The Effects of Liability of Foreignness on Performance: an Empirical Study of Foreign Banks in the U.s

This paper is an attempt to answer research questions about the performance of foreign banks’ subsidiaries in the U.S. banking environment. The primary focus is to investigate the effects of liability of foreignness on these subsidiaries’ loans portfolio, efficiency, and overall performance by proposing and testing a partial mediating effect of the risky loans portfolio on the relationship between LOF and performance. It is an attempt to bridge the gap between strategy and finance research by conducting an empirical study that incorporates financial measures and methods used in current banking and finance literature. Other research questions, including reasons for entering the U.S. market and types of initial entry modes, are also examined in the present study. Effects of the U.S. banking regulations are also discussed. Factors, such as country of origin in terms of the countries’ status (developed vs. developing), and other cultural factors influencing sustainability of these foreign banks in the U.S., are considered. The hierarchical regression analyses of the relationships between the LOF and these foreign banks’ riskiness of loans portfolio, efficiency, and performance are performed. Suggestions for future research are presented and limitations of the current study are also