Question

The ‘liability of foreignness’ implies that foreign firms are disadvantaged relative to their local counterparts, all else equal, and yet foreign firms often (but not always) seem to outcompete locals. Use the AAA framework to explain this statement.

Answer 1

Answer-

Liability of foreignness

The AAA triangle framework was suggested by  Professor Pankaj Ghemawat of New York University and IESE Business School in 2007.

The AAA triangle highlights 3 generic international strategies

The AAA stands for

1) Adaptation - localization and responsiveness
2) Aggregation- standardization and economies of scale
3) Arbitrage- exploiting economic differences

Adaptation

When the local companies have higher rebates on production of goods whereas the foreign companies have to pay taxes which may be higher. The local companies are advantaged compared to foreign counterparts as they can manufacture tailor made goods and as per the needs of locals. The foreign companies outclass the local producers despite the advantages because of adaptation of the local needs of customers along with superior technlogy and expertise in manufacturing goods at lower rates due to disparity of wages paid to emloyees. The foreign companies particularly are having marketing teams who are well versed of local  needs and adapt to the country specific requirements.

Aggregration

The foreign companies have higher chances in creating or utilizing existing economies of scales across multiple branches in different locations. Companies following this strategy tend to get advantage from already established business in products and market them to the new location through active marketng strategies. The Research & Development ( R&D) and management for multiple countries are in general centralized at a regional or global level.

Arbitrage

Arbitrage is the stragegy of taking the advantage by foreign companies of the price differences between different locations for the benefit of the whole organization. Production cost is the most important cost that can be reduced for foreign companies which having factories in locations with lower raw material and labor cost. This arbitrage strategy benefits the companies which are labor intensive or companies which are vertically integrated.

Therefore there are reasons mentioned above that give the foreign companies outcompete the local companies despite having the liability of foreignness.