than 60% of companies following a backshoring strategy in the first four years after the initial offshoring was made. The main factors were said to be inefficiency in flexibility or the poor abilities of the international supply chain.

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Delaney (2007) states that the attractiveness of the offshore location changes also mainly due to the increase in wage inflation or transportation costs.

WP10: The backshoring strategy becomes an option for firms unable to reduce LoF and costs.

3. Methodology

Multiple-case design will be used as methodology in order to answer the research question in this study (Yin, 1994). First, a discussion of the ontological and epistemological foundations will be addressed (Brannick and Coghlan, 2007). This concept represents more the research philosophy of the researcher in order to logically justify the methodology used in this research. When these foundations are explained, quality criteria and case selection will be presented, as highly important for the multiple-case design (Yin, 1994). Finally, the section will include a description of the cases used, the sources for gathering the data and the strategy which has been used to analyze the data

3.1. Ontology

This section describes what the world is, epistemology is more about what we can know about this world and the research methodology is like a summary of the sources and the way in which we can gather that world’s knowledge (Fleetwood, 2005). Ontology can be split in objective and subjective types. The first type suggests that the world has no connection with the human mind: “social and natural reality have an independent existence before human cognition” (Brannick and Coghlan, 2007, p. 62). The subjectivist stance is radically different: “what is taken as reality is an output of human cognitive process” (Brannick and Coghlan, 2007, p. 62). When the research comprises social actors with different views on reality, the latter is more relevant. This research presents an objectivist ontological position because organizations are taken for granted: “objective material entities” (Reed, 2005, p.1622).

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3.2. Epistemology

Epistemological positions suggest the way in which we can know the world and also the nature of that knowledge. They split in four categories: positivism, post-positivism, critical theory and constructivism (Brannick and Coghlan, 2007). Our belief regarding the nature of the world dictates what we can know of it. When we adhere to the objective ontological view it is only normal to believe that the nature of knowledge is also independent from the human mind and not subject to interpretations (Brannick and Coghlan, 2007). The main question of this study therefore can follow the post-positivism paradigm (Hyde, 2000).

3.3. Qualitative Multiple-Case Study Design

This study is conducted by multiple-case study approach as it analyzes multiple cases describing the same phenomenon. The case study method is considered an “in-depth study of a particular instance, or a small number of instances of a phenomenon” (Hyde, 2000, p. 83). The study aims to examine “a contemporary phenomenon within its real-life context” (Yin, 1994, p.13) and also because the research question is a “how” question (Yin, 1994; Hyde, 2000). The objectivist ontology and the post-positivist epistemology are confirmed by the approaches of Yin (1994) and Eisenhardt (1989).

There are some disadvantages regarding the use of case study research like for example lack of rigor: “too many times, the case study investigator has been sloppy and has allowed equivocal evidence or biased views to influence the direction of the findings and conclusions” (Yin, 1994, p. 9). In the same time, the generalization of the results to the broader context has a limited potential as well as the fact that many case study reports have a length which is considered too big. (Yin, 1994). Construct validity, internal and external validity and reliability are the concepts addressed by the objections of the researchers (Yin, 1994). Triangulation is used in order to increase the validity of the results (Hussein, 2009) and is referred to as “a process by which a researcher wants to verify a finding by showing that independent measures of it agree with or, at least, do not contradict it” (Meijer et. al., 2002, p.146).

The measurement of the concepts that are studied form the construct validity (Yin, 1994). This research aims to study the different sources of liability of foreignness faced by firms in

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foreign markets and the way in which they affect the performance and relocation decision of Dutch multinationals. Their decisions can have resource-based explanations or institution-based explanations. The correctness and measurement of the concepts in order to explain the liability of foreignness phenomenon is tested by construct validity (Yin, 1994).

The correctness of the existing concepts in this study and the links between them are assessed by the internal validity which is mainly concerned with causal relationships: “a case study involves an inference every time an event cannot be directly observed. Thus, an investigator will “infer” that a particular event resulted from earlier occurrence” (Yin, 1994, p.35). The working assumptions come only to approve that the inferences are made in a correct way. The existing literature regarding the topic under study is reflected in these assumptions and guides the researcher on which inferences are suitable or not so appropriate to use.

External validity refers to the large disadvantage associated with this method of study, the case-study approach. The findings from qualitative case studies cannot be expanded to large populations and to a larger environment due to the fact that the sample sizes are too small to be considered from a statistical point of view. (Yin, 1994; Myers, 2013). The use of multiple cases, as in this study, increases the external validity because the aim is to “provide a stronger base for theory building” (Eisenhardt and Graebner, 2007). Other ways to improve the external validity are inductive or deductive reasoning and also abductive reasoning (Boxenbaum and Rouleau, 2011; Shepherd and Sutcliffe, 2011). In order to enhance the analytical generalisability, this study uses a deductive approach as it starts with presenting a theoretical problem that will be subject to empirical testing (Yin, 1994; Shepherd and Sutcliffe, 2011).

The number of biases and errors present in a study should be minimal in order for that research to be reliable. Case study protocols and case study databases are used in order to increase the reliability (Yin, 1994). Ezemenari et. al. (1999) argues that reliability of a study can be further increased through data triangulation.

3.4. Case Selection and Sample

The theoretical sampling technique is used for selecting cases in this study and it aims to select cases that are representative for their population (Eisenhardt and Graebner, 2007). The purpose of this research is to extend the theory of liability of foreignness by analyzing how

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Dutch MNEs are influenced in their performance and relocation by different factors in the foreign markets. The selected cases need to be of high relevance thus theoretical sampling is “suitable for illuminating and extending relationships and logic among constructs” (Eisenhardt and Graebner, 2007, p.27).

This study builds on previously conducted researches on liability of foreignness/relocation tackled from different perspectives like the impact that the country of origin has on foreign subsidiaries (Moeller, Harvey, Griffith and Richey, 2013), the international offshoring of services (Bunyaratavej, Hahn and Doh, 2007) or an integrated perspective of the costs and benefits of doing business abroad (Sethi and Judge, 2009). The cases were selected from the Fortune Global 500 which comprises the world’s largest 500 MNEs in terms of revenue. The following companies have been selected: Royal Dutch Shell, Koninklijke Ahold, Unilever, Heineken International and Rabobank.

In order to replicate the findings and also to extend the explanation of existing liability of foreignness theory, the cases are sampled (Eisenhardt and Graebner, 2007). When it comes to regions covered by the sample, it varies from North America and Europe to Africa and Asia, as these are the regions where the Dutch multinationals have their largest markets and this way, a more representative outcome of the results will emerge. Companies selected have different core activities, varying from banking and financial services to consumer-goods and oil and gas. It should be noted that based on existing aforementioned academic literature, companies that have different business activities do not present the same motives for relocation. The reliability of the study can be increased by analyzing a wider diversity of companies and not restrict to a single sector or market. The theoretical sample of these five companies provides sufficient evidence to clarify whether findings are connected to a single case or consistent across cases (Eisenhardt and

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Company Shell Unilever Ahold Heineken Rabobank

Products Petroleum, Natural gas, Petrochemicals Food, Beverages, Cleaning agents, Personal care Convenience/Forecourt store, Discount store, Drug store/Pharmacy, Hypermarket/Superstore Heineken brands, Beer Banking, Leasing, Real estate Revenue 2013 €451.235 bn €49.8 bn €30.27 bn €18.383 bn €40.037 bn Operating income 2013 €26.879 bn €7.5 bn €1.34 bn €3.904 bn €13.020 bn Net income 2013 €16.371 bn €5.3 bn €1.01 bn €2.949 bn €2.01 bn Number of employees 2013 92,000 174,000 121,000 85,000 56,870

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Graebner, 2007). In the same time, theoretical sampling offers the possibility for future research (Eisenhardt, 1989).

Other core business activities of the companies assessed in this study were: brewing company and international retailing company. In the same time, these companies had a wide variety of activities transferred abroad such as financial desks or product manufacturing.

3.5. Data Collection

The first step in collecting data for this analysis about relocation, backshoring and offshoring by Dutch companies was to contact the Dutch Chambers of Commerce in different countries worldwide. I have called first in Europe, South America, Asia and Africa to find this information. I have first presented myself as a student doing a research for my master thesis and presented the situation. I have asked for a list of Dutch multinational companies that either backshored or relocated activity to other countries due to different reasons. They said that they do not have this information and is better for me to contact the Dutch Embassies in this regard.

Secondly, as a consequence, I have e-mailed Dutch Embassies from several countries (73 in total), with the same request. None of the European Embassies replied to my messages. The only ones that answered my request were mainly from Asia and some from Africa and South America. The answers were very diverse. In some cases they said that the information is private and cannot disclose it to me. Others sent me complete lists with Dutch multinationals having activities in their countries, but with no details regarding their backshoring or relocation strategies. It was just general information. Most of them told me to address my issue to Dutch Business Associations in their respective countries.

The third step was to send the same e-mail with the same request, as instructed, to Dutch business Associations but unfortunately they also said that they do not have this kind of information available or if they did, because of privacy reasons, It could not be disclosed.

This study uses both quantitative and qualitative information because I was forced to search for companies from different sources. The breadth and depth of the analysis is increased through the use of both types of information. The quantitative information comes from annual reports.

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These reports contain relevant information of Dutch multinational companies which indicates the geographic presence. In the same time, annual reports gave me the possibility to compare the companies from a financial point of view.

The qualitative information comes from newspaper articles because after identifying the companies that I want to use in my study, I have conducted a keyword search in the LexisNexis database for newspapers. (Schafraad, Wester and Scheeper, 2006). I have used the focal companies’ names connected with different other terms such as: “backshore”, “draw back”, “failure”, “close”, “subsidiaries”, “cut costs”, “pulls out”, “sell off”, “left”. After reading and identifying some which addressed the relocation problem, I have conducted a second round of research in the academic database which was more detailed using the companies’ names associated with countries in which they had difficulties or countries that they left. This resulted in a very large number of news articles that I systematically reviewed to identify sources of liability of foreignness to match my theoretical framework and be relevant for this study.

The primary newspaper used in my research is The Financial Times (London) (FT) which reports on all the important development of business and strategy. I have also used other newspaper articles as well because in some cases it was clear that the FT did not have sufficient information to justify Dutch MNE’s strategic decisions and events. Other newspaper sources used are Business Associated Press, Agence France Presse (English), Business Wire, Bloomberg News.

3.6. Data Analysis

This section elaborates on the data collected for the research and the on the analysis applied to the retrieved data. Quantitative data was used to indicate the financial size of the companies in terms of their revenues, assets and liabilities, while qualitative data illustrates the different sources of liability of foreignness encountered by the Dutch multinationals in different markets. The content of the selected newspaper articles will be coded to better understand how the activity of MNEs was affected and the reasons for which they selected to relocate.

The selected articles from the Financial Times (London) were scanned in order to fit the focus of this research. Subsequently, the selected articles were saved in Microsoft Word in order

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to be uploaded in the qualitative research software NVivo (Myers, 2013). Data can follow a content analysis, in order for relevant and useful information to help the research. After this stage, predefined categories were used to code the information found (Payne, 2004). Following Ryan and Bernard’s (2003) work, thematic coding was used in order to create relevant themes and match them with the pattern identified in the literature. Different words, sentences and paragraphs can be assigned to the pre-established codes (Ryan and Bernard, 2003).

The themes that emerged in this research were: “Liability of Foreignness”, “Costs”, “FSAs and Routines”, “Discriminatory Regulation”, “Institutional environment”, “Backshoring” and “General Information". In order to cover all dimensions within the data, some additional sub-codes were assigned. Different quotes from these articles taken mainly from The Financial Times (London) will be listed according to each case. (see next Chapter). In this way, the concepts will be better assessed.

The within-case analysis is a way to discover unique patterns and familiarize with each case in order to comprehend the great amount of data used. The cross-case analysis is a combination of the cases analyzed that gives the possibility to find general patterns (Eisenhardt, 1989).

Table 2: Overview of codes and sub codes used, their description and the working propositions to which they relate

Code Sub Code Description Proposition

LoF Lack of

value creation

All information with regard to the impossibility to create value in the host location.

WP1

Costs Spatial

distance

All information with regard to increased costs due to physical distance.

WP2

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Adaptation All information with regard to costs derived from adaptation to local environment.

WP3b

Consumers All information with regard to costs derived consumer behavior.

WP3a

Close operations

All information with regard to closing operational activities. WP3a + WP3b+WP8 FSAs and routines Extra investments

All information with regard to extra investments needed in order to perform at full capacity

WP6

Integrate business

All information with regard to integration of other firms acquired

WP6 + WP7

Discriminatory regulation

Nationalistic regulation

All information with regard to governmental decisions affecting costs

WP4a

Transfer of technology

All information with regard to the impossibility to transfer technology and resources due to regulation

WP4a + WP4b

World conditions

All information with regard to world financial markets affecting currencies and trading conditions

WP4b

Institutional environment

NA All information with regard to formal and informal institutional environment

WP5

Backshoring NA All information with regard to backshoring strategies.

WP10

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Other information

NA All other information not related to the above-mentioned ones

WP9

4. Results

The next section comprises the results from the within-case analysis, followed by the results from the cross-case analysis section. The cases are organized following the different sources of LoF found in the work of Zaheer (1995). Companies selected for the analyzing have different strategies for relocation. Some have production facilities that they own in the host market and either relocated or backshore to The Netherlands. Other companies have partnerships and joint-ventures abroad or, in other words, their production capacity is delivered by and with the help of external suppliers too. There was not too much information regarding the case in which companies backshore production facilities to external suppliers from The Netherlands but information regarding why companies choose a backshoring strategy will also be addressed in the analysis.

4.1. Within-case Physical Distance

Results show that companies have difficulties in delivering the same results in the host-location as the ones that they have in the home-host-location (Bunyaratavej et al., 2007). There is a combination of factors that contributes to this outcome. Although not all of them state clear the fact that liability of foreignness is the primary source of inconvenience, all factors connect more or lesser to it. Whether companies operating abroad require additional investment to carry on daily operations, remove their excessive capacity or relocate in order to save costs and make an investment closer to where the final product is shipped and consumed, all can be attributed to the fact that operating in a new and uncomfortable environment – at least in the initial stage – inquires additional costs (Rugman and Verbeke, 2008a). The first reason that can be discussed is the loss of speed because subsidiaries have to be coordinated in different time zones. More than that, firms have increased costs because of operating in an unfamiliar environment. These costs may suffer further increase due to the fact that companies have to take certain measures to adapt

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to the respective environment. Most of the times, these measures are costly both financially and strategically. When these measures imply a large number of employees being affected, the situation becomes sensitive (Meyer, 2001). This is the case of Rabobank in London. They closed the equity and forex trading offices, leaving also 105 people without their work place. The move can be partially attributed to the fact that the financial environment was deteriorating. The difficulties encountered by Rabobank in the financial market were not anticipated when the company started doing business there and the fact that they were not operating in their usual market was affecting their outcome. The turmoil in the financial sector has eroded the confidence in the wider economy. The move is also designed to reduce costs.

In some cases, working in different environments comes with hurdles that need to be addressed and because of the difficulties, companies take the decision to reorganize their activities. Often, there is a need for further investments in the production facilities for delivering the highest possible quality standards, quality service levels and future innovations (Cerrato, 2009). In the same time, some companies decide to reduce their excessive capacity. This kind of investment is considered an extra cost that many companies are not willing to take. Unilever is an example for this criterion. It was closing facilities in Bramalea and Belleville Foodsolutions plant in Canada, Ontario and relocating in US. The decision had at its core another reason. Unilever was trying to reduce costs and focus on fewer sites that were located closer to where the majority of their products were shipped. John Le Boutillier, president and CEO of Unilever Canada, said the majority of the plant's production ended up in the U.S. "As more than 80% of the volume produced at Bramalea is shipped to the United States, Unilever made the strategic decision to make its investment closer to where the bulk of the product is consumed." (Canada NewsWire, Unilever to close manufacturing plant in Bramalea, Ontario, May 8, 2014 via LexisNexis, accessed may 2014)

It is obvious that some companies try to concentrate their abroad activities in areas that deliver the maximum returns. It is useless to invest funds without proper logic in an unfamiliar environment. The same company followed this strategy in the United Kingdom also, choosing to redesign its business there in order to make it as efficiently as possible, financial wise. ''Unilever is a bit schizophrenic'' said Andy Smith, a consumer products analyst at Schroder’s Investment

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Bank. ''It's trying to downsize its portfolio on the one side and yet trying to boost performance in its core brands on the other. Basically what they admitted is that the portfolio is too complex.It has too many brands, and what they're trying to do is cut out the losers and keep the winners.'' (Bruce Stanley, Associated Press International, Unilever bulks up even while slimming down, April 12, 2000, via LexisNexis, accessed May 2014). Unilever concentrated its efforts on only 400 brands out of 1800. It is difficult to say which strategy is the best one, but for Unilever it was clear that they wanted to increase exposure to emerging markets by exiting low-growth food business in mature markets such as US and UK. Spatial distance might interfere here with additional costs that the company was not willing to take anymore.

MNEs can have different problems in host markets because of their unfamiliarity with the environment (Zaheer, 1995). Unilever missed both sales and earnings forecasts in some years because of the fact that some retailers cut back on their inventory.

Operating in a different country means that the firm is directly connected with the fluctuations of the specific market in which it activates in that country. Underinvestment is a problem that results from a slow host-country economy. A weak economic environment combined with strong competition and promotional activities from rival firms may force Dutch companies to cut prices as a measure to reduce costs of operating there (Hejazi, 2007). In the same time, consumers are also affected by the economical climate and their poor confidence is reflected in the earning incurred by firms. As a result, multinational companies see themselves forced to adopt innovative pricing strategies and emphasize on cheaper brands. All these factors are derived from the slow economic environment of a host-country that puts pressure on foreign multinational companies to cut costs (Knudsen, 2000). This is the situation of Ahold in the United States. In order to adapt, Ahold devised the Value Improvement Program to fend off competition by offering lower prices and better-quality fresh products. They also had to cut on core retail operations such as logistics and information systems and redesign their strategy. Dick Boer, chief executive, said that this move drove a lot of costs out of the company by combining its US chains into a single platform with one support office, back in 2006. They also sold some stores in the US, such as the US Foodservice. It is clear that the country economical problems made it too costly for the company to keep all of its assets. More than this, in order to improve

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performance, Ahold was in talks with their Belgian counterpart, Delhaize, for a merger. They wanted to split the assets in the US. This move would mean increased costs of integrating businesses into one entity at the beginning, but reduced costs in the long run. In the same time, Ahold had a 50/50 joint venture with Venturtech Investment Corporation in China and planned similar joint ventures in Malaysia, Singapore, Thailand and Indonesia. Ahold was trying to develop its retail brand "Tops" across all of these countries. The company was thus following an offshore outsourcing strategy (Dossani and Kenney, 2003; Jahns et al., 2006; OECD, 2006).

The unfamiliarity of the environment is also the cause of problems such as subdued consumer sentiment that hits the demand or a slowdown of growth in traditionally high growth countries (Rugman and Girod, 2003). Heineken confronted this problem in the European market in countries such as France or Russia.

When it comes to increased costs due to unfamiliarity with the host environment, Royal Dutch Shell encountered many hurdles that needed to be addressed (Rugman and Verbeke, 2007). In Nigeria for example, oil theft and pipeline sabotage continued to undermine the country’s output. Criminal gangs were stealing anything between 100,000 barrels/day and 400,000 barrels/day (International Energy Agency) worth billion dollars and reselling the crude oil to buyers as far afield as Latin America. This was forcing Shell to shut down their wells. Nigeria was also struggling to boost production thus affecting Shell’s revenues. Theft made it difficult to transfer technology in the host location. Mutiu Sunmonu, head of Shell in Nigeria, summarized the increasingly somber view of many foreign executives in the petroleum industry. He said: "The impact of the activities of crude oil thieves and illegal refineries on the environment in the Niger Delta and the Nigerian economy is now a crisis situation. We find it difficult to safely operate our pipelines without having to shut them frequently to prevent leaks from illegal connections impacting the environment. Ironically, it appears the crude thieves use repair windows to prepare and quickly launch fresh illegal connections when we restart production.” (Javier Blas, Financial Times London, Theft and sabotage mark an industry in decline, May 5, 2014, p.8, via LexisNexis, accessed May 2014). Theft was forcing Shell to adapt and sell onshore fields to a group of Nigerian companies and focus on expensive offshore

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oilfields. In the same time, it increased costs with infrastructure and safety in order to protect the pipelines.

Weak industry refining conditions, in particular in Asia-Pacific and Europe hit the downstream earnings of Shell. In the same time, they had increased costs due to maintenance works that they had to face in North Sea and the Gulf of Mexico. The upstream US business was making a loss because it was hit by low natural gas prices, further reducing the revenues and increasing costs. Shell was also having problems in the US due to the fact that is overinvested. Luuk van Beek, an analyst at Petercam in Amsterdam, called the profit warning a "strong

setback" for Shell. He said it could be partly explained by temporary factors such as maintenance

on high-margin fields, but other problems, such as low US gas prices and weak refining margins,

"are likely to persist" (Guy Chazan, Financial Times London, First earnings miss in decade adds

to Shell’s litany of woes, January 18, 2014, p.8, via LexisNexis, accessed May 2014).

Overcapacity was another stringent problem at Shell because there was no shortage of products in some markets.

The theft from the pipelines was also the cause for major oil spills for which Royal Dutch Shell received a $5 billion fine from the Nigerian regulators. They accused the company for environmental damage at its Bonga field in December 2009.

Because of increased costs, Shell was restructuring business in several markets and it was closing oil terminals in UK and Japan. The decision was resulted from the desire to redirect its investments in improving larger terminals (Barney, 1991). For example, there is evidence that shows the decision of Shell to close five small oil terminals and two regional distribution offices in the United Kingdom as well as the refinery from Niigata in northern Japan in order to centralize and streamline its refining, marketing and distribution business. Conditions in Japan's oil industry have deteriorated because of implemented deregulation measures and excess capacity in refineries and petrol stations. Although oil prices were at historic lows, fierce competition among petrol stations has also lowered retail prices and squeezed margins.

Royal Dutch Shell also disposed 23 per cent share in the Parque das Conchas project in Brazil to Qatari Petroleum International in order to raise cash.

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4.2. Within-case FSAs and Routines

A problem that is connected to the desire to cut costs and focus on core investments is the way in which Shell was able to deploy and recombine its firm specific advantages as well as company routines in the host-location (Barney, 1991). The continuing woes in refining, security problems in Nigeria and high exploration costs were affecting Shell’s capability to use its advantages. For example Royal Dutch Shell left the Wheatstone gas project in Australia after selling its stake to Kuwait Foreign Petroleum Company for $1.14 billion because the business and working environment from there was not prepared to support the production and in the same time, required additional investments that Shell was not eager to do in the future. "However, we are refocusing our investment to where we can add the most value with Shell's capital and technology. We are making hard choices in our worldwide portfolio to improve Shell's capital

efficiency.” Ben van Beurden, chief executive officer at that time (Sylvia Pfeifer, Financial

Times London, Shell pulls out of Australian gas project, January 21, 2014, p.20, via LexisNexis, accessed May, 2014).

In the United States, Shell was planning to apply the model that was successful in the shale gas sector to the “tight oil” sector. It was able in this way to capitalize on the advantages already created there and use its knowledge and network to bring down production costs and thus overcome costs created by unfamiliarity with the host-location. In order to strengthen this position even more, Shell was hoping that its joint venture with PetroChina, already successful in China will be able to show its efficiency in the US market also.

Other Dutch multinational company, Heineken, used the same approach in Nigeria. In order to transfer FSAs to the new host-location and recombine their FSA’s with new resources, they used liaisons that transfer knowledge from the home- to the host-location (Lu and Beamish, 2001). Heineken combined its Nigerian arms, Nigerian Breweries plc and Consolidated Breweries plc so that they could take full advantage of the growth potential of the local beer market. The combination of Nigerian Breweries, which ran eight breweries and two malting plants, and Consolidated Breweries, which had three breweries, was seen to be value creative for shareholders and other key stakeholders and resulted in enhanced economies of scale, operating and administrative efficiencies and ability to respond to market developments. It was easier to

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deploy firm specific advantages with restructured operations and melted knowledge. The efficiency was also increased along with high reduction of costs. Heineken was thus relocating jobs and production facilities to only one production site (Rugmann and Verbeke, 2003a).

For Ahold, the biggest problem in the US market was the declining margins. The company invested heavily in recent years in renovations and logistics improvement in order to keep pace with competitors and to deliver the best quality possible (Knudsen, 2000). This was the only way in which the company was able to overcome the difficulties of working in an unfamiliar environment and make use of its capabilities in order to sustain its competitive advantages. "The

important thing is that we see an end to the trend of declining margins in the US" said John Roeg

of ING Securities. (Financial Times London, Ahold defies difficult climate, November 18, 2011, via LexisNexis, accessed May 2014).

One reason for Ahold's low US profile was that its six east coast chains had retained their original brand names, such as Stop & Shop, Giant or Bruno's.

"Rebranding is tricky in retail" Mr van der Hoeven, Mass Retailer of the Year 2002. "You

have to be absolutely confident the new brand is far superior to the one you're closing down.

There has to be a new value proposition for the customer." (Andrew Edgecliffe-Johnson, The

Financial Times London, Ahold takes grip on US shoppers: Dutch retailer looks to build on success story, January 25, 2002, p.25, via LexisNexis, accessed May 2014). There was much to improve, however. Mr van der Hoeven said that the various supermarket chains were forced to find more synergies. Ahold’s sourcing was completely centralized in the United States market, with one center for the procurement of perishable goods which connected with the foodservice operation.

Stop & Shop and Giant-Landover, the flagship retail chains in Ahold's 1,500-store US supermarkets business, had yet to show the benefits of back-office integration and increased capital investment in refitting old and shabby shops.

The disposal of their arm, US Foodservice, came because there were little synergies between USF and its retail activities.

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Unilever, other Dutch multinational surveyed in this research had different methods through which enabled the transfer of assets and routines. The company acquired different other businesses and tried to teach the host-country employees their routines but this task was time-consuming (Hu, 1995). There are several examples including the acquisition of Alberto Culver Company and Bestfoods in the US or the home personal care (HPC) business and the ice cream distribution business of Sociedad Industrial Dominicana (SID) in the Dominican Republic.

In the same time, Unilever used the existing advantages that the acquired companies have on a specific market to add them to their portfolio of characteristics, thus avoiding adaptation costs. This was also a measure in order to learn from partners and thus reduce the time needed to overcome LoF. (Rugman and Verbeke, 2007). This was the case of Qinyuan Group, a water purification business from China, which was acquired by Unilever recently, in 2013. Paul Polman, chief executive, said Qinyuan, which was using a different purification technology from Pureit (Unilever’s main home purifier), "will bring together complementary technology and leverage Qinyuan's local marketing insight, manufacturing and distribution strength" (Schehherezada de Daneshkhu, Financial Times London, Unilever snaps up holding in purifier maker Qunyuan, March 11, 2014, p.14, via LexisNexis, accessed May 2014).

Their inability to recombine assets in the host-location on the other hand, mixed with labor problems that made it difficult to transfer routines and firm specific advantages were the main factors for closing some manufacturing plants such as the ones from Bramalea, Ontario, Canada, Chicago Distribution Center in the US or Unilever Ceylon Ltd., a top multinational producer of soap in Sri Lanka. The production capabilities of Bramalea plant were shipped to the United States. Other facilities such as a food plant in Montgomery, Illinois, shifted manufacturing to Asheboro, North Carolina. Nevertheless, these relocations can be only partially attributed to the unfamiliarity of working in a different location. Other factors that underlie these decisions can be the reduction of costs, strengthening platforms for long term growth or building optimal producer-supplier networks which should be located near the largest consumer markets ( Rugman and Girod, 2003).

Companies that have extensive experience with operating overseas may be aware of the risks resulted from the impossibility to successfully transfer resources because of the geographical

How does liability of foreignness influence the performance and relocation activities of Dutch companies?