How can MNCs overcome Liability of Foreignness? Localization and Experience as a Moderator of the Relationship between LOF and Performance

Foreign subsidiaries of multinational enterprises face numerous challenges stemming from their lack of familiarity with local languages, cultures, legal/policy frameworks and embedded customs in the host country. As such, MNEs wishing to expand globally strategize on how to effectively curb and manage the Liability of Foreignness (LOF) – that is, the tangible and intangible costs incurred on foreign subsidiaries that place them at a disadvantage compared to domestic firms. The literature on LOF confirms the negative impact of LOF on foreign subsidiary performance, but few address how to successfully overcome these liabilities. This study aims to further our understanding on foreign market entry by exploring the roles of LOF and localization as determinants of foreign subsidiary performance. Using a sample of 166 Korean companies in 28 countries, we empirically analyze LOF variables (cultural distance, local competition) and localization variables (local experience, hiring of local managers) to confirm their effects on subsidiary performance and corroborate the interplay between these variables. While cultural distance and local competition negatively affect subsidiary performance, our findings show that cultural distance can be bridged with local market experience while hiring of local managers allows subsidiaries to more effectively compete against domestic rivals.