IDENTIFYING DRIVERS OF LIABILITIES OF FOREIGNNESS FOR NORWEGIAN COMPANIES IN RUSSIA
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Abstract 2
1 Introduction 5
1.1 The relevance of the research 5
2 Literature review 8
2.1 Cost of doing business abroad 8
2.2 Liability of foreignness 9
2.3 A dyadic framework for LOF 10
2.3.1 Environmental factors of LOF 11
2.3.2 Firm-specific factors for LOF 12
2.4 Country of origins effect 14
2.5 Research gap and question 16
3 Theoretical framework 18
3.1 Environmentally derived liabilities 18
3.1.1 Institutions 18
3.1.2 Industry 20
3.2 Firm derived liabilities 23
3.2.1 Resources and capabilities 23
3.2.2 Strategic choice 25
3.2.3 Governance structure 26
3.3 COO 27
3.3.1 Stereotyping 27
3.3.2 Ethnocentrism 28
4 Methodology 31
4.1 Research design 31
4.2 Sample size and selection 32
4.3 Online questionnaire 32
4.4 Method of analysis 33
4.5 Evaluation of choice of methodology 35
5 Results 36
5.1 The respondents and companies 36
5.2 The Likert-scale variables 38
5.3 The categorical variables 41
5.4 Assumption testing for parametric tests 44
5.5 Differences in the Likert-variables 45
5.5.1 Analysis of the components 45
5.5.2 Analysis of the factors 47
5.5.3 Analysis of the perspectives 48
5.6 Effects of the categorical variables 48
5.6.1 ANOVA for differences in groups 48
5.6.2 MANOVA for multiple dependent variables 51
6 Discussion 53
6.1 The environment’s impact on LOF 53
6.2 The firm's impact on LOF 54
6.3 COO-impact on LOF 57
6.4 Limitations of the study 58
6.5 Suggestions for further research 59
7 Conclusion 61
References 64
Appendices 73
Appendix I: Survey 73
Appendix II: Explaination of variables 80
Appendix III: Unparied t-tests 83
Appendix IV: ANOVA OUTPUT 88
Appendix V: Manova output 100
1 Introduction 5
1.1 The relevance of the research 5
2 Literature review 8
2.1 Cost of doing business abroad 8
2.2 Liability of foreignness 9
2.3 A dyadic framework for LOF 10
2.3.1 Environmental factors of LOF 11
2.3.2 Firm-specific factors for LOF 12
2.4 Country of origins effect 14
2.5 Research gap and question 16
3 Theoretical framework 18
3.1 Environmentally derived liabilities 18
3.1.1 Institutions 18
3.1.2 Industry 20
3.2 Firm derived liabilities 23
3.2.1 Resources and capabilities 23
3.2.2 Strategic choice 25
3.2.3 Governance structure 26
3.3 COO 27
3.3.1 Stereotyping 27
3.3.2 Ethnocentrism 28
4 Methodology 31
4.1 Research design 31
4.2 Sample size and selection 32
4.3 Online questionnaire 32
4.4 Method of analysis 33
4.5 Evaluation of choice of methodology 35
5 Results 36
5.1 The respondents and companies 36
5.2 The Likert-scale variables 38
5.3 The categorical variables 41
5.4 Assumption testing for parametric tests 44
5.5 Differences in the Likert-variables 45
5.5.1 Analysis of the components 45
5.5.2 Analysis of the factors 47
5.5.3 Analysis of the perspectives 48
5.6 Effects of the categorical variables 48
5.6.1 ANOVA for differences in groups 48
5.6.2 MANOVA for multiple dependent variables 51
6 Discussion 53
6.1 The environment’s impact on LOF 53
6.2 The firm's impact on LOF 54
6.3 COO-impact on LOF 57
6.4 Limitations of the study 58
6.5 Suggestions for further research 59
7 Conclusion 61
References 64
Appendices 73
Appendix I: Survey 73
Appendix II: Explaination of variables 80
Appendix III: Unparied t-tests 83
Appendix IV: ANOVA OUTPUT 88
Appendix V: Manova output 100
My motivation for this paper is that I find the concept of liabilities of foreignness a fascinating topic, and I want to contribute to the international business strategy community by writing this thesis. After learning about the concept, my mind started racing toward using the LOF concept to analyze the widespread liabilities of Norwegian companies operating in Russia. As a Norwegian student in Russia, with a desire to learn more about the business interactions between the two countries. However, I simply find the currently available information lacking. The main problem is the limited literature volume, and the little materials available seem outdated. Thus, I desired to write a thesis about this subject to primarily increase my knowledge and leave the essential findings available for others to utilize and develop further.
I find it motivating to cover an unmapped subject matter and hope to be pioneering a new field of interest for both researchers and students. Additionally, I believe this thesis would be highly relevant for my future career plans as I wish to strengthen the commercial relationship between Russia and Norway in my professional career. It is imperative now as the political tensions are reaching levels not seen since the cold war. Yet, I see economic and business ties as facilitators to improving the relationship. With many companies leaving pr suspending operations in the Russian market, there is room for opportunity for Norwegian companies to either invest or expand current businesses in the Russian market.
I find it motivating to cover an unmapped subject matter and hope to be pioneering a new field of interest for both researchers and students. Additionally, I believe this thesis would be highly relevant for my future career plans as I wish to strengthen the commercial relationship between Russia and Norway in my professional career. It is imperative now as the political tensions are reaching levels not seen since the cold war. Yet, I see economic and business ties as facilitators to improving the relationship. With many companies leaving pr suspending operations in the Russian market, there is room for opportunity for Norwegian companies to either invest or expand current businesses in the Russian market.
The research theme was to identify the drivers of LOF for Norwegian companies in Russia. In the subsequent literature review, the following research question was derived: “How does the environment, the firm, and COO impact LOF for Norwegian firms in Russia? ” Eden & Miller’s (2004) definition of LOF was applied to the research question, which uses socioeconomic costs to describe the concept. Furthermore, Gaur, Kumar, & Sarathy's (2011) framework was used to categorize LOF with a few modifications to include the COO effect on LOF.
The theoretical framework designed to approach the research question separated the environment, the firm, and the COO into three perspectives. The perspectives were divided into factors and the factors to individual components. The components were identified based on present literature that was expected to significantly affect LOF, either limiting or expanding the effects of LOF. The methodology used to approach the research question was a quantitative approach using Likert-scale and categorical data. The data collection method was an online questionnaire completed by managers and executives in Norwegian firms operating in the Russian market. The online questionnaire received 24 respondents from 21 different Norwegian companies in Russia in various industries with a large concentration in the maritime industry.
The environment perspective on LOF was the second-largest driver after the firm perspective and before the COO effect. There were found no significant differences between the impact of the home and host regulatory environment. However, the Norwegian firms experienced a significantly larger challenge adapting to the Russian normative environment, whilst Russian firms seemed to have little to no challenge adjusting the normative distance to the Norwegian firms. However, overall, the regulatory environment was a significantly larger driver of LOF than the normative environment.
Regarding the second factor, industry, there was no significant difference between the components that both were below the median of the Likert scale. Moreover, the institutional distance and industry influence on LOF showed no significant driver between the two variables. Consequently, for managerial decision making, the most vital component to mitigate the effects of LOF concerning the environment is to make strategic decisions to reduce the pressure of the host regulatory environment and normative distance experienced by Norwegian firms. Moreover, Norwegian firms should not be daunted by the seeming regulatory distance between the two countries as the host environment provides limited additional challenges.
In the parametric tests applied in the data analysis, it was evident that the firm perspective had a significantly larger impact on LOF, with pre-existing knowledge about the Russian market as the most critical component for LOF in the research. The components followed were the importance of previous international experience for the firm and the firm’s ability to be resilient by fully committing to the market. Based on the literature, it was suggested to acquire knowledge about the Russian market by hiring in-house or partnering with a firm in the host market. However, the previous international experience of the firm might lessen the need for pre-existing knowledge about the Russian market, as organizational learning facilitates bridging the knowledge gap between foreign and domestic firms.
The second factor in the firm perspective was strategic choice showed that a resource-seeking motive for entering the Russian market required fewer product adaptations compared to a market-seeking motive. Unexpectedly, choosing WOS as an entry mode compared to exporting or joint venture proved to mitigate LOF as the firms experienced higher recognition for their products and services. An explanation for the phenomenon is the increased brand awareness the equity mode of entry provides. Furthermore, with regards to the factor governance structure, Norwegian state ownership in a company increased the regulatory pressures in the host country, consistent with the existing literature. Last, business group affiliation also had a limiting impact on LOF, as the firms associated experienced higher acceptance in the market.
For managerial application, there might be a more considerable regulatory burden in the host country if the company has the Norwegian state as a shareholder. Therefore, state-owned firms should take precautions before entering the Russian market, perhaps utilizing a partnership with a domestic firm to limit the pressure from the host environment.
Furthermore, an equity mode of entry is suggested (WOS or joint venture) as it has a mitigating effect on LOF. Thus, Norwegian firms should fully commit to the market as it provides superior outcomes.
If the firm is expanding internationally with a resource-seeking motive, Russia should be a prioritized choice as there is lower competition for resources, and the impact of LOF is substantially lower. Moreover, the following recommendation is that Norwegian companies should affiliate with business groups to assist operations in the Russian market. This can be done by connecting with individuals connected to the groups informally or through formal business arrangements.
The overall effects of the COO-perspective on LOF were limited as the Norwegian firms experienced Russian firms and consumers to have a positive perception of Norwegian products. Thus, the first component in the factor stereotyping was that the Norwegian PCI mitigated the adverse effects of LOF. Furthermore, the PCI was found to be stable across Russia, implying that the PCI might work as a facilitator for Norwegian firms across the vast landmass of Russia. Thus, the firms should not be deterred from entering more distant markets (from a European perspective) outside the business hubs of Saint Petersburg and Moscow. The subsequent suggestion for Norwegian firms is to expose and utilize the Norwegian PCI as it positively impacts the perception of Russian firms and consumers and limits LOF.
Furthermore, the factor ethnocentrism was not found to be a threat, even with the recent political turmoil, having the lowest score on the Likert scale. This was because the cultural differences between the two countries did not discourage Russian firms from collaborating with Norwegian companies nor buying Norwegian products. Furthermore, the respondents experienced that Russian firms and consumers prefer Norwegian products over domestic ones. Additionally, patriotism was not a significant driver of LOF as it had the second-lowest score on the Likert scale used in the research. Therefore, with the restricted risk of ethnocentrism, there is currently a good opportunity for Norwegian companies to enter the Russian market or expand existing activities.
The theoretical framework designed to approach the research question separated the environment, the firm, and the COO into three perspectives. The perspectives were divided into factors and the factors to individual components. The components were identified based on present literature that was expected to significantly affect LOF, either limiting or expanding the effects of LOF. The methodology used to approach the research question was a quantitative approach using Likert-scale and categorical data. The data collection method was an online questionnaire completed by managers and executives in Norwegian firms operating in the Russian market. The online questionnaire received 24 respondents from 21 different Norwegian companies in Russia in various industries with a large concentration in the maritime industry.
The environment perspective on LOF was the second-largest driver after the firm perspective and before the COO effect. There were found no significant differences between the impact of the home and host regulatory environment. However, the Norwegian firms experienced a significantly larger challenge adapting to the Russian normative environment, whilst Russian firms seemed to have little to no challenge adjusting the normative distance to the Norwegian firms. However, overall, the regulatory environment was a significantly larger driver of LOF than the normative environment.
Regarding the second factor, industry, there was no significant difference between the components that both were below the median of the Likert scale. Moreover, the institutional distance and industry influence on LOF showed no significant driver between the two variables. Consequently, for managerial decision making, the most vital component to mitigate the effects of LOF concerning the environment is to make strategic decisions to reduce the pressure of the host regulatory environment and normative distance experienced by Norwegian firms. Moreover, Norwegian firms should not be daunted by the seeming regulatory distance between the two countries as the host environment provides limited additional challenges.
In the parametric tests applied in the data analysis, it was evident that the firm perspective had a significantly larger impact on LOF, with pre-existing knowledge about the Russian market as the most critical component for LOF in the research. The components followed were the importance of previous international experience for the firm and the firm’s ability to be resilient by fully committing to the market. Based on the literature, it was suggested to acquire knowledge about the Russian market by hiring in-house or partnering with a firm in the host market. However, the previous international experience of the firm might lessen the need for pre-existing knowledge about the Russian market, as organizational learning facilitates bridging the knowledge gap between foreign and domestic firms.
The second factor in the firm perspective was strategic choice showed that a resource-seeking motive for entering the Russian market required fewer product adaptations compared to a market-seeking motive. Unexpectedly, choosing WOS as an entry mode compared to exporting or joint venture proved to mitigate LOF as the firms experienced higher recognition for their products and services. An explanation for the phenomenon is the increased brand awareness the equity mode of entry provides. Furthermore, with regards to the factor governance structure, Norwegian state ownership in a company increased the regulatory pressures in the host country, consistent with the existing literature. Last, business group affiliation also had a limiting impact on LOF, as the firms associated experienced higher acceptance in the market.
For managerial application, there might be a more considerable regulatory burden in the host country if the company has the Norwegian state as a shareholder. Therefore, state-owned firms should take precautions before entering the Russian market, perhaps utilizing a partnership with a domestic firm to limit the pressure from the host environment.
Furthermore, an equity mode of entry is suggested (WOS or joint venture) as it has a mitigating effect on LOF. Thus, Norwegian firms should fully commit to the market as it provides superior outcomes.
If the firm is expanding internationally with a resource-seeking motive, Russia should be a prioritized choice as there is lower competition for resources, and the impact of LOF is substantially lower. Moreover, the following recommendation is that Norwegian companies should affiliate with business groups to assist operations in the Russian market. This can be done by connecting with individuals connected to the groups informally or through formal business arrangements.
The overall effects of the COO-perspective on LOF were limited as the Norwegian firms experienced Russian firms and consumers to have a positive perception of Norwegian products. Thus, the first component in the factor stereotyping was that the Norwegian PCI mitigated the adverse effects of LOF. Furthermore, the PCI was found to be stable across Russia, implying that the PCI might work as a facilitator for Norwegian firms across the vast landmass of Russia. Thus, the firms should not be deterred from entering more distant markets (from a European perspective) outside the business hubs of Saint Petersburg and Moscow. The subsequent suggestion for Norwegian firms is to expose and utilize the Norwegian PCI as it positively impacts the perception of Russian firms and consumers and limits LOF.
Furthermore, the factor ethnocentrism was not found to be a threat, even with the recent political turmoil, having the lowest score on the Likert scale. This was because the cultural differences between the two countries did not discourage Russian firms from collaborating with Norwegian companies nor buying Norwegian products. Furthermore, the respondents experienced that Russian firms and consumers prefer Norwegian products over domestic ones. Additionally, patriotism was not a significant driver of LOF as it had the second-lowest score on the Likert scale used in the research. Therefore, with the restricted risk of ethnocentrism, there is currently a good opportunity for Norwegian companies to enter the Russian market or expand existing activities.
