14127: Beyond Liability: Startup Preference for Foreign Investors (session 25927)

Designated as a “Best Paper” by IM
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When do entrepreneurs value foreign investors, and when do they shun them? While prior research emphasizes the liability of foreignness in international business, we reveal how the market development stage fundamentally reshapes this dynamic in entrepreneurial finance. Through a field experiment with 29,132 British and Indian startups, we demonstrate three striking patterns in how entrepreneurs evaluate potential investors before substantive interactions occur. First, founders in developed markets strongly prefer domestic investors, responding 28% more often to them—suggesting that the liability of foreignness creates powerful screening effects at the earliest relationship stages. Second, entrepreneurs in emerging markets exhibit no such bias against investors from developed economies, recognizing the value these investors bring through networks, resources, and legitimacy. Third, gender systematically shapes these effects—men investors from developed markets use their foreignness as an asset, while women investors from emerging markets face heightened barriers that magnify their liability of foreignness. These findings advance theory by demonstrating how the market development stage can transform foreignness liability into an advantage of foreignness—but only under specific conditions. Our results reconcile conflicting prior research, revealing how institutional context systematically alters international investment dynamics and offering practical insights for entrepreneurs and investors navigating cross-market opportunities.

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