Definition: Liability of Foreignness (LOF) defines the disadvantages a company has in a foreign country because of being foreign. They have this disadvantage due to different cultures, languages, customs, regulations, and market environments.
Liability of Foreignness brings new challenges for organizations to deal with, and this costs a business additional expenses and effort to operate.
The term Liability of Foreignness was first coined by Zaheer, S., in her seminal work “Overcoming the liability of foreignness” published in the Academy of Management Journal in 1995.
Example of Liability of Foreignness
Consider a foreign company opening a business in a host country where culture, language, and regulations are different. In such a scenario, they have to train their staff to learn the basics of the foreign language, customize their products, suit local requirements, and change the marketing strategies.
All of these require additional costs to the business.
Summary
Liability of Foreignness provides details on additional costs and effort that a business will incur when launching a business in a new country. LOF is a competitive disadvantage for a foreign business in the host country.