SDA Professor of Strategic and Entrepreneurial Management
During one of our executive education programs I happened to talk to a manager who was an “NRI” – a non-resident Indian, originally from Kolkata who completed his studies in Europe and had been working for a German multinational. And I was told yet another example reconfirming the impact of the Liability of Outsidership on personal and company performance in doing business abroad.
After several years in a junior managerial position at the company’s headquarters in Europe, that person was relocated to India with an objective to strengthen the company’s local business development activities. Despite his energy, motivation and good relationship skills, that person kept on being “bounced back”, unable to create effective business relationships with potential clients and business partners. Seeing the meagre results of the initial decision, the company decided to adapt its policy: he was joined by a “local” Indian manager and things improved. “Before, I was seen an outsider, you know, even if I am an Indian”, he told me.
What is the Liability of Outsidership?
The Liability of Outsidership describes difficulties related with the entrance to a new foreign market where the firm does not have any position in business-relevant networks (Johanson & Vahlne, 2009).
Each new foreign market is a system of relationships in which the participants (firms) are linked with each other via formal (contract-based) and more complex, informal ties. An outsider has difficulties with gaining trust and initiating and developing collaboration with other members of the network who prefer make deals within the network. Being a part of a local business network, on the contrary, may become a source of superior organizational performance. In China, guanxi, synthetically described as a system of interpersonal reciprocal exchange of favors and gifts, at the firms’ level helps with building confidence in business partners and therefore overcome the periods of institutional instability when market players are often not protected by formal institutions. Similar networks substituting or complementing the formal institutions exist and thrive in most of emerging and transition economies.
The Liability of Outsidership can be relevant not only for a person or a company
“landed” on a foreign territory for the first time. Similar difficulties may arise when approaching such “alien” contexts as a different industry, a different sales channel or a different region within the same nation. The Liability of Outsidership increases the transaction costs and delays the strategy implementation, but also may contribute to errors in the managerial decision-making, when its importance is undervalued.
Four steps to overcome Outsidership
I suggest the following possible four-step approach in overcoming the drawbacks related to being an “outsider” to a local network.
1. Acknowledge and assess the importance of formal and informal networks in a new business context: the understanding of the role played by business networks in the chosen market rarely comes in the pre-internationalization phase (unless the firm is actively involved locally, employs local managers or hires local consultants) and does not emerge before the first negative experiences in doing business locally. Until the firm does not admit the importance of its Outsidership to relevant business connections, it will not commit any resources to overcome such an important weakness.
2. Develop a plan on how to enter the relevant networks:
- Define people in your firm in charge of managing the relevant networks.
- Identify the relevant networks (local or international) that are accessible by your firm. It is important not only to focus on networks that are directly relevant to the core business, but also on “peripheral” networks not strictly related to the industry or functional competence that potentially can be useful for your firm and for other members in the business network.
- Improve your firm’s visibility with actions aimed at reinforcing its positive and credible image, for instance, by participating at local and international events and being present in relevant media.
- Generate contacts (online networks, professional associations, conferences, network events, trade fairs, alumni associations, personal contacts), also by finding a way to connect or involve local “insiders” (local personnel, distributors, new local clients, etc).
3. Develop a plan on how to maintain and nourish the relevant network:
- Having done the first steps inside of a local network, invest time in maintaining the business relationships on a daily basis with calls, emails, meals – and not necessarily only when that person or connection is actually needed.
- Be useful to the members of the network: help with creating business connections and opportunities in your firm’s country of origin and, with time, among the members of the local network, doing it for free and without immediate economic or other benefits, solve other network members’ problems, possibly help local members of the network to be more visible locally and in your country of origin.
4. Institutionalize the knowledge and skills of your company’s first attempts at transformation from an “outsider” to an “insider”. Once the importance of such “non-competitive” market entry strategies is understood, it is frequent that firms focus a part of their efforts in rebundling their new capabilities to obtain synergies in addressing the new foreign markets, for instance by leveraging the global presence or the networking skills developed in the firm.
Towards a balanced approach in managing business networks
The effective management in overcoming the Liability of Outsidership helps in minimizing the risks of internationalization, in accessing the local market knowledge, in reducing the transaction costs and in obtaining the local reputation and credibility.
Unfortunately, there is a second, negative side, of the attempts of overcoming the Liability of Outsidership. Research showed possible positive effects of business networks on corruption: legal business networks may facilitate occasional bribery, and the effect is particularly strong in countries with weak, complex or unstable legal and administrative institutions. The institutionalization of anti-corruption rules at the company headquarters level (also in response to the legal requirements in the country of origin, such as Foreign Corrupt Practices Act in the US, the UK Bribery Act or the OECD Convention on Combatting Bribery) has to be part of a balanced approach in the development of local business networks.