Innovation Activities Abroad and the Effects of Liability of Foreignness: Where it Hurts

The innovation activities of foreign subsidiaries have been identified as an important source of competitive advantage for multinational corporations. The success of these engagements depends heavily on tapping host country pools of localized expertise. To achieve this foreign subsidiaries have to overcome cultural and social barriers (liability of foreignness). We derive potential stumbling blocks in the innovation process theoretically and argue that these materialize as neglected projects, cancellations or budget overruns. We test these hypotheses empirically for more than 1,000 firms with innovation activities in Germany from various sectors. We find that foreign-controlled firms are not challenged by liability of foreignness at the project mobilization stage. The lack of local embeddedness becomes more binding as projects have to be prioritized and managed which we identify as more frequent mistakes and delays. We argue that this is the result of shared practices within the multinational firm that do not readily fit into the local context. Finally, we derive management recommendations how foreign innovation engagements can achieve similar levels of effectiveness and efficiency as host country competitors. --Liability of foreignness,offshoring R&D,internationalization,innovation management

What Makes Foreign Knowledge Attractive to Domestic Innovation Managers?

This study focuses on the early stages of international innovation activities, i.e. the organizational processes through which promising ideas from around the globe are collected and evaluated. We ask: What characteristics make foreign knowledge interesting to domestic R&D managers? We envision this process as a balancing act between direct transaction costs for communication and coordination and indirect transaction costs from overlooking or misinterpreting important global trends. These hypotheses are tested through a conjoint analysis among 158 heads of R&D departments of German high-tech firms. We find that uncertainty avoidance is the most important driver. Radically new ideas from dynamic markets are most attractive and must not be overlooked. Complementarities with existing knowledge stocks and low language barriers are also important but to a lesser degree. Interestingly, we find no distinction between market and technological impulses. --Globalization,sensing,innovation impulses,conjoint analysis

There's no Place Like Home: A Strategic Framework to Overcome Liability of Foreignness in the German Car Market

Globalization has led to exciting new business opportunities around the globe. Still, national and cultural boundaries have not evaporated into a "borderless world". Several studies have identified so-called liabilities of foreignness that arise from a lack of embeddedness and roots in the host market and subsequent competitive disadvantages. Countervailing strategies for these effects have remained scarce so far. We suggest that this is due to the lack of a viable approach to identify and quantify these effects and develop a conceptual framework to empirically estimate the individual degree of liability of foreignness of a firm from a market perspective. We suggest that disruptive changes in a society change the dynamics of liability of foreignness and generate opportunities for foreign companies to optimize their localization strategies. We apply our approach to a large mature market with established international competition : the German new car market. For a comprehensive sample of roughly 1,400 car models from 2003 we estimate the relative turnover disadvantage for all major foreign manufacturers. We find that most foreign producers have managed to overcome liabilities of foreignness in Germany through firm-specific advantages. Still, some face significant challenges. A submarket analysis shows that home market advantages are more deeply rooted in the Western part of Germany and that foreign competitors find a more accessible competitive environment in Eastern Germany. Therefore, East Germany is a superior platform for deploying effective and efficient countervailing strategies. Moreover, we identify a broader rationale to engage early and decisively in untapped but promising markets like China. --Liability of foreignness,automotive market,multinational strategy,seemingly unrelated regressions

The pulse of liability of foreignness: dynamic legitimacy and experiences effects in the German car market

Globalization has provided many companies with new opportunities for growth and efficiency. This requires them to operate successfully across cultural and social borders. These can be stumbling blocks to internationalization and have been found to cause frequent errors and delays for multinational companies. Such liabilities of foreignness are persistent in nature. We investigate the causes behind these detrimental effects. We identify two major factors conceptually: a lack of legitimacy in the host country on the demand side and a lack of responsiveness on the side of the multinational corporation. We test these hypotheses empirically using a comprehensive sample of the German car market, which is especially suitable due to its established domestic producers and international competitors. Our results suggest that the two factors interact. For less experienced customer groups, we find that legitimacy is the dominant factor behind the effects of liability of foreignness. As customer experience increases, liability of foreignness caused by a lack of responsiveness becomes more of an issue. --Liability of foreignness,internationalization strategy,globalization

Search Patterns and Absorptive Capacity: A Comparison of Low- and High-Technology Firms from Thirteen European Countries

Searching for externally available knowledge has been characterised as a vital part of the innovation process. Previous research has, however, almost exclusively focused on hightechnology environments, largely ignoring the substantial low- and medium-technology sectors of modern economies. We argue that low- and high-technology firms differ in their search patterns and that these moderate the relationship between innovation inputs and outputs. Based on a sample of 4,500 firms from 13 European countries we find that search patterns in low-technology industries focus on market knowledge while they are built around differences in technology sourcing activities for high-technology industries. --Absorptive capacity,search strategies,low-,medium- and high-technology sectors,open innovation

Innovation on Demand: Can Public Procurement Drive Market Success of Innovations

Public procurement has been at the centre of recent discussions on innovation policy on both European and national levels (e.g., Aho-Report, Barcelona Strategy). It has a large potential to stimulate innovation since it accounts for 16% of combined EU-15 GDP. We embed public procurement for innovation into the broader framework of public policies to stimulate innovation: regulations, R&D subsidies and knowledge infrastructure (i.e. basic research at universities). We synthesize the characteristics of all four instruments based on existing literature and quantitatively compare their effects on innovation success. Our empirical investigation rests upon a survey of more than 1,100 innovative firms in Germany. Our survey puts us in the position to trace all sources of valuable innovation impulses, namely public customers, law and regulations, universities and public funding for R&D. We relate these sources back to innovation success. We find that (non-defense related) public procurement and knowledge spillovers from universities propel innovation success equally. In a second step, we explore whether these effects vary across firms (e.g. size, location, industry). The benefits of university knowledge apply uniformly to all firms. However, public procurement is especially effective for smaller firms in regions under economic stress as well as in distributive and technological services. Based on these findings targeted policy recommendations can be developed. --Innovation policy,public procurement,comparison of instruments,innovation success

There is no Place Like Home: A Strategic Framework to Overcome Liability of Foreignness in the German Car Market

Globalization has led to exciting new business opportunities around the globe. Still, national and cultural boundaries have not evaporated into a borderless world. Several studies have identified so-called liabilities of foreignness that arise from a lack of embeddedness and roots in the host market and subsequent competitive disadvantages. Countervailing strategies for these effects have remained scarce so far. We suggest that this is due to the lack of a viable approach to identify and quantify these effects and develop a conceptual framework to empirically estimate the individual degree of liability of foreignness of a firm from a market perspective. We suggest that disruptive changes in a society change the dynamics of liability of foreignness and generate opportunities for foreign companies to optimize their localization strategies. We apply our approach to a large mature market with established international competition: the German new car market. For a comprehensive sample of roughly 1,400 car models from 2003 we estimate the relative turnover disadvantage for all major foreign manufacturers. We find that most foreign producers have managed to overcome liabilities of foreignness in Germany through firm-specific advantages. Still, some face significant challenges. A submarket analysis shows that home market advantages are more deeply rooted in the Western part of Germany and that foreign competitors find a more accessible competitive environment in Eastern Germany. Therefore, East Germany is a superior platform for deploying effective and efficient countervailing strategies. Moreover, we identify a broader rationale to engage early and decisively in untapped but promising markets like China.Liability of foreignness, automotive market, multinational strategy, seemingly unrelated regressions

Formal and Strategic Appropriability Strategies of Multinational Firms: A Cross Country Comparison

International knowledge spillovers, especially through multinational companies (MNCs), have recently been a major topic of discussion among academics and practitioners. Most research in this field focuses on knowledge sharing activities of MNC subsidiaries. Relatively little is known about their capabilities for protecting valuable knowledge from spilling over to host country competitors. We extend this stream of research by investigating MNC appropriability strategies that go beyond formal methods (patents, copyrights, trademarks) to include strategic ones (secrecy, lead time, complex design). We conceptualize the breadth and depth of a firm?s knowledge protection strategies and relate them to the particular situation of MNC subsidiaries. Moreover, we argue that their approaches differ with regard to host country challenges and opportunities. We address these issues empirically, based on a harmonized survey of innovation activities of more than 1,800 firms located in Portugal and Germany. We find that MNCs prefer broader sets of appropriability strategies in host countries with fewer opportunities for knowledge sourcing. However, munificent host country environments require targeted sets of appropriability strategies instead. We deduce that these results are due to a need for reciprocity to benefit fully from promising host country knowledge flows. --Appropriability,Multinational Companies,Patenting

Managing Search Strategies for Open Innovation: The Role of Environmental Munificence as well as Internal and External R&D

Firms compete increasingly in an open innovation environment. Search strategies for external knowledge become therefore crucial for firm success. Existing research differentiates between the breadth (diversity) and depth (intensity) with which firms pursue external knowledge source. A consensus exists that resource constrains force firms to balance both dimensions. However, relatively little is known on how managers can selectively strengthen one of these dimensions. We argue conceptually that the breadth and depth of a search strategy depends upon the nature of a firm's absorptive capacity (i.e. whether they are built through internal or external R&D activities) and the munificence of its innovation environment. We test these hypotheses empirically for a large sample of more than 8,300 firms from 12 European countries. Our empirical results show that in-house R&D strengthens the depth of a firm's search strategy while external R&D activities (e.g. contract research) increase its breadth. Moreover, we find that scarce innovation environments favor deep search strategies while breadth is more prevalent in munificent environments. We develop targeted management recommendations based on these results. --Open innovation,absorptive capacity,search strategies

Lost in Translation: Empirical Evidence for Liability of Foreignness as a Barrier to Knowledge Spillovers

Entering host country networks of knowledge flows (new competencies, innovative technologies, and lead-market knowledge) is a major rationale of multinational firms for investing abroad. Foreign firms find it difficult to overcome cultural and social barriers which make their foreign engagements more strenuous and error prone (liability of foreignness). In our analysis we break down the complex mechanisms behind knowledge spillovers and identify conceptual links with liability of foreignness. We hypothesise that liability of foreignness acts as a filter for foreign firms, restricting their access to host country knowledge. We use a broad sample of roughly 1,000 firms in Germany to empirically test the existence of liabilities of foreignness in leveraging knowledge spillovers. Our particular setting allows us to distinguish between upstream (suppliers, academia) and downstream (customers) liabilities of foreignness. We find that multinational firms can compete on an equal footing with host country rivals when it comes to generating impulses for innovations from suppliers and academia. They are significantly challenged by liabilities of foreignness, though, where customers are involved. We suggest that the frictional losses from a lack of social and cultural embeddedness (liability of foreignness) in the host country are especially relevant when promising lead customers have to be identified and their tacit and often unarticulated impulses have to be transferred, understood and prioritised. --Liability of foreignness,knowledge spillover,globalisation,trivariate probit