Sources and Responses to Liability of Foreignness

Sources and Responses to

Liability of Foreignness

A Qualitative Study on Foreign MNEs in

the Netherlands

Author:

van Netten, J.H.S. (Jaco)

S2158396

MSc. International Business and Management

Faculty of Economics and Business

Date: June 2016

Abstract

1. Introduction

Best buy expanded to Europe in 2010, which quickly turned out to be a failing expedition. In 2011, Business Insider reported that Best Buy bungled its European efforts through poor marketing. It didn’t notice that European customers prefer smaller shops over large box stores, among other factors. In addition, Best Buy also retreated from China and Turkey (Business Insider, 2011). Google’s exit of the Chinese market in 2010 due to disagreements with the Chinese government (Fortune, 2011), and the recently (2015) announced exit of Target from Canada (Cbc Business, 2015) due to continues, losses are both similar examples of large multinational enterprises (MNEs) failing in foreign markets. When MNEs venture abroad to conquer new markets, increasing its size and revenues, they inevitable suffer from Liability of Foreignness (LoF). LoF concerns costs incurred by a foreign MNE once it enters a foreign market, which a local firm would not incur. This results directly in a competitive disadvantage for the foreign MNE. Foreign MNEs are often not well prepared for the liabilities they are facing in host country environments. Even after several decades of research, LoF remains a black box, consisting of multiple sources, factors and outcomes that a MNE can face (Eden & Miller, 2001; Calhoun, 2002; Zaheer, 2002; Elango, 2009). Due to the fact that not every MNE faces the same liabilities when entering a new market, the unraffeling of the LoF’s black box remains a complex task for scholars and business managers. As Zaheer (2002) already stated: ‘’we still need to strive for a deeper comprehension of what it really means to be foreign and which liabilities exist’’ (p. 357).

Furthermore, this study examines Eden and Millers (2004) assumption that the key driver behind the LoF is institutional distance (ID), composing of a regulatory, normative and cognitive aspect. As institutional distance increases, Eden and Miller, among many other scholars, argue that LoF increases as well. However, primary research to this theory is currently lacking. This study examines the role of ID on the LoF as well by gathering primary data. Therefore this study contributes to the literature by testing if ID is the key driver behind LoF, or perhaps other factors such as size or the industry in which the MNE operates. Results show that ID not only causes difficulties for local management in coping with local actors, but also leads to misunderstandings between local- and HQ management. Combining the research gap stated by Zaheer (2002), and the assumption that ID is the key driver of the LoF as proposed by Eden and Miller (2004), we address the following research question in this paper:

What are the key liabilities of foreignness managers of foreign subsidiaries located in the Netherlands face and to what extent are these driven by institutional distance?

First, past literature on LoF is reviewed to develop a strong basis and conceptual underpinnings. Second, the research method, sample, interview strategy and grounded theory is discussed to provide an overview of the study’s method of data gathering and processing. Third, the results of the interviews are presented and discussed. I expect these interviews to provide clear problems about how local management copes and perceives LoF. Finally, this study is concluded with a discussion of its findings and contributions.

2. Cost of Doing Business Abroad and the Liability of Foreignness

2.1 Cost of Doing Business Abroad and the Liability of Foreignness

have a disadvantage over domestic enterprises. He defined this disadvantage as ‘’the cost of doing business abroad’’ (CDBA). CDBA could also be measured in reverse by the advantages national firms have in their home market relative to foreign MNEs. Hymer identified four types of foreign firm disadvantages (or, alternatively, local firm advantages). First, a MNE has less information about the country itself compared to the national firm and needs to acquire this information, resulting in one-time ´start-up´ costs. Second, national firms would receive a better treatment from the local government, buyers and suppliers. Hymer expected that this disadvantage for foreign MNEs persists over time, even when the MNE has set up the operations in the host country. Third, the firm’s home country government could also generate extra regulations, for example, prohibiting the parent firm and its subsidiaries to involve in certain activities or imposing extra taxes. This treatment doesn’t affect the local firm in the host country. Lastly, the MNE subsidiary could face foreign exchange risks because receipts and payment are in foreign currencies, which doesn’t affect the local firm. Based on these disadvantages, foreign MNEs need to compensate these costs by utilizing own firm-specific advantages (FSAs) (Hymer 1960/1976).

The costs of Hymer’s CDBA are on top of the costs that domestic firms face in the host country. Therefore it is assumed, taken the same amount of revenue, that the foreign MNE will earn smaller profits compared to its local competitor. The costs are assumed to be fixed to a large extent and are expected to decrease over time. However, the costs will remain present and won’t diminish, even after the foreign firm has established its operations in the host countries for a significant amount of time (Hymer, 1960/1976). The foreign firm can overcome these costs and increase net profit by either decreasing costs (e.g., economies of scale and scope), increase earnings (e.g., brand reputation, production efficiency) or both (Hymer, 1960/1976; Zaheer, 1995, Elango, 2009).

their home markets relative to foreign-owned firms’’ (MIT Press 1976), while Zaheer (1995) defined LoF as ‘’all additional costs a firm operating in a market overseas incurs that a local firm would not incur’’ (p. 6). This resulted in an ongoing discussion when either CBDA and LoF are the same (Zaheer, 2002; Mezias, 2002a) or not (Eden and Miller, 2004).

2.2 Uniting CDBA and LoF

In a special issue regarding LoF (Journal of International Management, 2002), Zaheer (2002) raised the question if CDBA and LoF are identical or different concepts herself. Through the years multiple definitions and views were given on the CDBA and LoF. Luo and Mezias (2002a) argued that CDBA was a precursor to the LoF, and thereby both concepts were identical. Another view, proposed by Calhoun (2002), developed an understanding in which LoF could be seen as CDBA, but argued that the costs could be categorized in two groups, geographic costs and uncertainty costs. The latter are perceived as the most important costs of every research involving LoF. The conclusion of this paper is that LoF therefore can be seen as part of CDBA. Zaheer (2002) herself argued that CDBA came from the economic approach while LoF took a more socio-institutional approach. Here, Zaheer (2002) also chose to focus on institutional distance rather that the concept of cultural distance (Kogut and Sing, 1988) in order to explain the costs associated with the LoF. CDBA is mostly dominated by market-driven costs, while the subtler structural/relational and institutional costs of doing business abroad dominate the costs associated with the LoF. Institutional distance takes the impact of being foreign to a broader aspect, as Zaheer argues ‘’I see institutional distance as broader, allowing for politics, ideology law, and other such societal institutions to be taken into account, in addition to culture’’ (p. 351-352). We elaborate on institutional distance and institutional costs later in this paper.

insurances, communication, tariffs and entry and licence fees. All of these costs will not be incurred by the local firm operating in the host country. Even when the firm decides to set up a local plant, some of the geographic related costs are lower, but one-time costs will be incurred for setting up the plant, adapting technology and productions methods and additional costs for hiring and training personnel.

operations are often vague and underestimated, and sometimes even ignored by companies entering a foreign market’’ (p. 292). In addition, governance costs can arise from conflicts between these different authority lines (Sundaram & Black, 1992), increased transaction costs, increased managerial information processing demands (Hitt, Hoskisson and Kim, 1997) and monitoring-, bargaining- and bonding costs (Tomassen and Benito, 2009). Bonding costs are incurred through various activities that lead to stronger relationships between parties (e.g. HQ and subsidiary) such as building an incentive system, developing common identities, etc. In sum, the key difference between economic costs is that, as indicated by Eden and Miller (2004), is economic costs are quantifiable and therefore can be anticipated on, while this is not the case for social costs. Quantifying the costs related to the different hazards arising from differences between the institutional environment of the home- and host country are considered to be difficult and time consuming. Therefore, Eden and Miller (2004) argue that as economic costs can be anticipated on, it leaves the MNE’s management with the core issue of the LoF.

Table 1 - Construction of CDBA

Cost of doing business abroad

Liability of Foreignness - Related to social costs

o Unfamiliarity hazards o Relational hazards o Discriminatory hazards o Governance hazards

Economic costs

- Related to geographic distance o Production costs o Distribution costs o Marketing costs

2.3 Past research on the LoF

trading rooms in Tokyo. She found that the local trading rooms have higher profits per trader compared to foreign traders and concluded that there is an existing LoF in the currency trading business. As an extent to this research, Zaheer and Mosakowski (1997) studied the effect of being foreign on the survival of foreign currency traders worldwide between 1974 and 1993. Also here a lower survival rate (40%) for foreign-owned trading rooms was found compared to domestic trading rooms. In addition, they compared the exit rate of the two trading rooms (foreign and domestic) and found that exit rates tended to become more similar over time, indicating that the LoF decreases over time. This may be due to foreign trading rooms becoming familiar with the new environment by overcoming difficulties and differences. More recently, Hennart et al. (2002) studied the exits of 32 Japanese subsidiaries in the United States and found that thirteen of those exits can be ascribed to a LoF. Seven of them experienced difficulties in human resource management and six subsidiaries did not realize the difficulty of transferring their ‘’lean production’’ advantages to the foreign subsidiary.

3. Institutional distance and the LoF

Institutional theory is a widely accepted theoretical posture which focuses on the social structure of a country (Scott, 2004). Here, institutions are seen as ‘’the rules of the game in a society, or, more formally, are the humanly devised constraints that shape human interaction’’ (North, 1990: p. 3). Scott (1995) divided these institutions in regulatory, normative and cognitive institutions and called them the ‘’pillars of institutional theory’’ (p. 50).

organizations through individuals’’ (Kostova, 1997, p. 1). This difference, or distance, is now used to explain MNE behavior regarding legitimacy (Kostova & Zaheer, 1999), transferring of organizational practices to the subsidiary from the parent (Kostova & Roth, 2002) and entry mode strategies (Xu & Shenkar, 2002).

The institutional distance between two countries can be different for each pillar. The regulatory pillar is composed of the institutions that develop and monitor rules and laws that exist in the country to ensure stability and order in the society. These rules and laws promote certain behaviors of institutions and society and prohibit others. When the government is not able to formulate and implement sound policies and regulations, this pillar is considered to be ‘weak’ (Kaufmann, Kraay & Mastruzzi, 2009). The normative pillar consists of the social norms, values, beliefs and assumptions about human nature and human behavior that are socially shared and are carried out by individuals (Kostova, 1997). The normative pillar specifies what should be done or should not be done, based on the values and norms of society. This is mostly based on culture and therefore hard to interpret by outsiders (Kostova & Zaheer, 1999). An example of a weak normative institutional environment is when corruption is a common practice (El Said & Mc Donald, 2002). Lastly, the cognitive pillar reflects the cognitive structures and social knowledge shared by the people in a given country. It is defined as the schemas, frames and inferential sets which people use when selecting and interpreting information (Kostova, 1997). This also captures the way individuals acquire and categorize cultural knowledge. An example is the way how newspapers write and how information is perceived by individuals.

normative pillars are most relevant to the MNE and therefore are mostly dealt with. Xu et al. (2004) strengthens this by arguing the following:

‘’the practical implication of this study is that now firms can view regulative and normative distances as a source of competitive (dis)advantage … the regulative and normative domains are more relevant to strategies designed for subsidiary control. It is not necessary, therefore, to include all three constructs simultaneously’’ (p.

298-299)

Some cognitive-cultural scholars (i.e. Henisz, 2000; Lizardo, 2010) also suggest that cognitive pressure is embedded in the regulatory and normative pillar, for example, capitalism is not institutionalized because people cannot “conceive” of a different way of doing things, but it is institutionalized on normative and regulative grounds. Kostova et al. (2008) even took this further in provoking existing literature by proposing that pressures from the host country do exist, but rarely for local isomorphism. They argue that MNEs bring their own organizational culture to the host country that is valued and even appreciated by local actors. Therefore it is less likely they would adopt to local customs. This leaves the foreign MNE with the pressure to comply to regulatory and legal domains only. In this study, the normative pillar is still taken into account as the new direction offered by Kostova et al. (2008) lacks additional empirical evidence, while extensive research shows the importance of normative differences in international business (DiMaggio & Powell 1983; Calhoun, 2002; El Said & McDonald, 2002; Xu et al. 2004; Wu & Solomon, 2015) .

4. Liabilities of Foreignness

In this section we will propose several liabilities that management of subsidiaries of MNEs may face when operating abroad. Each liability is supported by an example or existing literature. During our interviews managers are asked if these liabilities are recognized in their day-to-day operations. We divide the liabilities into two categories, regulatory and normative liabilities.

4.1 Regulatory liabilities

liabilities proposed in this section may have overlap with the CDBA. However, as it is important to identify if these disadvantages (still) are present in the Netherlands and to what extent, they are still included. Twelve potential regulatory liabilities are proposed:

1. The most direct and easily visible difficulties when entering the new market are the regulatory institutional differences compared to the home country (Kostova, 2008). Foreign MNEs are unfamiliar with local laws and regulations. As a consequence, foreign MNEs face increased costs due to local law management (WTO press, 1996 volume 57);

2. Due to this unfamiliarity, foreign firms have to put extra effort in research with regard to local laws. Firms have to check if procedures or requirements are different and if their way of operating is conform local law. These investigation and management costs are not incurred, or to a smaller extent, by the local firm. This backlog on local law results directly in an increase in lawsuits (Mezias, 2002b);

3. A different environment with different laws and regulations may directly influence the product or services a firm produces (Pistor, 2002). Product and packaging needs to be altered to be in line with local standards, and higher service fees or certain certificates for services should be obtained due to local regulations. An example of a foreign MNE altering its products due to unfamiliarity is that Ikea had to impregnate all of its wooden furniture in England to comply with fire prevention standards (Inter Ikea Sytems B.V. 2014);

4. In addition, unfamiliarity with local law and regulations may lead to potential contracting conflicts with local employees or suppliers (Daamen et al. 2007); 5. Zaheer (1995) showed that German banks were better able to forecast

changes in the Deutsche Mark compared to British banks in Germany as British banks were rather unfamiliar with the German banking environment. These increased costs due to less accurate forecasting is an additional liability that local firms do not face;

incurred with regard to its internal organization, it can be seen as relational costs as well;

7. As foreign MNEs may hire the right personnel through its own organization, it may face increased relational costs by hiring expatriates as they tend to be a more expensive workforce (Wederspahn, 1992);

8. MNEs can face increased costs by discriminatory activities of the local institutional environment such as additional taxes (Heckemeyer & Overesch, 2013), this is reflected in a survey of Forbes (2015), in which foreign MNEs indicated African countries (bottom 60%) as a tax-unfriendly environment; 9. In addition, a local government may impose higher standards for foreign firms

to make sure they will contribute to the local environment. For example, food-producing firms are often subjected to discriminatory hazards such as higher quality and safety standards compared to local food producing firms (Jayasuriya et al. 2006);

10. To prevent missteps, or to prevent potential opportunistic behaviour by buyers and suppliers, MNEs tend to increase the specificity of contracts, which increases contracting costs (Elango, 2009). These costs are made on a governance basis, as they are part of the managements way of controlling for risks;

11. All these liabilities together result in an increase of administration costs for the foreign MNE (Buckley & Casson, 1998). The additional efforts of the MNE to hedge problems, increased monitoring and reporting back to the parent all add up to the total amount of governing costs that the local firm would not incur; 12. In addition, Sundaram & Black (1992) showed that foreign MNEs tend to have

governance structures with more authority lines compared to local firms due to a higher intensity of management and increased monitoring, which resulted in more bureaucratic procedures, and therefore higher costs.

4.2 Normative Liabilities

1. In some cases the products or services should be altered due to rules and regulations. However, it is also common that the foreign MNE has to alter certain activities to conform with local norms and values which it was unfamiliar with. Ikea removed all females in their catalogue in Saudi-Arabia due to the cultural value that women are not allowed to display themselves openly in public. Besides the costs Ikea had to make to alter the catalogue, they also received a lot of critique from western countries resulting in higher governance costs as well, as management had to reframe their corporate standards and values (Quinn, 2012);

2. By altering these products, or negotiating about contracts with local buyers, suppliers and institutions, the foreign MNE may face extra costs due to language and cultural differences. When negotiating with potential buyers and suppliers, it is likely that these meetings will have an increased duration compared to meetings with buyers/suppliers from the same country as both parties may be unfamiliar with each other’s negotiation customs (Graham, 1985; Adair, Okumura, Brett, 2001). As these costs are made with regard to the foreign MNE’s organization, these costs are on a relational basis as well; 3. A direct effect of the unfamiliarity with different norms and values can be

experienced between local personnel and expatriates or the management. Conflicts, frustrations and tension is a direct source of increased costs (Daamen et al. 2007);

4. Besides the higher costs incurred due to longer or inefficient negotiations, the foreign MNE may find it necessary to organize its external activities in such way that it becomes more familiar with the local environment and increases its participation with the local environment. This form of more intense relationship management and networking is an additional relational cost for the foreign MNE (Luo, Shenkar & Nyaw, 2002);

6. Another obstacle regarding operating the foreign subsidiary is the operational management in multiple languages. When operating in a foreign country with a different language, procedures, protocols, contracts, signs etc. has to be translated to the local language. These translation costs are not incurred by the local firm (WTO Press 57, 1996);

7. Additional costs can be incurred due to direct discrimination by host country actors. DiMaggio & Powell (1983) related this problem to the legitimacy issue. A foreign MNE can increase its legitimacy by conforming to local actors, referred to as isomorphism, or by increasing its relationships with the local actors;

8. Besides translation costs, a foreign MNE faces direct costs by operating at a distance. This distance results in time lost in communicating information and decision making between local management and HQ management. These costs are incurred on a governance level and referred to as communication costs. These also include the costs of misunderstandings that lead to mistakes (Kindleberger, 1969);

9. Operating at a distance from HQ may also result in conflicts, mainly between HQ executives and subsidiary managers. Typically, subsidiary managers favour the needs for local responsiveness while HQ executives face the need for global integration (Doz and Prahalad, 1984). These conflicting governing perspectives results in finding trade-offs in decisions between HQ and the foreign subsidiary and this may also result into conflicts.

10. HQ conflict costs, communication costs, multiple authority lines and other differences between local firm governance and foreign MNE’s governance together form the global governance costs a foreign subsidiary faces (Masten et al., 1991);

other types of industries. However, certain liabilities are commonly experienced by all foreign MNEs operating in a foreign environment.

Table 2 – Regulatory and Normative liabilities

Hazard Regulatory # Normative # Unfamiliarity Law management

Increased lawsuits

Product/service alterations

Contract conflicts

Less accurate forecasting

Finding the right personnel

1 2 3 4 5 6 Altering activities Negotiation costs

Conflicts due to normative differences 1

2

3

Relational Finding the right personnel

Hiring of expatriates

6

7

Negotiation costs

Local networking

Interaction with local customer base

Translation costs

2

4

5

6

Discriminatory Taxes for being foreign

Higher standards for foreign firms

8

9

Discrimination by host country actors 7

Governance Higher specificity of contracts

Administration costs

More authority lines

10 11 12 Altering activities Communication costs Conflicts with HQ Governing costs 1 8 9 10

5. Methods

horizontal multinational enterprise (MNE), whose subsidiaries are basically replicas of each other. The MNE here aims to copy-paste their activities abroad. Because those operations usually compete on a local-for-local basis, their disadvantages due to its LoF are not experienced by its local competitors. A vertical and mixed MNE may feel the LoF less as a vertical MNE uses its geographically dispersed subsidiaries as stages in a globally integrated value-adding chain. In other words, different subsidiaries are different parts of one, long, chain. These MNEs can exploit economies of global scale or scope. Mixed MNEs have subsidiaries with differentiated roles and levels of integration. Both of the MNEs are likely to experience the LoF less compared to horizontal MNE (Ghoshal & Nohria, 1989). In order to maximize the potential occurrence of the proposed liabilities, only horizontally integrated subsidiaries are included in the sample.

In addition, MNEs were selected on the basis of size (> 5.000 employees), geography (the Netherlands) and nationality (non-Dutch). In order to discover the liabilities faced by managers and top management, we selected managers based on the number of employees they are responsible for, with a minimum of 50 employees. We approached foreign subsidiaries through social media such as LinkedIn, contacting subsidiaries directly by phone and by using personal networks. The interviews were conducted in a semi-structured way. Semi-structured interviews engage interviewees to tell a story, produce a narrative of some sort and incorporate their life-experiences (Wengraf, 2004). As Wengraf (2004) stated: ‘’assuming semi-structured interviewing is easier, you are making a terrible mistake. Semi-semi-structured interviews are not ‘easier’ to prepare and implement than fully structured interviews; they must be fully planned and prepared. It allows the researcher to realize an in depth interview in an interactive way’’ (p. 5).

5.2 Interview Agenda

Interviews took place between February 2016 to June 2016. Respondents were all positioned in top management and were responsible for their whole subsidiary. With respect to location and physical context, all interviews took place at the managers’ office in the subsidiary. Interviews lasted between 1 and 2 hours, and were recorded. Interviews were conducted in English and Dutch and each interviewee was asked to introduce him or herself and the MNE as a whole. In order to guarantee dependability, a semi-structured interview guideline was followed. The interview guideline (Appendix B) was developed following the method as specified in Emans’ (2004) book on developing high quality interview guidelines and interviewing techniques. In addition, the approach of Daamen et al. (2008) was used to categorize possible liabilities into rubrics.

Table 3 - Interview sample

Company Headquarters Employees Industry Position

Engie France >6.300 Multi-technical services Managing director Spie France >38.000 Multi-technical services Managing director Huhtamaki Finland >12.000 Manufacturing General manager MacDonald’s United States >450.000 Restaurants Multi-site director Edelman United States >5.500 Public relations Department director BASF Germany >112.000 Chemicals Regional director BASF Germany >112.000 Chemicals Regional director Media-Saturn

Holding

Germany >65.000 Consumer electronics retailing Multi-Site director

Teijin Aramid Japan >16.000 Chemicals Regional director Fonterra New Zealand >17.000 Manufacturing, retail Director Operations

5.3 Grounded theory

single-case study is modest in terms of numbers, but offers four times the analytical power’’ (p. 27). In addition, Eisenhardt and Graebner (2007), as well as Suddaby (2006), argue that gathering of primary data should continue until a saturation point is reached. In this research, ten interviews were conducted as a saturation point was reached for 19 of the 22 liabilities.

A popular technique used to conduct qualitative research is the grounded theory methodology, originally developed by Glaser and Strauss (1967). It suggests that theory emerges inductively from data collection (Chesebro & Borisoff, 2007). Grounded theory can be used in different types of research, and is often adopted to discover the participants’ main concern and how they continually try to resolve it (Glaser, 1992). Grounded theory, opposed to numerous other methods for qualitative research, seems to leave less space for differences in interpretation and other forms of knowledge building (O’Connor, 2008). Grounded theory is built upon two basic concepts. First, during the data collection the researcher uses ‘’constant comparison’’, in which data is collected and analysed simultaneously. Second, ‘’theoretical sampling’’ is used to determine which data should be collected next. (Sinkovics, Penz, & Ghauri, 2008). Constant comparison allows the researcher to question its method and discover properties and dimensions of the data. This increases the ‘fit’ of the method and the research question that needs to be answered. Variations in patterns can be identified alongside the data collection and it leads to the identification of the saturation point of data collection (Eisenhardt & Graebner (2007). Constant comparison was also used, and allowed for fine tuning interview questions and the ability to raise extra questions in later interviews. For example, the question if managers perceived being part of a foreign MNE as an advantage or disadvantage was added after the first interview. In its editor’s note, Suddaby (2006) noted six critical flaws commonly made by researchers which claim to use grounded theory. This editor’s note is critically taken in consideration when we designed our method. In addition, the seven fundamental components of grounded theory (Sbaraini et al., 2011) were taken into account to ensure our approach is in line with grounded theory.

different topics are marked and the answers are noted. Open coding is used to verify and saturate liabilities. Line-by-line open coding minimizes missing important categories and ensures relevance by generating codes that fir the substantive area under study (Glaser & Holton, 2004). An example how data is coded is provided in Appendix C for the regulatory liability ‘finding the right personnel’. Information that wasn’t useful for our research had not been deleted. However, it is not used for the results or discussion. After each rubric the manager is asked to rank the rubric on a Likert scale from 1 to 7 with regard to the amount of time he or she invests on a daily basis into those activities. With 1 being almost no time, and seven almost all time. As results regarding the Likert scale didn’t yield useful results, it is not included in the results of discussion section. In the searching stage, useful results regarding the proposed liabilities are marked and noted. Finally, in the results and discussion section the results are interpreted. In this research, the goal is to identify if the liabilities exists among the interviewed managers or not, and to what extent.

6. Results

Each of the MNEs in the sample reported to have some kind of problems which can be related to their foreign status in the Netherlands. None of the problems were so severe that it caused them to seize their activities, however, it did cause inefficiencies, challenges and costs. These will not be incurred by Dutch firms for a variety of reasons, which will be discussed per topic. Results are categorized according to Table 2, where each cell is a separate category. Some liabilities are placed in two categories, as some overlap can be present.

6.1 Regulatory hazards

6.1.1 Regulatory unfamiliarity hazards

standards, the chances of breaking laws or regulations are decreased. One manager explained this strategy as follows: ‘’We think that as a multinational company, we have a ‘responsible care’. People associate international companies with high budgets and ´deep pockets´, by using tougher internal audits, we ensure ourselves that external audits and inspections never find something wrong within our facilities. By doing so, we avoid negative publicity and I´m pretty sure we take a leading role in safety, emissions etc.´´. Second, two subsidiaries indicated the use of organizational compliance. When safety or environmental regulations were violated anywhere in the organisation (anywhere around the globe), the new standard would be implemented across the whole organization. By doing so, every subsidiary has to be compliant to the most strict standards, causing an internal policy that is compliant to every law or regulation around the globe, or even stricter. Lastly, three managers indicated that its management took local law management extra serious to ensure that its subsidiary delivers the highest quality to its customers. By focussing on local laws and regulations intensively, they found themselves working more accurate which reduced mistakes. By actively communicating this approach to customers, their brand was often associated with higher quality. In sum, by investing in law management, this foreign subsidiary created advantages that helped them overcome this liability and turn it into an advantage. Two subsidiaries don’t focus on local law more than Dutch competitors, one uses only local employees within their legal departments which made them equal to the local competitors. The other subsidiary only focussed more on local law as some of its clients operated in segments with rapid changing laws and regulations. This caused them to focus more on Dutch laws and regulations, but not with regard to its own operations.

Interestingly, none of the managers recognized or experienced more lawsuits compared to local firms. As one manager stated: ‘’The Netherlands is a very stable country, with no significant political shifts or other disturbances. I cannot imagine that customers or companies would sue us more rapidly than a Dutch company just because we are bigger’’.

and safety standards. Regarding Edelman, the manager stated that the public relations industry doesn’t have specific industry regulations. Their operations are all in line with Dutch laws and regulations and they didn’t need to alter activities to be compliant.

Only two of the subsidiaries felt that they had more conflicts with local personnel, suppliers or other actors than Dutch firms. However, every foreign subsidiary recognized that they sometimes faced discussions that originated from their way of working which differed from that of suppliers or customers. These differences were small and sorted out easily, and never escalated to conflicts. Fonterra uses a Fonterra collective agreement (CAO in Dutch) only, while other firms in the dairy industry joined the dairy collective agreement developed by the labour union and largest firms. This sometimes resulted in disputes with personnel that had worked for competitors before and certain conditions were less favourable. For example, Fonterra’s CA offered a lower salary premium when working on holidays, which resulted in employees referring to their previous employer. This form of ‘cherry picking’ is a direct result of the differences in CAs. In the case of Teijin Aramid, in 2015, 19 percent of the personnel of two sites lost faith in their management with regard to its long-term strategy (RTV Drenthe, 2015). Automation caused a loss of jobs, which was one of the underlying reasons for this conflict. Through an increase of transparency and relocation of personnel, this conflict resolved within half a year.

national activities and market forecasting. One manager within BASF recognized that local players were often able to adapt more quickly to changing demand from the market. However, he also recognized that they were better at predicting the market at longer-terms, and their vision proved to be more sustainable.

The results show that foreign subsidiaries in the Netherlands need to adapt to changes and different laws and regulations. As a consequence, law management is increased and product, production processes or services have to be altered. These costs are not incurred by Dutch firms, which causes a liability of foreignness for the foreign MNE. However, increased law management can allow the firm to prevent fines or negative media attention, and guarantee a high quality towards customers. In forecasting changes in the market, none of the subsidiaries felt they performed less on a national level. However, on a local basis, small changes may be recognized earlier by local customers, indicating to a disadvantage of the MNE. Interesting results are found with regard to lawsuits and conflicts. This disadvantage is mentioned repeatedly in existing literature (Zaheer, 1995; Mezias, 2002b), it seems to be absent for the countries in our sample. This could be explained due to the fact the Netherlands harmonized, to a large extent, its laws and regulations with the European Union and the foreign subsidiary’s increased law management. The results are summarized in Table 4.

Table 4 - Regulatory Unfamiliarity Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Law management 1 YES YES NO YES YES* YES YES YES YES YES

Increased lawsuits 2 NO NO NO NO NO NO NO NO NO NO

Product/service alterations 3 YES YES YES YES NO YES YES YES YES YES

Contract conflicts 4 NO NO NO NO NO NO NO NO YES YES***

Less accurate forecasting 5 NO NO NO NO YES** YES NO NO NO NO

Finding the right personnel 6 YES YES YES NO NO NO NO NO YES NO

* Increased law management for certain clients, not for compliance to the Dutch law and regulations for own activities

6.1.2 Regulatory relational hazards

Regulatory relational hazards focussed on the subsidiaries ability to find the right personnel for the right positions, and if the subsidiaries employ workers from other sites within the organization. In addition, it was examined if these expats are more expensive compared to local employees. Every foreign subsidiary did employ expats on either local site or national headquarters. In addition, each foreign subsidiary acknowledged additional costs related to these employees. Increase in costs occurred through a variety of ways, including providing households, higher salaries or compensating for costs incurred by the employee regarding their housing in the home country. These higher costs of employment are incurred on the local level, which means that local subsidiaries may pay higher costs for their employment base compared to Dutch firms, indicating that they face a cost disadvantage.

While each foreign MNE incurred a disadvantage through higher costs regarding the employment of expats, it is hard to argue that this has a negative impact overall. MNEs are able to find expertise in their organisation that is not available in the local market. Through hiring expats from other subsidiaries, the foreign subsidiary may create a knowledge advantage over local competitors. Regarding finding new personnel, it seems that mostly higher qualified personnel is harder to find. However, it is not clear if this is caused by scarcity or by being a foreign MNE. The results are summarized in Table 5.

Table 5 - Regulatory Relational Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Finding the right personnel 6 YES YES YES NO NO NO NO NO YES NO

Hiring of expatriates 7 YES YES YES YES YES YES YES YES YES YES

6.1.3 Regulatory discriminatory hazards

Regulatory discriminatory hazards are faced when the foreign subsidiary faces a disadvantage through laws, regulations, standards or taxes that a local firm doesn’t face. Interesting results are found regarding discriminatory hazards in the host country. None of the subsidiaries recognized any form of discrimination through laws and regulations, or in paying taxes in the Netherlands compared to local firms. As already mentioned, Dutch law and regulation is harmonized within the European Union and has no barriers to foreign MNEs. More surprisingly, certain managers even indicated that it gave them an advantage within their organisation. As the Dutch tax system was appealing compared to other countries, more revenue flows through the foreign subsidiary compared to other subsidiaries. This doesn’t give direct advantages within the foreign subsidiary with regard to profits or revenue, however, managers indicated that it gave them recognition as a country within the organisation. Their subsidiaries are seen as important players in the whole MNE.

by the globalization in general and harmonisation within the European Union and the high institutional quality of the Netherlands. The results are summarized in Table 6.

Table 6 - Regulatory Discriminatory Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Taxes for being foreign 8 NO NO NO NO NO NO NO NO NO NO

Higher standards for foreign

firms 9 NO NO NO NO NO NO NO NO NO NO

6.1.4 Regulatory governance hazards

Regulatory governance hazards are concerned with the internal organization of the MNE. A MNE may create more detailed contracts for personnel, suppliers or customers to lower risk, or it may have higher administration costs due to reporting back to its headquarters. In addition, multiple authority lines in MNEs may cause a bureaucratic structure that delays operations or increase costs. Regarding the specificity of contracts, only the French MNEs acknowledged this process. In the case of Engie, contracts were highly specified to lower risk and because clients within the industry often take advantage of unspecified contracts. This creates large piles of paperwork, increasing duration of negotiations and costs. An interesting case was observed in the case of Spie, which emphasized on specified contracts which is a part of Spie’s culture. As the manager explained: ‘’We undertake the procedures of contracting only one time. During this time we do it intensively and detailed, and never talk about it thereafter’’. Besides resulting in higher costs, it also prevents misunderstandings or the possibility for opportunism when issues arise. Other subsidiaries didn’t differ in contracting methods compared to Dutch firms.

administration and additional audits. Bureaucratic procedures varied among subsidiaries, one example of bureaucracy was shown by a manager that illustrated the difference between their subsidiaries and local Dutch firm. Subsidiaries within this MNE were allowed to allow payment periods of 30 or 60 days towards it clients. When clients requested for any other amount of days, this was impossible to confirm to. Local firms can act much more flexible in this manner and towards its clients. These costs are not incurred by Dutch firms that don’t have a headquarters above them. Only Media-Saturn Holding eliminated these administration costs notably. Their organizational structure is decentralised, leading to highly autonomous subsidiaries, which only report once a month back to the national headquarters. Subsidiaries which are underperforming are put under increased monitoring and guidance, which in turn increase the subsidiaries administration costs.

In line with results of higher administration costs, managers also recognized more authority lines within its organisation compared to Dutch firms. However, Spie eliminated these costs by creating separate business units when subsidiaries grown too big. By doing so, one authority line was created per business unit. Due to the decentralised structure of Media-Saturn Holding, no additional authority lines were experienced compared to Dutch firms. One extreme case emerged regarding this liability, as the structure MacDonald’s incorporates regional groups of subsidiaries, which communicate intensively. These subsidiaries report to the national headquarters, which in turn reports to the regional headquarters. Finally, regional headquarters reports back to the global headquarters located in the United States.

able to act quicker and more flexible compared to the foreign MNE, creating a disadvantage for the MNE. The results are summarized in Table 7.

Table 7 - Regulatory Governance Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Higher specificity of contracts 10 YES YES NO NO NO NO NO NO NO NO

Administration costs 11 YES YES YES YES YES YES YES NO YES YES

More authority lines 12 YES NO YES YES YES YES YES NO YES YES

6.2 Normative hazards

6.2.1 Normative unfamiliarity hazards

Normative unfamiliarity hazards originate from the differences between the host and home country’s norms and values, in which the foreign MNE couldn’t anticipate on these differences due to unfamiliarity. In the case of altering activities, only one foreign subsidiary didn’t recognize this liability. In the case of Huhtamaki, it was surprisingly the other way around, as the Dutch operations were leading within the organization, resulting in a high request of inputs and advice by the headquarters and other subsidiaries. For the other foreign MNEs, managers experienced differences between home country norms and values and those in the host country. An example in one of the cases was the implementation of strict safety measures which were required in the home country, but were not common practice in the Netherlands. Management didn’t want to implement these measures, but were required by its headquarters to do so.

take a long time to make decisions and referred to the Dutch ‘poldermodel’, in which different parties try to meet each other in the middle. This means that negotiations don´t take longer for foreign subsidiaries compared to local firms, however, negotiations take longer compared to other subsidiaries within the foreign MNE.

In the case of which normative difference have led to conflicts, three foreign subsidiaries had experienced this once. Different reasons were the cause of this, in which one manager gave an example in which differences in the way business was done led to frustrations of one party towards the other, resulting in a conflict. None of the managers faced conflicts which were unable to sort out shortly after. Several subsidiaries used their local sales managers to lead negotiations, which eliminated possible issues regarding normative differences. Others indicated that differences were known beforehand and were taken into account.

Normative differences may be hard to quantify beforehand as it is difficult to observe. As local firms are embedded in their own environment, alterations of activities won’t be present here, resulting in a disadvantage for foreign MNEs. Results regarding negotiation costs and possible conflicts show the existence of this liability, but it varies across different MNEs. Strategies to prevent issues originated from normative differences appear to be difficult, however, transparency and preparation definitely lowers the probability. The results are summarized in Table 8.

Table 8 - Normative Unfamiliarity Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Altering activities 1 YES YES NO YES YES YES YES YES YES YES

Negotiation costs 2 NO NO YES YES NO NO NO NO YES NO

Conflicts due to normative

differences 3 NO NO YES NO YES NO NO YES NO NO

6.2.2 Normative relational hazards

the managers indicated they network more locally due to normative differences. However, two managers indicated they networked more compared to Dutch firms. In the case of Spie this was because it is the MNE’s strategy to ensure a tight relationship with its clients. For Teijin Aramid, it was a way to actively incorporate Japanese management into its operation in order to explain how local management operates and how the Dutch market works.

The emphasis on interaction with local customers wasn’t more intense as well. However, again as part of their strategy, Spie and Fonterra used close interaction with local clients to involve them in their service operations and production process, respectively. Other subsidiaries indicated Dutch firms interact with customers on the same basis as themselves.

Each foreign MNE incurred translation cost, in one way translating from Dutch to English, or in the more extreme cases translating host country documents into English. All MNEs used English as their organisational language, however, some switched only recently resulting in a lack of quality. As one manager indicated: ‘’Sometimes we receive documents in English that are literally translated, then we end up translating bad English documents to proper English, or Dutch’’. In addition, invoices to clients or customers and local legal documents are all in Dutch, resulting in the translation to English when reporting back to the headquarters. One manager indicated this was a necessary practice, as managers at the headquarters are not able to distinguish an invoice and subpoena when both are written in Dutch.

translating, which are not incurred by Dutch firms. The results are summarized in Table 9.

Table 9 - Normative Relational Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Negotiation costs 2 NO NO YES YES NO NO NO NO YES NO

Local Networking 4 NO YES NO NO NO NO NO NO YES NO

Interaction with local

customer base 5 NO YES NO NO NO NO NO NO NO YES

Translation costs 6 YES YES YES YES YES YES YES YES YES YES

6.2.3 Normative discriminatory hazards

Normative discriminatory hazards refer to cases in which personnel, suppliers or customers prefer local, Dutch firms over foreign MNEs, which result in a disadvantage for the MNEs. None of the managers have experienced this during their time being. In addition, several managers stated they even couldn’t imagine that Dutch customers, suppliers or personnel would take a MNE’s nationality into account. As one manager illustrated: ‘’I believe that actors in our industry decide on the basis of quality, not nationality’’. Both managers of BASF even argued that customers in their industry favoured BASF over local firms, as their brand and size gave the feeling to customers that they wouldn’t go bankrupt or engage in opportunism.

These results show that, for at least foreign MNEs in the Netherlands, this liability of foreignness is absent, or in the case of BASF, is even reversed. Again, this can be explained by globalization, and that Dutch people are used to international firms and people in such extent, that they don’t discriminate among them. The results are summarized in Table 10.

Table 10 - Normative Discriminatory Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Discrimination by host country

6.2.4 Normative governance hazards

Normative governance hazards arise from normative differences between local management and management at headquarters level. These include extra costs local management face in communicating with headquarters management, conflicts with headquarters management and general governing costs, which can arise from governing activities which are only present in MNEs.

Communication costs were clearly recognized by each foreign MNE. Managers indicated they communicated on a weekly, or even daily basis with HQ. Need for communication could arise at both sides. In the case of Teijin and Fonterra, difficulties regarding time differences made communication harder. Even in the case of Spie and Media-Saturn Holding, which differed in organizational structure compared to the other foreign MNEs, managers recognized costs related to communicating with HQ.

While each manager of the foreign subsidiary had discussions, sometimes quite severe, only Teijin Aramid could provide an example of a conflict between local management and HQ management. Not surprisingly, the conflict originated from normative differences, which appeared substantial between the Netherlands and Japan.

Each manager recognized differences in their operations compared to local firms with respect to governance structure. Reporting to HQ, bureaucratic procedures and specialized systems were the most common examples. In addition, some managers indicated that it took some time to become familiar with the foreign MNE’s culture and procedures. Managers indicated that Dutch firms without foreign headquarters could make important decisions quicker, and would spend less time on reporting, administration and MNE related activities.

costs compared to local firms with regard to these activities. The results are summarized in Table 11.

Table 11 - Normative Governance Hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Altering activities 1 YES YES NO YES YES YES YES YES YES YES

Communication costs 8 YES YES YES YES YES YES YES YES YES YES

Conflicts with HQ 9 NO NO NO NO NO NO NO NO YES NO

Governing costs 10 YES YES YES YES YES YES YES YES* YES YES

* Smaller compared to other subsidiaries due to decentralized structure

6.3 Additional hazards and advantages

Several managers indicated that Dutch laws and regulations were unnecessarily strict compared to other countries. Two managers stated that due to high penalties and severe regulations, clients become increasingly risk averse which tempers innovation. They claim that developing new practices, and improving own operations are antagonized due to strict regulations. However, not every foreign subsidiary acknowledged this, while two managers recognized differences between Dutch laws and regulations and laws and regulations in other countries, but indicated they were explainable or gave a feeling of safety and high quality within the industry.

6.3.1 Disadvantages of being part of a foreign MNE

manager believed his subsidiary should increase its customer focus, as whole departments never met a client. Fifth, probably the largest disadvantage presented by managers was the presence of bureaucracy. This further reduces flexibility and disables the subsidiary to make resolute decisions. One extreme example was presented in the case of Fonterra, in which local management aimed to hire a telecom firm for installing fibreglass. They were not allowed to approach Dutch largest telecom provider, KPN directly. Instead, New Zeeland HQ outsourced this activity to its New Zeeland’s partner Spark, which in turn approached its partner in Hong Kong, this partner had a joint venture in the United Kingdom with a firm. In turn, this firm had a partnership with KPN. Through this route KPN was hired to do the job. This example illustrates the severity of bureaucratic procedures within MNEs, as a local firm would have approached KPN directly, saving a lot of time. Lastly, small incidents that occur locally can be taken up as huge accidents when HQ is located far away from the subsidiaries operations. One manager showed that when small news is presented on a local website, HQ was notified automatically. HQ often enlarged small problems, which in turn required local management to explain what really happened and put it into context. From this point local management directly communicated with HQ when small incidents occurred to prevent these misunderstandings. Local firms do not face these problems as their management is more closely involved with its operations.

6.3.2 Advantages of being part of a MNE

investment plan and risk assessment to HQ management. When approved, the subsidiary gets access to fund the investment with internal capital. Local firms that lack these high amounts of capital have to raise capital through the market, which leads to interest payments and lower margins. Fourth, each foreign subsidiary used local ‘best practices’ to increase the standard for other subsidiaries as well. Successful marketing campaigns, new production processes increasing efficiency or better safety standards are shared among the whole organization, allowing local subsidiaries to improve themselves without conducting research on their own. One manager showed that each subsidiary received a document at the end of the week in which best practices and lessons learned were shared. In turn, it was the local management’s task to see which measures would be beneficial for its own subsidiary as well, and implement it when possible. This sharing of best practices gives the foreign subsidiary an advantage over local firms that do not have access to firm´s experiences in other countries. Fifth, one manager showed the advantage of a MNE to relocate operations. At the local subsidiary level, one of their activities was no longer allowed due to a change in European regulations. As a consequence, the headquarters relocated the activity to a subsidiary outside Europa. In doing so the organisation as a whole could continue its operations for international clients, while local competitors had to seek for alternative inputs or seize this production process entirely. Lastly, one manager argued that due to their size, they had more influence on national politics. As the manager explained: ‘’When we approach a minister at a large congress, he is always willing to listen to us as he knows we are an important player for the local economy. On the other hand, the minister won’t waste his time on a small company with only 50 employees’’. The results of the extra questions are summarized in Table 12.

Table 22 – Additional hazards

Company Manager: Liability: En gi e Spi e H u h tam aki Mac -Don al d ’s Ed e lm an BA SF M 1 BA SF M 2 M e d ia -S atu rn H o ld in g Te ij in A ra m id Fo n ter ra

Dutch regulatory environment

too strict YES YES NO YES NO NO* NO YES NO NO*

Threshold for investment YES YES YES YES YES YES YES YES YES YES

* Managers recognized strict laws, regulations and standards, but thought they were explainable or realistic

6.4 The role of institutional distance

Throughout the interviews the role of differences between the institutional environment of the Netherlands and the home country was discussed. Differences between the Netherlands and the home country can differ between the regulatory- and normative pillar, and vary between countries. While each manager provided some examples that indicate that institutional difference is a key driver behind the liability of foreignness, the most interesting examples will be discussed.

An interesting example can be found in the case of Fonterra, which headquarters is located in New Zeeland. Regarding safety measures it is common practice in New Zeeland to increase safety measures and lower risks when possible. This was illustrated by an interesting example: ‘’Headquarters tried to implement a mandatory safety measure regarding cycling. When using a bike on the Fonterra’s terrain, each employee was required to wear a helmet. Well, in Holland we won’t even think about doing that. It is typically something for New Zeeland, when they have a pool, they build a fence around it to prevent children to fall into the water. Here in the Netherlands, people teach their children to swim or recognize the possible dangers’’. Not surprisingly, such measure wouldn’t be implemented by German or French headquarters, which are much more familiar with the Dutch standards. In New Zeeland these safety measures are institutionalized, while in the host country, in this case the Netherlands, these practices are less intense.

foreign subsidiary to cope with them and overcome them. This indicates that the institutional distance is a key driver behind the severity of a certain liability. In addition, in the case of Teijin Aramid, the manager had experienced meetings in Japan in which were conducted in Japanese. As Japanese people tend have weaker skills in English, they don’t feel comfortable talking in a different language. During this meeting Japanese was translated simultaneously to the Dutch manager. (S)he recognized this difference also when communicating from the Netherlands with the Japanese management, severely increasing communication inefficiency. Again, while doing business in English is institutionalized in MNEs in the Netherlands, this may not be the case for other parts of the organization which are located in different countries. Lastly, one manager of a German MNE recognized differences in reporting style when reporting to its headquarters in Germany or to a specialized department in the United States. (S)he found the German way of reporting quite similar to Dutch standards, with the difference that Germans tend to be more punctual and detailed. However, the manager felt that in the United States it was common practice to measure, register and report everything, just in case it will be helpful in the future. The department in the United States often requested data that wasn’t measured locally. When informing about the need of the data, the manager recognized gathering the data won’t create any addition value. This normative disadvantage for local subsidiaries are clearly driven by institutional distance, as in this case HQ in Germany demand different standards compared to the specialized department in the United States.

Regarding discriminatory hazards, interesting results were found. Managers perceived the Netherlands as a stable environment with high institutional quality. Contracts are respected, the law is actively enforced and no large shifts or disturbances occur in politics and the economy. This is reflected in the interviews regarding regulatory and normative discriminatory liabilities, as they all appeared to be absent. As the institutional environment is similar, or as highly developed as the local country, foreign MNEs didn´t face any hazards regarding its local legitimacy.

6.5 Summary of results