Foreign firms face additional costs arising from distance. Of course, distance here dose not only mean the geographic distance, but also distance from different cultures, perceptions, institutions and rules.
Geographic distance brings the most obvious impact. Foreign firms must undertake additional costs caused by transportation and communication. They are all about money and it’s tangible. But as the development of information and communication technology and globalization, this cost will keep reducing.
Different cultures may increase the difficulty of understanding the practices in host countries. And also, it may increase the costs of internal governance. For example, Haier in America, at the beginning it was really in trouble about the reward system. In China, if an employee does a bad job, supervisor can criticize him/her in a public meeting, but in America, supervisors are not going to do this because you emphasize human rights so much. Then Haier changed its way. Instead, it began to praise ones who did good jobs. Another question comes. This made someone else to be jealous. Finally, it changed rewards to money. It took a long time to make it right. So this kind of things is always not to be educated, but to practice by yourself because we hold different philosophy.
There are numerous differences in formal and informal institutions governing the rules of the game in different countries. While local firms are already well versed in these rules, foreign firms have to invest resources to learn such rules. Some of these rules are in favor of local firms. Like China, Jack Ma said that you can fall in love with Chinese government, but never marry her. We can call it like this, a firm must keep a close relationship between government and keep far away from politics. It may be a little hard to understand, because it’s a conclusion drew by Chinese entrepreneurs with five thousand years accumulation. How can a foreign firm know this as soon as it enters.
I just want to say sometimes it can change everything. Like Rockefeller, the Standard Oil Company, the U.S. government even needs an antitrust act to make the balance of oil industry, how can SINOPEC compete with it in America.
Liability is obvious, but under certain circumstances, being foreign can be an asset.
With most countries realizing the importance of being open, they provide foreign firms with tremendously attractive favorable policies which local firms will never get. Japan is a good example. It introduced several policies like, preferential tax policy, debt guarantees from government, financing from central bank and higher limit of loans. After China’s reform and opening, our government also gives such policies.
Economies of scale and economies of scope. To put it simply, cost per unit will reduce associated with increasing the scale of production or producing two or more products. Auto companies are good examples. Like Mercedes-Benz and BMW, they have established their factories in China and America, and also, they produce several models based on one platform, like BMW’s 5 series sedan and 5 series touring and X5.
Every country has its own strong point. German cars are viewed as of higher quality and made-in-Switzerland watches are the best in the world. Sometimes Chinese treat made-in-China products as inferior, but we will never buy a ceramic teapot which is made in USA. So consumers from host countries may think that foreign products have better quality when the home country of the firm has a higher level of technology in this specific area. And good reputation here is not only because of its fame, but also because there may be a situation that consumers from host country sometimes do not give indigenous firms much credit because they always use their close relationship between government or even bribe. So they may consider that foreign firms are more legal, they more deserve what they get.
Finally, to adapt local market, imitating local firms is a good way to avoid liability of foreignness. In a word, firms which can adjust instantly, wherever they are, are always good. Liability of foreignness is not unavoidable.
