• Jonas S. Müller

Struggles of Foreign Firms When Selling in Germany

Businesses from abroad selling in Germany face several competitive disadvantages compared to their German competitors.

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


That foreign businesses that want to sell in Germany face some struggles that local competitors do not have is well felt by many foreign businesses. We experience that on a regular basis by businesses that sell in Germany and experience obstacles. But also among scholars, the struggles are thoroughly examined. 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, managers and business developers 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 and experienced by us.


Skepticism of Germans towards foreign firms

According to Kutschker and Schmidt, foreign businesses must earn the trust of potential customers, which means that German consumers and businesses are (at first) skeptical towards foreign vendors.


Cultural difference, psychic distance, and language barrier

On the one hand, customers do not know what to expect from foreign firms. On the other hand, foreign firms are sometimes unable to explain to their German target group what exactly can be expected from them. This lack of cultural understanding applies even if the texts are flawlessly translated and not properly localized to Germany. 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.


“Economic patriotism”

Consumers generally prefer domestic products. Also German consumers prefer German production. Even the liberal, international-minded, and urban (young) people in Germany do prefer locally produced products and services. This is even a trend in Germany esp. for the progressive people in Germany. However, fortunately foreign firms can adjust their marketing strategy to mitigate this disadvantage.



3. Transportation and travel


This disadvantage for foreign companies selling in Germany is quite obvious. The products have to be shipped. Also, managers must travel if they want to meet partners or visit the German 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 often times 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.






Sources:


  • Cazacu, Stela (2016): Preference for domestic goods: a study of consumer ethnocentrism in the republic of Moldova

  • Gaur, Ajal / Kumar, Vikas / Sarathy, Ravi (2011): Liability of Foreignness and Internationalization of Emerging Market Firms

  • Hymer, Stephen (1976): The international operations of national firms, a study of direct foreign investmen

  • Johanson, Jan / Vahlne, Jan-Erik (1977): The Internalization Process of the Firm – A Model of Knowledge Development and Increasing Foreign Market Commitments, in: Journal of International Business Studies, 1/1997

  • Josiassen, Alexander / Fletcher, Richard (2010): Looking at Both Sides of the Coin: Revisiting the Role of Country of Origin in International Business, in: Journal of Business System, Governance & Ethics, Vol. 5, 1/2010, pp. 1-12

  • Kim, Heeyon / Jenssen, Michael (2014): Audience Heterogeneity and the Effectiveness of Market Signals: How to Overcome Liabilities of Foreignness in Film Exports?, in: Academy of Management Journal, 5/2014, pp. 1360-138

  • Knight, Gary (1999): Consumer preferences for foreign and domestic products, in: Journal of Consumer Marketing, 2/1999, pp. 151-162

  • Kutschker, Michael / Schmid, Stefan (2011): Internationales Management, 7. Edition, Munich

  • Meas, Thong / Hu, Wuyang / Grebitus, Carola / Colson, Greg (2014): The Effects of Country of Origin Image and Patriotism on British Consumers’ Preference for Domestic and Imported Beef

  • Mittal, Som / Nivsarkar, Ameet (2012): Emerging Markets from an Indian Perspective: Focus on Germanic Countries, in: Bäumer, Ulrich / Kreutter, Peter / Messner, Wolfgang (editiors): Globalization of Professional Services: Innovative Strategies, Successful Processes, Inspired Talent Management, and First-Hand Experiences, Heidelberg, pp. 213-224

  • Nes, Erik / Ghauri, Pervez (1998): Country of Origin Effects on Industrial Products Coming from Eastern Europe

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  • Portes, Richard / Rey, Helene (2005): The determinants of cross-border equity flows, in: Journal of international Economics, 2/2005, pp. 269-296,

  • Potoski, Matthew / Prakash, Aseem (2009): Information Asymmetries as Trade Barriers: ISO 9000 Increases International Commerce, in: Journal of Policy Analysis and Management, 2/2009, pp. 221-238

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  • Zaheer, Srilata (1995): Overcoming the Liability of Foreignness, Academy of Management Journal, 2/1995, pp. 341-363