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 from various sectors with innovation activities in Germany. We find that foreign-controlled firms are not challenged by liability of foreignness at the idea generation stage. The lack of local embeddedness becomes more problematic as projects have to be prioritized and managed. We identify these problems by the more frequent mistakes and delays that accompany them. We argue that this is the result of shared practices within the multinational firm that do not readily fit into the local context. However, multinational firms that can leverage their unique capability of transferring scientific knowledge across borders are significantly less prone to suffer from liability of foreignness.
Sofka, Wolfgang (2007), Innovation Activities Abroad and the Effects of Liability of Foreignness: Where it Hurts, Working Paper Series 2007-2008 Georgia Tech Center for International Business Education and Research (CIBER) Working Paper 031-07/08, Atlanta. Download