Disadvantages of Being Foreign Which Challenge Foreign Firms When Selling in Germany
Businesses from abroad selling in Germany face several competitive disadvantages compared to their German competitors. But what exactly are the disadvantages non-German businesses are confronted with which are called liability of foreignness in the academic world? And what should be known about the disadvantages in Germany?
Liability of foreignness: the disadvantages for foreign firms selling in Germany
Hymer identified 1960 (published 1976) that firms face disadvantages when selling in a market to which they are foreign. Zaheer specified in 1995 the disadvantages which can be categorized into the following.
1. Unfamiliarity with the German market
It is acknowledged among scholars and felt by entrepreneurs and managers that foreign firms know less about the market than local competitors do. Foreign firms must study - if they want to do it themselves - the economy, analyze the competitors, and observe the behavior of their target group, to come close to the level of local firms. However, this requires quite some time and the inherent thorough understanding of the customers might never be compensated as the roots in the market are missing.
2. Image disadvantage & discrimination in Germany
Unfortunately, foreign businesses face discrimination. Several aspects undermine the standing of a foreign firm:
Country of origin image - if negative
Countries with a negative country of origin image must adjust the strategy in Germany accordingly to mitigate the image disadvantage. Especially firms from emerging markets or countries with a wide difference in standards of living are often treated unfairly by the potential customers in the target market and their products are seen as inferior, as found out by Gaur et al.
Skepticism towards foreign firms
According to Kutschker and Schmidt, foreign businesses must earn the trust of potential customers, which means that people are (at first) skeptical towards foreign vendors.
Cultural difference, psychic distance, and language barrier
Customers do not know what to expect from foreign firms and foreign firms are sometimes unable to explain it to them (even if their texts are flawlessly translated). Information asymmetries are greater at cross-border trade and customers tend to buy locally to be “sure” as analyzed in our article about information asymmetry in cross-border sales.
People prefer domestic products - also in Germany. Even the liberal, international-minded, and urban (young) people in Germany do prefer regionally produced product. This is even a trend in Germany esp. for the progressive people in Germany. However, foreign firms can adjust their marketing strategy to mitigate this disadvantage.
3. Transportation and travel
This disadvantage for foreign companies is quite obvious. The products have to be shipped but also the managers must travel if they want to meet partners or visit the market.
4. Cross-border coordination
When having a subsidiary in Germany then there is coordination between the headquarters and the subsidiary (among other issues that must be dealt with like the principle-agent-theory). Depending on the nationality of the staff in the subsidiary, there are also cultural issues that make the coordination more difficult. Also, when dealing with business partners there is coordination necessary – even though less than with a subsidiary.
5. Tariffs and other administrative barriers
This one is also obvious but thankfully mostly neglectable as both Germany and the EU pursue a free trade policy. Except, sadly, the follow-up effects from Brexit.
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