Liability of Foreignness as a Boundary Condition for an Entry Mode Choice: a Case of Russian Companies on German Market

Abstract

In the paper we apply liability of foreignness (LOF) concept as a boundary condition for a choice of entry mode used by Russian companies while penetrating German market. In terms of an entry mode we differentiate between export and FDI and test how different aspects of LOF affect the choice between these two alternatives. The paper presents the results of a pilot study of 40 subsidiaries of Russian MNEs operating in different regions of Germany. Our results show that both exporter and companies who are involved in FDI experience significant negative effects from the lack of proper institutional and business knowledge about host market, though in various degrees. Legal consulting and personal market analysis are identified among effective instruments to mitigate these effects for both types of entry modes, however, cooperation with institutional agents, such as the Chamber of Commerce, is also of high value, especially, for companies involved in FDI.