Unpacking liability of foreignness: identifying culturally driven external and internal sources of liability for the foreign subsidiary

Unpacking the box of liability of foreignness, we are forced to realize that there are some costs that can be ascertained and there are other costs that are not subject to objective quantification. Country and cultural differences manifest both in readily discernable and in more tacit societal practices and individual variation. This paper links well-established streams of literature concerning foreign direct investment (FDI), corruption, and cross-cultural differences in an effort to provide a basis for explanation and future testing of certain cultural sources of liability of foreignness. Foreign firms are disadvantaged in comparison to native firms by gaps in understanding caused by cultural variation that impacts both the firm's external and internal environments. In the environment external to the firm, cultural differences are reflected in varying levels of transparency related to the state's institutional practices and procedures. Less transparent markets are associated with higher levels of tacitness, and increased corruption is a significant indicator of the resulting institutional inefficiency. In the internal firm environment, cultural differences manifest in observable behavior differences and less observable values differences of individuals. The degree of the external and internal cultural understanding gap will be determined through comparison of the cultural orientation of the parent firm in its native country with the culture of the host country of the subsidiary. Finally, given that transparency/corruption is the societal embodiment of individual cultural differences, a correlation is expected between corruption levels and value orientations in each subsidiary.