U.S. Based Lobbying Efforts and the Liability of Foreignness

The liability of foreignness (LOF) is a well-established concept that captures the disadvantages experienced by foreign-based firms as they compete with local firms (Zaheer, 1995). Expenses stemming from the LOF vary by... [ view full abstract ]

The liability of foreignness (LOF) is a well-established concept that captures the disadvantages experienced by foreign-based firms as they compete with local firms (Zaheer, 1995). Expenses stemming from the LOF vary by industry and consist of additional expenses associated with things such as less developed infrastructure, less know-how, or physical distance. This study examines if foreign firms attempt to overcome the liability of foreignness by developing non-market organizational capabilities, specifically, corporate political capabilities.

We focus on lobbying expenditures by approximately 180 franchising firms over the five-year period from 2009 to 2013 (capturing approximately 880 firm-year observations). Franchising firms provide a particularly meaningful backdrop for LOF studies because of the fairly simple business models they utilize. Franchising firms generally utilize a horizontal multinational enterprise (MNE) model, where units offer homogeneous products or services in different markets (Caves, 1982). The LOF should be relevant because MNE units compete directly with local firms. Theoretically the LOF is less acute in contexts where vertical operations (value-add systems) are typical (Ghoshal and Nohria, 1989).

In this study we posit that foreign-owned franchisors spend on lobbying activities in an effort to overcome the liability of foreignness. We find support for this hypothesis. We then test the relationship between the percentage of U.S. subunits and lobbying efforts, arguing that the percentage of U.S. units will be positively related to lobbying expenditures. However, we find a negative relationship. Finally, we test the interaction between the percentage of U.S. units and foreignness and find insignificant results. These findings help to fill an important research gap in the LOF and corporate political activities literature.