What is Liability of Foreignness and how does it impact scaling companies?
Every company that crosses a border pays a hidden tax. Economists call it the Liability of Foreignness (LoF). This is the extra cost of doing business abroad simply because you’re not local.
The concept dates back to Hymer (1960) and was formalized by Zaheer (1995). It consists of three hazards:
→ Unfamiliarity — not knowing the market, regulations, or unwritten rules
→ Relational — no existing trust or network to lean on
→ Discrimination — being treated as an outsider by customers, partners, or regulators
These go beyond typical costs of doing business as they are social in nature. You can’t budget your way out of them.
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THE FLIP SIDE: ASSETS OF FOREIGNNESS
Foreignness is not necessarily a liability. Sethi and Guisinger (2002) introduced Assets of Foreignness (AoF). This is the idea that being foreign can become a selling point. Country-of-origin effects, home-market certifications, and “outsider” credibility have all been shown to work in a company’s favor, not against it.
New Zealand food and beverage firms entering China leaned on home-country food safety standards as a quality signal (Fiedler et al., 2024). Foreign SMEs in Korea used informal networks strategically rather than defensively (Lee et al., 2021). Foreignness, used right, becomes leverage. This may also apply to innovations from a country with a strong reputation in the specific industry.
WHY THIS MATTERS NOW
Scaling companies feel LoF more acutely than companies on a traditional growth trajectory. These are the ones expanding fast, with lean teams, and repeatable business models. They don’t have the resource buffer that large multinationals rely on to absorb these costs.
Now for a 2026 twist: can AI tools help scaling companies shrink LoF, and even convert it into AoF? Early signals suggest AI-enabled communication is already reshaping how founders build trust and embeddedness abroad (Stoyanov & Stoyanova, 2025).
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Further reading
Fiedler, A., Fath, B., Whittaker, D. H., & Garlick, M. (2024). Activating assets of foreignness in compressed developing markets: Evidence from New Zealand SMEs entering the Chinese market. Asia Pacific Business Review, 30(1), 49–71.
Hymer, S. (1960/1976). The international operations of national firms: A study of direct foreign investment. MIT Press.
Lee, J., Paik, Y., Horak, S., & Yang, I. (2021). Turning a liability into an asset of foreignness: Managing informal networks in Korea. Business Horizons, 64(5), 659–670.
Sethi, D., & Guisinger, S. (2002). Liability of foreignness to competitive advantage: How multinational enterprises cope with the international business environment. Journal of International Management, 8(3), 223–240.
Stoyanov, S., & Stoyanova, V. (2025). Mitigating liabilities of foreignness in migrant entrepreneurship: The role of AI in building virtual embeddedness. Technological Forecasting and Social Change, 220, 124323.
Zaheer, S. (1995). Overcoming the liability of foreignness. Academy of Management Journal, 38(2), 341–363.