Perspectives from ISB

There are several studies that show that developing market brands suffer from country of origin disadvantage or “liabilities of origin,” and these perceptions are very difficult to change quickly because of heuristics or mental shortcuts people take to make decisions. “Marketing research has conclusively demonstrated that country of origin elicits powerful consumer reactions; the reactions depend on how the consumer views the country.” (Verlegh and Steenkamp, 1999). “When consumers are uncertain about product attributes, they rely on brand and country of origin perceptions to assess the product’s attribute levels and to increase confidence in its claims. The reduced uncertainty lowers information costs and the risk perceived by consumers, thus increasing customer value.” (Kumar and Steenkamp, 2013).
But Liabilities of Origin is only one dimension of the challenges faced by emerging market firms. There is a broader issue of organizational legitimacy in host countries (Kostova and Zaheer, 1999). According to Pant and Ramachandran (2012), Developing country Multi National Companies (DMNCs) face three distinct challenges to cultural-cognitive legitimation: the liabilities of origin but also the liabilities of foreignness and the liability of advantage.
Liabilities of foreignness: the disadvantages borne in the host country by firms because of where they are NOT from. The firms are NOT local, but their specific nationality is less material.
Liabilities of origin: the disadvantages borne in the host country by firms because of where they ARE from. When a specific country conjures negative images or connotation.
Liability of advantage: Some emerging market firms possess unique advantages relative to their developed country counterparts. These could include mass production expertise, low-cost processes, and resources, or scrappy innovation or fast follower capabilities. These advantages are a double-edged sword: “Low-cost production by DMNCs in their home counties might get conflated with labels of cheap and shoddy quality in the minds of developed country customers because of a perceived trade-off between quality and cost.”
“We can see that two kinds of disadvantages cut across the three dimensions – capability-based disadvantages and legitimacy-based disadvantages. The former includes a lack of access to comprehensive and efficient capital markets and global managerial talent and inappropriate organizational learning routines. The latter includes discrimination by host country customers and governments and lack of credibility within the organization for the internationalization program.” (Ramachandran and Pant, 2010).
These disadvantages make the bargaining power of even high quality, innovative, and socially conscious developing market firms very low when they try to compete in a global marketplace. They are squarely typecast as the low-cost vendor. This is even true for knowledge-intensive industries like the software industry, as shown in a twenty-year study conducted by Pant and Ramachandran between 1984 and 2004. Even if they do offer more, they are expected to do so for less and cannot command a premium.
“TCS typically won competitive bids when technical capabilities, process discipline, and price were key criteria. When TCS lost, relationships and brand were often important factors. The adage that “no one ever gets fired for choosing IBM” continued to hold sway in some companies. Other causes of lost bids included client preference for a local vendor and proposals calling for either more or less offshoring than fit with the client’s comfort level or preference.”
The current political and media landscape increases the risk of misunderstanding and misinformation about developing markets and their firms. As decision-makers in developed market firms are bombarded with America First, Brexit, or Made in Bharat propaganda, the psychological distance or “otherness” of international brands increases the liabilities of foreignness. In this environment of great information asymmetry, premium quality foreign firms will lose out to low quality, low-cost foreign firms. This will further exacerbate the liability of foreignness and perpetuate the myth of cheap and low quality from emerging markets. I will use the “lemons problem,” which is a financial theory by Nobel prize winners Akerlof, Spend, and Stiglitz in 2001 to explain.
Let’s take the example of two marketing automation companies, both based in India. Company one, let’s call it Innotech, has invested in R&D and has hired top graduates from the best engineering and business schools who use world-class GDPR compliant tools to run campaigns for clients. They also have a strong and independent board and senior leadership team who have global experience. They have strong IT governance and HR practices. Basically, they do everything right. Company two, let’s call it Imitech, has a different model. They have a call center where they hire low skilled workers who receive lists of contacts every day with numbers and email addresses (the company buys these lists from database companies). Their job is to call, text, and email contacts and qualify them as a marketing lead. They get basic training in English and are given a call script and email/SMS templates. Assuming the same profit margins, say $100 each, Innotech charges clients $2500/campaign, and Imitech charges clients $2000/campaign.
The client CMO (decision maker) in the US is willing to pay up to $3000 for a successful campaign. According to Akerlof et al., this is an efficient outcome, so a deal between Innotech and the US company will happen. This would be a good decision since Innotech has a better chance at delivering successful campaigns and better customer experience, and Innotech, through its strong company governance and practices, will create a good reputation with this US client and could get repeat and referral business.
But Innotech is not the only company trying to compete in the US market. Imitech has done x`a good job window dressing its offering through a great website. On the surface, both seem like reasonable options, and in the absence of differentiation between Innotech and Imitech, the CMO will consider both offerings (assume that she wants to make a fast decision – we know in the real world, this will be a long sales process with various stages of buyer evaluation).
Based on her experience and speaking to her peers, the CMO believes that there is a 70% chance that a marketing technology solution will work and result in a successful campaign and a 30% chance it will fail (assume she has no country of origin concerns about Indian tech companies). Marketing, after all, is an art more than a science. Based on this she offers a weighted average price (.70*2500+.30*2000) = $2350/campaign.
At the $2350, Imitech would be very happy, they were willing to sign for anything above $1900 to break even, so they are making a $400 profit! But this would force Innotech to have to offer a discount in order to get the business. They would make a $50 loss per deal. In order to at least win a new logo, Innotech would come back with a $2400 offer but, without differentiation between two Indian companies, the CMO would proceed with Imitech. If Innotech was Adobe instead, the CMO might have considered paying a premium because of the strong brand recognition and market leadership role. Over time, Innotech would not see their strategy or investments pay off in terms of revenue growth and would realize lower-cost solutions to compete and win, which perpetuates the developing market country of origin image competing on lower prices. It’s a race to the bottom. Over time Innotech will exit the US market because of investor and board pressure on margins and results.
How does an emerging market brand striving to be a premium player in a global market deal with the double punch of country of origin liability and the lemons problem? While one solution is to build a brand through differentiation and market positioning, branding alone will not solve the legitimacy challenge.
Pant and Ramachandran prescribe several actions; DMNCs can take to overcome the legitimacy issues:
Reassurance: Face to face interaction by working side by side on-site with the client, hiring managers of Indian or Chinese origin, high profile anchor clients, listing on the New York Stock exchange are examples of subjective evidence that create familiarization and endorsement.
Measurement: Industry certifications like the European ISO 9001 standard or the American CMM (Capability Maturity Model).
Co-option: If DMNCs can convince their clients to enter into longer-term commitments with them, e.g. by offering clients dedicated resources in the form of an offshore development center. This gives the customers a sense of ownership and strengthens their relationship as a partner vs. a vendor.
Collective Action: Industry associations like NASSCOM but also global consulting companies like McKinsey and Gartner play crucial roles in helping position DMNCs positively with developed market clients.
Validation: Industries go through moments of transformation like Y2K, which can change perceptions for good. The central role Indian software firms played in remediation the fall out of Y2K left a lasting influence on their credibility.
Innotech will have to engage all of these actions both at the firm level but also with its peers. Its board will have to take a long term view for Innotech to survive the battle with low cost, low quality domestic competition from companies like Imitech both also methodically work through the five steps to overcome the legitimacy challenge. If they are successful, they pave the way for others. Based on LinkedIn research, we have seen that US companies are more open to working with an Indian tech vendor if they have previously had experience with one.
There are no shortcuts to building a successful global premium brand. If a company wants to compete on the world stage based on high quality and command a premium, it has to do the work. It has to build a great company but also make sure people know about it.
Summary by Virginia Sharma, January 2020
Ghemawat, P. and Altman, S. “Tata Consultancy Services: Selling Certainty” Company Case Study, 2011.
Kostova, Tatiana, and Srilata Zaheer. “Organizational legitimacy under conditions of complexity: The case of the multinational enterprise.” Academy of Management Review 24, no. 1 (1999): 64-81.
Kumar, Nirmalya, and Jan-Benedict EM Steenkamp. Brand breakout: How emerging market brands will go global. Springer, 2013.
Ramachandran J. and Pant, Anirvan. “The liabilities of origin: An emerging economy perspective on the costs of doing business abroad.” In the past, present, and future of international business & management, pp. 231-265. Emerald Group Publishing Limited, 2010.
Pant, Anirvan and Ramachandran, J. “Legitimacy beyond borders: Indian software services firms in the United States, 1984 to 2004.” Global Strategy Journal 2, no. 3 (2012): 224-243.
Rau, Raghavendra. Short introduction to corporate finance. Cambridge University Press, 2016.
Verlegh, Peeter WJ, and Steenkamp, Jan-Benedict E.M. “A review and meta-analysis of country-of-origin research.” Journal of economic psychology 20, no. 5 (1999): 521-546.

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