Revisiting the liability of foreignness: political ideology, globalization, and discrimination

Abstract

Equal treatment of foreign and local firms is the cornerstone of international investment law. Yet, why do foreign firms face discrimination in host countries? We analyze this critical but underexplored aspect of the liability of foreignness in two stages. First, drawing on the insights from political science, we argue that the political ideology of the host government along the left-right spectrum drives discriminatory dynamics, resulting in elevated regulatory risk for foreign firms. Next, we argue that globalization moderates the relative regulatory risk while distinguishing political and social dimensions of globalization: political globalization amplifies the effect of ideology on discrimination, while social globalization mitigates it. We validate our theory using tax inspection data on 38,326 firms across 95 countries from the World Bank Enterprise Surveys between 2008 and 2019. We identify a novel, context-specific source of discrimination revealing how political ideology and globalization jointly shape the regulatory risk of foreign firms. We advance a growing stream of research that explores how political ideologies shape international business. CEOs must recognize that political ideology can drive discrimination risk and that globalization is a double-edged sword. Strategic planning demands nuanced integration of both factors to successfully mitigate discrimination in international markets.