Innovation Activities Abroad and the Effects of Liability of Foreignness: Where it Hurts

Wolfgang Sofka

No 06-029, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: The innovation activities of foreign subsidiaries have been identified as an important source of competitive advantage for multinational corporations. The success of these engagements depends heavily on tapping host country pools of localized expertise. To achieve this foreign subsidiaries have to overcome cultural and social barriers (liability of foreignness). We derive potential stumbling blocks in the innovation process theoretically and argue that these materialize as neglected projects, cancellations or budget overruns. We test these hypotheses empirically for more than 1,000 firms with innovation activities in Germany from various sectors. We find that foreign-controlled firms are not challenged by liability of foreignness at the project mobilization stage. The lack of local embeddedness becomes more binding as projects have to be prioritized and managed which we identify as more frequent mistakes and delays. We argue that this is the result of shared practices within the multinational firm that do not readily fit into the local context. Finally, we derive management recommendations how foreign innovation engagements can achieve similar levels of effectiveness and efficiency as host country competitors.

Keywords: Liability of foreignness; offshoring R&D; internationalization; innovation management (search for similar items in EconPapers)
JEL-codes: D83 F23 O31 O32 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ino, nep-ipr, nep-pr~, nep-ppm and nep-tid
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:4613

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