Overcoming liability of foreignness for companies from emerging economies : a case study at a Chinese MNE entering Europe

Overcoming Liability of Foreignness for Companies From

Emerging Economies

A Case Study at a Chinese MNE Entering Europe

Name: Ning Ning

Student Number: 10839631

MBA – Company Project

Date: 15/October/2016

Executive Summary

Over a decade after Company H’s first move on global expansion, in the consequence of Asia, Africa, America, it made the decision to enter the market that has been long targeted but strategically reserved until full confidence of readiness. Upon careful studies, strategic preparation and a collection of over-a-decade experience in overseas operation, the board was of the belief that they had an answer to every problem they predicted. However, Europe proved itself as being a different market than any of those Company H conquered before, what worked everywhere else did not work here. Sales revenue and market share fell far behind any other previously entered foreign market at the same stage and channel distribution accounted for less than 15% of total revenue, which is an unsettlingly unhealthy ratio. Meanwhile, local employees have been struggling to deliver enough contribution needed to the growth projected. Strategy at every stage was being questioned. So where did it go wrong?

This paper will summarize theoretical findings that are applicable in the analysis of the case based on the topic of Competitive Advantage, The CAGE Framework, Liability of Foreignness, Liability of Origin, Knowledge Transfer as well as Agency Theory. Upon a description and analysis of the case, a hypothetical set of resolutions will be proposed and their applicability examined. The uniqueness of Company H’s organization structure and the specificities of the Europe market are making the case worth the study and discussion. Complementary to most existing strategic studies based on the global expansion of MNEs from developed countries to emerging economies, this paper looks into the LOFs and the underlying costs faced by traffic from the opposite direction, Chinese company to be specific.

Recommendations on future study are provided at the end so more insights and guidance could be concluded to enhance the applicability of studies on international business.

Table of Contents

Acknowledgement ………..………..4

I.

List of Abbreviations ……….…..…..5

II.

Introduction ………..…………..6

III.

Literature Review ………..………..9

A. Competitive Advantage ……….………9

B. The CAGE Framework ……….…11

C. Liability of Foreignness ………..………13

D. Liability of Origin ………..……….…..….……17

E. Knowledge Transfer ……….………19

F. Agency Theory ……….………21

IV. Gap and Research Question ……….………24

V.

Case Analysis and Hypothetical ………..………27

VI. Conclusion ………..………..36

VII. Further Research Recommendations ……….………37

Acknowledgment

This Company Project Report is the final work of my Master of Business Administration study at the University of Amsterdam – Amsterdam Business School(ABS).

First of all, I would be extremely proud of myself when I complete the entire MBA program. Pursuing this study was an impulsive decision albeit having considered for a long time, one that I even doubted in the first block of courses when the shock of workload kicked in. fortunately enough, I was assigned a group of classmates that are not only intelligent, knowledgeable but also kind and patient. Same goes for every group followed. It was their encouragement and help together with my own endeavor that allowed me to finish the all the courses in the past two years.

Besides, I would like to express my appreciation to my manager at work, Dr. Kunbin Hong. Repeatedly encouraging and monitoring my progress at the same time, Dr. Hong provided support that allowed me enough flexibility in work arrangement to attend all the courses and finish assignments.

Additionally, I would like to express my appreciation to my family, friends and colleagues who offered support, encouragement and tips from their past study. The feeling of not being alone gave me just the strength and faith I needed to handle work, study and life with my own humble hands.

Finally, I want to thank Dr. Markus Paukku and Mr. Kasper Verhoog who shed salvaging light on the company project and rescued me from the loss and struggle of where to start. Also, I am grateful for the faculty of the MBA program for their teaching and helping us throughout the two-year-long journey.

List of Abbreviations

LOF – Liability of Foreignness

CDBA – Cost of Doing Business Abroad

COO – Country of Origin

LOO – Liability of Origin

MNE – Multinational Enterprise

Corporate HQ – Corporate Headquarter

Regional HQ – Regional Headquarter

Expat – Expatriate

Introduction

The development and communication technology and globalization has lowered the entry barrier of international business in the past few decades. Contrasting to its difficulties and complexities some twenty or thirty years ago, business operation outside the country of origin has become more and more practical for even small and medium business.

However, it is one thing to have business operation abroad by simply exporting outside the base country. It’s a completely different thing to make a bold move that qualifies as a Foreign Direct Investment(FDI) that calls for much more carefully considered strategy in advance as well as adaptation afterwards. In the latter case, companies, commonly known as Multinational Enterprises(MNEs) would typically do some study both on the target country/market and on their own competitive advantage in order to find the most suitable entry mode in which the key deciding factor is the extent of Liability of Foreignness(LOF) recognized. As define by (Hymer, 1976), sometimes also referred to as the Cost of Doing Business Abroad(CDBA), “Liability of Foreignness is all additional costs a firm operating in a market overseas incurs that a local firm would not incur”.

Needless to say, MNEs choose to enter overseas market because they see value in it- be it market opportunities, factor costs, natural resource availability and cost, the political and economic stability of countries, or the international debt position of the host country (Beamish, Morrison, & Rosenzweig, 1997). However, until a clear strategy to overcome LOF is clearly formed and receives enough buy-in and confidence in its effectiveness within the organization, hardly any company would proceed with the internationalization move simply because that value they see in the overseas market can easily be diminished by cost induced by LOF if it was not controllable. CDBA, according to (Hymer, 1976) arises from the

unfamiliarity of the environment. And to overcome it, the most instinct and effective way is to gain knowledge of the environment and become familiar with it. In the MNE study, there are several entry modes that can be applicable based on the actual firm-specific competitive advantage as well as its perceived LOF in the host country, in this article, only Wholly-owned direct investment will be studied and discussed.

In the case of a wholly-owned direct investment subsidiary, the approach to gain knowledge of local environment is faced with choices of staffing strategy, managing style as well as the extent to which local initiatives are permitted and motivated. An enormous amount of researches have been made based on MNEs’ entry to emerging market. However, not so much is the case for the other way around - MNEs from emerging economy have been making a profound statement in the international market and many have established subsidiaries in developed markets, namely Europe and North America. It was widely

believed that companies based in emerging economy should be able to make a much easier entry to developed market nowadays comparing to did the European or American

companies expand in the opposite direction both because of the globalization which brings down the impact of physical distance by the uniformity of standards and the past studies of MNE, FDI & Entry Mode as well as LOF. Unfortunately, when it comes to cases in real life where companies from emerging economy makes entry to developed economy, they did not enjoy as much ease comfort as they had expected making their studies and strategies.

In this paper, Company H, a Chinese company with local subsidiaries almost everywhere has made their entry in Europe, the last continent on the earth after Asia, Africa and America by the order of entrance and encountered far more obstacles and resilience than was ever predicted. Europe has long been considered by Company H as the most difficult market to enter because of its size, complexity & diversity and maturity. On the other hands,

companies in the entire world found it difficult to resist to enter Europe because of the higher margin, established regulations and sustainability. Although not be a market that enjoys lower labour cost, rich natural resource or innovation incubation, competition in Europe has always been as fierce, if not fiercer, than in any other market. This is particularly true in the enterprise market where Company H operates, everyone is entering with the most advanced technology and most competitive value proposition - pricing, service, payment model all play important roles here.

Company H captured all those challenges and risks right at the beginning, it therefore strategically decided to leave this market the last to enter. It was believed that the answer to a near-zero-tolerance-to-mistake market is to not enter until being fully prepared. In year

2011, with 25 years successful operation and over 10 years’ experience overseas, Company H made its official move to enter the Europe enterprise market with confidence that it had everything prepared - product, technology, staff with overseas experiences and a

formulated approach to exert influence on the strategy directly from HQ. As a common practice in Company H, a regional HQ was set up in order to overlook all the country-based subsidiaries and support each one with resources allocated by Global HQ as deemed necessary. Unfamiliarity of the environment was seen as the only factor that Company H had been unable to fully prepare at the time of entry but experience elsewhere suggested that knowledge could be “bought” by hiring local professionals and stored.

Sadly, despite the solid establishment Company H made in the European market, the growth rate fell far short of prior estimation. To make it worse, not only was the expected acquisition and absorption of knowledge not seen anywhere down the way, conflicts and resilience were observed from time to time, especially between the subsidiaries and the regional HQ. Even management style became a topic when the heat was at its highest. The global strategy that veteran expats be the managers at subsidiaries and gather, absorb, retain knowledge from local hired professionals was repeatedly questioned for its fit and effectiveness in this market. “What if we hire quality local professionals and let them run the subsidiaries?” was finally brought on the table.

In this paper, literature review was first done on the topics of Competitive Advantage, The CAGE Framework, Liability of Foreignness and Knowledge Transfer in order to highlight a few key concepts and their ramifications in business environment. Followed by an analysis of the current case at Company H from a managerial perspective and then a hypothetical case where different strategies are applied to rectify the most imminent problems in the current case. An allround comparison between the two cases will be carried out to list the advantages and disadvantages of both cases as well as their viabilities & limitations in real life. At the end, recommendations are to be made both in possible adjustments of strategy in the current case and in future researches and studies in this topic.

Literature Review

Competitive Advantage

Global expansion appears to be an inevitable step during the growth of a company, the attraction of a much bigger landscape of market, more favourable exchange rate and tax rate, more competitive labour cost and everything there is to exploit is almost irresistible to owners. Meanwhile, the ambition must be backed by a thorough analysis and knowledge of the environment. Owners and investors will only be assured/convinced with a 360-degree overview of the situation. A simple SWOT tool would most commonly be used for this analysis to identify opportunities and threats in the market and at the same time, the company either possesses or is capable of obtaining some competitive advantage to exploit those opportunities and avert threats at the same time. As defined by Barney(1995), the competitive advantage of a company is normally present as the resources and capabilities to fill in the “internal blanks” created by SWOT analysis and managers will be faced with the four essential questions with regards to the resources and capabilities inside each one’s company: (1) the question of value, (2) the question of rareness, (3) the question of imitability, and (4) the question of organization.

From a value perspective, it is suggested that the value of a company’s resources not to be assessed on its own. Rather, it is only worth assessing the value when they can be used to exploit external opportunities and/or neutralize threats. Moreover, one is reminded that the value of a company’s competitive advantage is neither permanent nor unchangeable. In the highly interactive business environment, one tiny change from the competitor or the market itself could significantly weaken or even eliminate a company’s advantage from the past. (Barney J. B., Firm Resources and Sustained Competitive Advantage, 1991) went on by classifying the numerous firm resources into three categories: “physical capital resources, human capital resources and organizational capital resources”.

Rareness of a company’s resources and capabilities could never receive too much attention in that it helps evaluate the company’s competitive advantage in a subjective manner. The value and strength of competitive advantage can easily be overstated if rareness was not taken into consideration. In the case of the absence of rareness, a company’s competitive advantage is effectively nothing more than competitive parity at best. (Barney J. B., Looking inside for Competitive Advantage, 1995)’s finding that it is only legit to grant a company as having a competitive advantage when its value creating strategy is inapplicable to any competitor in the market.

In the discussion of imitability, first the advantage has to be qualified by whether or not the absence of it will result in a cost disadvantage to the company. When we have a positive answer to this question, we can further discuss the sustainability of a company’s

competitive advantage by the cost and ease of imitation. A company with long vision would constantly make effort to signify the difficulty and cost of imitability of its competitive advantage or in a highly commoditized industry/market, management even has to create new competitive advantage to minimize the impact of low cost of imitation.

Organization of a company decides the performance of it in a completely different angle than all the factors mentioned above - a company’s value recognition, rareness and

imitability of its competitive advantage set the foundation of its core value and competence while the organization decides to what extent the company could take those advantages and eventually, how much those advantages can benefit the profitability.

Being able to set strategies based on accurate analysis of market environment and internal competences lays a good foundation for a company but it is far from enough to keep the advantage built on it, a constant observation of the internal & external changes as well as counteracts accordingly is needed to retain or even signify that advantage.

The CAGE Framework

As one of the most popular tools in considering the viability and potential cost of overseas expansion, the CAGE framework specifies a few aspects from which the potential costs of the most significance as a result of distances are categorized and most likely risks are pointed out.

Study by (Ghemawat, 2001), namely, examined the CAGE framework by discussing the distances from four aspects:

Cultural distance highlights additional cost induced by the differences in the likes of

language, religion and social norms, etc. not only is there a chance that the product/service the entrant company offers might not suit the local taste as much as it did elsewhere, but also could it cost the company their image and popularity in the new market in an extreme case simply because the lack of knowledge in this difference. As a result, the entrant

company would either have to make additional investment localizing their product to fit the local market or inevitably suffer from a much lower profitability comparing to operations in less distant markets. Worse than that, a total failure of entry would be no surprise in the case of a significant distance.

Administrative and political distance is the most obvious of all mentioned here. Besides the possible absence of common monetary policies and political hostilities as is, the

involvement or intervention by the government could also bring unexpected obstacles. Especially in the case of being a big employer, posing a threat to the national security, production of staples, offering “entitlement” product or services, exploitation of natural resources as well as having high sunk cost underway. In additional to all these, operating in a country with a weak institutional infrastructure will inevitably jeopardize the business. This explains why countries with a fame for corruption or social conflicts attract much less interest from foreign companies to enter than do those that are known for an established regulation system.

The discussion of geographic distance goes beyond the intrinsic physical distance between the home country of the company and its target of entrance. The size of the country, the advancement of transportation and communication technology implementation play a much more critical role in deciding the accessibility of the market by both physical reach and economic cost. Some believe an FDI entry mode is the most effective way to offset the lack of well implemented enough a transportation network but it was proven that the

advancement of communication network deployed is the most essential deciding factor in this topic. It is wise to always take both into consideration when evaluating the geographic distance.

Economic distance, interestingly, is often evaluated not to assess the potential risk/obstacle. Rather, it is used as a benchmark to forecast the market and revenue. For instance, a

foreign market with lower logistics or labor cost for a firm than it has in its domestic country would appear extremely attractive. The firm is thus highly likely to take the advantage or even arbitrage should condition permit. Strong economy and consistent exchange rate in an overseas country would also usually be considered a positive sign of stability and

sustainability. Moreover, companies from developed countries would normally judge the ease and viability of doing business in the target country by this. In particular, “those that rely on economies of experience, scale, and standardization should focus more on countries that have similar economic profiles” (Ghemawat, 2001).

In general, distance does translate into higher cost and/or lower profitability for entrant companies than it does to those that operate locally because over-the-border complication and fluctuation induces an extra cost to stay responsive and agile in order to deliver an output on the same level. This is especially true for those entrant companies that

strategically aim to replicate the business model. Without many noticing, companies that chose an FDI entry mode would normally benefit significantly from assembling a large cadre of cosmopolitan managers comparing to those whose managers are all from the home country. While the world has been becoming a smaller place than it appeared in the past thanks to the globalization and the development of technology, cost of distance still makes a profound presence in real world business nowadays, the ramification of distance should not be overlooked or underestimated in decisions of cross-country expansion.

Liability of Foreignness(LOF)

The study of Liability of Foreignness has long been a topic that received a significant amount of attention and interest in that this translates all types of distances in Foreign Direct

Investment into a more tangible concept. As defined by (Zaheer & Mosakowski, The

dynamics of the liability of foreignness: a global study of survival in financial services, 1997), Liability of Foreignness is the sum of all costs a firm operating in a foreign market has to bear while a local one does not. LOF poses such induces such significant a risk and penalty to an entrant firm that not only does it induce all sorts of cost unnecessary for local firms to be faced with, but also the duration of the impact remains valid for a considerably long time. LOF is determined as a composition of various barriers of a virtually indefinite nature

(Petersen & Pedersen, 2002).

Like the distances discussed in the CAGE framework, LOF can also be viewed from different angles. One advantage that the local firms have in common over entrant firms is their superior access to the economy, the language, the law as well as the politics in the host country (Hymer, 1976). As a penalty to not having knowledge to those conditions, an entrant firm would either be entitled difficulty to enter, low productivity & profitability and failure maximize its competitive advantage to capture market opportunities or have to offset the disadvantage by additional investment in both capital, manpower and time. Even if this would bring a perfect return and brings the entrant firm back to an equal stage to the competition, an impact would eventually kick in on the profitability.

However, firms with sufficient capital and a long term plan still rather anchor their

establishment by living with this additional expense as they see a return in the long run that justifies this investment. This behavior was backed by the empirical study by (Zaheer & Mosakowski, The dynamics of the liability of foreignness: a global study of survival in financial services, 1997) that confirmed the high likelihood of faded liability of foreignness

with elapsed time. Zaheer and Mosakowski went further on the study and came to the conclusion that the Cost of Doing Business Abroad(CDBA) should rather be treated as a regressive cost than as a constant cost.

Entrant firms’ willingness to invest in overcoming LOF is thus rationalized as a sunk cost to establish business operation abroad, especially in a form of FDI, that enables them to obtain the knowledge and familiarity of the local market condition and hence eliminate their disadvantage over local firms. Meanwhile, they unquestionably establish and enjoy the protection of barriers from newer entrants.

That the entrant firms witness solid proof of getting familiarized to the local market and benefiting from an improved profitability will undoubtedly boost the confidence of the management and encourage them to commit even more resource and focus in purse of faster and more effective localization. However, (Welch & Wiedersheim-Paul, 1980)’s research revealed a phenomena that the accumulated knowledge of local market did not exactly result in a declination on the level of perceived risk and uncertainty. This somehow goes back to the discussion of a firm’s competitive advantage and the implication of distances. Managers and investor might be discouraged by the differences or contrasts between what the market was expected to be like and what it really is. Dramatic changes of strategy or even a withdrawal of investment may sound extreme in this case but there have been cases where a divestment, of all possible moves, is the most intelligent one to take to avert all further risks when the LOF is deemed so significant that the firm does not have sufficient resource or knowledge to mitigate it.

Three key factors of LOF are identified by (Hymer, 1976): “exchange risk of operating businesses in foreign countries, local authorities’ discrimination against foreign companies, and unfamiliarity with local business conditions”.

Exchange risk remained a topic in the study of LOF in the past few decades because not only is the foreign exchange system a dynamic environment, but also are there competitors from all currency based countries, given the nature of an attractive market. Meanwhile, the

fluctuation of exchange rate can put one firm in a disadvantageous position on cost simply because of the real time relative exchange rate.

Local authority discrimination against foreign firms is present almost everywhere but it is rather situation specific and industry specific. Exceptional cases have proven that the situation could go completely opposite. In 1979, at the beginning of the period of China’s “Open Door” policy, foreign investment was so encouraged by the nations policy that the condition was in all sorts of favour to foreign investors, so much that many MNEs from outside the country found it irresistible even taking the relatively weak institutional infrastructure and all other distances into consideration. The actual industry could also decide the likelihood of intervention/disruption by the local government, in the case of an industry where there is zero participation of local firm, all foreign firms operating in the market are to be treated equally by the local government due to the absence of protection to local firms and possibility of lobbying by foreign firms.

Unfamiliarity with local business conditions is normally the most instinctive perception in foreign business operation. However, as the development of information and

communication technologies as well as the globalization of the world, his unfamiliarity is widely believed to be able to mitigate by pre-entry research and post-entry learning. In particular, (Petersen & Pedersen, 2002) suggested that during the process of obtaining knowledge and experiences by operating internationally, one key takeaway is precisely “how to learn”.

Where firms enter a market by setting up country subsidiary, a variety of LOFs as

disadvantage are present in particular. Echoing with the findings of Petersen & Pederson, (Zaheer & Mosakowski, The dynamics of the liability of foreignness: a global study of survival in financial services, 1997) also identified four main types in their article The Dynamics of the Liability of Foreignness: A Global Study of Survival in Financial Services as: “(1) higher coordination costs; (2) unfamiliarity with the host country culture; (3) lack of information networks and/or political influence in the host country; (4) inability to adapt to nationalistic buyers.” Further on, costs were categorized by them as liabilities as LOF was originally defined. Eventually, those financial costs were included in (Zaheer, Liability of

foreignness, redux: A commentary, 2002)’s “structural/relational and institutional costs of doing business abroad”.

Firms with different competitive advantage and core value also choose to go different paths adapting to the specificities of a local market. Those subscribing an unified global strategy and following international business routines would most commonly undergo a limited learning process. In contrast, those pursuing a localization strategy would make any effort deemed necessary to adapt to the local business specificities (Petersen & Pedersen, 2002). So much the success of entrant firms can be limited by the deficiency of knowledge of the market, behavioural & mental differences in the host country. The study of overcoming LOF arose accordingly among which (Johanson & Vahlne, 1977) and (Welch & Wiedersheim-Paul, 1980) pinpointed a solution to such limitation - to minimize the impact of LOF by obtaining knowledge via local agents. Having operated in the host country for a

considerable amount of time and made establishment, local agents are expected to not only be familiar with the local market condition, consumer tasted as well as social norms, but also have established the connections necessary to claim all the supports and advantages by local regulation. Thus, acquiring knowledge goes down to the qualification of agents,

motivation of agents’ initiatives and migration of the knowledge to inside the firm so the knowledge becomes the firm’s asset.

Assuming everything above mentioned were flawlessly done, it then takes the managers in the foreign firm to acquire cultural knowledge so by elapsed time, business are operated in line with what the domestic labour resources would expect and what the consumers is looking for (Zaheer & Mosakowski, The dynamics of the liability of foreignness: a global study of survival in financial services, 1997).

Proactive actions to reduce LOF would certainly help minimize the cost and shorten the period in which the impact stands. However, even a gradual natural adaptation to the local environment be present without much deliberate action, (Hymer, 1976) was of the belief that as soon as an MNE have established their presence in an environment for a

considerable period of time, it is foreseeable that certain part of the ‘cost of doing business abroad’ fades out by itself. Meanwhile, the firm specific advantage that once granted the

firm the convenience to compete in the market would also drain out as the competitors gains access to and imitates the core competence of its products and as the industry itself commoditizes (Teece, 1977). Rareness and imitability plays an essential role again in the sustainability of a firm’s competitive advantage here. Unless it carries resources and/or capabilities that are both inaccessible by most competitors and difficult/costly to imitate, a firm is most likely to communize into the market by time so both their initial disadvantages and advantages will insignify. Competition in the market will eventually settle with a few leaders with unique advantages while a number of survivors make their livings on mere operation excellence or cost control.

Nevertheless, a smooth and struggle-free adaptation to the local market would be too luxury in any case. By (Zaheer & Mosakowski, The dynamics of the liability of foreignness: a global study of survival in financial services, 1997)’s observation, it is most probable that the host country is not the sole market in which a foreign firm is competing due to its nature of MNE. In this case, the local firms without overseas operation would always thrive harder for their survival than do the local subsidiary of an international corporation.

Liability of Origin

Globalization is effectively the process of business expansion over the border of countries and continents where the advancement of economics, politics and societies could be ahead of or behind that of the entrant firm’s Country of Origin(COO). In general, the foreign firms would be on natural disadvantage against the local firms because of cultural distance with impacts coming from both inside and outside. This, from a stake holder’s perspective, calls for a deliberate development of relationship with additional external stakeholder, most typically suppliers, venders and distributors. (Calhoun, 2002) (Hult, Cavusgil, Deligonul, Kiyak, & Lagerstrom, 2007)

Studies of the nature of and countermeasures to LOF have been immensely carried out given the continuous impact on both individual and organizational level as a result of globalization. Meanwhile, many are of strong faith that LOF can be decreased by insights of the local environment obtained as business operations taking place. Liability of Origin(LOO), as a peculiar subset of LOF, has only been recently identified and attracted interests from many scholars. As defined by (Moeller, Harvey, Griffith, & Richey, 2013), LOO is the extra cost induced by host country assessment of the foreign organization is based on

expectations based upon prior exposure to the company’s products/services or with other companies from the same COO. A particular COO profile of an organization plays a big role in its perceived acceptance mediated by LOF of both tangible and intangible form.

Its own effort and performance aside, the perceived quality of the products and brand image of a foreign organization independently heavily impacted by its COO signature in the host country (Riddle & Brinkerhoff, 2011) (Wagner, 2004) (Yildiz & Fey, 2011). A foreign firm with a positive COO signature would be blessed with a natural competitive advantage, in contrast, one with negative image is exposed to the risk of not only external biases but also potential impact on the organization’s performance as a result of confirmation seeking to those stereotypes, regardless of the extent to which they themselves give credit to the stereotypes (Operario & Fiske, 2001) (Steele & Aronson, 1995). As indicated by the word “stereotype”, a firm may be suffering from it solely because of acts by organizations from the same COO.

This impact becomes far more prominent when the stereotypes are spread by persons or groups on the top, so much that it eventually becomes tangible (Harvey, Novicevic, Buckley, & Fung, 2005). To make it even worse, fear for the stereotype to be true induces

tremendous damage to the performance and this phenomenon is defined as ‘the threat of being viewed through the lens of a negative stereotype or the fear of doing something that would inadvertently confirm that stereotype’ (Steele C. M., 1999). Despite not being fair, a foreign firm does not always have to “earn” a reputation even if it is negative. The liability of being endowed a notorious “halo” on the day of entrance to the new market may end up being too hefty to afford for many companies. Sadly, the stigma can sometimes be so significant that all companies from the same country will be affected.

Thus, it is of vital importance for the management to strategically take the potential benefit/risk into consideration in foreign business operation.

Knowledge Transfer

The study of knowledge transfer in business world has been mainly focused on the

perspective of the transfer inside organizations in the aim of success replication as well as performance improvements. At some point, firms with an efficient and effective internal knowledge transfer system are considered to have a much better chance to excel than those do not (Argote, Beckman, & Epple, The persistence and transfer of learning in industrial settings, 1990). It was also occasionally brought to the attentions of the scholars that the design of viability & flexibility should be done with consideration of risks of knowledge spillover. Theories are that when a firm builds effective internal knowledge transfer mechanism with minimal exposure to risks of knowledge spillover, it effectively established significant competitive advantage from a managerial perspective (Lippman & & Rumelt, 1982). Thus, when viewing on an above-personal analytical level, knowledge transfer consists of processes like sharing, interpreting, combining information as well as storing information. All those contribute to its persistence in the case of turnovers on personnel (Argote & Ingram, Knowledge Transfer in Organizations: Learning from the Experience of Others, 2000).

There are many repositories where knowledge in organizations are believed to reside (Levitt & March, 1998). One popular example set is the five retention bins for knowledge in

organization: (a) individual members, (b) roles and organizational structures, (c) the organization’s standard operating procedures and practices, (d) its culture, and (e) the physical structure of the workplace. Assessment on transfer of knowledge therefore has to be done by observing changes in all relevant repositories.

Echoing with Levitt & March, the framework of three fundamental elements of

organizations as the carrier of knowledge was suggested by (Argote & McGrath, Group processes in organizations: Continuity and change, 1993) (Arrow, McGrath, & Berdahl, 2000): members, tools and tasks. The framework specified a perfect scenario where the

performance of an organization is granted a near certain boost and that is when inter and intra network compatibilities improved at the same time. Moreover, the inter-relationships between those factors as well as the effects of each combination were discussed.

Knowledge acquired by an organization can be embedded in the members, the tools or the tasks respectively, or a combination of any above mentioned. All factors concerned,

organizations often enjoy improvements on productivity by learning the best combination of a member and the task in which he/she will best perform and then assign duly (Argote, Group and organizational learning curves: Individual, system and environmental

components, 1993). Besides, organizations also learn tasks that are best performed by members or by tools and ultimately, the best combination of member, task and tool. An interesting phenomenon is implicit knowledge transfer where knowledge is

unperceivedly embedded in the norm and the beneficiaries would fail to even articulate upon acquisition of it.

Recent studies of strategic management have given rise to knowledge on organization level as the foundation of its competitive advantage. Statistics and observations have proven that distinctions of organizations themselves overweigh that of industry nature as being the essential differentiator on performance.

According to (Barney J. B., 1986), organization should reclaim the price of the value of resources obtained from competitive markets. Therefore, competitive advantage generated internally, over those procured externally, deserve more attention from a strategic

management perspective. It is further narrowed that only resources inaccessible to the majority of competitors and cannot be easily imitated can qualify as what leads to competitive advantage (Lippman & & Rumelt, 1982).

What works in one context may not as much in another one. One challenge to make the best use of knowledge in transit is to make sure that members, tools and tasks made

adaptive to the new environment when being transferred given the vital importance of the compatibility inside and outside the networks (Argote & Ingram, Knowledge Transfer in Organizations: Learning from the Experience of Others, 2000).

It is concluded that human being are most flexible and adaptive as means of knowledge transfer while tools, also not as sensitive, hold the knowledge more consistently and allows transfer on a much bigger scale. Knowledge transfer by tasks, on the other hand, appears more neutrally on flexibility and consistency.

Among all the knowledge reservoirs, member related subnetworks are of the highest uncertainty due to the various nature of human being. hence, this would not be the best approach should consistency and integrity be the primary concern.

On the other hand, the upside of people being the blockage of knowledge transfer is that it also makes knowledge spillover a lot less likely because of the complexity to replicate a same context of subnetwork so the member can perform at the same excellence level. Managers should be enlightened by this and deliberately build a fence of their knowledge from leakage.

Agency Theory and Stewardship Theory

In the study of owner-manager relationship, the most well developed and utilized theories are Agency Theory and Stewardship Theory.

Agency Theory suggests that it is in the nature of human being to pursue maximum personal return whenever possible, unless separation of a CEO from the chair of board or

compensation plan that aligns the interest of the CEO to that of shareholders is in place, shareholders’ interest will be at stake due to the inevitable opportunistic managerial behaviors (Donaldson & Davis, 1991). The theory asserted that CEOs awarded the position

of chair of the board of directors are predicted to take advantage of the breach of

impartiality of the board, hence an agency loss will be present as a result of the shift in of interest of owners in favor of management. Such individualistic “model of man” is based on the pre-assumption of conflict of interest between owner and agency (Donaldson & Davis, 1991). As a prevention measure, avoiding the duality of CEO and chair of the board of director will undoubtedly restrain CEOs from gaining too much power in decision making so as to compromise shareholders’ interest for the security of their own positions or in the rare case of a giant ego, empire building. Admitted, a preventive approach will fence an

individualistic CEO from going too far in the wrong direction but at the same time, it also puts a leash on one that stays true to his/her commitment. Insufficient authority and credibility on strategic decisions takes a CEO nowhere but dampened motivation and productivity. Another approach from a relatively less negative side is to ensure the productivity of CEOs by offering them duality with chair of board and incentive that is closely bound to the performance of company at the same time. This way the CEO has legitimate authority to make decisions in the best interest of the shareholders given its immediate link to his/her own welfare. Despite the increased cost of employment, sheer monetary incentive is proven very effective. Companies with an intention for rigid management/supervision are observed to often take this approach.

As another “model of man” from a completely different angle, the Stewardship Theory focuses on the non-monetary incentives perceived by managers through satisfaction of achievement by “performing challenging work, to exercise responsibility and authority, and thereby to gain recognition from peers and bosses” (McClelland, 1961) (Herzberg, Mausner, & Snyderman, 1959). Additionally, upon a long term service and responsive modification of vision in self-fulfillment & development, a manager is very likely to align his/her personal value to with the success of the company, especially when an assured future employment and pension rights are present. In comparison, this model advocates a more sustainable employment with guaranteed authority for managers so that the

consistency of both the company and employees are assured. The drawback of this is that executives have to be given a longer time to prove themselves, hence the company expose itself to the risk of more serious strategic & operational mistakes. In addition, only after years of service and fair treatment would an executive build the feeling of pride of and

belonging to the company, hence further adaptations would be justified to push the binding to the next level. Until then, this executive is nothing more than a happy employee and will still be open to various temptations. Companies with board of directors that are of limited knowledge to the business/market are more likely to take this approach.

Agency Theory focuses on prevention of agency loss by limiting the degree of freedom that enables executives to exploit personal interest at the owner’s cost and on stimulation on executives of their best effort by closely binding their personal well-being to the

performance of company. Stewardship Theory highlights the value managers see in

achievement of duty exercise and recognition by peers & supervisors. The former observes executive behaviors from a pure economic perspective while the latter takes the stand on organizational psychology and organizational sociology. The main difference being

employee satisfaction & loyalty to be cultivated by monetary or non-monetary incentives. Both provide insights on managerial considerations but the effectiveness and applicability are rather object-specific and industry-specific.

Gap and Research Question

As an MNE ranked top 300 in the World’s G500 list, Company H has already had over 15 years’ experience of overseas expansion. Having noticed the difficulty to enter the European market, it strategically decided to leave this continent the very last to conquer. The

management is of the belief Europe is the most mature market in the world, despite its higher operation cost as a collective result of higher labor cost, logistics cost, facility rent as well as a longer incubation period comparing to other markets, investment and effort are deemed justifiable by its intrinsic size of market, acceptance of latest technology and protection by regulations.

However, attractiveness of this market had been perceived by companies from all over the world. Competition has been tense for decades and never eased at any point in time. Companies that survived years of battle have more or less established their networks that not only give them competitive advantages but also guard them from sudden threat by new entrants. Any newcomer would have to fight their way into the market and a tiny mistake could cost them the opportunity to stay in the game. Having understood all this, Company H made a high level strategy to not make an attempt to this market of zero tolerance until it has enough confidence in its experience and technologies proven in other

markets/continents.

In year 2011, 14 years after its first attempt of overseas expansion, Company H made the move entering the enterprise market in Europe. By chronical consequence, Company H started its global expansion in Asia for geographical convenience, followed by Africa following the trend of political & diplomatic relation building and then America because of the market size and size of individual enterprises. Despite being the most attractive market by virtually every MNE, Europe has been strategically kept untouched because of its strict & comprehensive regulations, density & variation of countries, nature of homeland of many arch competitors and fierce competition by companies coming from globally. Tolerance of this market to mistake is close to zero by assessment, one mistake could cost the company years of prospect.

Management had repeatedly examined the company’s readiness and came to the

conclusion that the company had accumulated sufficient capital and experiences to support a successful entry. LOF as the most imminent potential factor of cost was also given

adequate attention but Company H has not only formulated a set of best practice approach tailored to the organization but also reserved a cadet of expats managers with rich overseas experience. It was made crystal clear to the top management that according to the SWOT analysis, company H’s strength in technology and capital (both human and economic) would suffice in offsetting its internal weakness of unfamiliarity of the market and external threat of low brand recognition therefore enabling it to exploit and capture the opportunities in the richest market on the earth.

Moreover, past successes in multiple entry attempts proved the viability and effectiveness of obtaining knowledge in host country by hiring high profile local talents. It was believed that an aggressive investment in human resource can dramatically accelerate the

familiarization of the market and consequently shorten the learning period. A high level manager was quoted announcing that knowledge can be “bought” and the potential in the market is substantial enough to eventually reward so much as to far more than even the initial investment.

Taken in action in no time, local subsidiaries were setup in virtually every country and a regional HQ was established to overlook the entire continent. Manpower was dispatched at the same time as facilities were built/rent. The outline of organization from HR perspective was clear: veteran expats in charge of each department and high profile local professionals hired to function mainly in areas such as sales, distribution channel, partner alliance, etc. As planned by the company - also proven effective in the prior experience, the expat managers are to absorb knowledge from the local hired employees and become the repository of it. Reasons for this set up at least at the initial phase are:

 As a common practice specific to Company H, global strategies are made at

managers already worked in the company for a couple of years and had a deep understanding of the strategies.

 The expat managers were selected with consideration of dependability and loyalty in advance, risks that they leave the company on short notice is much lower than that of local employees both because of loyalty and contractual reasons. Consistency of knowledge retention is thus better assured.

 The quality of local candidates in the host countries is highly dependent on the ability of HR officers and sometimes even local head hunter agencies. It takes time to examine the capability and adaptability of local employees.

 Concerns of empire building by local employee once he/she is promoted to management position in rare cases.

Despite pre-entry studies and preparations, performance of newly set up business in many subsidiaries fell short of expectation by a huge margin. The belief that the advancement of technology, quality of products & services as well as experience of global operation would provide enough competitive advantage was proven by far invalid. Externally, company struggled to generate revenue on par with expectation because of low acceptance level both from local customers and channel partners. Internally, local employees, especially those hired directly from partners or competitors exhibited unanticipated level of difficulties fitting into the organization and the operations, let alone providing their prior knowledge readily usable to the managers or the organization. Motivation and confidence on both expats and local employees quickly become on the low and the management started question themselves from almost every angle. Strategies on organizational and human resource level received tremendous reviews and questions: how much did we know the local culture indeed? Would it be different if we had gone another route instead?

Case Analysis and Hypothetical Resolution

A hypothetical alternative is to be proposed and compared with the current strategy based on experiences, insights and theories. The aim is to answer the question “would we have been better off if…?” it is common in big companies that each function group identifies one or a few problems to which the solution is straight forward and it might appear hardly logical to not pursue a different route where the solution is already embedded. However, from top management’s perspective, the collection of different approaches, even each supported by theoretical studies and findings, does not always lead to a better world because of inter-compatibility and the fit of the coincidence of “corrections” to the nature of the company as well as to the market specificities. That being said, with all the imminent problems and solutions, the least that can be achieved is to check their fit to the real life environment one by one by priority or seriousness and apply the ones that are fit and have the biggest impact on profitability or sustainability.

Case A will be used to denote the current situation while Case B representing the hypothetical proposal. All data and information were obtained by daily interactions and interviews where both local employees and expat managers were given an opportunity to explain their concerns and proposed solutions. Countries studies/interviewed include UK, France, Germany, Italy, Spain, Netherlands, Switzerland, Poland, Romania and Bulgaria.

Current Situation Analysis

The operation of Company H in all European subsidiaries were falling below projection and industrial average, most internal people believe this was because of failure to predict the variety of LOFs faced and the extent to which LOFs will be affective. As a consequence, not as much attentions as are necessary were given to overcome/avoid LOFs in strategy. Take employer’s attractiveness for example, countries in Western and Central Europe exhibited a much higher level of resilience by candidates to work for unknown employers than did in Eastern and Southern Europe. It was only after a few meetings held by the

regional HQ with attendance of managers in most subsidiaries that the explanation was concluded: employees in Western and Central Europe can afford to pursue prestige of employer because of the much stronger economies and social security systems than in Eastern and Southern Europe. Hence, the cost to offset this reluctance is much higher in strong economies than in those where employment rate is low and social security system is unable to support citizens’ survival without income. The original strategy to use local

headhunters and agencies to minimize LOF in the employment market was evidently flawed as such contrast would never be perceived by agencies that operate on country level, it is only possible for organizations with first hand cross-border experiences to be able to compare and conclude.

Another example in the same spirit could be the failure in channel distributor recruitment where when Company H thought they could give distributors high enough motivation to include Company H in their offerings by rebate. Nevertheless, other competitors already established process to use distributors as their local assembly and logistics partner. This way the competitor can offer extremely high quality and short delivery time without the vendor having to establish local production and logistics facilities. The revenue sharing model incentifies distributors much better than does a merit based rebate because of their value add in the process. As a result, failure to partner with enough channel distributors severely restricted Company H’s access to SME market which accounts for over 70% of business in Europe.

In case A, one of the biggest caveats observed is the lack of identification &

acknowledgement of LOF faced by Company H in the new market. Admittedly, cultural distance was given enough attention in assessing the difficulties and costs to enter. The rest distances by the CAGE framework were believed to have been largely neutralized thanks to the globalization and unification of regulation all over the world. Administration & legal distance, as an instance, poses minimal threat to entrant companies as a result of the mature local regulation system as well as the quality of legal consultant firms. However, it was the confidence that LOF in culture could be mitigated simply by acquiring knowledge from local agents that calls for some re-consideration. The underlying logic and strategy was that Company H had sufficient advantage based on technology & product, experience on

overseas operation and capital to compete with the local & localized firms, knowledge was to be bought to mitigate LOF and to maximize those advantages

There are a few different levels of uncertainties each of which could sabotage the entire plan.

Quality Of Knowledge Container

First of all, on recruiting level, the quality of candidates accounts for the potential of the extent to which the local talent could bring knowledge and hence contribute to the performance of business development and localization. Another level of LOF is making effect without most entrants noticing: the unfamiliarity of the local labor market is depriving the companies of the ability to take control of the quality of recruitment by their own hands - the HR department could do a perfect job interviewing and filtering candidates but the value it brings is limited at the absence of access to adequate, quality pool of candidates. When introduced to a poor collection of candidates by the local head hunter, HR

department cannot do anything except hiring the least unqualified out of a group of

imperfect containers of relevant knowledge or containers of knowledge that is of little value. To make it worse, another layer of cost is introduced to Company H in particular because of its Country of Origin. As a badge to which an organization’s nature and past are translated into, COO could work in favor of the carrying firm and endow a natural advantage.

Unfortunately, in the case of Company H, it went the opposite direction and pulled it one step back on the starting line (Moeller, Harvey, Griffith, & Richey, 2013). It is difficult to enter a market with low brand recognition but it is desperate to do so when starting with a stigma. Being a Chinese company, Company H carried the “halo” of cheap manufacturer since the very day it made the entry. The stereotype of Chinese companies being as the symbol of low cost, poor quality product manufacturer casts an equal competitive disadvantage on every one of them. Besides the discrimination from customers on the brand and its products, there is also an impact on employment preference: highly successful and qualified professionals simply fail to perceive as much pride in working for such a company as they do working for an indigenous or globally acknowledged employer. Hence, until the company has fought its way into the market and established its positive, firm-specific reputation, it will be charged in the form of Liability of Origin, either its access to top

quality talents or higher-than-market compensation package to offset the lack of satisfaction of achievement.

Quality Of Knowledge Extraction

Secondly, assuming candidates with decent quality and background were identified and hired, it would be over-optimistic to expect that they can bring the experiences and knowledge into the company that are readily applicable: according to (Argote & McGrath, Group processes in organizations: Continuity and change, 1993), out of the three basic elements of organizations where knowledge is embedded, people(members) involved subnetworks are the most complicated to transfer knowledge. Difficulty to set up a similar context in which the new employee can efficiently and effectively transfer his/her

knowledge from the past experience would be several times as much as to even hire him/her.

Compatibility Of Knowledge Acquired

Thirdly, the value and applicability of knowledge embedded in the local employees hired from established companies, especially direct competitors may be overstated. Complexity of knowledge transfer by people aside, competitors formulated the process of collaboration with partners over years of operation. There is no surprise those processes are tailored to maximize their own strength. As suggested by (Barney J. B., Firm Resources and Sustained Competitive Advantage, 1991), rareness plays a pivotal role in the value of an organization’s resources as being competitive advantage, it is thus only logical to give faith in the rareness of the competitive advantage of the competitors and therefore conclude that replicating the partner processes in place with competitors brings little value to Company H in that they are not designed nor optimized to take the best advantage of Company H. Meanwhile,

Company H will need to exhibit some significant advantage in products or strategy to attract partners with long history of its competitor into working with it. One typical conceivable gain through years of localization and familiarization is that the impact of LOF decreases without the organization deliberately counteracting. As a consequence of its

(Zaheer & Mosakowski, The dynamics of the liability of foreignness: a global study of

survival in financial services, 1997). Efforts on recruitment of large local partners make take an extremely long time and heavy investment before getting any substantial return, entrant companies with short term obligation of performance review are thus prone to

underachievement and even lead to dramatic amendment of strategy that undermines all initial investment. In the case of Company H, similar resilience was perceived with such approach. For a long time, company had to bypass channel partners and approach

customers directly. Unsurprisingly, penalties on multiple folds took place in no time: terribly low efficiency, devastatingly limited access to the market apart, even the channel partners were offended by this direct vendor approach. Company H stuck with this approach for at least the first four years until some sizable partners finally opened to it. However, an

alternative approach by targeting the mid and small sized local partners could give Company H a much smoother kick start.

Flaws In Expats As Retention Nodes Of Knowledge

Most critically, the organizational set up with expats being top managers of the majority of function departments and supervise local employees was indeed proven to be effective in adhering to the global strategy from the corporate HQ, nevertheless, it is not necessarily the best fit in the most developed market where localization is key. Those local talents not only have to make their best possible effort adapting to the managerial styles of their direct line managers but also shifting their own work styles so as to maximize their value in the new environment. The potential risks here are rich and profound: on the one hand, local employees would find it hard to motivate themselves without given the authority and credibility. On the other hand, falling far short on performance and business commitment could induce severe damage to the local employee’s confidence and hence demotivate him/her from sharing valuable knowledge. Additionally, cultural distance between the expat managers and the local employees should never be overlooked due to its potential

influence on knowledge transfer: the possibility of poor relationship between expat manager and local employee because of cultural differences could never be ruled out. Meanwhile, even in a perfect world where every local employee gets along with his/her

manager, cultural distance could still strike in and impact the quality of reception of knowledge.

To summarize, from a knowledge transfer perspective, Company H’s current strategy is exposing the operations to risks and uncertainties in the processes of accessing the best containers of knowledge, building a formidable context in which the employee can best perform with knowledge embedded in him/her, choosing the best fit of target knowledge as well as encourage the highest level of knowledge extraction.

As questioned even internally in the management meetings, the productivity of the local organization appeared to be somewhat limited because of insufficient motivation from the local employees. In Netherlands, Germany and France, over 60% of local employment termination were by resignation as a result of frustration of slow blend in and

underperforming. Rumor has it the employees are concerned their value to the company will diminish as their knowhow stream out, and hence their positions will be at stake.

Hypothetical Resolutions

As a hypothetical alternative to case A, the objective of case B is to find a resolution for each of the problems above mentioned. The objective is to welder a collection of different

approaches that solve the most serious problems identified. Consequences and effects are based on classic theories and experiences from operations elsewhere that are proven generic. The strategy should then be formed with the focus of intuitive knowledge transfer.

Quality And Extraction Of Knowledge

For the highest level of efficiency on knowledge transfer and motivation of initiative, Company H is should consider promoting the local talents as managers and let pride and loyalty grow in them. At the same time, the local managers are to be given the privilege and authority to influence the hiring of the team. This way, he/she gets to build the team

according to his/her priorities and value perception. Another advantage in this is his/her insight in the local labor market could also be utilized and passed to the HR department. As

a result, the subnetwork and environment should be most compatible with the knowledge brought in and consequently reach the highest level of efficiency and effectiveness.

Loyalty And Sustainability

The risk of local employees not being as loyal to the company as are the veteran expats can be mitigated by attempts to incorporate the wisdoms, knowledge and experiences in processes and norms. Although not as intuitively adaptive as are people, processes and norms present a much higher level of consistency and liberates the employees from being the potential single point of failure in the knowledge retention & transfer chain. A boost in performance is expected to occur marginally sooner comparing to case A, therefore the local employees are more likely to start feeling pride and joy and eventually the satisfaction of achievement.

Complementary Approach To Ease The Struggle In The Beginning

Partnering with the large channel distributors is eventually inevitable but it could be a lot less frustrating if this was done at a later stage when company has established some brand image and local acceptance. At the initial stage, targeting on mid and small distributors as potential partner could return with a more promising success rate. Confidence will also be strengthened by progresses at high frequency also not necessarily sizable. Knowledge of partnership with others can still be used as guidelines to define and fine tune processes to the specificities of Company H in particular.

Another value in the long run is when Company H has a considerable amount of mid and small sized partners, it will effectively gain access to a certain proportion of the market, flexibility in smaller partners could enable them to achieve a higher growth rate that do sophisticated ones and in no time, pose a threat to the established ones. Under pressure of competition, those that previously were either too proud or too closely tied to vendors with longer history to collaborate with Company H will naturally choose to start a partnership. As not at absolute disadvantage or desperation, Company H also avoids having to compromise too many agreements in favor of the partners.

Applicability And Compatibility Of Case B

As much as the hypothetical setup in case B appears optimal and convincing, it’s applicability needs to be examined. From a typological and configurational perspective defined by (Harzing, 2000), three major types of setups were discovered.

By observation and statistics, Global companies prioritize standardization of product and efficiency of operation as economies of scale is vitally important. Local adaptation can be expected on marketing level at best, product modification as a course of responsiveness would normally be null. Subsidiaries in such a setup would normally function as “pipelines” with a high degree of dependency on headquarter where subsidiaries stay nearly invisible to each other.

Transnational companies, on the other hand, thrives to balance the needs of both local responsiveness and global efficiency. The most typical characteristic in transnational setup is its network structure that synergize resources and knowledge across multiple subsidiaries through the flows of people, products, etc. Interactions and dependency between

subsidiaries weigh much more than does between subsidiary and headquarter.

According to internal survey, Company H stands somewhere in between Global and Transnational setup as depicted in Fig. 1.

Although most insiders would categorize Company H as a Global type of company, many boxes Transnational was ticked in questionnaire. One explanation to this could be that a regional HQ is present whose job, next to monitoring the operation of subsidiaries, is to expedite needs for resources from every subsidiary.

From a structural & configurational perspective, nothing Company H is doing provides a clear explanation to the struggle – the decision to put a regional HQ in the center of the subsidiary web is even inspirational, although not unique.

Conclusion

Strategic adjustments to maximize local responsiveness seems to help solve most of the problem Company H is facing in Europe now but in reality its compatibility and applicability to the organizational setup of the company is largely limited. A further shift to Transnational configuration from its current Global status might help adapting to this peculiar market in a smoother and faster fashion but the underlying cost to maintain two different

configurations within the same company could potentially be enormous. Moreover, such a switch of organization structure indicates a potential undermining of previous investment for the establishment. HR adjustment will most likely translate into layoff of employers and nothing does a better job than it to corrupt a company’s reputation.

Given the competitive advantages perceived by Company H itself: technology, product and capital are solid and can only introduce positive force to a company’s competitiveness in any case. As observed and concluded by (Zaheer & Mosakowski, The dynamics of the liability of foreignness: a global study of survival in financial services, 1997), companies with sufficient capital and long term determination & strategy to operate in a market will

eventually perceive a reduction of LOF even without much deliberate effort to overcome it. Company H’s investment in the past four years will only accelerate this process. Global operation experience, on the other hand, did not seem to add as much value as expected. Details in operation and sub-strategies could be made more conforming to the local

environment. Meanwhile, as soon as Company H managed to shake off its stigma and build some brand reputation, hiring qualified talents and give them authority should be taken into agenda, this will introduce a snowball effect on the local acceptance.

Further Research Recommendations

Although still at early phase of market entry and development in Europe, the problems Company H Europe faced was significant enough to reflect incompatibilities of the entry strategy with the local environment. The causes of many serious problems were identified and resolutions/recommendations proposed. However, the applicability of this case to the massive Chinese companies trying to expand their business to Europe and/or North America is severely limited because of Company H’s long history of international operation and rich capital. Most companies, especially those publicly listed on stock market, are obligated to quarterly and annual financial report and hence a “long term plan” would not suffice to support a humongous sunk cost followed by years of deficit in one market.

Besides, not every Chinese company chooses to go the same path as does Company H on organizational structure and expansion strategy. Much smoother local adaptation was witnessed by another Chinese firm, Company L, in the same industry by simply acquiring a division of a global enterprise with established local presence everywhere for decades. Company L gained immediate access to local HR resource as well as distribution channel. The media exposure also helped to reduce the level of resilience and uncertainty from local customers. The absence of a big proportion of LOF and LOO gave Company L unbelievably less discomfort to start with comparing to most other Chinese firms. Further studies and recommendations could be made in the direction of approaches for companies from emerging economies to minimize LOF and LOO at the same time so as to increase their survival rate in the new market. Specifically for those with and without sufficient capital resource to support such activities respectively.