Facing a Liability of Foreignness: Is Blending in Enough?

Many foreign MNEs abroad face a disadvantage – a liability of foreignness (LOF) – vis-à-vis their local equivalents. This often comes from the additional challenges of transferring and adapting what works well in their home country to unfamiliar environments, such as management methods or compensation practices. Overall, research suggests that when it’s possible, foreign MNEs can overcome their LOF by blending in and using practices similar to those of their local counterparts – practices that are consistent with local cultural norms.  Doing so can help them avoid legitimacy issues that can come with being an outsider and also help attract, retain, and motivate local employees that have internalized local cultural norms.

However, in our research published in the Journal of Management Studies, we question the assumption that by mimicking practices of local firms, foreign MNEs will successfully overcome their LOF. Building on the notion that contextual factors can largely influence if the formal adoption of practices are successful or not, in our paper we explore why local adaptation sometimes fails to be effective for foreign MNEs.

Egalitarianism and France: Foreign MNEs adopting egalitarian practices…but what about the informal norms and requirements?

We focus on analyzing the performance benefits of using collective bonuses by both foreign MNEs and French MNEs in the cultural context of France, where egalitarian commitment to wealth and benefit distribution is deeply embedded in the culture. Using longitudinal survey data from the French Ministry of Labor, which tracks the organizational practices of firms in France, we find that, as expected, collective bonuses are more effective than individualized bonuses in the highly egalitarian culture of France. However, foreign MNEs, especially those from countries where egalitarian commitment is less valued, benefit significantly less than their French counterparts when implementing collective bonuses in France. 

So why do foreign MNEs that adopt compensation practices that local French firms use and that are inline with French cultural norms still face a disadvantage?

Based on 50 in-depth interviews of managers and employees working in France, we unpack why a MNE’s home-country commitment to egalitarianism plays a role in its successful implementation of collective bonuses in France. Overall, we find that local adaptation results in poorer performance for foreign MNEs (relative to their local counterparts), in many cases because of conflict between the informal requirements to make a given practice succeed and the culture of the MNE’s home country, a core component of its tacit knowledge.

First, when MNEs come from countries that are less egalitarian, they have more trouble maintaining a coherent egalitarian environment. There tends to be inconsistency within the subsidiary of an egalitarian practice (collective bonus) and a generally non-egalitarian mentality (the remarks and actions of top management and the symbols they employ). Second, these MNEs have more difficulty maintaining a calm and cohesive social environment in a strongly egalitarian country. This becomes an issue, as collective bonuses tend to work best in settings where people feel united.

In summary, our study suggests that formally adopting local practices is not always enough because informal norms can strongly influence the effectiveness of these formal practices. In addition, our findings highlight how MNEs’ home country cultures can impact the effectiveness of their behaviors in foreign markets. Even when subsidiaries of foreign MNEs adopt practices similar to local firms they can subtly transfer the cultures of their home countries (home country commitment to egalitarianism). In other words, they transfer informal, elusive norms (e.g., non-egalitarian attitudes of top management) that can be problematic.

Practical Implications for foreign MNEs

Overall our findings imply that a deeper understanding of local environments – beyond just knowing the practices that local firms are using – can help MNEs make more strategic decisions in terms of their adaptation policies. For instance, in our context, for certain MNEs perhaps a deeper comprehension of the informal norms of egalitarianism in France is enough to allow them to fully benefit from local adaptation (i.e. using collective bonuses). They can invest the time and energy to understand and adhere to the informal requirements (i.e. maintaining a cohesive and coherent egalitarian environment) and this will not cause unresolvable issues with their headquarters.

For other MNEs, from countries where home country cultural norms are in deep conflict with the egalitarian norms of France, a different strategy may be better. This could mean coming up with a new way to compensate employees instead of using local practices, which may be different, but still acceptable.

If you are a manager or HR professional at a foreign subsidiary of a MNE, you may be interested in reading the full article here.

Keywords: collective bonuses, egalitarianism, informal norms, liability of foreignness, local adaptation, multinationals