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Theme 4: Home and Host Countries (Complete Summary)
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Theme IV: Home and Host Countries andConcepts of Distance
Lecture, Literature & Notes
By AceAcademy ©
, Theme IV: Home and Host Countries and Concepts of
Distance
Impact of Geographic Proximity on Multinational Enterprise (MNE)
Performance
MNE success is greatly influenced by two factors:
1. The liability of foreignness; and
2. Distance
The central concept is that when multinational enterprises (MNEs) operate across
international borders, the geographical distance they navigate plays a crucial role in shaping
their success. This distance can affect various aspects of their operations, including their
ability to accurately evaluate opportunities and threats. Moreover, even after establishing a
presence in a foreign country, MNE subsidiaries may encounter challenges in competing with
local businesses.
Questions to Explore:
1. What specific type of distance are we referring to, and why is it significant in the
context of MNE success?
2. How does geographical distance impact MNE operations and performance?
3. What factors can either exacerbate or mitigate the challenges posed by this distance?
4. How does the Liability of Foreignness (LOF) concept tie into this discussion,
particularly in relation to cultural, institutional, and psychic distances? How can LOF
have both negative and positive effects on MNEs, influencing their choice of entry
mode and market selection?
In essence, this discussion revolves around the idea that geographical distance, coupled with
the concept of Liability of Foreignness, can significantly influence the success and decision-
making processes of multinational enterprises as they navigate foreign markets.
Liability of Foreignness (LOF)
Liability of Foreignness (LOF) serves as a foundational concept underpinning various
theories related to Multinational Enterprises (MNEs), including the Internalization theory, the
Ownership-Location-Internalization (OLI) paradigm, and the Uppsala model.
In the context of LOF, MNEs often find themselves at a disadvantage compared to
local competitors when operating in a host country. This disadvantage stems from
several factors, including the increased costs associated with conducting business
abroad and the inherent non-local status of MNEs. These ideas were initially explored
by Hymer in 1976.
The disadvantages that MNEs face when operating in foreign markets, as articulated
by Zaheer in 1995, can be attributed to various factors:
o Spatial distance, encompassing expenses related to travel, transportation, and
coordination.
o Unfamiliarity with the host country, resulting in adaptation and learning costs.
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