Maximizing the benefits, minimizing the obstacles of being foreign: Strategies to counter the liability of foreignness for multinational companies

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Maximizing the benefits, minimizing the

obstacles of being foreign: Strategies to counter

the liability of foreignness for multinational

companies

Master Thesis

By Lidiya Asenova Daskalova Student ID: S3127362

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1 Abstract:

It is suggested that multinational companies face additional costs that local firms do not have to face. Such costs are associated with cultural, economic and political differences between the home and the host country, as well as with specific characteristics of the host market of their operations. Exactly this is liability of foreignness. Taking the form of qualitative research, this master thesis is a single case study which examines the possible strategies to overcome this phenomenon. There are two theories that stress the importance of liability of foreignness for multinational companies: resource-based view on strategy and institutional theory. According to the resource-based view, companies should use firm-specific advantages in order to counter liability of foreignness. Institutional theorists, on the other hand, suggest that firms are likely to mimic the practices of the best performing local companies to minimize the negative effects of their foreignness. The findings of this study, however, show that to be foreign in particular environment cannot be only associated with negative outcomes. Moreover, there are some benefits of being foreign which can be used by firms operating abroad to overcome liability of foreignness. The first one is related to the attractiveness of such foreign companies in the local market for both doing business and seeking employment. These firms can also play with the stereotypical perceptions about their country of origin. Last, but not least, as being foreign, companies might pretend to not understand the local context and claim ignorance to the business practices there.

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2 Acknowledgments:

First of all, I would like to express my gratitude to my supervisor Dr Hammad Ul Haq who provided me with his continuous advice and encouragement. Since that was the first time for me to write an academic paper, his guidance was crucial for what I have achieved as a result. Dr Ul Haq was always ready to answer all my questions and to provide me with valuable feedback, and his supervision guided me in the right direction whenever I needed it. Without his continuous help, this thesis would not have been possible.

Also, I would like to acknowledge Dr Rian Drogendijk as a second reader and co-assessor of my master thesis.

I would like to thank my respondents for their willingness to participate and to share their experience for the purposes of my study. Their openness and the amount of valuable information they provided me with gave me the opportunity to conduct this research.

Furthermore, I owe my deepest gratitude to my beloved family for their incomparable love, help and support – both spiritually and materially. Thank you for believing in me.

Finally, I want to thank all my friends for all the devotion and encouragement.

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3

1. Introduction

Liability of foreignness is one of the central topics reflected in the literature on multinational enterprise (Hennart, 2002). The concept has been discussed since the middle 1970s (Barnard, 2010). It is considered that when MNEs enter into foreign markets, they find themselves in a disadvantageous position compared to local firms (Hymer, 1960; Hennart, 1982). Exactly this disadvantage is the liability of foreignness (Zaheer and Mosakowski, 1997). Additionally, such companies that operate abroad have to face additional costs, associated with economic, cultural and political differences between the host and the home country, unfamiliarity with aspects of the local market, etc. (Kindleberger, 1969; Hymer, 1976). According to Hymer (1960), there are three main reasons for such liability. First, when they enter into a new market, firms have less knowledge about how to do business in this foreign for them country, compared to local firms. Second, foreign firms might be discriminated against by the local consumers, suppliers or governments. Third, such firms might be affected by foreign exchange risk.

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5 Stephen Hymer (1976) introduced the idea that being foreign might be a liability. He states that when a company is doing business abroad, it faces some additional costs which other companies, operating in their local market, do not face (Hymer, 1976). According to Zaheer and Mesakowski (1997), this assumption was studied by a lot of researchers working on theories of the multinational enterprise (also see Mezias, 2002b; Pennings et al., 1994). Some scholars argue that international companies have to provide their subsidiaries operating abroad, with some firm-specific advantages in order to overcome liability of foreignness and to be able to compete successfully with local firms. Very often such advantages are associated with some managerial or organizational capabilities coming from the parent company (Buckley and Casson, 1976; Caves, 1982; Dunning, 1977; Hennart, 1982). Nachum (2003) specifies that not only firm-specific advantages, but also the advantages caused by the multinationality alone can help companies to overcome liability of foreignness. The importance of such firm-specific resources for the creation of sustainable competitive advantage has been also stressed by the resource-based view on strategy (Barney, 1991; Lippman and Rumelt, 1982; Winter, 1991). According to this theory, international companies might try to counter liability of foreignness by implementing organizational practices, which are firm-specific and originating from the parent company. That would be especially true when the subsidiary is operating in an undifferentiated product market, where other potential sources of imported competitive advantage do not have significant impact (Zaheer, 1995).

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2. Literature review

In this chapter of the master thesis the core literature on liability of foreignness will be reviewed. The aim of the section is to provide the theoretical background of the study. There are two main theoretical perspectives that discuss the concept of liability of foreignness – resource-based view and institutional theory. These theories offer different strategies to counter such liability. Before introducing both of the theories briefly, the relevant literature on liability of foreignness will be discussed. Next, both resource-based view and institutional theory perspectives on liability of foreignness will be examined.

2.1. Liability of foreignness

Liability of foreignness is defined as “the costs of doing business abroad” (Zaheer, 1995, p. 342). The concept is associated with all additional costs that a company operating abroad would face, which local companies doing business in their countries would not (Zaheer, 1995). Such costs might result in a competitive disadvantage of the multinational enterprises’ subunit. These costs may vary across different host countries (Zaheer and Mesakowski, 1997). Zaheer (1995) claims there are four main sources of liability of foreignness. The first one is related to the costs that are directly associated with the spatial distance (e.g. transportation costs, travel costs and coordination costs). Secondly, there are costs related specifically to the company. These are caused by the firm’s lack of knowledge about the local environment, as well as by its lack of roots in the host country. The third source of liability of foreignness is related to the environment in the host country. These are, for example, economic nationalism and absence of legitimacy for foreign companies. The last group of sources is resulting from the context of the home country of the firm (e.g. restrictions on high-technology sales to certain countries) (Zaheer, 1995).

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8 business strategy and its effective implementation are crucial for the achievement of good performance (Sethi and Guisinger, 2002). Other researchers such as Mezias (2002a,b) emphasized on the disadvantages caused by the regulatory framework in the host country. He defines liability of foreignness as the “benefits denied to foreign firms that are enjoyed exclusively by domestic firms” (Mezias, 2002a,b: pp.268).

Zaheer (1995) was the first to associate liability of foreignness to the inability of companies to adopt local practices in the host country of their operations. She addresses the question to what degree does either copying practices of local firms which are successful or importing firm-specific organizational capabilities help the firm in its attempt to overcome liability of foreignness. However, her study has some limitations. For its purposes, Zaheer (1995) focuses only on companies from New York and Tokyo, which raises the question of generalizability of the results. Mezias (2002b) investigated foreign subsidiaries from Germany, Great Britain and Japan operating in the United States. In his study he proved that foreign subsidiaries face more labor lawsuit judgments, compared to their local competitors.

Dunning’s ownership – location – internalization paradigm is one of the most widely used frameworks in the literature on international business (Eden, Dai and Li, 2011; Ferreira et al., 2011). It has been also used to categorize liability of foreignness. Following that logic, three types of liability of foreignness are distinguished – ownership-, location- and internalization-specific. Using the OLI paradigm ensures consideration of the most important factors which have an impact on internationalization process. While the concept of liability of foreignness is associated with the disadvantages companies face when going abroad, that model emphasizes on the advantages related to internationalization, which encourage companies to start doing business abroad (Zhou and Guillen, 2016).

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9 the subunit located abroad, some of the costs, such as coordination costs, might be shared between the parent company and its subunit. Thus, these costs can be viewed on two levels: first, on the subunit level, they are related to the foreignness of the subunit itself; second, on the MNE’s level, such costs are typically associated with complexity and magnitude (Zaheer and Mesakowski; 1997). According to Caves (1982), liability of foreignness might be a more serious issue for “horizontal” multinational enterprises, whose subunits compete with local firms for a share of the host market of their operations. Horizontal multinationals are those, whose production process takes place in both home and host countries, while the headquarters are located in the home country (Yokota, 2005).

2.2. Resource-based view

Research in strategic management has focused on understanding the sources of sustained competitive advantage for firms (Porter, 1985; Rumelt, 1984). A firm is said to have a competitive advantage when it implements a value creating strategy which is not implemented at the same time by any competitors, neither current nor potential (Barney, 1991). A sustainable competitive advantage is defined as a competitive advantage which continues to exist after attempts to duplicate that advantage have stopped (Lippman and Rumenlt, 1982; Rumelt, 1984). Resource-based views on strategy (Barney, 1991; Lippman and Rumelt, 1982; Winter, 1991) emphasized on the role of organizational capabilities and firm-specific resources in providing such advantage to companies.

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10 and judgment of individuals within the company (both managers and employees). Last, but not least, a company’s formal reporting structure, its coordinating systems and controlling, formal and informal planning in addition to informal relations between the company and its environment, as well as among groups within the firm fall into the category of organizational capital resources. Also, it is argued that there are four indicators for the potential of company`s resources to create sustained competitive advantage – value, rareness, imitability, substitutability. In order to have this potential a resource has to be valuable, rare among company’s competitors, neither current nor potential, imperfectly imitable, and there should not be substitutes for this resource, which are strategically equivalent, valuable, but neither imperfectly imitable or rare (Barney, 1991).

2.3. Institutional theory

North (1991) defines institutions as “humanly devised constraints that structure political, economic, and social interaction” (North, 1991, pp. 97). They could be formal rules as well as informal constraints. Among the main reasons for the creation of institutions was the desire to reduce uncertainty in exchange and to create order. Institutions, together with the standard constraints of economics, define the feasibility and profitability of engaging in business activities by determining the transaction and production costs (North, 1991). According to the institutional theory, rational actors change their organizations and make them increasingly similar. Isomorphism is the concept that best captures this process of homogenization (DiMaggio and Powell, 1983). According to Hawley (1968), isomorphism is a constraining process which compels units of the population to try to become similar to other units which are in the same environment and, thus, face the same environmental setting. Two types of isomorphism have been studied – competitive and institutional isomorphism (Meyer, 1979; Fennel, 1980).

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11 creates uncertainty, when goals are not clearly defined, or when organizational technologies are not understood (March and Olsen, 1976). The third process through which institutional isomorphic change occurs is normative isomorphism, which is related to professionalization (DiMaggio and Powell, 1983). Professionalization is associated with the difficulty members of an occupation face as a group when trying to determine the conditions and the approaches in their work, to control the work process and to establish legitimation and cognitive base for their business independence (Larson, 1977; Collins, 1979). DiMaggio and Powell (1983) argue that structural changes are not mainly driven by competition, nor by the need of efficiency; conversely, bureaucratization, along with other types of structural change, is an outcome of processes that make organizations more similar, but not necessarily more efficient.

2.4. Resource-based view versus Institutional theory perspective of liability of foreignness

As already mentioned above, there are two main theoretical perspectives that stress the importance of liability of foreignness for multinational companies: resource-based view of strategy (Barney, 1991; Lippman and Rumelt, 1982; Winter, 1991) and institutional theory (DiMaggio and Powell, 1983; Scott, 1987; Zucker, 1988).

2.4.1. Liability of foreignness from the resource-based view perspective

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12 practices, which are usually associated with their parent companies, subunits would be able to compete with local firms in the foreign market (Zaheer, 1995).

Additionally, in line with the resource-based view perspective, Sethi and Guisinger (2002) advocate that the extent to which companies develop tacit knowledge and skills related to understanding the complex and unstable international business environment significantly affects their performance. Companies which are better at understanding the environment in which they operate and are able to quickly adapt to ongoing changes have the possibility to transform their liability of foreignness into a competitive advantage (Sethi and Guisinger, 2002).

It was suggested that foreign companies would benefit when they do not have the need to rely heavily on competences which were created recently in the host market. Rather than that, drawing from the organizational sociology, according to which firms have the ability to learn when there are shared expectations and values, they suggested exploiting other capabilities, which have existed from before (Kogut and Zander, 1996). Following the same logic, Rangan and Drummong (2004) found that in Brazil European MNEs outperform their counterparts from the United States in the cases when prior linguistic and historical ties are present. However, US MNEs could outperform MNEs from Europe because of their firm-specific advantages (Rangan and Drummong, 2004). Nonetheless, it is possible for a firm to continue suffering from liability of foreignness, even though it has a pre-existing capability base. The case could be that this base is either too weak or inappropriate to help the company in this particular host country (Barnard, 2010).

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13 some liabilities of foreigness through a learning process (by acquiring knowledge of the market, the established practices, etc.). However, one should consider the role of the absorptive capacity of subunits of multinational enterprises. Subsidiaries might not be able to benefit from the resources in the host environment when these resources are much richer than their absorptive capacity, which is associated with the level of prior related knowledge that the company already has. Thus, such firms’ resources are not applicable in the given foreign context (Cohen and Levinthal, 1990).

2.4.2. Liability of foreignness from the institutional theory perspective

Institutional theory, on the other hand, emphasizes on the importance of the local environment in the foreign for the company country (DiMaggio and Powell, 1983). Following this theory, there are a lot of differences between multinational organizations and domestic ones, which are not only related to their size, but also to their kind (Westney and Zaheer, 2001). Multinational companies and their subunits have to face a lot of different, already established and often opposing institutional environments. This approach has been used to explain the link between international companies and the host environments of their operations. In order to overcome the liability of foreignness, multinationals have to comply with different rules, logic and norms in the foreign environment, and in case of violation or deviation, such companies can be subject to investigation or sanctions by local legitimating actors (Kostova, Roth and Dacin, 2008).

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14 place, they become similar to each other in their organizational field and then legitimacy is achieved (Kostova, Roth and Dacin, 2008). It is difficult for multinational companies to achieve legitimacy given the complexity of the environments and the uncertain practices in the process of legitimation (Kostova and Zaheer, 1999). Such acceptance and approval by external actors of the actions an organization undertakes are considered to be crucial for the survival of the organization (Kostova, Roth and Dacin, 2008).

On the other hand, however, some scholars argue that multinational companies have the freedom to choose the degree to which they respond to local institutional environment as long as they comply with the law when trying to overcome liability of foreignness (Kostova, Roth and Dacin, 2008). Kostova, Roth and Dacin (2008) argue that one of the reasons for that is the fact that not all of the scarce resources a multinational firm might need are controlled by local environments. Additionally, they state that there are no clear requirements for the patterns a multinational should follow. Regulatory institutional rules might be enforced to international firms through coercion, but there will be a little enforcement of normative and cognitive constituents (Kostova, Roth and Dacin, 2008).

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3. Methodology

In this part of the master thesis the research approach, strategy and methodology will be discussed. This would provide a clear understanding of the way data has been collected and analyzed. First, the type of research that has been chosen will be discussed. Secondly, the case company and the Bulgarian context will be presented in detail. The third section of this chapter provides information regarding the way data has been gathered and how was the study actually conducted. In the last section, the way the collected data was analysed will be discussed.

3.1. Single case study research

Saunders, M., Lewis, P. and Thornhill (2008) argue that research strategy depend on the type of research, the issue which the researcher wants to investigate, the data which will be used, among others. There are two main approaches which can be used – inductive and deductive. For the purposes of the current research I used the inductive one, as conclusions will be drawn from single and several facts (Blumberg, Cooper and Schindler, 2008). Another reason for choosing the inductive approach is the fact that it provided me with the opportunity for summarizing raw textual data into a brief, more structured format. This approach allowed developing a framework of the underlying system of processes, which are obvious in the raw data. Additionally, the general inductive approach implements a systematic set of procedures to interpret qualitative data which produces accurate and reliable findings (Thomas, 2006).

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16 opportunity to collect historical data, as well as data from managerial perspective of the problems a foreign company faces while operating in the Bulgarian context, in addition to the strategies that could be used in order to counter that liability of foreignness.

Another reason for using a single case study method is the fact that it gives opportunity for in-depth explanation of social behaviour. Yin (1984, pp. 23) defines the case study research method as “an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used”. The case study research method is flexible since data collection and analyses depend to a large extent on the subject matter and some of the specific procedures within the research are decided throughout the duration of the study (Fidel, 1984). By using case studies, one could go beyond the quantitative statistical results, thus, this provided the opportunity to understand the research issue through the actor’s perspective (Zainal, 2007). The emphasis of case study research strategy is on understanding the dynamics observed in a particular environment (Eisenhardt, 1989). Exactly this is one of the main advantages of this research approach: the examination of the data is usually conducted within the context of its use (Starman, 2013).

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17 methods were used in addition to the descriptive approach. This helped further for observing, describing, analyzing and understanding the results (Yin, 2009).

3.2. Research context

3.2.1. Case company: N-Vision Energy

For the purposes of the current study, I have contacted a German-owned company operating in Sofia, Bulgaria and I conducted a number of interviews with its CEO and employees. The company’s name is N-Vision Energy and it specializes in renewable energy. The reason why I chose this firm was the fact that I used to work there. Since I had the connections with the employees of N-Vision Energy, this was a convenient firm for my single case study. Also, as the company was relatively new in Bulgaria, during the time I worked for the firm I experienced myself some of the problems related to its foreignness that the company has faced. Exactly that was the reason why I chose N-Vision Energy for my single case study.

N-Vision Energy started its operations in Bulgaria in 2007 (Commercial register, n.d.). The sector in which the company operates – renewable energy, is of particular interest to me, given the growing attention towards climate change and its mitigation (Chakrabarty and Wang, 2013). N-Vision Energy is an “integrated developer, installer, investor and operator of solar power plants” (N-Vision Energy website, n.d.). The firm offers solar solutions that can replace part or all of the electricity consumption of its customers from the grid with clean solar electricity. Depending on their electricity needs, clients can choose between three types of solar systems (N-Vision Energy website, n.d.). The German-owned company is currently operating five photovoltaic projects in Bulgaria – three of them, each one with the capacity of 200 kilowatt hours, in the town of Pernik and two smaller projects of 30 kilowatt hours each in the village of Ravnishte (Sustainable Energy Development Agency, n.d.). The firm was also planning to invest up to 300 million euros in the construction of two wind energy parks in Bulgaria (Ivanova, 2009). However, because of the instability of the policies regarding renewable energy in the country these along with many more projects were not executed (Yuskeseliev, 2010).

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18 process of adaptation took place because expatriats had additional translation and attention needs, associated with additional costs and foreignness that had to be bridged. In general, instead of hiring a lot of local people, N-Vision Energy relies on using partnerships and freelance agreements.

N-Vision Energy is currently working in more than ten countries. These are Bulgaria, Iran, Djibouti, Somalia, Kenya, South Sudan, Mauritius, Zimbabwe, Ghana, Gambia and Namibia. Also, the company is currently developing leads in Bangladesh, Seychelles, Maldives, Uganda and Nigeria. In the past N-Vision Energy had projects in Pakistan and Turkey, but the company’s operations in these markets were stopped. During the last couple of years the firm is developing business mainly in Africa. For the purpose of expanding worldwide, at present N-Vision Energy has five partner companies from different countries. These represent the company in Iran, Mauritius, Djibouti, Somalia, Kenya, Ghana and Namibia. Some of the partner firms have hired additional staff who works particularly with N-Vision Energy’s employees, so in total the team is of around twenty people. Also, an interesting fact is that the company has incorporated subsidiary companies in Kanya, Ghana, Mauritius, Iran, as well as Pakistan.

3.2.2. Bulgarian context

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19 World Bank’s Quality of Juridical Processes Index reflects the ability of series of good practices promoting the existence of an efficient commercial court system with high quality. It is composed by 4 subindexes: Court structure and Proceedings, Case Management, Court Automation, and Alternative Dispute Resolution. In 2016, the overall index for Bulgaria is 10.5 out of 18. This score is a bit higher compared to the average for the region of Europe and Central Asia – 10.3 out of 18 (World Bank, n.d.). These were among the main factors contributing to the decision of a lot of foreign businessmen to invest or to start their own business in Bulgaria.

Another thing which is worth mentioning is the Renewable energy country attractiveness index. This is a ranking of countries which is based on the attractiveness of investment and deployment opportunities available in the renewable energy sector of a given country. Macro, technological and energy market factors, among others, are taken into consideration when ranking the countries (Hill, 2015). In 2011 Bulgaria had reduced its subsidies for wind and solar, following the example of its European neighbors. A new renewables law was signed by the President and the incentives for the two of the technologies were determined. The period the tariff was available was reduced from 25 years to 20 years for solar and to 12 years for wind projects. Incentives for solar projects in the country were reduced by 13 percent to 31 percent. According to stakeholders who were involved in the sector, such regulatory uncertainty, coupled with the absence of grid infrastructure, could stop investments, thereby the development of the industry. As a result of these cuts a lot of the foreign investors and developers left the country and Bulgaria’s solar index decreased by one point to 33 for 2011(Ernst & Young, 2011). However, investments in the sector have risen significantly in 2012 (Ernst & Young, 2012). The industry has experienced another shock since as part of 2014 Budget Act, the Bulgarian Parliament approved additional 20 percent levy on the income of established renewable energy facilities (Ernst & Young, 2014a). Nontheless, because of the efforts made by companies such N-Vision Energy, in late July of the same year this new fee was declared to be unconstitutional (Ernst & Young, 2014b).

3.3. Data collection

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20 Nesavich, 2007). In order to collect the data needed for this research, interviews, secondary data, as well as observations, when possible, were used. Interviews used in qualitative research are typically semi-structured or unstructured (Bryman, 2001; May, 1997). Muswazi and Nhamo (2013) claim that private conversations and notes are very important part of the study as well.

Since the aim of this research was not to test prepositions, but to study the nature of a particular phenomenon, semi-structured interviews were found to be the most appropriate way to collect data given the freedom provided to the participant to set the direction of the conversation (Dana, Daves and Peterson, 2013). Additionally, flexibility was needed, as the idea behind the research was to explore into depth the phenomenon of liability of foreignness. Open-end questions were also found to be suitable, because of opportunity given to the interviewees to express their personal opinion and understanding on the phenomenon (Ghauri, P. and Grønhaug, 2005).

The use of in-depth interviews was chosen for the purposes of this study since according to Boyce and Neale, they give freedom to interact and to study an issue to both the respondent and the researcher (2006). In addition to that, semi-structured and unstructured questions give the interviewee the opportunity to express his/her own opinion, because he/she is not constrained by available response options. Such interviews allow the respondent to set the direction of the conversation (Sreejesh, 2014), which was especially useful for the purposes of this study. Last but not least, when the interview take the form of a conversation (over phone or web call), it is more likely for it to be unstructured (Saunders, Lewis and Thornhill, 2008).

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21 Thus, there was no additional value of interviewing more people. Since I have worked for the company and I have established personal connections with its employees, I had the opportunity to interview the people who are on the top of the hierarchy within the firm. As the N-Vison Energy’s unit in Bulgaria is relatively small, in line with the Upper Echelon argument, these individuals are the people who are involved in the decision-making process (Hambrick, 2006).

Table: Details of the interview data

Informant Position Time working in the company Duration of the interview In person/Via Internet Sebastian Noetlichs

CEO 10 years 76 min Over Skype

45 min In person Margita

Noetlichs

Chief Research Officer

6 years 44 min Over Skype

Ana

Boshnyakova

Project Manager 3 years 35 min Over Skype

Total: 4 interviews

200 min

The respondents were asked only two questions: “What are the problems that N-Vision Energy has faced because of its foreignness?” and “What do you do to address these problems?”. There was no prior information provided to them and the whole structure of the interviews was not planned in advance. The respondents had the opportunity to talk freely and the flow of the discussion was determined by their answers. For example, even though I had no such prior plan to investigate it, the CEO of the company mentioned in his first interview about the existence of not only obstacles, but also benefits of being foreign, so I decided to investigate the issue further.

3.4. Analysis

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22 induction and deduction” (Saunders, Lewis and Thornhill, 2008; pp. 149). This approach is considered to be appropriate for studies which explain or predict conduct (Goulding, 2002). According to Charmaz (2006), in grounded theory, initial theoretical structure is not needed in order for data collection to start. Data gathered from a number of observations is used for the development of theory (Evans, 2013). However, there are some misconceptions associated with grounded theory, such as the fact that its use could not be an excuse for ignoring the existing literature, among others (Suddaby, 2006).

Accourding to Unsworth (2009), both critical and creative thinking are needed in the analysis of qualitative data. Strauss and Corbin argue that “analysis is the interplay between researchers and data” (Strauss and Corbin, 1990, pp.13). Creativity provides researchers with the opportunity to name categories in a relevant way, to ask provocative questions, to make comparisons as well as to come up with an innovative, reasonable and integrated structure of all unstructured raw data which was collected. Coding, on the other hand, allows researchers to be creative and systematic simultaneously (Böhm, 2006).

For the purposes of the current research I used open coding, which includes identification of initial concepts in the data and grouping them into categories. Some of the labels were taken directly from the interviews (first order concepts (Van Maanen, 1979)), but when that was not possible codes decided by the researcher were used (constructed codes). These second order concepts were used to provide better explanation of the studied matter. Grounded theory methodology allows the construction and the categorization of first order concepts by taking patterns and saturation into consideration. Also, through a process of abstraction, it provides the means for creating second order concepts (Fernández & Lehmann, 2005). Next, connections were made amongst the categories and data were structured in a distinct way. This could be achieved by exploring the context and the conditions (Böhm, 2006).

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23 found in the literature review. Among them could be distinguished things like hiring locals, adapting to the local culture and practices, establishing connections with local stakeholders as well as reliance on already existing firm capabilities. Exactly these were decided to be the second order concepts in the data structure of my research. However, in the data collected during the interviews I found some items that could not be captured by the two theories. For instance, according to this data, in some situations N-Vision Energy benefited from its foreignness since it was an attractive company for both doing business and seeking employment. Also, the firm’s employees could claim ignorance to local business practices as working for a foreign company (e.g. they could pretend they did not understand regulations, established business practices, etc.). Last, but not least, N-Vision Energy had the opportunity to play with the stereotyped perceptions of locals for certain nations and use the fact it had a German CEO as advantage. I decided that these elements could fall into category labeled Benefits of being foreign (Appendix 1).

3.5. Discussion

In different occasions N-Vision Energy has used different strategies to counter its liability of foreignness. In some cases, following the resource-based view perspective, the company had to rely on firm-specific resources and turn them into competitive advantage in order to compete successfully in the local market. Sometimes, in line with the institutional theory, N-Vision Energy had to comply with established local business practices. In other situations, however, the company could use the benefits of being foreign and put an emphasis on them rather than trying to minimize the obstacles related to its foreignness. In the following subsection, these strategies implemented by the firm in its attempt to overcome the problems associated with its foreignness will be discussed.

3.5.1. Relying on already existing firm capabilities

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24 Charisma and experience of the CEO

The prior experience and the willingness to learn of the CEO, for example, have played a role of competitive advantage of N-Vision Energy. As Barnard (2010) states, firms might overcome some liabilities of foreignness through learning process. Prior experience gained in other foreign markets gives a broader view to an individual. Also, it is considered that individual skills and competences are an important tool for achieving social and economic goals (Uliena, Nevala and Hawley, 2011). As explained by Ana Boshnyakova, having background from somewhere abroad was beneficial for N-Vision Energy’s CEO. Also, according to Sethi and Guisinger (2002), companies’ performance is highly dependent on the extent to which they develop tacid knowledge associated with understanding the complex and unstable international business environment.

According to Wright, Dunford and Snell (2001), human capital is among the firm resources that could be used as a source of competitive advantage. Other personal characteristics of the CEO of N-Vision Energy, which were important when facing the problems associated with the liability of foreignness were his charisma and proactiveness. Proactive behaviour is defined as self-initiated, anticipatory action, whose aim is to change the situation (Bindl and Parker, 2010). These personal charachteristics allowed Sebastian Noetlichs to get attention more easily and, eventually, to deal with the problems N-Vision Energy faced. Also, this proactiveness made the CEO of the company “famous” within the sector. According to Ana Boshnyakova, it took him less that a year to get to the moment when everybody in the industry knew his name. As Ana Boshnyakova explained, “Sebastian’s personal characteristics like his charisma and proactiveness” had to be taken into consideration as well.

Additionally, it was very important for N-Vision Energy, for its employees and for its CEO to evaluate all the existing problems and opportunities through their individual personalized lenses. In fact, all important strategic decisions for the company were taken by its CEO, Sebastian Noetlichs. In order to make sure that everything regarding the business was going alright, he had to check the routine work of his employees.

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25 partners as a source of information, but after that you should evaluate this information yourself… (Ana Boshnyakova).

Experience, access to technology and qualification of the employees of the firm

In order to counter the liability of foreignness, sometimes N-Vision Energy had to focus on firm-specific advantages. According to Barney (1991), firms could use their internal strengths to respond to the opportunities in the foreign context in order to build up sustained competitive advantages and overcome the liability of foreignness. The company had better access to technology, given its experience and ongoing operations in other foreign markets. This, coupled with the capabilities of the employees of the firm, was also among the firm-specific advantages used to counter liability of foreignness. The employees of N-Vision Energy had superior English level, compared to local companies’employees, for example. Also, presentation skills turned out to be crucial for getting the attention of other investors. As the CEO of the firm admits, N-Vision Energy “had an advantage on the side work”.

We would know better how to structure, present and calculate a financial model and present it to outside investors, because of what I have learned beforehand (Sebastian Noetlichs).

3.5.2. Complying with established local business practices

In some instances, when trying to overcome the liability of foreignness N-Vision Energy had to comply with the established practices and, in line with the institutional theory, to act mimic to local companies. As DiMaggio and Powell (1983) explain, rational actors change their organizations in a way that they are getting similar to each other. Also, by implementing such strategy, companies can achieve legitimacy (Kostova and Zaheer, 1999). The three most important themes that were classified into this cathegory were: Adapting to local culture, language and practices; hiring locals and establishing connections with local stakeholders.

Adapting to local culture, language and practices

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26 of the correspondence of N-Vision Energy with local parteners, state agencies and municipalities was also in Bulgarian. As explained by Margita Noetlichs, “there is some kind of a trend in Bulgaria people on higher hierarchical level not to speak English”. Thus, a translator has played a major role in the initial stage of firm’s operations in Bulgaria and the cost paid by the company for translation was way higher, compared to local firms. Margita Noetlichs explains that “there was an additional employee needed, who had to make sure all the information reaches Sebastian”. As the CEO of the firm admits, N-Vision Energy “definitely spent a lot more money on translation of documents and other communications than other companies”.

Another thing that the CEO had to do was to learn about the culture and the customs of the country, as according to Zaheer (1995) the liability of foreignness is actually associated with the inability of firms to adapt to local practices. Also, it was suggested that the phenomenon is caused by the firms’ lack of knowledge about the local environment. Thus, by acquiring knowledge about local norms and culture and adapting their business model, managers have the opportunity to minimize the negative effect of their foreignness (Aharoni, 1966; Hymer, 1976; Johanson and Vahlne, 1977; Tschoegl, 1987). Since the company was generally perceived as foreign (e.g. during business negotiations), showing some interest about the host country seemed to be beneficial in most of the cases. By being able to talk about the current political and economic situation of Bulgaria, for example, an emphasis was put on the long-term orientation of the firm in the country. As a result, local partners were willing to do business with N-Vision Energy more. This was “an easy way to get over some of the barrier of being foreign in meetings” (Sebastian Noetlichs). Also, such “small talks” before negotiations are considered to work as an icebreaking activity, as communication nowadays is a crucial part of our daily lifes (Garber, 2008).

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27 Also, since Bulgarian institutions did not work so efficiently, employees of the company “did not expect anything from them” (Margita Noetlichs). Even though a comprehensive research of the local institutional environment was made prior entering the Bulgarian market, the business model of N-Vision Energy and the expectations of its employees still had to be changed according to the local context. According to Kostova, Roth and Dacin (2008), multinational firms have to comply with different rules, logic and norms in the foreign environment in order to overcome the liability of foreignness. As Margita Noetlichs explains, they “had different expectations on how do institutions work” and “expected more from them”. As a result, longer timeframes had to be planed for the projects of the company because of the delayed procedures, for example. All the risks associated with the project work had to be reassessed.

We must keep in mind there are delays when we want to issue some documents, for example (…) Sometimes the state administration is so unclear that we cannot execute our projects (…) It is so annoying when they reject the documents you should file without any explanation… (Margita Noetlichs).

Hiring locals

Next, an attempt to overcome the liability of foreignness was implementing a strategy to hire exclusively local people. Hiring a foreigner implies more translation costs, as well as another different culture incorporated into the firm. Locals, on the other hand, not only could speak Bulgarian, but also were able to understand better the Bulgarian business culture. Also, according to DiMaggio and Powell (1983), such imitation of local companies which usually hire locals stems from standard responses to uncertainty (mimetic isomorphism). As mentioned by the CEO of the company, Sebastian Noetlichs, “the foreigner would introduce more foreignness within the company and has more translation needs and (…) foreignness that needs to be bridged”.

Establishing connections with local stakeholders

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28 We have always tried to learn as much as we can and internalize as much of the knowledge that we are lacking (…) since we had to spend more on advice (…) we tried to make sure that, ok, pay for advice once, but make sure we can then do it ourselves the next time (...) we write all our contracts, for example (…) save money compared to local competitors, because the expense for them is not so big they, so just keep on paying for advice… (Sebastian Noetlichs).

An interesting way to deal with inefficient local institutions was to establish “friend” relationship with employees in the state agencies. These people were willing to help way more in case there was such relationship established. In this way employees of N-Vision Energy could minimize the negative effect of the delays related to the very slow procedures of the state administration on the company’s performance.

For example, CHEZ (the local power supplier) (…) with all these invoices and so (…) Even though it is not legally required they want the invoices to have the stamp of the company on (…) In Bulgaria, you cannot use electronic invoices (...) I made friends with one of the employees there. I had to send him the invoices beforehand so that he could check whether everything is fine and to print them out before I go there with the stamp… (Margita Noetlichs).

3.5.3. Benefits of being foreign

The results from the interviews I have taken, however, have shown that to be foreign in a particular context connot always be considered as a bad thing. In some instances, the foreignness of N-Vision Energy turned out to be beneficial for the company. Exactly by emphasizing on such benefits of being foreign N-Vision Energy could counter the liability of foreignness in a lot of situations in the Bulgarian context. The advantages of being foreign could be associated with the attractiveness of the firm in the local market, as well as with the possibility to either play the “German” card of to claim ignorance to local norms and business practices. As the CEO explains, “aside of the cost of being foreign there are also some assets and benefits to being foreign”.

Attractive company for doing business and seeking employment

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29 to when they were working with local companies. When dealing with N-Vision Energy, such foreign companies did not have to comply with the norms and with the established business practices by local firms. The communication between two or more foreign companies was easier, as compared to situations when a local firm was involved. As stated by the CEO of N-Vision Energy, “while on the one side it has been more difficult to deal in the local market, it has definitely been easier to deal with foreign companies than for many Bulgarian companies”. This became obvious when the Wind Association was created by Sebastian Noetlichs.

When we set up the Wind Association, a whole bunch of the foreign companies switched over to us or preferred to work with us and then with the Bulgarian Association which already existed, because we were not that foreign to them, we though more like them, we talked more like them, and definitely spoke English better than the other guys… (Sebastian Noetlichs).

Another positive aspect of N-Vision Energy’s foreignness was the fact that, because of being foreign, the firm happened to be an attractive employer in Bulgaria. According to the Project Manager of the company, Ana Boshnyakova, especially young people preferred to work for foreigners. Some of the reasons for that were their expectations for more interesting job and their belief that working for foreign company would give them more carreer opportunities.

According to the CEO of N-Vision Energy, a bizarre case was that some local companies trusted the German firm more, compared to other Bulgarian companies. For instance, when purchasing products or paying for services on a local level, N-Vision Energy did not have to pay in advance, “which would not necessarily be the case for other Bulgarian companies” (Sebastian Noetlichs). Sometimes employees of the firm could get free advice from lawers, tax consultants and even municipal employees by promising prospects of lucrative future business with N-Vision Energy. The firm and its employees were more respected and more interesting compared to locals.

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30 offering solar solutions). When facing the problem associated with the instability of the policies of the country regarding renewable energy, N-Vision Energy could rely on the support of the German embassy, for example.

We have been able to drag the German ambassador out to meet mayors and so on and make some PR noise around things that a local competitor would not have been able to (…) The virtue of being foreign makes us different from most of the other companies and it has been easier for us to get attention when we wanted (…) For example, in parliament, if there are 10 companies complaining, I would get more attention from politicians, from the media (…) simply because we stick out by being foreign. When used correctly, that has been useful… (Sebastian Noetlichs).

Playing the German card

In Bulgaria, a lot of people have stereotypical perceptions of other nations. As Sebastian Noetlichs explained, there is a stereotype among Bulgarians of the main characteristics that people from a given country possess – “…to me a lot of the foreignness is really stereotypes and perceptions that people have of (…) in our case, of me as a German…”. Germans, for example, are often associated with punctuality, trustworthiness, high quality and seriousness. Rather than trying to “fight” its foreignness, the firm could play on these perceptions. Given the prevailing positive perception about Germans in general, N-Vision Energy had the opportunity to play the “German” card and to benefit from that. By implementing this strategy, the CEO of the firm could avoid or at least alleviate a large number of the problems faced by the company because of its foreignness. First, they could play the German punctuality card. For instance, the CEO of N-Vision Energy has the habit to intentionally show up earlier for meetings and, instead of waiting for their start, he tried to get the meeting started earlier. By making a quip about German punctuality he hoped to trigger a positive German stereotyping by the other party.

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31 the company to avoid long considerations regarding trustworthiness, etc. during negotiations was the Trust card: “…I literally just tell people “trust me, I am German” (Sebastian Noetlichs). Such a thing was crucial since establishing trust is considered to be extremely important for the success of any type of negotiations, as there is always some level of risk involved (Malhotra, 2004).

Sometimes the “bad impression” card could be used. By playing it, employees of the firm could stick to their own strategy and way of working with no need to comply with local business practices. For instance, in some situations where the counterparty from the view of their nationality looks up to N-Vision Energy representatives’nationality, the company’s employees could easily define some behavior as unacceptable: “…point out that a certain practice or action would make them (or their entire nation) look bad in front of you (or your entire nation) (…) For example: “You want to be part of Europe? So then let’s do this the proper European way.” (Sebastian Noetlichs).

Another card which was played by the company to counter the liability of foreignness was the “Be serious, not funny” one. As explained by Sebastian Noetlichs, this strategy was used to make negotiations shorter by eliminating the perception of locals that when N-Vision Energy makes an offer, it is a very high one and offer-counteroffer negotiation is expected to take place. Simply by telling future partners “you know, Germans, we are not funny and we like getting to the point”, the CEO could avoid entering into very long and exhaustive negotiations and save a lot of time.

Overall, playing with the stereotypical perseptions of the German nation has resulted to be beneficial for N-Vision Energy in the Bulgarian context. Since in Bulgaria Germans are usually associated with good quality, trustworthiness and punctuality, among with other positive characteristics, by triggering positive stereotyping the company could alleviate and in some situatuons even eradicate problems, associated with its foreignness. As Sebastian Noetlichs explained, “by being a German, I am lucky, because there is a net positive perception”.

Claiming ignorance to local norms and business practices

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32 company’s employees could simply ignore the way things worked in the Bulgarian context and stick to their own plan. By pretending not to unredstand what was wanted, the company`s employees could get out of attempts at bribery and extortion. Such thing has happened not only in business permitting, but also by road police, for example:

We also managed to get away from corruption more than a local company would have (…) In Bulgaria there is more hesitation when trying to extort bribes from a foreign company especially if you are facing the foreigner directly (…) They are more afraid, it is a bit more awkward… (Sebastian Noetlichs)

N-Vision Energy’s employees also had the possibility to claim to be “the dumb foreigner” in some occasions as a benefit of being foreign. They could intentionally leave locals under the impression that they did not understand something, because they were foreign. Also, N-Vision Energy’s representatives used the language barrier and the lack of understanding of how processes and regulations work in general as an excuse for this. As Sebastian Noetlichs explained, when there was a traffic police wanting a bribe, for example, the CEO of the firm had the ability just to pretend that he could not understand what the police wanted, because the officer did not speak German or English.

This perception was also used to get out of sticky situations, around lengthy procedures, as well as to speed up or get around regulations. For example, N-Vision Energy’s employees intentionally skipped on some steps in an import process and then tried to rely on the excuse “we just did not know” to get out of the situation. In many occasions, such strategy worked out for the firm and N-Vision Energy could get work done more easily.

Sometimes firm’s representatives were intentionally leaving locals in the belief that they could expect a lot of money to be made by N-Vision Energy (e.g. bribery), since the firm was foreign, rich and easily tricked into overpaying. This belief was often used by firm’s employees to get free or cheap services, since the counterparty was left with the impression they were going to get something out of the situation.

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33 to pay more to the foreign company only because of the fact it had a foreign owner: “we simply had to point out our firm’s foreign ownership…” (Sebastian Noetlichs).

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34 Figure: Concepts, themes, and dimensions

1st_{Order concepts} ₂nd_{Order themes} _{Aggregate Dimensions}

Adapting to local culture, language and practices Hiring locals Establishing connections with local stakeholders Comply with established local business practices Charisma and experience of the CEO Experience, access to technology and qualification of the employees of the firm Relying on already existing firm capabilities Attractive company for doing business

and seeking employment

Playing the German card

Claiming ignorance to local norms and business practices as

being foreigner

Benefits of being foreign

• learning the language

• learning about the culture and the customs • entering the market “prepared”

• willingness to adjust business model and expectations to the context • planning longer timeframes for projects

• not expecting anything from inefficient institutions • reassessing risks

• hiring locals no need to bridge foreignness, no need of additional translation • team up with local partners to bridge the gap of foreignness

• when dealing with inefficient institutions  establishing “friend” relationship with employees in the state agencies

• trying to learn when working with a local partner • access to information as a competitive advantage • charisma

• prior experience

• willingness to learn, to internalize knowledge • entrepreneurship

• evaluating problems/opportunities through individuals’ personalized lenses • focus on the firm-specific advantages – experience, access to technology • better in negotiating for larger projects

• prior experience, support from abroad, operations in foreign markets (related to the waterfall expansion strategy)

• superior level of English of the employees • better presenting firm’s projects

• preferred counterparty for foreign partners • getting the attention easily

• some local firms trusted the “German” firm more compared to local companies • ability to get free advice from lawyers, tax consultants and municipal employees by

promising prospects of lucrative future business with the company • respect towards the company

• attractive employer

• easier communication with other foreign companies

• Punctuality intentionally showing up early

• Trust literraly saying people “trust me, I am German”

• Being serious, not funny pointing out that Germans like getting to the point • Quality referring to well-known, respected German brands

• The “bad impression” card pointing out that certain practices would make your counterparty look bad in front of you

• getting out of attempts at bribery/extortion

• intentionally leaving someone in the believe that there’s lots of money to be made of the firm because it is foreign, rich and easily tricked use this to get a good amount of free or cheap services

• possibility to claim the “dumb foreigner”

• leaving someone under the impression that they don’t understand something • using this perception to get out of sticky situations, around lengthy procedures

and to speed up or get around regulations

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35

4. Conclusion

4.1. Discussion

In the light of the N-Vision Energy case study, examples for applying both based view and institutional theory perspectives can be distinguished. In line with the resource-based view, the company`s employees relied on firm-specific advantages such as personal characteristics and experience of its Chief Executive Officer, as well as access to technology and qualification of its employees. Following the institutional theory perspective, on the other hand, in some situations the firm complied with established local business practices. For instance, Sebastian Noetlichs (the CEO of N-Vision Energy) not only tried to learn as much as possible about local customs, but also learnt the Bulgarian language. Also, other strategies used by the company as an attempt to overcome the liability of foreignness in line with the institutional theory perspective were to establish connections with local stakeholders, as well as to hire locals.

However, these two theories were not able to explain entirely the strategies implemented by N-Vision Energy to counter the problems related to firm’s foreigness, since they are only focused on the negative aspects of the phenomenon. The findings of the current study have shown that to be foreign in a particular context might not present only an obstacle, but also a benefit that could be used to overcome the liability of foreignness. For example, N-Vision Energy was an attractive firm for doing business and for seeking employment because of its foreign ownership.

Of course, one should consider the importance of aspects such as time, size and nature of the studied company when implementing strategy to benefit from the foreignness in a particular market. According to Zaheer and Mesakowski (1997) factors contributing to liability of foreignness might change over time. Managers have the ability to learn from the local environment and, thereby, to adjust their business model according to local customers’ needs (Kogut and Zander, 1996). Also, as the CEO of N-Vision managed to do, they might learn how to benefit from their foreignness in the particular context.

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36 multinational company level, such costs are related with magnitude and complexity (Zaheer and Mesakowski, 1997). Perhaps large companies which operate simultaneously in many foreign for them markets, do not have the opportunity to concentrate on one particular market and analyse the potential benefits of their foreignness that could be used there. Bain (1954, 1956) states that the concentration within the industry interacts with barriers to entry to boost the performance of larger firms. Following the same logic, Martin (1993) puts an emphasis on the role of economies of scale, product differentiation and absolute capital requirements play as barriers to entry. In this respect, larger firms might be in advantageous position. Perhaps because of being relatively small, N-Vision Energy does not use so many company-specfic resources to counter liability of foreignness. However, the company has the opportunity to benefit from its foreignness. Also, perhaps being small keeps companies such N-Vision Energy away from the scrunity from government and other local authotities. One would argue that large multinational enterprises such as McDonalds, for example, might face greater pressure to conform to the local environment, such as in the case when McDonalds entered the Indian market. However, large multinational companies might have been able to use more of their firm-specific advantages in order to overcome liability of foreignness. Also, in different markets, big multinational firms might benefit from different advantages over different local firms. In such situations, more complex transnational management could take place, thus, these companies have the opportunity decide on how to manage their different activities – in an integrated or in responsive way (Bartlett and Groshal, 1989).

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37 present and presumably because of its size, the firm did not use many firm-specific advantages in order to counter its liability of foreignness. However, the sector in which the company operates is also important, given the growing attention towards climate change and its mitigation (Chakrabarty and Wang, 2013). Bulgaria has already achieved the objectives of the European Union’s strategy “Europe 2020” associated with the consumption of energy from renewable sources and companies within the industry are subsidized by the government (Martino, 2015) which makes the renewable energy sector more attractive as compared to other sectors of the Bulgarian economy.

The CEO of the company could also play the “German” card by putting emphasis on positive stereotypes about the German nation as a whole (e.g. punctuality, quality, trustworthiness, etc.) and benefit from this. Such a thing has to do with national stereotypes of the country of origin. It was suggested that the product’s country of origin has strong effect on its evaluation by customers (Chattalas, Kramer and Takada, 2007). In this case, it is very likely for Bulgarian customers to prefer German to Chinese company, for example. According to Klein and Ettenson (1999), German products are perceived as technologically-advanced and with high quality, since Germany as a country has this image that people there are hard-working, well-educated and conscientious.

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38 Last, but not least, the employees of N-Vision Energy could claim ignorance to local norms and business practices especially because of being foreign. They could pretend they were not able to understand how processes and regulations worked in the Bulgarian context. Also, by using that advantage of being foreign, they had the opportunity to get away of attempts at corruption way more, compared to local firms. However perhaps as N-Vision Energy becomes more established in the Bulgarian market, the possibility for the company to use that strategy might decrease over time. A possible explanation of that for N-Vision Energy might be the fact that its CEO is learning the Bulgarian language, for example. Thus, there is a relatively high possibility for him not to be perceived as being foreign anymore.

To conclude, the finding that to be foreign could be beneficial for a company in some situations is the main contribution of the current research. The case has shown that for this particular company it was very useful to use the advantage of being foreign in order to overcome liability of foreignness.

4.2. Implication for theory

Companies operating abroad, face a large number of problems and challenges that local firms do not have to face. Exactly this is the meaning behind the concept of liability of foreignness (Zaheer and Mosakowski, 1997). Such firms can implement different strategies in order to overcome such liability. However, not many studies have focused on strategies to counter problems associated with the foreignness in a particular context. According to the existing literature, they could either use firm-specific advantages (following the resource-based view perspective) or copy best practices of local companies and comply with established business practices (following the institutional theory perspective) to overcome liability of foreignness (Zaheer, 1995). Taking the form of a single case study, my research focused on the strategies, used by a company to overcome the liability of foreignness. Moreover, the idea behind it was to explore how and when different strategies were used by a single company in a foreign context.

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39 aspects of the phenomenon. The findings of the current study have shown that foreignness can also be associated with positive outcomes. Being foreign might result in competitive advantage rather than liability. By putting an emphasis on these positive dimensions of foreignness, managers of firms which are operating abroad would be able to overcome the problems caused by their unfamiliarity with the local context. Such benefits of being foreign could be associated with the stereotyped perceptions of locals of given nationality, the attractiveness of the company because of being foreign, as well as the possibility such firm would have to pretend not to understand the local environment, thereby, to go around some locally established practices and norms. By starting associating foreignness within a particular context with positive outcomes, international business researchers would be able to study more into depth the phenomenon called liability of foreignness and the possible strategies to overcome it.

4.3. Implications for practice

Maximizing the benefits, minimizing the obstacles of being foreign: Strategies to counter the liability of foreignness for multinational companies