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Understanding liability of foreignness in an Asian business context: A study of the Korean asset management industry

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Abstract

This study provides an in-depth understanding of the liability of foreignness (LOF) in an Asian business context. Based on previous literature, we distinguish the two distinct cost components that comprise LOF: The cost of foreignness and the cost of multinationality. Whereas the former refers to the costs incurred by foreign firms when they develop location-specific advantages in a host country environment, the latter refers to the costs associated with an MNC’s multinational operation, more specifically, transferring firm-specific advantages from the home country (or elsewhere) and adapting them to a particular host country context. Based on this distinction, we investigate whether and how persistently each of these costs exists in an Asian business environment. Our data on the Korean asset management industry support the presence of both costs, resulting in lower performance increase of foreign firms relative to local ones from utilizing location- and firm-specific advantages, respectively. Furthermore, in our study setting, compared to the cost of foreignness, the cost of multinationality persists longer in the market, suggesting that the latter is more difficult and takes a longer time for MNCs to mitigate than the former. Our results provide important insights into detailed aspects of strategic challenges confronted by MNCs in the Asian business context from which they can derive effective strategic responses.

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Notes

  1. When we refer to Asian business contexts, we only include non-Japanese Asian countries throughout the paper.

  2. AMAK has been integrated into the Korea Financial Investment Association (KOFIA) in 2009 with the merger of the Korea Securities Dealers Association, the Korea Futures Association, and the Asset Management Association.

  3. This growing trend has continued: as of 2010, the total number of competing firms is 78, and the number of foreign firms is 32.

  4. We acknowledge that local firms can also be multinational; in this case, local firms incur the cost of multinationality, as well. However, in our study period, only two Korean firms run the asset management operation in more than two countries (Kim, 2011). When we exclude these two firms in testing Hypotheses 2 and 3 with regard to the cost of multinationality, the results were consistent to those shown here.

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Authors and Affiliations

  1. Department of Management, John Molson School of Business, Concordia University, 1455 de Maisonneuve West, Montréal, Québec, H3G 1M8, Canada

    Jisun Yu

  2. Desautels Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montréal, Québec, H3A 1G5, Canada

    Sung Soo Kim

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  1. Jisun Yu
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Correspondence to Jisun Yu.

Additional information

We thank Srilata Zaheer, Michael Carney, and Seung-Hyun Lee for their insightful comments and suggestions. We gratefully acknowledge that this study is financially supported by the Past President Research Award provided by the Administrative Sciences Association of Canada.

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Yu, J., Kim, S.S. Understanding liability of foreignness in an Asian business context: A study of the Korean asset management industry. Asia Pac J Manag 30, 1191–1217 (2013). https://doi.org/10.1007/s10490-012-9310-z

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