Theme 4: Home and Host Countries and
Concepts of Distance
Influence of Distance on MNE Success
● Liability of Foreignness
● Distance
Central idea→ Crossing an international boundary is not without difficulty in accurately
assessing opportunities and threats and even once in a host country subsidiaries may face
disadvantages relative to local competitors
Which distance? Cultural, institutional, psychic…
Why does it matter? Negative or positive effect
What does distance affect? Entry mode, market selection
What aggravates/ alleviates distance? Moderators: experience
Liability of Foreignness (LOF)
● LOF the fundamental assumption driving theories of MNEs
(Internalization theory, OLI paradigm, Uppsala model)
● MNEs at a disadvantage to local competitors in a host country
○ Costs of doing business abroad, non-local status (hymer, 1976)
● Disadvantages to operating in a foreign market due to (zaheer, 1995)
○ Spatial distance: Travel, transportation & Coordination costs
○ Unfamiliarity with the host country, adaptation & learning costs
○ Lack of Legitimacy, (economic) nationalism by local stakeholder
○ Home country restrictions on host-country activities increase the costs of
doing business
● To overcome LOF, MNEs need to provide foreign subsidiaries with FSAs (traditional
view)
How to reduce LOF?
Isomorphism partially mediates the
relationship between distance &
performance (regulatory & economic
distance disappears, but not cultural
distance)
, Concept of distance
● Among one of the most important stream of research in IM
● 4 decades of distance-related research but, no clear consensus on which is the best
distance to consider in IM
● MNEs at a disadvantage in the host economy compared to domestic firms (LOF) a
result of distance (Ghemawat,2001)
● Difficult to anticipate the effect of distance
● MNEs overcome distance with FSAs or using isomorpgism strategy
● Distance normally assumed to have a negative impact, but there are examples of
evidence for positive effects on IB value creation
Hutzschenreuter, Kleindienst & Lange (2016) - The concept of distance in international
business research: A review and research agenda
Main idea: Distance is the extent of differences between country pairs that prevent/disturb
information flows between firms and markets
What is distance?
● In the IB context, distance typically refers to the extent of differences between
country paris
● Assumption: differences prevent or disturb the information flows between firms &
markets
● Distance introduces friction & complexity to cross-border activities and increase the
challenges
Distance measurement:
○ Cultural
■ Most frequently used
■ Increased complexity to deal with foreign partners, hence more risky
investments
● Relatively small investments or low level of commitment or no
local partners established
● Globe Project
● Survey of Values
● Hofstede Cross-cultural dimension
● Study of Event Management
● World Values survey
○ Institutional
■ Cultural distance does not entirely capture the complexity associated
with cross-border activities
■ Ecnompasses differences in the regulatory, normative and cognitive
pillars of institution
■ often measured with
● World Bank’s governance indicators
● Economic Freedom index
■ Factors that increase distance
● Barriers to trade
● Unilateral
● Institutional infrastructure
Concepts of Distance
Influence of Distance on MNE Success
● Liability of Foreignness
● Distance
Central idea→ Crossing an international boundary is not without difficulty in accurately
assessing opportunities and threats and even once in a host country subsidiaries may face
disadvantages relative to local competitors
Which distance? Cultural, institutional, psychic…
Why does it matter? Negative or positive effect
What does distance affect? Entry mode, market selection
What aggravates/ alleviates distance? Moderators: experience
Liability of Foreignness (LOF)
● LOF the fundamental assumption driving theories of MNEs
(Internalization theory, OLI paradigm, Uppsala model)
● MNEs at a disadvantage to local competitors in a host country
○ Costs of doing business abroad, non-local status (hymer, 1976)
● Disadvantages to operating in a foreign market due to (zaheer, 1995)
○ Spatial distance: Travel, transportation & Coordination costs
○ Unfamiliarity with the host country, adaptation & learning costs
○ Lack of Legitimacy, (economic) nationalism by local stakeholder
○ Home country restrictions on host-country activities increase the costs of
doing business
● To overcome LOF, MNEs need to provide foreign subsidiaries with FSAs (traditional
view)
How to reduce LOF?
Isomorphism partially mediates the
relationship between distance &
performance (regulatory & economic
distance disappears, but not cultural
distance)
, Concept of distance
● Among one of the most important stream of research in IM
● 4 decades of distance-related research but, no clear consensus on which is the best
distance to consider in IM
● MNEs at a disadvantage in the host economy compared to domestic firms (LOF) a
result of distance (Ghemawat,2001)
● Difficult to anticipate the effect of distance
● MNEs overcome distance with FSAs or using isomorpgism strategy
● Distance normally assumed to have a negative impact, but there are examples of
evidence for positive effects on IB value creation
Hutzschenreuter, Kleindienst & Lange (2016) - The concept of distance in international
business research: A review and research agenda
Main idea: Distance is the extent of differences between country pairs that prevent/disturb
information flows between firms and markets
What is distance?
● In the IB context, distance typically refers to the extent of differences between
country paris
● Assumption: differences prevent or disturb the information flows between firms &
markets
● Distance introduces friction & complexity to cross-border activities and increase the
challenges
Distance measurement:
○ Cultural
■ Most frequently used
■ Increased complexity to deal with foreign partners, hence more risky
investments
● Relatively small investments or low level of commitment or no
local partners established
● Globe Project
● Survey of Values
● Hofstede Cross-cultural dimension
● Study of Event Management
● World Values survey
○ Institutional
■ Cultural distance does not entirely capture the complexity associated
with cross-border activities
■ Ecnompasses differences in the regulatory, normative and cognitive
pillars of institution
■ often measured with
● World Bank’s governance indicators
● Economic Freedom index
■ Factors that increase distance
● Barriers to trade
● Unilateral
● Institutional infrastructure
