# The impact of liability of foreignness on performance in hybrid organizations

Tigist Woldetsadik Sommeno, Roy Mersland, Trond Randøy

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Tigist Woldetsadik Sommeno, Roy Mersland, Trond Randøy. The impact of liability of foreignness on performance in hybrid organizations. Journal of International Management, 2024, 30 (2), pp.101133. 10.1016/j.intman.2024.101133. hal-05221048

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# The impact of liability of foreignness on performance in hybrid organizations

Tigist Woldetsadik Sommeno<sup>a, b, *</sup>, Roy Mersland<sup>b</sup>, Trond Randøy<sup>b, c</sup>

## ARTICLE INFO

**Keywords:**

Liability of foreignness

Hybrid organization

Social enterprise

Microfinance

Social performance

Financial performance

## ABSTRACT

This study extends the concept of liability of foreignness from for-profit firms to "hybrid" organizations that combine financial and social goals. By using a global dataset of 655 microfinance institutions (MFIs) observed in 77 countries between 1998 and 2015, we investigate the effect of foreignness on the financial and social performance of MFIs. The results suggest a negative effect of foreignness on the financial and social performance of hybrid organizations. Our results also suggest that the negative financial performance effect of foreignness is stronger in organizations with high social performance and in MFIs hosted in institutionally weaker countries. Furthermore, our results emphasize the moderating influence of scaling and longer tenure of MFIs in their host countries. Interestingly, our findings also shed light on the dual nature of scaling, demonstrating both its positive and negative moderating effects. By applying the concept of liability of foreignness this study enriches the understanding of performance in international hybrid organizations.

## 1. Introduction

Hybrid organizations, which apply a business approach to address social causes, have recently received increased capital flows from international investors (Chen et al., 2018; Xing et al., 2020). These organizations with both social and financial goals lie at the intersection of conventional for-profit firms and non-profit organizations (Haigh et al., 2015; Battilana and Dorado, 2010; Doherty et al., 2014). Unlike traditional for-profit organizations, hybrid organizations maximize a social goal in addition to a financial sustainability goal. Unlike non-profit organizations, hybrid organizations do not depend exclusively on donations or subsidies, but simultaneously maintain financial sustainability as a core goal (Santos, 2012; Chen et al., 2017).<fnref n="1" /> This twofold goal involves combining "ostensibly contradictory organizational goals"<fnref n="2" /> (Miller et al., 2012, p. 619), which can lead to tensions and trade-offs between the

<footnote><sup>a</sup> Centre for Applied Research at NHH (SNF), Helleveien 30, NO-5045 Bergen, Norway</footnote>

<footnote><sup>b</sup> University of Agder, School of Business and Law, Gimlemoen, Postboks 422, N-4604 Kristiansand, Norway</footnote>

<footnote><sup>c</sup> Copenhagen Business School, Center for Corporate Governance, Department of Accounting, Solbjerg Plads 3, C5.09, DK-2000 Frederiksberg, Denmark</footnote>

<footnote>* Corresponding author at: Centre for Applied Research at NHH (SNF), Helleveien 30, NO-5045 Bergen, Norway.</footnote>

<footnote>E-mail addresses: tigist.sommeno@snf.no (T.W. Sommeno), roy.mersland@uia.no (R. Mersland), trondrandoy@uia.no, tra.ccg@cbs.dk (T. Randøy).</footnote>

<footnote n="1">¹ In contrast to for-profit and non-profit organizations, which often pursue one primary goal and pursue other goals as supplementary, a hybrid organization typically strives to align both goals that are fundamental to its objective.</footnote>

<footnote n="2">² One goal can negatively affect the other goal (Smith and Tracey, 2016; Wry and Zhao, 2018).</footnote>
goals. While hybrid organizations may be forced to focus on one goal over the other in order to eventually fulfill their blended value,<fnref n="3" /> an excessive trade-offs can threaten the viability of hybrid organizations (Ebrahim et al., 2014). This makes the realization of hybrid organizations' dual goals a complex process (Pache and Santos, 2013; Smith et al., 2013). In considering the unique duality of hybrid organizations' overall goals, we take the issue one step further by addressing the impact of internationalization on their social and financial performance.

Our study is motivated by Alon et al.'s (2020) call to explore how internationalization affects the trade-off between hybrid organizations' dual goals (Wry and Zhao, 2018), and the authors' recommendation to leverage international business theories. We argue that analyzing international influence through the lens of liability of foreignness theory, a central theory explaining the effect of firm-level internationalization, can enrich our understanding of the advantages and disadvantages of foreignness (Edman, 2016; Zaheer, 1995; Denk et al., 2012). Specifically, leveraging the advantages of foreignness in host countries can be time-consuming and resource-intensive due to the disadvantages of foreignness, such as lack of local knowledge, limited embeddedness, coordination difficulties, and travel expenses (Schmidt and Sofka, 2009; Eden and Miller, 2004). Therefore, the concept of liability of foreignness allows us to understand how foreignness affects hybrid organizations' dual performance goals and how the impact of foreignness is moderated by factors such as organization size and tenure in the host country.

Moreover, the investigation of liability of foreignness in hybrid organizations is particularly interesting due to the tension between the social and financial goals of such organizations (Wry and Zhao, 2018). Foreign hybrid organizations may for example mitigate traditional aspects of liability of foreignness such as lack of legitimacy and lack of embeddedness in the host market by gaining such legitimacy and embeddedness through satisfying social needs (Alon et al., 2020). On the other hand, the social goal imposes higher costs on foreign hybrid organizations than on domestic hybrid organizations since it requires leveraging community-level information and social networks in the host market, which are typically less accessible to foreign organizations (Chen et al., 2017). Therefore, the investigation of liability of foreignness in hybrid organizations can provide unique insight into the impact of foreignness on the trade-off between social and financial performance.

It is noteworthy that, unlike domestic hybrid organizations that have roots in the host market, foreign hybrid organizations must overcome liabilities of foreignness such as lack of embeddedness, local knowledge, and legitimacy. These liabilities of foreignness can be particularly relevant for hybrid organizations because hybrid organizations are context-dependent organizations that harness community-level information, social networks, and embeddedness to perform their operations (Mair and Martí, 2006; Dacin et al., 2011). In addition, foreign hybrid organizations must overcome the liability of foreignness related to the process of internationalization. Specifically, hybrid organizations, guided by the desire to balance their dual goals, do not necessarily internationalize into countries that offer the highest financial returns but instead often internationalize into low-income and institutionally weak countries with better opportunities for social returns (Mersland et al., 2020). Although domestic hybrid organizations also mostly operate in institutionally weak countries for the same reason, foreign hybrid organizations may experience a greater liability when operating in such a context. Specifically, institutionally weak countries are characterized by weak rule of law, poor legal quality, and corruption, and therefore economic relationships tend to be governed by social relationships rather than legal mechanisms (London and Hart, 2004). Thus, liabilities of foreignness such as unfamiliarity with and lack of embeddedness in the host country can be particularly daunting in institutionally weak contexts, where hybrid organizations often internationalize. For these reasons, this paper explores the impact of liability of foreignness on hybrid organizations by comparing the social and financial performance of foreign hybrid organizations with the social and financial performance of their domestic counterparts.

The global microfinance industry is a good empirical context in which to examine liability of foreignness in foreign hybrid organizations. Past research has demonstrated that microfinance represents a genuine hybrid business model that couples social and financial logics (Battilana and Dorado, 2010). This unique hybrid model has attracted international investors who have established, or invested in, a large number of microfinance institutions since the 1980s (Reille et al., 2011). We utilize a well-recognized global dataset of 655 microfinance institutions (MFIs) in 77 countries over the period 1998–2015. Furthermore, in this dataset, we can access transparent and high-quality data from third-party rating agencies specializing in microfinance (Beisland et al., 2014).

Our results support the theoretically motivated argument, based on Zaheer (1995), that foreignness harms the performance of hybrid organizations. We find that microfinance institutions of foreign origin have partly (i.e., the effect is statistically significant only in some models) lower financial and social performance than MFIs of domestic origin. We also found that foreignness accounts for part of the trade-off between the dual goals, as demonstrated by the partly reduced financial performance of foreign organizations relative to their domestic counterpart for an increase in social performance. The negative effect of foreignness on financial performance is more pronounced in organizations in institutionally weak host countries, but it becomes partly weaker as the size of the organization increases. By contrast, the negative effect of foreignness on social performance is independent of the institutional quality of the host country, but it becomes partly weaker as the size of the organization and the length of tenure in the host country increase. Additionally, the foreignness-related trade-off is partly stronger in larger organizations, but diminishes in organizations with longer tenure in the host country.

We contribute to the understanding of international hybrid organizations by using liability of foreignness theory, a central theory in the international business literature. Our work provides evidence that liability of foreignness lowers the financial and social performance of foreign hybrid organizations. We also reveal that liability of foreignness accounts for part of the trade-off between the dual goals, with the negative effect of foreignness on financial performance becoming more pronounced with an increase in social

<footnote n="3">³ Blended value is a term used to indicate the aim of fulfilling both social and financial goals (Emerson, 2003; Ostertag et al., 2021).</footnote>
performance. As hybrid organizations often operate in countries with weak institutions, we examine and underscore the moderating role of host country institutional quality. We emphasize that while the financial performance challenges of liability of foreignness is more pronounced in institutionally weak countries, liability of foreignness has no bearing on the social performance, regardless of the institutional quality of the host country. Moreover, we extend research that has shown the moderating role of organization size and tenure on the effect of foreignness on financial performance (Johanson and Vahlne, 1977, 2009; Blomström and Lipsey, 1991; Hennart, 2007) by showing that these variables partly also moderate the effect of foreignness on social performance. Our research underscores the significance of organizational tenure in the host country, which plays an additional moderating role in mitigating the trade-off between social and financial performance arising from foreignness in hybrid organizations. Concurrently, we shed light on the dual role of organization size, highlighting its negative moderating effect on the foreignness-related trade-off between social and financial performance.

The rest of the paper is organized as follows. In Section 2, we present the theoretical background, review the literature, and formulate our hypotheses. In Section 3, we describe the data and methodology. In Section 4, we present the results, and, in Section 5, we discuss the implications. Section 6 concludes.

## 2. Literature and hypothesis development

### 2.1. Theoretical background

The concept of liability of foreignness refers to the disadvantages encountered by foreign firms compared to domestic firms in a host country. The concept, introduced by Hymer (1976), is well-established in the international business literature. Specifically, liability of foreignness refers to "all additional costs a firm operating in a market overseas incurs that a local firm would not incur" (Zaheer, 1995, p. 343). These costs may be incurred due to lack of domestic market information, unfamiliarity with the domestic cultural environment, differential treatment due to host- and home-country policy restrictions, and geographical distance barriers that entail travel costs and coordination costs (Zaheer, 1995; Zaheer and Mosakowski, 1997).

Following the pioneering work of Zaheer (1995), several studies demonstrated the effect of foreignness in different industries (Denk et al., 2012). Some notable examples are the lower X-efficiency of foreign banks (Miller and Parkhe, 2002), as well as the lower profitability (Zaheer, 1995) and lower survival rate (Zaheer and Mosakowski, 1997) of foreign banks in trading rooms. Similarly, in the manufacturing sector, past studies have shown that liability of foreignness increases the likelihood of foreign affiliates exiting from a host country (Hennart et al., 2002) and engaging in lawsuits (Mezias, 2002).

Initially, the notion that foreign firms incur additional costs compared to domestic firms was called the "cost of doing business abroad" (Hymer, 1976) and was only later dubbed "liability of foreignness" (Zaheer, 1995; Zaheer and Mosakowski, 1997).<fnref n="4" /> However, subsequent research has shown that these disadvantages of foreignness may be offset by certain advantages. Specifically, internalization theory emphasizes how international firms exploit their distinct advantages (such as knowledge sets, human capital, patents, etc.) when crossing national borders (Rugman and Verbeke, 2003; Eden and Miller, 2004).

Thus, when examining liability of foreignness, it is essential to look into the advantages as well as the disadvantages of being a foreign firm as opposed to a domestic firm to achieve a nuanced understanding of the effect of liability of foreignness on firm performance (Edman, 2016; Zaheer and Mosakowski, 1997).

### 2.2. Advantages and disadvantages of being a foreign firm and their relevance and uniqueness in a hybrid context

#### 2.2.1. Advantages

International business research on regular for-profit firms highlights that firms cross national borders to deploy their firm-specific advantages efficiently (Rugman and Verbeke, 2003). Specifically, internalization theory research explains that for-profit firms cross national borders to decrease the transaction costs associated with deploying their firm-specific advantages such as technologies, know-how, and other similar intermediate products.

Efficiency is still important in hybrid organizations because hybrid organizations aim not merely to address social issues but to do so in a financially sustainable manner. Hence, hybrid organizations internationalize to deploy firm-specific advantages that can be used to address certain social needs efficiently (Zahra et al., 2008). These firm-specific advantages include relevant skills for supplying social needs, access to international networks or international best practices, and innovative business models (Zahra et al., 2008; De Beule et al., 2020; Mersland et al., 2011). Thus, hybrid organizations cross national borders into countries where social issues are rampant to efficiently leverage their unique advantages for solving such problems (Zahra et al., 2008). In this regard, just like foreign for-profit firms, foreign hybrid organizations can adapt their firm-specific advantages to the host market (Earne et al., 2014; De Beule et al., 2020).

However, deploying firm-specific advantages across borders often comes with higher fixed costs (Moen, 1999). For example, setting up technologies, standardized systems, and procedures often entails higher fixed costs that require the organization to scale in order to spread the cost and reap the benefit (Hennart, 2007). However, given that hybrid organizations often internationalize into developing countries, the institutional context of the host country (e.g., weak regulatory system, political instability, etc.) may make the

<footnote n="4">⁴ Although Hymer's "cost of doing business abroad" is broader than Zaheer's "liability of foreignness," both concepts refer to the fact that foreign firms are at a disadvantage compared to domestic firms (Eden and Miller, 2001).</footnote>
implementation of firm-specific advantages costly (Earne et al., 2014). Moreover, since hybrid organizations are locally embedded, a system that works in one country may not work in another and hence may incur international adaptation costs (Chen et al., 2017). Thus, to leverage firm-specific advantages (international talent, technology, knowledge transfer, etc.), a foreign hybrid organization needs to scale its organization further in order to offset its higher investment costs.

### 2.2.2. Disadvantages

In addition to explaining the advantages enjoyed by foreign organizations, research has identified the primary disadvantage of a foreign firm compared to a domestic firm (Zaheer, 1995; Angulo-Ruiz et al., 2020). As explained in Section 1, hybrid organizations operate with both social and financial logics; thus, such organizations require not only firm-specific knowledge and resources but also social embeddedness in the host country (Mair and Martí, 2006; Chen et al., 2017). Collaboration and alliances with domestic players and beneficiaries are means of gaining local information and legitimacy and, as such, are vital for the creation of social value (Hart and Sharma, 2004; London and Hart, 2004). The context-dependent nature of hybrid organizations implies that the disadvantages of foreignness such as lack of host-country information, embeddedness, and legitimacy are formidable. Indeed, these disadvantages can result in substantial costs for foreign hybrid organizations in the host country.

On the other hand, liability of foreignness in hybrid organizations is particularly unique due to the tension and trade-off between the dual goals of social and financial performance, where one goal may be achieved at the expense of the other goal (Wry and Zhao, 2018). Most importantly, the social goal delivers social value to the local community; thus, it is an ongoing source of legitimacy (Sinkovics et al., 2014). The social goal is also greatly valued by local partners such as cooperatives and civil society organizations; thus, it can be an essential means of connecting with local players (London and Hart, 2004; London et al., 2010). Moreover, the social goal entails the involvement of both consumers and local players, which is vital for gaining local market information. In a nutshell, the social goal is an essential means of decreasing liability of foreignness by way of increasing legitimacy, connections, and local market information. Foreign hybrid organizations that normally lack legitimacy, connections, and local market information can prioritize their social goal at the expense of their financial goal. Therefore, liability of foreignness is not necessarily manifested in the same way in relation to the two goals because it can decrease financial performance while increasing social performance.

Indeed, foreign hybrid organizations aim to achieve higher social performance than domestic hybrid organizations to mitigate liability of foreignness. This does not mean that foreign hybrid organizations do not experience liability of foreignness in achieving social performance. Given that high social performance is essential for decreasing liability of foreignness, foreign hybrid organizations may strategically focus on social performance by trading-off between the two goals. However, achieving social performance can be daunting for foreign compared to domestic hybrid organization due to liability of foreignness. As a result, a unit increase in social performance can impose a higher financial performance challenges for foreign compared to domestic hybrid organizations.

To see this, consider that foreign hybrid organizations lack host-country roots; accordingly, they lack local market information and the familiarity needed to attain social performance (Angulo-Ruiz et al., 2020). By contrast, domestic hybrid organizations have host-country roots; accordingly, they can easily understand customers' needs and access the domestic resources needed to achieve social performance. Thus, the cost of achieving social performance is higher for foreign hybrid organizations than for their domestic counterparts.

Furthermore, social issues that are ineffectively dealt with by a government often drive the widespread establishment of foreign and domestic hybrid organizations in institutionally weak countries (Zahra et al., 2008). Institutionally weak countries create a greater need to address social issues (Tashman et al., 2019), but, at the same time, they are more susceptible to liability of foreignness precisely because of those institutional voids. In this regard, the institutional quality of the host country potentially interacts with liability of foreignness.

In institutionally weak countries, institutional voids such as weak rule of law, poor legal quality, and corruption force business relationships to be governed by social rather than legal governance mechanisms (Khanna and Yafeh, 2007; De Soto, 2000). Thus, getting fine-grained insight into consumer needs, services, and products remarkably requires embeddedness in the local context (London et al., 2010; London and Hart, 2004). As a result, foreign organizations can face substantial challenges of information asymmetry due to a lack of embeddedness and be exposed to higher costs due to liability of foreignness.

Norwegian-based Alliance Microfinance, a hybrid organization that expanded into Liberia in 2015, is a good example. According to interviews we conducted with the CEO in Norway as well as the foreign CEO in Liberia, the lack of host-country information was a crucial challenge for the organization, particularly in a less developed and institutionally weak country like Liberia. As a result of this lack of host-country information, Alliance Microfinance set up its first main office in Liberia in a suboptimal location far away from where its target clients were located. This further exposed the organization to unforeseen and significantly high start-up costs.

On the other hand, the social goal makes a greater marginal contribution to society when underlying social problems are rampant (Sinkovics et al., 2014). In countries beset by social problems, the social goal is an important means of organizational success since people and partner organizations seldom accept, let alone support, organizations that do not pursue a social goal (Sinkovics et al., 2014: London et al., 2010). In this regard, the social goal can be an even more decisive means of gaining legitimacy and embeddedness in the local market in institutionally weak countries than in institutionally strong countries. Thus, foreign hybrid organizations facing challenges of legitimacy and embeddedness may follow a strategy of achieving high social performance at the expense of financial performance.

### 2.3. Hypotheses

Based on the theoretical arguments presented in Sections 2.1 and 2.2, we formulate the following hypotheses to guide our analysis of liability of foreignness in foreign hybrid organizations.
### 2.3.1. Financial performance, social performance, and the foreignness trade-off

#### 2.3.1.1. Financial performance.
Hybrid organizations are commonly initiated by impact investors who aim to combine social and financial performance as the core goal (Marshall, 2011; Chen, 2012). Often, impact investors from the global North (developed countries) initiate foreign hybrid organizations in the global South (developing countries) (Zahra et al., 2008; Cull et al., 2015). Like regular for-profit organizations operating in such settings, these hybrid organizations face various liabilities of foreignness. Following Zaheer (1995), we argue that unfamiliarity with local conditions and heightened communication, transportation, and coordination problems can result in higher administrative costs and lower financial performance in foreign hybrid organizations than in domestic hybrid organizations. In particular, a foreign hybrid organization having limited social embeddedness in a host country can incur significant costs due to the contextual nature of its activity.

While foreign hybrid organizations possess competitive advantages that support their internationalization, they still face substantial costs when it comes to adapting these advantages to the host context. This process can be resource-intensive and time-consuming, due to foreign hybrid organization limited embeddedness and knowledge of the host country, as well as their coordination and travel expenses, which are especially salient in these context-dependent hybrid organizations. Hence, the direct impact of these costs can be substantial even if they can be potentially attenuated through organizational learning over time and with organizational scaling.

Therefore, we propose the following hypothesis:

**Hypothesis 1-A.** Foreign hybrid organizations, on average, have lower financial performance than domestic hybrid organizations.

#### 2.3.1.2. Social performance.
Research indicates that attaining social goals requires social capability, i.e., the capability of leveraging internal and external community relationships (Teegen et al., 2004; Tate and Bals, 2016). Hybrid organizations that aim to reach out to the lower-income segments of society need to harness community-level information and social networks, which are typically less accessible to foreign organizations (Chen et al., 2017). In this regard, domestic hybrid organizations have a stronger local connection with local community groups and leaders than foreign hybrid organizations (Yang and Wu, 2015). Their local roots help domestic hybrid organizations to understand customers' needs and to gain the legitimacy and local resources needed to achieve social performance (Dacin et al., 2011). By contrast, foreign hybrid organizations with limited local roots lack the local information, familiarity with local conditions, and legitimacy needed to attain social performance (Angulo-Ruiz et al., 2020). These liabilities can hinder the social performance of foreign hybrid organizations compared to domestic hybrid organizations.

On the flip side, foreign hybrid organizations could bring along competitive advantages such as proven managerial systems, innovative business models, and access to international talent from their international networks or experience (De Beule et al., 2020). Although localizing these advantages may come at high costs, the advantages can improve the social performance of foreign hybrid organizations compared to domestic ones. Moreover, these advantages of foreignness can exert a substantial influence on the strategic decisions of foreign hybrid organizations. As long as these organizations maintain a viable level of financial sustainability, they may prioritize social performance by leveraging their unique firm-specific advantages. Indeed, the direct impact on social performance may not be substantial or immediately fully apparent, given that adapting the advantages to the host context takes time.

At the same time, it is important to note that social performance generates social value within the host country, as shown in the works of Alon et al. (2020) and Maruyama and Wu (2015). This implies that a strong commitment to social objectives reflects the organization's dedication to contributing to and addressing the concerns of the host country. Thus, as noted by Sinkovics et al. (2014) and Maruyama and Wu (2015), the social goal is essential for gaining legitimacy and connections in the host country. Social performance also entails active engagement with consumers and local stakeholders (Sundaramurthy et al., 2013; Hart and Sharma, 2004). Hence, a strong commitment to social goals fosters deeper connections with local stakeholders and facilitates gathering valuable local market knowledge (London and Hart, 2004; Mithani, 2017). In summary, achieving higher social objectives collectively serves as a valuable strategy for addressing the challenges posed by liability of foreignness, such as limited legitimacy, embeddedness, and familiarity in the host country (Sinkovics et al., 2014; Maruyama and Wu, 2015). While liability of foreignness deters social performance, social performance is an essential means of decreasing liability of foreignness (Sinkovics et al., 2014; Maruyama and Wu, 2015; Alon et al., 2020).

Specifically, within the context of our study, people and potential partner organizations have social performance expectations for hybrid organizations as social performance is one of the two goals of hybrid organizations. Hence, foreign hybrid organizations must demonstrate their commitment to social performance as one of their fundamental dual goals but also to a high degree that can allow them to gain the legitimacy and acceptance, they lack in the host country.

We argue that foreign hybrid organizations can achieve high social performance due to the possibility of a trade-off between the two goals. To the extent that favoring one of the goals over the other goal facilitates better long-term dual performance, a trade-off can be a rational strategic decision. For this reason, foreign hybrid organizations uphold high social performance since a social goal can help them overcome their liability of foreignness obstacles and thereby gradually improve their dual performance.

Therefore, we propose the following hypothesis:

**Hypothesis 1-B.** Foreign hybrid organizations, on average, have higher social performance than domestic hybrid organizations.

#### 2.3.1.3. The foreignness trade-off.
Even if foreign hybrid organizations need to achieve higher social performance to mitigate liability of foreignness, attaining social performance can be more challenging for foreign hybrid organizations than for domestic hybrid
organizations. This is due to liability of foreignness barriers to social performance. As a result, although foreign hybrid organizations uphold high social performance, each unit increase in social performance decreases more the financial performance of foreign hybrid organizations compared to domestic hybrid organizations in the host country.

To see this, note that foreign hybrid organizations typically have limited knowledge of the local social context and limited embeddedness in the local market (Yang and Wu, 2015). Yet, precisely such knowledge and embeddedness are required in order for foreign hybrid organizations to acquire resources such as information, products, labor, etc. needed to reach the marginalized segment of society (Tate and Bals, 2016). In other words, foreign hybrid organizations require a large amount of resources to adapt to the host-country context and, therefore, adopt a strategy of deepening social performance tailored to the specific context of the host country (Ambos et al., 2020). As a result, a high social performance orientation can be associated with a higher financial cost for foreign hybrid organizations than for domestic hybrid organizations in a given host market. This suggests that the foreign hybrid organization's level of social performance interacts with the effect of foreignness on financial performance.

**Hypothesis 1-C.** An increase in social performance increases the negative effect of foreignness on financial performance.

## 2.4. Moderating effects

### 2.4.1. The host-country institutional context

As mentioned earlier, foreign investors and donors typically establish hybrid organizations to address rampant social needs in emerging markets. In emerging markets, these organizations face regulatory systems and formal contract enforcement mechanisms that are undeveloped (Khanna and Yafeh, 2007). Often, the institutional systems of emerging markets are weak in that contractual agreements are enforced primarily by social and not legal governance mechanisms, and informal social relationships play a predominant role in formal legal procedures (De Soto, 2000). Thus, compared to their domestic counterparts, foreign hybrid organizations are markedly less familiar with and embedded in the host country since they commonly do not have a well-established network of relationships with domestic social institutions (Webb et al., 2010; Van den waeyenberg and Hens, 2012). Hence, we argue that liability of foreignness is more pronounced in institutionally weak countries.

According to London and Hart (2004), economic, social, cultural, and environmental factors are highly intertwined in less developed and institutionally weak countries. As a result, firms without sufficient understanding of the institutional context and without embeddedness in the domestic social network cannot be expected to meet the challenge of overcoming liability of foreignness (London and Hart, 2004; Schuster and Holtbrügge, 2012). This challenge is particularly daunting for foreign hybrid organizations initiated in the global South (developing countries) by investors from the global North (developed countries) (Zahra et al., 2008; Cull et al., 2015).

Therefore, we propose the following hypothesis:

**Hypothesis 2-A.** The negative effect of foreignness on financial performance is more pronounced in institutionally weak countries.

On the other hand, since underlying social problems are more visible in institutionally weak countries, people and potential partner organizations in those countries greatly value the social goal. As a result, the social goal considerably helps foreign hybrid organizations to connect with local players and gain legitimacy in the local market (Sinkovics et al., 2014). In fact, connections with local players and legitimacy are particularly essential in institutionally weak countries due to institutional voids such as weak rule of law and poor legal mechanisms, where contractual agreements and business relations are governed more by social than by legal mechanisms. Moreover, as explained above, connections with local players and legitimacy are also essential in order for foreign organizations to overcome liability of foreignness (Zaheer, 1995; Zaheer and Mosakowski, 1997). Hence, foreign hybrid organizations may adopt a strategy of achieving high social performance to gain local connections and legitimacy in the host country. For these reasons, foreign hybrid organizations that approach institutionally weak countries may achieve better social performance than their domestic counterparts.

Therefore, we propose the following hypothesis:

**Hypothesis 2-B.** The positive effect of foreignness on social performance is more pronounced in institutionally weak countries.

### 2.4.2. Scaling

Research has recognized that foreign firms have a number of advantages that may offset the disadvantages of foreignness (Sethi and Judge, 2009; De Beule et al., 2020). As explained in Section 2.2, these advantages include, among other things, advanced managerial systems, international best practices, and access to international talent (Mersland et al., 2011; De Beule et al., 2020). These advantages are essential for advancing product development and productivity, which are crucial for both social and financial performance (De Beule et al., 2020).

Nonetheless, transferring the advantages from the home country to the host country can be costly and require scaling (Blomström and Lipsey, 1991; Hennart, 2007; Earne et al., 2014). Specifically, adapting these firm-specific advantages to the specific context of the host country involves costs related to liability of foreignness such as higher travel and coordination costs. Most of these costs are also fixed (Caves and Caves, 1996; Sethi and Guisinger, 2002). After all, hybrid organizations engage in contextually contingent activities (Dacin et al., 2011), which make offering standardized products in the host market daunting. Therefore, adapting the advantages to the specific context of the host country can entail high fixed costs (De Beule et al., 2020). For foreign hybrid organizations facing such disadvantages, size matters because scaling can lower the per-unit cost of transferring the advantages from the home country and adapting them to the host context. Organization size can thereby alleviate the impact of liability of foreignness on financial performance.
Moreover, given that organization size helps to contain the per-unit cost of transferring the firm-specific advantages to the host context, foreign hybrid organizations can better leverage their firm-specific advantages at large organization size than smaller organizations size. Thus, compared to domestic hybrid organizations, foreign hybrid organizations improve more their social and financial performance as the size of the organization increases. This is because the firm-specific advantages of foreign organizations adopted at large organizations size enable them to productively address social issues (De Beule et al., 2020). For example, when advantages such as international best practices and innovative business models are well adapted to the host-country context, it increases the competitive positions of foreign hybrid organizations compared to domestic hybrid organizations in achieving both social and financial performance.

On the other hand, organization size increases the visibility of the organizations in the host country (Eden and Miller, 2004). Thus, as organization size increases, foreign compared to domestic hybrid organizations are often more pressured to improve their social performance in order to maintain their legitimacy in the host country.

Furthermore, the literature relates scaling to financial strength (Eden and Miller, 2004), and interaction with a diverse set of stakeholders (Hart and Sharma, 2004), all of which open up possibilities for garnering domestic market information. Thus, large organization size can mitigate the effect of liability of foreignness on their social and financial performance.

In addition, as organizations scale, the foreign hybrid organization's increased access to community-level information and networks can mitigate their lower financial performance encountered for a unit increase in social performance compared to their domestic counterpart. This improvement in the foreignness-related trade-off can also occur because scaling allows foreign hybrid organizations to effectively implement and leverage their strategies for enhancing social performance within the specific context of the host country. Consequently, in larger organizations, foreign compared to domestic hybrid organizations can improve their lower financial performance associated with an increase in social performance by leveraging their firm-specific advantages, community-level information, and networks. As a result, the interaction effect between foreignness and social performance has a more pronounced negative effect on financial performance in smaller hybrid organizations but not in larger hybrid organizations.

In this regard, we propose the following hypotheses:

**Hypothesis 3-A.** An increase in the size of the organization decreases the negative effect of foreignness on financial performance.

**Hypothesis 3-B.** An increase in the size of the organization increases the positive effect of foreignness on social performance.

**Hypothesis 3-C.** An increase in social performance increases the negative effect of foreignness on financial performance, such that the negative effect diminishes in larger organizations.

### 2.4.3. *Organization tenure in the host market*

In line with Johanson and Vahlne's (1977, 2009) and Zaheer and Mosakowski's (1997) classic studies on the effect of learning on for-profit firms, it is reasonable to expect a similar effect of learning on foreign hybrid organizations. Specifically, learning occurs as the foreign hybrid organization accumulates information about, gains familiarity with, and becomes embedded in the new market. Hence, it is likely that the learning of a hybrid organization mitigates the effect of liability of foreignness on financial and social performance.

As the liability of foreignness is reduced with a longer foreign hybrid organization's tenure in the host country, we expect a reduced need for foreign hybrid organizations to use social performance as a means of gaining legitimacy and getting access to important stakeholders. However, we do not completely discount the potential that foreign hybrid organizations may leverage social performance as a means of gaining or maintaining legitimacy and connection in the host country, because liability of foreignness may not entirely disappear over time.

On the other hand, as a foreign hybrid organization's tenure in a host country increases, it gains greater familiarity, legitimacy, and embeddedness in the host market (Johanson and Vahlne, 2009). Consequently, the foreign compared to the domestic hybrid organization's lower financial performance encountered for an increase in social performance can improve over time. This improvement with time can also occur because the foreign hybrid organization combine better its firm-specific advantages in the host context, building a network and knowledge base within the host country over time.

Similarly, the social performance of foreign hybrid organizations compared to their domestic counterparts can also improves over longer tenure for the two reasons. First, foreign hybrid organizations in the host country may achieve their social performance goal more easily due to the fact that liability of foreignness decreases over time. Second, foreign hybrid organizations may leverage their firm-specific advantages (e.g., knowledge transfer, technology and, international talent) that have been effectively deployed in the host country over time, thereby improving their social performance more than that of their domestic counterparts.

Therefore, we propose the following hypotheses:

**Hypothesis 4-A.** An increase in the length of tenure in the host country decreases the negative effect of foreignness on financial performance.

**Hypothesis 4-B.** An increase in the length of tenure in the host country increases the positive effect of foreignness on social performance.

**Hypothesis 4-C.** An increase in social performance increases the negative effect of foreignness on financial performance, such that the negative effect diminishes in the later years of the organization's tenure in the host country.
# 3. Data and method

## 3.1. Context

The microfinance industry is a relevant context for this study for several reasons. First, the microfinance business model is a prominent hybrid model, providing financial services to populations excluded from the conventional financial sector (Battilana and Dorado, 2010). At the end of 2018, microfinance institutions (MFIs) globally reported to Microfinance Barometer that they had provided microloans to >139 million individuals (Microfinance Barometer, 2019).

Second, international investors have been actively engaged in establishing new MFIs in various foreign countries (Cull et al., 2015). Reille et al. (2011) report that around half of the investments of foreign development finance institutions are earmarked for the establishment of greenfield microfinance institutions. An important feature of a greenfield MFI is that a holding company (i.e., the international investors) plays a central role in its creation and various aspects of its operation (Earne et al., 2014). This makes greenfield MFIs a particularly attractive empirical context in which to test liability of foreignness in a hybrid setting.

Moreover, most international greenfield MFIs are established in developing countries by investors from developed countries.<fnref n="5" /> As a result, the institutional and cultural heterogeneity between the home and host countries is normally high. These home- vs. host-country disparities are consistent with the literature on the internationalization of hybrid organizations (e.g., Zahra et al., 2008).

Third, the microfinance industry has transparent and high-quality data as a result of third-party rating agency scrutiny and the push for transparent information by international institutional donors, such as the World Bank microfinance unit CGAP (Beisland et al., 2014). This is a rare exception to the low quality of data on most other industries in emerging markets (Beisland et al., 2014).

## 3.2. Data

To test our hypotheses on the global microfinance industry, we use information from MFIs rated by at least one of the top five rating agencies specializing in microfinance, namely, MicroRate, Microfinanza, Planet Rating, CRISIL, and M-CRIL. In all, we have a sample of 655 MFIs in 77 countries for the period 1998–2015. Our sample is well suited for studying internationalization in microfinance since MFIs are often required to undergo a third-party rating when they need international collaboration and funding. Therefore, the dataset reflects MFIs that are internationally oriented and transparent, i.e., willing to let a third party review their business practices and performance. The dataset is an up-to-date version of the dataset used in numerous previous studies (e.g., Mersland et al., 2011; Hartarska et al., 2013; Golesorkhi et al., 2019a).

The dataset has several advantages over other datasets often used in microfinance research, such as the MIX Market dataset (www.mixmarket.org). First, the dataset contains more information that is particularly pertinent to our study, such as information on the international features of MFIs. Second, the dataset is hand-collected and verified by a third-party rating agency and not self-reported by MFIs, as is the case with the MIX Market dataset. Third, the dataset has less of a large-MFI bias than the MIX Market dataset (Golesorkhi et al., 2019b). To facilitate comparisons, the data entry on relevant variables has been dollarized and annualized using the official exchange rate at the time.

To analyze the data, we first present summary statistics of the variables used in the study. We then conduct a two-way comparison of foreign and domestic MFIs. Finally, we run multiple regression analyses to control for confounding factors that can create systemic differences between the two groups.

Since our two performance variables (the dependent variables of social and financial performance) are likely to be interdependent, we use a seemingly unrelated regression (SUR) model that allows for the correlation of errors between equations (Zellner, 1962). In this interdependent performance variables context, the SUR model provides more efficient estimates than separate least squares estimates (Zellner, 1962). The general form of our model is thus as follows:

Microfinance performance = *f* (foreign MFI, foreign MFI and social performance,<fnref n="6" /> foreign MFI and institutional quality of the host country, foreign MFI and MFI size, foreign MFI and MFI tenure, control variables, *ε*).

## 3.3. Measures of dependent and independent variables

We measure financial performance in terms of financial sustainability and cost indicators. First, since we are focusing on a hybrid industry, where both client satisfaction and financial return to investors and donors are important, we see a need to look at both financial sustainability and costs. In markets with perfect competition, the cost side does not matter, but in markets with imperfect competition, such as in most microfinance markets, addressing the cost side becomes necessary (McIntosh and Wydick, 2005). Specifically, in markets with imperfect competition, MFIs can easily transfer high operational costs to clients through high-interest rates while still maintaining a high level of financial sustainability (Hudon and Ashta, 2013). Second, minimizing cost is an essential operational objective of hybrid organizations to ensure their financial sustainability. Third, higher social performance can potentially

<footnote n="5">⁵ Examples of investors or MFIs from developing countries establishing greenfield MFIs in other developing countries are uncommon. A notable exception is the Bangladeshi MFI BRAC, which established greenfield MFIs in Uganda, Liberia, and several other low-income countries (Reille et al., 2011).</footnote>

<footnote n="6">⁶ The interaction term “foreign MFI and social performance” is considered only in the financial performance regression to examine the contingency of the cost impact of foreignness on social performance.</footnote>
increase costs even if the organization still satisfies operational self-sufficiency. This is due to the trade-offs based on the negative relationship between the financial and social performance of these organizations.

To measure financial sustainability, we use operational self-sufficiency (OSS), which indicates how well an MFI covers its costs by the means of operating revenues. Past research has also used OSS as a typical measure of financial sustainability (e.g., Mersland and Strøm, 2009; Golesorkhi et al., 2019a). To proxy for the cost of MFIs, we use the operating expense ratio, which is the largest cost component of the MFI and covers both personnel and administrative costs (Randøy et al., 2015). We adjust the operating expense ratio to MFI size by dividing it by the annual average total assets. Accordingly, the operating expense ratio shows the organization's overall efficiency (Randøy et al., 2015).

We measure social performance using the average loan size provided to individual microfinance customers. This is one of the most common social performance benchmarks used by investors and microfinance researchers (Cull et al., 2007) because it is claimed to proxy for the clients' poverty level. The argument is that poorer clients take smaller loans (Schreiner, 2002; Cull et al., 2007). Hence, a smaller average loan size indicates better social performance, while a larger average loan size indicates worse social performance. In line with past research (e.g., Bos and Millone, 2015), we scale average loan size by gross national income per capita (ALS_GNI) to account for the difference in economic development between the various countries where MFIs operate.<fnref n="7" />

In addition to average loan size, we also use the logarithm of the number of credit clients as another social performance measure, as it indicates how successful the MFI is in reaching out to more clients (Table 1). Together with average loan size, the number of clients is the most used proxy for social performance in the microfinance literature (Schreiner, 2002).

The data on whether or not an MFI is foreign is recorded as a dummy variable; thus, the “foreign MFI” variable takes a value of 1 if a foreign investor initiated the MFI and 0 otherwise.<fnref n="8" /> The foreign MFIs in the sample are normally initiated as greenfield MFI in the host countries. On average, there are three MFIs of foreign origin and five MFIs of domestic origin in each sample country.<fnref n="9" /> The foreign MFIs are also mostly from Western-based countries, and >80 % of the foreign MFIs are initiated by investors from the U.S. and 14 % from Europe. Hence, the institutional and economic heterogeneity between foreign MFIs' home countries is somewhat limited, as very few are based in low-income and emerging economies.

We also create the interaction between foreign MFIs and average loan size, to measure how social performance interacts with the effect of foreignness on financial performance.

Next, we create a variable that measures the moderating effect of the host-country level of institutional quality. To do so, we interact the host-country's institutional quality variable with the foreign MFI variable. We operationalize the institutional quality latent variable by using the six interrelated and independent indicators of institutional quality developed by Kaufmann et al. (2009). These indicators are voice and accountability (VAC), political instability and violence (PIV), government effectiveness (GEF), regulatory quality (REG), rule of law (LAW), and control of corruption (COR). Since the six indicators are highly correlated, we construct a combined latent variable using principal component analysis varimax rotation. In line with previous studies, the analysis yields a single latent variable for institutional quality (Ault, 2016).

We also interact the foreign MFI and MFI tenure variables, to measure how length of tenure in the host country moderates the effect of foreignness on performance.<fnref n="10" /> Our last independent variable is an interaction between the foreign MFI and MFI size variables. The natural logarithm of an MFI's total assets is used to measure the MFI's economies of scale (Hartarska et al., 2013). We also log transform the total assets variable because of the positive skewness of the total asset's distribution (Kirkwood and Sterne, 2003), and we lag the total assets variable by one year to mitigate endogeneity concerns.

In addition, we apply firm-level and country/region-level variables to control for possible unobserved confounding effects. Hence, in line with previous research (Golesorkhi et al., 2019b; Mersland and Strøm, 2009), we control for ownership type, share of portfolio at risk, regulatory status, donations, and subsidized funding, which are scaled by MFI size, and salary of MFIs, which is scaled by gross national income.

Due to different regional microfinance networks, microfinance organizations in the same region likely share similar practices (Isern and Cook, 2004). Therefore, the regional dummy variables are included in the regression (as applied, e.g., by Golesorkhi et al., 2019a, and Mersland et al., 2011) to control for possible regional effects. The Human Development Index (HDI), a composite measure of life expectancy, education, and per capita income, is used to control for country-level development effects (Golesorkhi et al., 2019b). The latent variable derived from a principal component analysis of Kaufmann et al.'s (2009) six governance indicators is also included to control for the effects of the institutional quality of the sample countries.

In Table 2, we carry out a correlation analysis to test for multicollinearity between the variables. Most of the correlations are significant but low in magnitude and in all cases below problematic levels of 0.8 (Kennedy, 2008). The variables' variance inflation factors are also <10, consistent with Hair's (1998) cut-off for ruling out a multicollinearity problem. We also have limited concerns about a reverse causality problem because the primary variable of interest, “foreign MFI,” is exogenous.

<footnote n="7">⁷ Although no consensus exists on an appropriate measure of poverty outreach in microfinance (Armendáriz and Szafarz, 2011), average loan size is the most common proxy used in microfinance research (e.g., Ahlin et al., 2011; Mersland and Strøm, 2009).</footnote>

<footnote n="8">⁸ This sample does not have MFIs initiated by a combination of domestic and foreign investors.</footnote>

<footnote n="9">⁹ The detailed distribution of domestic and foreign MFIs across the sample of countries is available upon request from the authors.</footnote>

<footnote n="10">¹⁰ “MFI tenure” denotes years of operation of MFI in the host country.</footnote>
<table><caption>**Table 1**
Definitions and measurements of variables used in the study.</caption><thead><tr><th>Variables</th><th>Definitions</th></tr></thead><tbody><tr><td><strong>Dependent variables</strong></td><td></td></tr><tr><td><strong>Financial performance</strong></td><td></td></tr><tr><td>Operational self-sufficiency (OSS)</td><td>Total operating revenues divided by total operating expenses</td></tr><tr><td>Operating expense ratio</td><td>Operating expenses over annual average total assets.</td></tr><tr><td><strong>Social performance</strong></td><td></td></tr><tr><td>Average loan size scaled by GNI (ALS_GNI)</td><td>Average outstanding loan per credit client scaled by gross national income (GNI).</td></tr><tr><td>In_credit_clients</td><td>Natural logarithm of number of credit clients.</td></tr><tr><td><strong>Independent variables</strong></td><td></td></tr><tr><td>Foreign MFI</td><td>1 if MFI is of foreign origin, 0 otherwise.</td></tr><tr><td>Foreign MFI * L. ALS_GNI</td><td>Interaction between foreignness and lag average outstanding loan per credit client scaled by gross national income (GNI).</td></tr><tr><td>Foreign MFI * L.In_credit_clients</td><td>Interaction between foreignness and lag natural logarithm of number of credit clients.</td></tr><tr><td>Foreign MFI * Institution</td><td>Interaction between foreignness and host-country institutional quality.</td></tr><tr><td>Foreign MFI * MFI tenure</td><td>Interaction between foreignness and MFI tenure.</td></tr><tr><td>Foreign MFI * MFI size</td><td>Interaction between foreignness and MFI size measured by the natural logarithm (ln) total assets.</td></tr><tr><td><strong>MFI-level control variables</strong></td><td></td></tr><tr><td>L.MFI size</td><td>The lag of the natural logarithm of an MFI's total assets.</td></tr><tr><td>Shareholder</td><td>1 if MFI is a shareholder firm, 0 if non-profit.<sup>a</sup></td></tr><tr><td>Par30</td><td>Fraction of loan portfolio that is at least 30 days overdue.</td></tr><tr><td>Regulated</td><td>1 if MFI is regulated by banking authorities in the country, 0 otherwise.</td></tr><tr><td>MFI tenure</td><td>Years of tenure in host country.</td></tr><tr><td>Salary_GNI</td><td>Average annual employee's salary scaled by gross national income (GNI) (total personnel expenses divided by the number of employees in an MFI).</td></tr><tr><td>L. Donations and subsidies</td><td>Lag of total amount of donations and subsidies received by an MFI scaled by the total assets.</td></tr><tr><td>L. ALS_GNI</td><td>Lag average outstanding loan per credit client scaled by gross national income (GNI) (considered in the financial performance regressions).</td></tr><tr><td>L. In_credit_clients</td><td>Lag natural logarithm of number of credit clients (considered in the financial performance regressions).</td></tr><tr><td>L. Operating expense ratio</td><td>Lag operating expenses over annual average total assets (considered in the social performance regressions).</td></tr><tr><td>L.OSS</td><td>Lag total operating revenues divided by total operating expenses (considered in the social performance regressions).</td></tr><tr><td><strong>Country-level control variables</strong></td><td></td></tr><tr><td>Institution</td><td>Principal component with varimax rotation of six governance indicators that produce a single factor score.</td></tr><tr><td>HDI</td><td>A composite country index covering life expectancy, education, and income (GDP per capita).</td></tr><tr><td><strong>Regional dummies</strong></td><td></td></tr><tr><td>East_Asia_Pacific</td><td>1 if MFI is in East Asia and the Pacific, 0 otherwise.</td></tr><tr><td>Europe_Central_Asia</td><td>1 if MFI is in Eastern Europe and Central Asia, 0 otherwise.</td></tr><tr><td>Latin_America_Caribbean</td><td>1 if MFI is in Latin America and the Caribbean, 0 otherwise.</td></tr><tr><td>Middle_East_North_Africa</td><td>1 if MFI is in the Middle East and North Africa, 0 otherwise.</td></tr><tr><td>South_Asia</td><td>1 if MFI is in South Asia, 0 otherwise.</td></tr><tr><td>Sub-Saharan Africa (the reference category)</td><td>1 if MFI is in Sub-Saharan Africa, 0 otherwise.</td></tr></tbody></table>

# 4. Empirical results

## 4.1. Summary statistics

Table 3 below presents the summary statistics of the variables used in the study and the results of the t-test/chi-squared test of foreign versus domestic MFIs. The operational self-sufficiency (OSS) is 1.13 %. This ratio is above one which indicates that on average MFIs are financially self-sufficient. The average operating expense ratio (total operating expenses divided by gross assets) in the sample is 20 %. This is much higher than in commercial banking, illustrating the high costs incurred by MFIs from servicing low-income clients in institutionally weak countries (Mersland and Strøm, 2010).

As for the social performance variables, the average outstanding loan balance divided by the gross national income (GNI) per capita is 29 %. In the sample, MFIs have 22,201 credit clients on average (unreported).<sup>11</sup>

<footnote><sup>a</sup> We group NGOs and cooperatives under non-profits, and banks and non-bank financial institutions under shareholder firms (Mersland and Strøm, 2009).</footnote>

<footnote n="11"><sup>11</sup> Since the number of credit clients is positively skewed, we report the natural logarithm of the number of credit clients in the table.</footnote>
<caption>Table 2</caption>

Correlation matrix and collinearity values of variables.

<table><thead><tr><th></th><th></th><th>1</th><th>2</th><th>3</th><th>4</th><th>5</th><th>6</th><th>7</th><th>8</th><th>9</th><th>10</th><th>11</th><th>12</th><th>13</th><th>14</th><th>15</th><th>16</th><th>17</th><th>18</th><th>19</th></tr></thead><tbody><tr><td>1</td><td>OSS</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>2</td><td>Operating expense ratio</td><td>-0.321</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>3</td><td>ALS_GNI</td><td>0.0036</td><td>-0.157</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>4</td><td>ln_cred_clients</td><td>0.0802</td><td>-0.0468</td><td>-0.299</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>5</td><td>Foreign MFI</td><td>-0.0279</td><td>0.106</td><td>-0.0125</td><td>0.156</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>6</td><td>MFI size</td><td>0.146</td><td>-0.357</td><td>0.0636</td><td>0.679</td><td>0.0105</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>7</td><td>Shareholder</td><td>-0.0394</td><td>0.032</td><td>0.0463</td><td>0.0476</td><td>0.0724</td><td>0.0842</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>8</td><td>Par30</td><td>-0.229</td><td>0.000503</td><td>0.0151</td><td>-0.178</td><td>-0.125</td><td>-0.0995</td><td>-0.0202</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>9</td><td>Regulated</td><td>-0.039</td><td>-0.23</td><td>0.111</td><td>0.1</td><td>-0.00734</td><td>0.236</td><td>0.476</td><td>0.0305</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>10</td><td>MFI tenure</td><td>0.0168</td><td>-0.218</td><td>-0.0273</td><td>0.228</td><td>-0.0998</td><td>0.32</td><td>-0.29</td><td>0.0867</td><td>-0.0179</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>11</td><td>Salary_GNI</td><td>-0.124</td><td>-0.0197</td><td>0.202</td><td>0.0959</td><td>0.0735</td><td>0.126</td><td>0.121</td><td>0.0863</td><td>0.173</td><td>-0.00773</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>12</td><td>Donations and subsidies</td><td>-0.0234</td><td>-0.0314</td><td>0.0284</td><td>-0.0913</td><td>-0.018</td><td>-0.116</td><td>0.0388</td><td>0.0228</td><td>0.0376</td><td>0.0148</td><td>-0.0201</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>13</td><td>Institution</td><td>-0.00393</td><td>0.114</td><td>-0.0932</td><td>-0.0604</td><td>-0.0641</td><td>0.0578</td><td>-0.0496</td><td>0.0307</td><td>-0.165</td><td>-0.0155</td><td>-0.155</td><td>0.0456</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>14</td><td>HDI</td><td>0.15</td><td>0.0562</td><td>-0.0546</td><td>-0.133</td><td>-0.115</td><td>0.148</td><td>-0.0372</td><td>-0.0843</td><td>-0.233</td><td>0.0561</td><td>-0.561</td><td>0.0348</td><td>0.435</td><td>1</td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>15</td><td>East_Asia_Pacific</td><td>0.0235</td><td>-0.0167</td><td>0.0393</td><td>0.105</td><td>0.047</td><td>-0.0224</td><td>0.128</td><td>-0.0713</td><td>0.0814</td><td>0.0182</td><td>-0.157</td><td>-0.00466</td><td>-0.116</td><td>-0.038</td><td>1</td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>16</td><td>Europe_Central_Asia</td><td>0.146</td><td>-0.111</td><td>0.113</td><td>-0.223</td><td>0.191</td><td>-0.0292</td><td>0.2</td><td>-0.111</td><td>0.134</td><td>-0.23</td><td>-0.0943</td><td>0.0821</td><td>-0.0837</td><td>0.267</td><td>-0.128</td><td>1</td><td></td><td></td><td></td><td></td></tr><tr><td>17</td><td>Latin_America_Caribbean</td><td>0.00174</td><td>0.0792</td><td>-0.112</td><td>-0.0114</td><td>-0.25</td><td>0.116</td><td>-0.27</td><td>0.036</td><td>-0.317</td><td>0.199</td><td>-0.259</td><td>-0.0426</td><td>0.246</td><td>0.48</td><td>-0.322</td><td>-0.43</td><td>1</td><td></td><td></td><td></td></tr><tr><td>18</td><td>Middle_East_North_Africa</td><td>0.0688</td><td>0.0423</td><td>-0.0434</td><td>0.0995</td><td>0.0427</td><td>0.0307</td><td>-0.0291</td><td>-0.0184</td><td>-0.0116</td><td>-0.0531</td><td>-0.0938</td><td>-0.00958</td><td>0.145</td><td>0.0626</td><td>-0.0612</td><td>-0.0818</td><td>-0.206</td><td>1</td><td></td></tr><tr><td>19</td><td>South Asia</td><td>-0.00828</td><td>-0.0234</td><td>0.0228</td><td>0.0246</td><td>0.0583</td><td>0.058</td><td>0.0571</td><td>-0.0294</td><td>0.0556</td><td>-0.0563</td><td>0.0945</td><td>-0.000927</td><td>-0.155</td><td>-0.0765</td><td>-0.0142</td><td>-0.0189</td><td>-0.0476</td><td>-0.00906</td><td>1</td></tr></tbody></table>

Significance ($p < 0.01$, $p < 0.05$, $p < 0.1$) is shown in bold; Sub-Saharan African MFIs is our reference category for region dummies.
<table><caption>**Table 3**
Summary statistics.</caption><thead><tr><th>Variables</th><th>N</th><th>Mean</th><th>Standard deviation</th><th>Min</th><th>Max</th><th>Foreign MFI = 1<br>Mean/proportion</th><th>Foreign MFI = 0<br>Mean/proportion</th><th>T/chi-squared statistic for diff. in<br>mean or proportion</th></tr></thead><tbody><tr><td>OSS</td><td>3452</td><td>1.127</td><td>0.355</td><td>0.087</td><td>2.960</td><td>1.108</td><td>1.140</td><td>2.505**</td></tr><tr><td>Operating expense ratio</td><td>3069</td><td>0.2003</td><td>0.133</td><td>0.002</td><td>0.975</td><td>0.22</td><td>0.19</td><td>-7.182***</td></tr><tr><td>ALS_GNI</td><td>2953</td><td>0.29</td><td>1.05</td><td>0.01</td><td>16.89</td><td>0.26</td><td>0.31</td><td>1.326</td></tr><tr><td>Ln (credit_clients)</td><td>3459</td><td>8.80</td><td>1.65</td><td>1.95</td><td>13.86</td><td>9.02</td><td>8.66</td><td>-6.296***</td></tr><tr><td>Foreign MFI</td><td>3644</td><td>0.39</td><td>0.49</td><td>0.00</td><td>1.00</td><td></td><td></td><td></td></tr><tr><td>MFI size (ln [total assets])</td><td>3626</td><td>15.36</td><td>1.66</td><td>9.12</td><td>20.92</td><td>15.42</td><td>15.33</td><td>-1.674*</td></tr><tr><td>Shareholder</td><td>3598</td><td>0.39</td><td>0.49</td><td>0.00</td><td>1.00</td><td>0.42</td><td>0.36</td><td>15.33***</td></tr><tr><td>Par30</td><td>3324</td><td>0.06</td><td>0.09</td><td>0.00</td><td>0.69</td><td>0.05</td><td>0.07</td><td>7.155***</td></tr><tr><td>Regulations</td><td>3586</td><td>0.38</td><td>0.49</td><td>0.00</td><td>1.00</td><td>0.38</td><td>0.38</td><td>0.077</td></tr><tr><td>MFI age</td><td>3647</td><td>11.1</td><td>7.90</td><td>0.00</td><td>79</td><td>9.99</td><td>11.84</td><td>7.467***</td></tr><tr><td>Salary_GNI</td><td>2687</td><td>1.92</td><td>2.12</td><td>0.013</td><td>26.46</td><td>2.13</td><td>1.79</td><td>-3.886***</td></tr><tr><td>Donations and subsidies</td><td>3626</td><td>0.090</td><td>1.15</td><td>0</td><td>60.59</td><td>0.077</td><td>0.098</td><td>0.5307</td></tr><tr><td>Institution</td><td>3318</td><td>-1.12</td><td>0.899</td><td>-4.21</td><td>3.61</td><td>-1.23</td><td>-1.05</td><td>5.45***</td></tr><tr><td>HDI</td><td>3495</td><td>0.64</td><td>0.14</td><td>0.23</td><td>0.87</td><td>0.62</td><td>0.65</td><td>5.872***</td></tr><tr><td>East_Asia_Pacific</td><td>3224</td><td>0.09</td><td>0.29</td><td>0.00</td><td>1.00</td><td>0.10</td><td>0.08</td><td>3.255*</td></tr><tr><td>Europe_Central_Asia</td><td>3224</td><td>0.15</td><td>0.36</td><td>0.00</td><td>1.00</td><td>0.23</td><td>0.10</td><td>113.46***</td></tr><tr><td>Latin_America_Caribbean</td><td>3224</td><td>0.46</td><td>0.50</td><td>0.00</td><td>1.00</td><td>0.30</td><td>0.57</td><td>216.89***</td></tr><tr><td>Middle_East_North_Africa</td><td>3224</td><td>0.05</td><td>0.21</td><td>0.00</td><td>1.00</td><td>0.70</td><td>0.03</td><td>22.88***</td></tr><tr><td>South Asia</td><td>3224</td><td>0.0025</td><td>0.05</td><td>0.00</td><td>1.00</td><td>0.0032</td><td>0.002</td><td>0.451</td></tr><tr><td>Sub-Saharan Africa</td><td>3224</td><td>0.25</td><td>0.43</td><td>0.00</td><td>1.00</td><td>0.29</td><td>0.22</td><td>21.35***</td></tr></tbody></table>

Notes: Sub-Saharan African MFIs is our reference category for region dummies.

\*\* p < 0.01.

\*\* p < 0.05.

\* p < 0.1.

MFIs of foreign origin account for 39% of the total sample, demonstrating the strong foreign influence in the microfinance industry. Columns (6)–(8) show the two-way comparison of foreign and domestic MFIs. The average OSS for foreign MFIs is 1.11, whereas the average OSS for domestic MFIs is 1.14. At the same time, the average operating expense ratio for foreign MFIs is 22% compared to 19% for domestic MFIs. Both differences are statistically significant. The average outstanding loan value scaled by GNI is 26% for foreign MFIs compared to 31% for domestic MFIs, but this difference in not statistically significant. In addition, on average, foreign MFIs serve a statistically significantly larger number of credit clients compared to domestic MFIs. Taken together, the results suggest that foreign MFIs perform worse financially and partly better socially compared to domestic MFIs. This is in line with Hypothesis 1-A on financial performance and partially with Hypothesis 1-B on social performance. In Section 4.2 we test our hypotheses in a multiple regression setting.

The t-test is used when we compare a continuous variable of MFIs of foreign versus domestic origin. The chi-squared test is used when we compare categorical and dummy variables. The former test uses mean as a basis for comparison whereas the latter test uses proportion as a basis for comparison. The two tests provide a robust p-value for comparing continuous and categorical variables, respectively.

## 4.2. Multiple regression result

Tables 4 and 5 present the SUR regression results. Table 4 presents the direct effect of foreignness (row 1 of columns (1)–(4)), the interaction effect between foreignness and social performance (rows 2–3 of columns (1)–(2)), the interaction effects between foreignness and the institutional quality of the host country (row 4 of columns (1)–(4)), with MFI size (row 5 of columns (1)–(4)), and with MFI tenure in the host country (row 6 of columns (1)–(4)). Table 5 presents the interaction effect between foreignness and social performance in small MFIs (rows 2–3 of columns (1)–(2)) and large MFIs (rows 2–3 of columns (3)–(4)). Table 5 presents the interaction effect between foreignness and social performance in early (rows 2–3 of columns (5)–(6)) and late (rows 2–3 of columns (7)–(8)) years of tenure in the host market. The correlations of the errors relating to each equation are presented at the bottom of each table. Accordingly, the Breusch-Pagan test (chi-squared test and p-value) reported in each table shows that the correlation of errors across equations is statistically significant (p < 0.01). These results support the use of the SUR model for having efficient coefficient estimates (Zellner, 1962).

The results presented in the tables mirror the results of the two-way analysis reported in the previous section. Table 4 shows that, ceteris paribus, the financial sustainability (OSS) of foreign MFIs is 0.4 points lower (statistically significant at p < 0.05) than the OSS of domestic MFIs (row 1 of column (1)). The operating expense ratio of foreign MFIs is not statistically significantly different from the
<caption>Table 4</caption>

The direct effect of foreignness and the interaction of foreignness with social performance, host-country institutional quality, MFI size, and MFI tenure in the host country: seemingly unrelated regression (SUR) joint estimation of financial and social performance.

<table><thead><tr><th>Variables</th><th>(1)<br>OSS</th><th>(2)<br>Operating expense ratio</th><th>(3)<br>ALS_GNI</th><th>(4)<br>ln_credi_clients</th></tr></thead><tbody><tr><td>Foreign MFI</td><td>-0.407**<br>(0.167)</td><td>0.0694<br>(0.0592)</td><td>0.602<br>(0.615)</td><td>-0.851*<br>(0.509)</td></tr><tr><td>Foreign MFI * L.ALS_GNI</td><td>0.00634<br>(0.0153)</td><td>-0.00666<br>(0.00523)</td><td></td><td></td></tr><tr><td>Foreign MFI * L.ln_credi_clients</td><td>-0.0323**<br>(0.0162)</td><td>0.00451<br>(0.00556)</td><td></td><td></td></tr><tr><td>Foreign MFI * Host-country institution</td><td>0.0459**<br>(0.0186)</td><td>-0.0299***<br>(0.00658)</td><td>0.0662<br>(0.0678)</td><td>0.00434<br>(0.0561)</td></tr><tr><td>Foreign MFI * MFI size</td><td>0.0452***<br>(0.0150)</td><td>-0.00797<br>(0.00522)</td><td>-0.0380<br>(0.0396)</td><td>0.0549*<br>(0.0328)</td></tr><tr><td>Foreign MFI * MFI tenure</td><td>0.000350<br>(0.00243)</td><td>-0.000643<br>(0.000859)</td><td>0.00182<br>(0.00890)</td><td>0.0167**<br>(0.00736)</td></tr><tr><td>L.MFI size</td><td>0.0119<br>(0.00997)</td><td>-0.0762***<br>(0.00347)</td><td>-0.0401<br>(0.0251)</td><td>0.844***<br>(0.0207)</td></tr><tr><td>Shareholder</td><td>0.000239<br>(0.0182)</td><td>0.0168***<br>(0.00643)</td><td>-0.126*<br>(0.0673)</td><td>0.161***<br>(0.0557)</td></tr><tr><td>Par30</td><td>-0.823***<br>(0.101)</td><td>0.108***<br>(0.0359)</td><td>0.0794<br>(0.376)</td><td>-2.234***<br>(0.311)</td></tr><tr><td>Regulated</td><td>-0.0267<br>(0.0187)</td><td>-0.0206***<br>(0.00660)</td><td>0.0634<br>(0.0688)</td><td>-0.213***<br>(0.0569)</td></tr><tr><td>MFI tenure</td><td>0.000847<br>(0.00118)</td><td>-0.00177***<br>(0.000418)</td><td>-0.0109**<br>(0.00438)</td><td>0.00367<br>(0.00363)</td></tr><tr><td>Salary</td><td>-0.0106*<br>(0.00569)</td><td>0.0177***<br>(0.00201)</td><td>0.203***<br>(0.0203)</td><td>-0.191***<br>(0.0168)</td></tr><tr><td>L.Donations and subsidies</td><td>-0.00750<br>(0.00459)</td><td>-0.00519***<br>(0.00163)</td><td>0.00511<br>(0.0170)</td><td>0.0417***<br>(0.0141)</td></tr><tr><td>L.ALS_GNI</td><td>0.000176<br>(0.00997)</td><td>0.00743**<br>(0.00342)</td><td></td><td></td></tr><tr><td>L.ln_credi_clients</td><td>0.00910<br>(0.0102)</td><td>0.0638***<br>(0.00351)</td><td></td><td></td></tr><tr><td>L.Operating expense ratio</td><td></td><td></td><td>-1.772***<br>(0.236)</td><td>4.077***<br>(0.191)</td></tr><tr><td>L.OSS</td><td></td><td></td><td>-0.119<br>(0.0901)</td><td>0.306***<br>(0.0725)</td></tr><tr><td>Institution</td><td>-0.0378***<br>(0.0140)</td><td>0.0240***<br>(0.00494)</td><td>-0.0996*<br>(0.0516)</td><td>-0.129***<br>(0.0427)</td></tr><tr><td>HDI</td><td>-0.0128<br>(0.154)</td><td>0.488***<br>(0.0543)</td><td>0.831<br>(0.564)</td><td>-3.831***<br>(0.466)</td></tr><tr><td>Constant</td><td>1.080***<br>(0.160)</td><td>0.505***<br>(0.0568)</td><td>0.396<br>(0.625)</td><td>-2.022***<br>(0.516)</td></tr><tr><td>Regional dummies</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td></tr><tr><td>Year dummies</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td></tr><tr><td>Observations</td><td>1513</td><td>1513</td><td>1513</td><td>1513</td></tr><tr><td>R-squared</td><td>0.142</td><td>0.343</td><td>0.126</td><td>0.658</td></tr></tbody></table>

<table><thead><tr><th></th><th>OSS</th><th>Operating expense ratio</th><th>ALS_GNI</th><th>ln_credi_clients</th></tr></thead><tbody><tr><td>OSS</td><td>1</td><td></td><td></td><td></td></tr><tr><td>Operating expense ratio</td><td>-0.2927</td><td>1</td><td></td><td></td></tr><tr><td>ALS_GNI</td><td>-0.0117</td><td>0.0959</td><td>1</td><td></td></tr><tr><td>ln_credi_clients</td><td>0.0355</td><td>-0.2511</td><td>-0.4523</td><td>1</td></tr></tbody></table>

Breusch-Pagan test of independence: chi²(6) = 550.6, Pr = 0.0000.

Standard errors in parentheses.

*** p < 0.01.

** p < 0.05.

* p < 0.1.
<caption>Table 5</caption>

The role of organization size and tenure on the interaction effect between foreignness and social performance on financial performance: seemingly unrelated regression (SUR) joint estimation of financial and social performance.

<table><thead><tr><th rowspan="3">Variables</th><th colspan="2">Small MFI size</th><th colspan="2">Large MFI size</th><th colspan="2">MFIs in their early years of tenure in host</th><th colspan="2">MFIs in their later years of tenure in host</th></tr><tr><th colspan="2">Financial performance H 3-C</th><th colspan="2">Financial performance H 4-C</th><th colspan="2">Financial performance H 4-C</th><th colspan="2">Financial performance H 4-C</th></tr><tr><th>OSS</th><th>Operating expense ratio</th><th>OSS</th><th>Operating expense ratio</th><th>OSS</th><th>Operating expense ratio</th><th>OSS</th><th>Operating expense ratio</th></tr></thead><tbody><tr><td>Foreign MFI</td><td>-1.514<sup>***</sup><br>(0.557)</td><td>0.747<sup>***</sup><br>(0.200)</td><td>-0.510<sup>*</sup><br>(0.286)</td><td>-0.0796<br>(0.0962)</td><td>-0.671<sup>**</sup><br>(0.289)</td><td>0.0126<br>(0.106)</td><td>-0.392<sup>*</sup><br>(0.221)</td><td>0.0643<br>(0.0703)</td></tr><tr><td>Foreign MFI * L.<br>ALS_GNI</td><td>0.00947<br>(0.0469)</td><td>-0.0140<br>(0.0165)</td><td>0.00448<br>(0.0158)</td><td>-0.00507<br>(0.00505)</td><td>0.00643<br>(0.0178)</td><td>-0.0119<sup>*</sup><br>(0.00613)</td><td>0.00882<br>(0.0392)</td><td>0.00527<br>(0.0123)</td></tr><tr><td>Foreign MFI * L.<br>ln_credit_clients</td><td>-0.0175<br>(0.0295)</td><td>0.00361<br>(0.0103)</td><td>-0.0425<sup>**</sup><br>(0.0194)</td><td>0.00483<br>(0.00620)</td><td>-0.0408<sup>*</sup><br>(0.0235)</td><td>-0.00429<br>(0.00810)</td><td>-0.00552<br>(0.0233)</td><td>0.00136<br>(0.00731)</td></tr><tr><td>Foreign MFI * Host-<br>country institution</td><td>0.0604<sup>*</sup><br>(0.0334)</td><td>-0.0256<sup>**</sup><br>(0.0120)</td><td>0.0158<br>(0.0223)</td><td>-0.0203<sup>***</sup><br>(0.00750)</td><td>0.00236<br>(0.0283)</td><td>-0.0430<sup>***</sup><br>(0.0104)</td><td>0.106<sup>***</sup><br>(0.0249)</td><td>-0.0243<sup>***</sup><br>(0.00790)</td></tr><tr><td>Foreign MFI * MFI<br>size</td><td>0.114<sup>***</sup><br>(0.0395)</td><td>-0.0531<sup>***</sup><br>(0.0142)</td><td>0.0544<sup>**</sup><br>(0.0219)</td><td>0.000665<br>(0.00724)</td><td>0.0611<sup>***</sup><br>(0.0231)</td><td>-0.00340<br>(0.00831)</td><td>0.0289<br>(0.0209)</td><td>-0.00328<br>(0.00661)</td></tr><tr><td>Foreign MFI * MFI<br>tenure</td><td>0.00353<br>(0.00489)</td><td>-0.00273<br>(0.00175)</td><td>-6.26e-05<br>(0.00268)</td><td>0.000292<br>(0.000902)</td><td>0.0107<br>(0.0101)</td><td>0.00479<br>(0.00371)</td><td>0.00300<br>(0.00376)</td><td>-0.00211<sup>*</sup><br>(0.00120)</td></tr><tr><td>L.MFI size</td><td>0.0356<sup>*</sup><br>(0.0200)</td><td>-0.0628<sup>***</sup><br>(0.00715)</td><td>-0.00727<br>(0.0143)</td><td>-0.0862<sup>***</sup><br>(0.00470)</td><td>0.0204<br>(0.0164)</td><td>-0.110<sup>***</sup><br>(0.00585)</td><td>-0.00696<br>(0.0129)</td><td>-0.0469<sup>***</sup><br>(0.00406)</td></tr><tr><td>Shareholder</td><td>-0.0396<br>(0.0334)</td><td>0.0178<br>(0.0120)</td><td>0.0278<br>(0.0213)</td><td>0.00782<br>(0.00715)</td><td>-0.0100<br>(0.0265)</td><td>0.0111<br>(0.00975)</td><td>0.0224<br>(0.0252)</td><td>0.0113<br>(0.00801)</td></tr><tr><td>Par30</td><td>-0.825<sup>***</sup><br>(0.173)</td><td>0.0944<br>(0.0619)</td><td>-0.852<sup>**</sup><br>(0.126)</td><td>0.150<sup>***</sup><br>(0.0424)</td><td>-0.920<sup>***</sup><br>(0.147)</td><td>0.232<sup>**</sup><br>(0.0539)</td><td>-0.526<sup>***</sup><br>(0.143)</td><td>-0.110<sup>**</sup><br>(0.0455)</td></tr><tr><td>Regulated</td><td>-0.0247<br>(0.0386)</td><td>-0.0312<sup>**</sup><br>(0.0139)</td><td>-0.0351<sup>*</sup><br>(0.0213)</td><td>-0.00647<br>(0.00713)</td><td>-0.0333<br>(0.0278)</td><td>-0.00832<br>(0.0102)</td><td>-0.00526<br>(0.0254)</td><td>-0.0344<sup>***</sup><br>(0.00807)</td></tr><tr><td>MFI tenure</td><td>-0.000378<br>(0.00256)</td><td>-0.00142<br>(0.000918)</td><td>0.00199<br>(0.00126)</td><td>-0.00175<sup>***</sup><br>(0.000423)</td><td>0.00785<br>(0.00594)</td><td>-0.00922<sup>***</sup><br>(0.00218)</td><td>-0.00221<br>(0.00156)</td><td>0.000185<br>(0.000495)</td></tr><tr><td>Salary</td><td>-0.0149<br>(0.0119)</td><td>0.0295<sup>***</sup><br>(0.00427)</td><td>-0.0132<sup>**</sup><br>(0.00627)</td><td>0.0153<sup>***</sup><br>(0.00210)</td><td>-0.0285<sup>***</sup><br>(0.00906)</td><td>0.0238<sup>**</sup><br>(0.00331)</td><td>0.00290<br>(0.00726)</td><td>0.0137<sup>***</sup><br>(0.00231)</td></tr><tr><td>L. Donations and<br>subsidies</td><td>-0.00651<br>(0.00539)</td><td>-0.00332<sup>*</sup><br>(0.00194)</td><td>0.00402<br>(0.0110)</td><td>0.00908<sup>***</sup><br>(0.00352)</td><td>-0.102<br>(0.0689)</td><td>-0.0600<sup>**</sup><br>(0.0253)</td><td>-0.00747<sup>*</sup><br>(0.00444)</td><td>-0.00319<sup>**</sup><br>(0.00141)</td></tr><tr><td>L.ALS_GNI</td><td>-0.000332<br>(0.0199)</td><td>0.00943<br>(0.00698)</td><td>0.00402<br>(0.0110)</td><td>0.00908<sup>***</sup><br>(0.00352)</td><td>-0.0133<br>(0.0116)</td><td>0.0259<sup>**</sup><br>(0.00400)</td><td>0.0342<br>(0.0299)</td><td>-0.0402<sup>***</sup><br>(0.00938)</td></tr><tr><td>L.ln_cred_clients</td><td>-0.0104<br>(0.0187)</td><td>0.0723<sup>**</sup><br>(0.00656)</td><td>0.0241<sup>*</sup><br>(0.0123)</td><td>0.0647<sup>***</sup><br>(0.00396)</td><td>-0.0241<br>(0.0164)</td><td>0.107<sup>**</sup><br>(0.00571)</td><td>0.0375<sup>**</sup><br>(0.0134)</td><td>0.0267<sup>***</sup><br>(0.00422)</td></tr><tr><td>Institution</td><td>-0.0336<br>(0.0252)</td><td>0.0107<br>(0.00903)</td><td>-0.0308<sup>*</sup><br>(0.0164)</td><td>0.0278<sup>**</sup><br>(0.00550)</td><td>-0.00641<br>(0.0213)</td><td>0.0381<sup>***</sup><br>(0.00784)</td><td>-0.0678<sup>***</sup><br>(0.0185)</td><td>0.0140<sup>**</sup><br>(0.00588)</td></tr><tr><td>HDI</td><td>-0.183<br>(0.298)</td><td>0.571<sup>***</sup><br>(0.107)</td><td>0.0221<br>(0.175)</td><td>0.478<sup>***</sup><br>(0.0587)</td><td>-0.623<sup>**</sup><br>(0.257)</td><td>0.789<sup>**</sup><br>(0.0941)</td><td>0.612<sup>***</sup><br>(0.194)</td><td>0.169<sup>**</sup><br>(0.0616)</td></tr><tr><td>Constant</td><td>0.538<br>(0.447)</td><td>0.442<sup>***</sup><br>(0.161)</td><td>1.387<sup>***</sup><br>(0.201)</td><td>0.614<sup>***</sup><br>(0.0677)</td><td>1.366<sup>***</sup><br>(0.250)</td><td>0.543<sup>***</sup><br>(0.0919)</td><td>1.096<sup>***</sup><br>(0.214)</td><td>0.482<sup>***</sup><br>(0.0679)</td></tr><tr><td>Regional dummies</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td></tr><tr><td>Year dummies</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td><td>Yes</td></tr><tr><td>Observations</td><td>557</td><td>557</td><td>956</td><td>956</td><td>667</td><td>667</td><td>846</td><td>846</td></tr><tr><td>R-squared</td><td>0.185</td><td>0.326</td><td>0.151</td><td>0.363</td><td>0.222</td><td>0.427</td><td>0.141</td><td>0.349</td></tr></tbody></table>

<table><thead><tr><th></th><th>OSS</th><th>Operating expense ratio</th><th>OSS</th><th>Operating expense ratio</th><th>OSS</th><th>Operating expense ratio</th><th>OSS</th><th>Operating expense ratio</th></tr></thead><tbody><tr><td>OSS</td><td>1</td><td></td><td>1</td><td></td><td>1</td><td></td><td>1</td><td></td></tr><tr><td>Operating expense ratio</td><td>-0.308</td><td>1</td><td>-0.2676</td><td>1</td><td>-0.2563</td><td>1</td><td>-0.3013</td><td>1</td></tr><tr><td>ALS_GNI</td><td>-0.0108</td><td>0.0763</td><td>-0.0134</td><td>0.1123</td><td>-0.0101</td><td>0.0838</td><td>-0.0212</td><td>0.1408</td></tr><tr><td>ln_credit_clients</td><td>0.0538</td><td>-0.2214</td><td>0.0192</td><td>-0.3075</td><td>0.0683</td><td>-0.3348</td><td>-0.0112</td><td>-0.149</td></tr><tr><td></td><td></td><td>Breusch-Pagan test of independence: chi²(6) = 174.0, Pr = 0.0000</td><td>Breusch-Pagan test of independence: chi²(6) = 394.4, Pr = 0.0000</td><td>Breusch-Pagan test of independence: chi²(6) = 323.1, Pr = 0.0000</td><td></td><td></td><td>Breusch-Pagan test of independence: chi²(6) = 248.0, Pr = 0.0000</td><td></td></tr></tbody></table>

Standard errors in parentheses.

Notes: We run the financial performance regressions simultaneously with the social performance regressions, using a seemingly unrelated regression estimation. For brevity, we present only the financial performance results. This is because both in *Hypotheses 3-C and 4-C* we are interested in the moderating effect of social performance on the foreignness and financial performance nexus. The social performance results are similar to columns (3) and (4) and are available upon request.

<footnote>*** p < 0.01.</footnote>

<footnote>** p < 0.05.</footnote>

<footnote>* p < 0.1</footnote>
country, a foreign MFI compared to a domestic MFI does not significantly increase either its financial sustainability (OSS) or decrease its operating expense. Hence, these results do not support the moderating effect of organization tenure on the relationship between foreignness and financial performance (Hypothesis 4-A). By contrast, with each additional year of tenure in a host country, a foreign MFI compared to a domestic MFI significantly increases the number of credit clients it serves ($p < 0.05$) (row 6 of column (4)). While row 6 of column (3) does not show a decrease in average loan size as anticipated, the result regarding the number of credit clients partially supports Hypothesis 4-B. Therefore, organization tenure in the host country increases the social performance of foreign MFIs to some extent compared to that of their domestic counterparts.

Additionally, Table 5 shows the effect of the interaction between social performance and foreignness in the early years of the MFI's tenure in the host country (rows 2–3 of columns (5)–(6)) and in the late years of the MFI's tenure in the host country (rows 2–3 of columns (7)–(8)). We divide the early and late years of the MFI's tenure in the host country by the median MFI tenure in the host country. In the early years of the MFI's tenure in the host country, low social performance (as measured by larger average loan size) does not significantly affect the financial sustainability of foreign MFIs compared to domestic MFIs (row 2 of column (5)). In the early years, low social performance (as measured by larger average loan size) significantly ($p < 0.1$) lowers the operating expenses of MFIs of foreign origin compared to the operating expenses of MFIs of domestic origin (row 2 of column (6)). Conversely, this means that high social performance, as measured by smaller average loan size, significantly increases the operating expenses of MFIs of foreign origin compared to the operating expenses of MFIs of domestic origin. Additionally, high social performance, as measured by an increase in the number of clients reached, significantly decreases financial sustainability ($p < 0.1$) but does not significantly affect the operating expenses of MFIs of foreign origin compared to MFIs of domestic origin (row 3 of columns (5)–(6)). However, during the later years of an MFI's tenure in the host country, an increase in social performance, whether measured by a smaller average loan size or a higher number of clients reached, does not significantly affect the financial performance of MFIs of foreign origin compared to MFIs of domestic origin. Therefore, at least partly, the effect of foreignness on financial performance significantly interacts with social performance only in the early years and not in the late years of an MFI's tenure in the host country, consistent with Hypothesis 4-C.

Some of the control variables also yield consistent and interesting results in Tables 4–5. For example, MFIs in institutionally strong host countries have partially (i.e., statistically significant only in some models) lower financial and social performance as indicated by higher operating expenses and smaller numbers of clients. These results may be due to the cost of complying with rules and regulations in institutionally strong countries (Ahlin et al., 2011). MFIs operating in developed countries (according to the Human Development Index) are also less efficient and reach a smaller number of clients, which may indicate that the microfinance business model fits best in developing countries (Ahlin et al., 2011).

## 5. Discussion

We find that the financial performance of foreign hybrid organizations is significantly lower than that of domestic hybrid organizations (Hypothesis 1-A). In line with the theoretical arguments of the literature on for-profit internationalization, this negative effect of foreignness on the financial performance of hybrid organizations can be attributed to their unfamiliarity with local social networks, as well as geographical and cultural barriers (Zaheer, 1995; Zaheer and Mosakowski, 1997). Indeed, liability of foreignness can have a negative financial performance effect on hybrid organizations given that the operations of hybrid organizations are grounded in local social networks and context, which are less accessible to foreign hybrid organizations than to their domestic counterparts. Additionally, the internationalization process of hybrid organizations typically follows a migratory route from the global North (developed countries) to the global South (developing countries), supported by investors from the North deploying their unique advantages in sustainably addressing social issues (Zahra et al., 2008; Earne et al., 2014; Cull et al., 2015). Adapting these firm-specific advantages to the host country can come at a high cost, given that the context-dependent nature of hybrid organizations implies that disadvantages of foreignness such as lack of host-country market information, embeddedness, and legitimacy are particularly formidable.

Moreover, our analyses reveal the same negative effect of foreignness on hybrid organizations' social performance. Specifically, we find partial evidence that, contrary to Hypothesis 1-B, foreign hybrid organizations have lower social performance (in particular, reach a lower number of clients) than their domestic counterparts. This may be because while foreign hybrid organizations possess unique firm-specific advantages that can confer a competitive edge in achieving social performance, effectively transferring these advantages from the home country to the host country, and leveraging them, requires time and resources. This becomes evident when we observe the effect of foreignness before<fnref n="14" /> and after controlling for the interaction effects between foreignness and organization size and between foreignness organization tenure in the host country. When we do not control for the positively moderating impact of size and tenure, foreign hybrid organizations appear to have higher social performance than their domestic counterparts by including the foreign organizations higher gains from organization size and tenure. However, when we hold constant the moderating effects of organization size and tenure, we observe that foreign hybrid organizations tend to attain partly lower level of social performance compared to their domestic counterparts.

The international business literature has recognized that social performance serves as a means of mitigating liability of foreignness for foreign firms (Maruyama and Wu, 2015; Sinkovics et al., 2014). Social performance serves as a vehicle for conveying credibility information about foreign firms, thereby enhancing their legitimacy within the host country (Muller, 2020; Mithani, 2017). In this

<footnote n="14">¹⁴ The lower-order model is available upon request from the authors.</footnote>
context, achieving social goals can be of strategic importance for foreign hybrid organizations not only as a fundamental objective but also as a means of addressing the challenges posed by liability of foreignness in their host market.

Despite the recognized strategic significance of social performance in addressing the liability of foreignness, foreign hybrid organizations achieve lower social performance compared to their domestic counterparts in the host country. This finding is consistent with the literature that underscores the role of community-level information and social networks in understanding customer needs and leveraging domestic resources to enhance social performance (Dacin et al., 2011; Tate and Bals, 2016). Consequently, foreign hybrid organizations, facing limitations in terms of familiarity, social networks, and legitimacy, encounter obstacles in expanding their social performance compared to their domestic peers in the host country.

Our findings also show that foreign hybrid organizations relative to domestic ones, encounter a partial reduction in financial performance for an increase in social performance. This finding is partly in line with Hypothesis 1-C. This underscores that attaining a social goal requires a hybrid organization to be socially embedded in the domestic market in order to gain the right information and resources (Tate and Bals, 2016). The reason for this is that social demand and social infrastructure are heterogeneous, and the creation of social services depends on existing social capital (Chen et al., 2017). For example, hybrid organizations that use the group-lending technique to reach the poorest segments of society rely on their clients' social capital (Hermes and Lensink, 2007). This illustrates how local market knowledge and harnessing of social capital are vital for hybrid organizations to meet their social goal. However, foreign hybrid organizations normally have limited local knowledge and are less locally embedded (Yang and Wu, 2015). Hence, foreign hybrid organizations need substantial number of financial resources to understand the host-country context and, in turn, adopt a strategy of enhancing social performance tailored to the specific context of the host country (Ambos et al., 2020). As a result, foreign hybrid organizations compared to domestic hybrid organizations face lower financial performance for an increase in social performance.

Moreover, we find that the effect of foreignness on performance is contingent upon the host country's institutional quality. Our finding supports Hypothesis 3-A and concurs with studies that highlight the formidable challenge of overcoming liability of foreignness in institutionally weak host countries (London and Hart, 2004). In such environments, informal social institutions play a predominant role in formal legal procedures due to formal institutional voids such as weak rule of law, low government effectiveness, and poor regulatory quality (De Soto, 2000; Khanna and Yafeh, 2007). Accordingly, in institutionally weak countries, the foreignness-related disadvantages of limited embeddedness and limited local market knowledge are formidable (London and Hart, 2004; Sinkovics et al., 2014). These disadvantages can be particularly challenging for hybrid organizations since such organizations need to leverage the local socioeconomic context to attain their goals (Angulo-Ruiz et al., 2020). Therefore, our finding underscores that the negative effect of foreignness on financial performance increases as the institutional quality of the host country decreases.

On the other hand, given the rampant social needs and the high value attached to social value creation in institutionally weak countries, a social goal is a particularly useful means of securing legitimacy and embeddedness in those countries (Sinkovics et al., 2014; London and Hart, 2004). The institutional voids in those countries also imply that local connections play a vital role in business relations (London and Hart, 2004). Therefore, it is vital for foreign hybrid organizations to address the high “demand” for social reform caused by the rampant social issues endemic in institutionally weak countries in order to overcome the liability of foreignness that impedes their acquisition of legitimacy, embeddedness, and market knowledge in the host country. However, our findings do not support these arguments of Hypothesis 3-B. Instead, we find that the impact of foreignness on social performance does not depend on the institutional quality of the host country.

This unexpected result might be due to foreign hybrid organizations prioritizing social performance while encountering a heightened challenge of achieving social performance due to institutional voids. The institutional voids may also increase home- and host-country dissimilarity, limiting the foreign hybrid organizations' potential to leverage their advantages in the host country. Therefore, these two opposing conditions, on the one hand, the foreign hybrid organization's high priority on social performance, on the other hand, the uphill task of achieving social performance in weak institutional countries, imply that weak institutions neither increase nor decrease the impact of foreignness on social performance.

Furthermore, we find that organization size moderates the effect of foreignness. In this regard, our finding extends De Beule et al. (2020) who argue that foreign hybrid organizations compared to domestic hybrid organizations have crucial advantages that enhance financial performance, such as financial resources, advanced technologies, international best practices, and expertise. We find that De Beule et al.'s (2020) claim holds for larger foreign hybrid organizations but not much for smaller ones. Specifically, larger foreign hybrid organizations are better equipped to manage the financial challenges associated with transferring the aforementioned advantages from the home country to the host country and adapting them to the specific context of the host country. Indeed, size can reduce the per-unit financial burden of liability of foreignness encountered in adapting firm-specific advantages to the host-country context (Sethi and Judge, 2009). The firm-specific advantages realized at a large organization's size can also enable large foreign hybrid organizations to operate with better financial sustainability. Thus, we find partial support for Hypothesis 4-A that the financial performance of foreign hybrid organizations compared to their domestic counterparts partly improves as the organization's size increases.

Moreover, we find partial support for Hypothesis 3-B, that to some extent, the social performance of foreign hybrid organizations improves in comparison to their domestic counterparts, as the organization's size increases. This finding aligns with arguments suggesting that larger foreign hybrid organizations can more easily gain familiarity with the host market and local market information because of their greater financial strength and interaction with the local community (Eden and Miller, 2004). At the same time, the visibility that comes with size (Eden and Miller, 2004) implies that larger foreign hybrid organizations may be under greater pressure to improve social performance in order to maintain their legitimacy. Additionally, the firm-specific advantages adapted at large organization's size can equip large foreign organizations to improve their social performance. For example, the firm-specific advantage of
connectedness to international donors, who tend to be more accessible to larger foreign organizations, is important as larger foreign hybrid organizations may find it necessary to demonstrate their social performance to international stakeholders (Drori et al., 2020).<fnref n="15" /> Consequently, larger foreign hybrid organizations may choose to prioritize social performance to maintain their legitimacy in the eyes of those international donors, provided, of course, that they can show a viable level of financial sustainability.

Turning to Hypothesis 3-C, our findings reveal that contrary to this hypothesis, in larger organization samples, foreign compared to domestic hybrid organizations partly face significant decrease in financial performance for an increase in social performance. Whereas in smaller organization samples, the significance diminishes, indicating foreign compared to domestic hybrid organizations do not encounter a significance difference in financial performance for an increase in social performance.

The potential explanation for this counterintuitive finding may lie in heightened challenges in maintaining legitimacy—an aspect of liability of foreignness that increases with organization size (Kostova and Zaheer, 1999). International business research underscores that while an increase in organization size reduces liabilities of foreignness, such as limited connections in the local market, it also increases the difficulty of maintaining legitimacy due to increased visibility (Kostova and Zaheer, 1999; Eden and Miller, 2004). In this respect, our findings demonstrate that large organization size constitutes a double-edged sword for foreign hybrid organizations, conferring both advantages and disadvantages. On the one hand, as previously described in the findings to Hypotheses 3-A and 3-B, the advantages of large organization size help to mitigate the lower social and financial performance effect of foreignness. On the other hand, the disadvantages of large organization size potentially pressure foreign hybrid organizations to augment social performance, as discussed in the findings to Hypothesis 3-B. As well as, the disadvantages potentially aggravate foreignness-related lower financial performance linked to an increase in social performance, as described in the contrary finding to Hypothesis 3-C. Besides, the improvement in the effect of foreignness on financial performance, coupled with the worsening of foreignness-related lower financial performance linked to an increase in social performance, suggest that foreignness may interact with an organization's various activities and service offerings in nuanced ways. This intriguing finding paves the way for more in-depth investigations, as outlined in the future research directions section.

Finally, our findings do not support Hypothesis 4-A but partly support Hypotheses 4-B and 4-C. Specifically, our study reveals that the length of tenure of a foreign hybrid organization in the host country does not moderate the effect of foreignness on financial performance. However, it positively moderates the effect of foreignness on social performance and positively moderates the effect of the interaction between foreignness and social performance on financial performance.

The fact that our findings do not support Hypothesis 4-A that longer tenure mitigates the effect of foreignness on financial performance is surprising. The robustness of liability of foreignness to length of tenure may be attributed to the fact that hybrid organizations engage in contextually contingent activities. Furthermore, the outcome may be linked to the possibility that foreign hybrid organizations evolve over time, adapting their advantages to the host country's context, with an increased emphasis on social performance once sustainable financial performance has been achieved.

On the other hand, we find partial support for Hypothesis 4-B, indicating that foreign hybrid organizations' social performance improves with longer tenure in a host country. These organizations gain local market knowledge, embeddedness, and legitimacy over time and, as a result, become increasingly able to adapt their firm-specific advantages to the host country and thereby increase their social performance. Importantly, the advantages of foreign hybrid organizations, such as their connections with international donors, often serve as a resource for their superior social development models, managerial systems, and talent (De Beule et al., 2020). Consequently, as foreign hybrid organizations continue to adapt these advantages to the host context over time, they may choose to prioritize social performance in order to maintain their legitimacy in the eyes of their international donors.

Moreover, we cannot rule out that liability of foreignness persists as formidable obstacle, within the context of organizations as context dependent as hybrids. As a result, the gradual improvement in social performance may not solely be attributed to the advantages of foreignness. Given that liability of foreignness for hybrid organizations may decline but not completely vanish over time, social performance may remain an essential means of maintaining legitimacy and fostering connections in the host country for foreign hybrid organizations. This is especially true since hybrid organizations need to be intricately integrated into their local context, making high social performance a crucial means for maintaining legitimacy and connections for foreign hybrid organizations.

The findings also provide partial support for Hypothesis 4-C indicating a diminish in the foreignness related trade-off between social and financial performance over time. This diminish in the foreignness-related trade-off can be attributed to the gradual adaptation of foreign hybrid organizations' firm-specific advantages to the host country context, enabling them to better overcome the higher financial performance challenges associated with achieving social performance. Additionally, this diminish in the foreignness-related trade-off over time may be linked to a gradual decrease in liability of foreignness. While the decrease in liability of foreignness does not improve overall financial performance, as demonstrated in the lack of supporting evidence for Hypothesis 4-A, it appears to gradually reduce the foreignness-related financial performance challenges associated with achieving high social performance, as demonstrated in the partial support for Hypothesis 4-C. This finding reinforces the complexity of foreignness interaction and open an opportunity for future research to delve into the subtle interactions between foreignness and various service offering of the organizations as highlighted in the future research section.

<footnote n="15">¹⁵ Although we control for donations and subsidies in our regression analysis, we cannot entirely rule out the possibility that the donors themselves may exert an influence, irrespective of the donation amount.</footnote>
# 6. Conclusion

This study aims to extend the concept of liability of foreignness from the international business literature on for-profit firms to performance issues related to the internationalization of hybrid organizations. We argue that hybrid organizations are a special case due to their dual goals of financial sustainability and social value creation. In particular, we analyze how liability of foreignness harms the financial and social performance of hybrid organizations operating in overseas markets.

We test our hypotheses on a global multiyear dataset in the microfinance industry and find that hybrid organizations of foreign origin have significantly lower financial and social performance compared to hybrid organizations of domestic origin. This indicates that foreign hybrid organizations are confronted by a significant liability of foreignness. This negative effect of foreignness on financial performance is more pronounced as social performance increases, indicating that hybrid organizations face a foreignness-related trade-off between their dual goals.

Moreover, the negative effect of foreignness on financial performance in hybrid organizations increases in institutionally weak host countries, where foreign organizations must rely more on informal social relationships than on formal legal procedures (London and Hart, 2004). By contrast, the negative effect of foreignness on social performance does not increase or decrease in institutionally weak host countries, potentially underscoring two offsetting effects. On the one hand, foreign hybrid organizations may set a higher priority for social goals to tackle their liability of foreignness in institutionally weak countries, where social problems are endemic and social value creation is highly valued. On the other hand, foreign hybrid organizations face greater challenges in achieving social goals due to institutional voids that increase their lack of embeddedness, familiarity and knowledge of the host country.

Furthermore, the negative effect of foreignness on financial performance decreases as the organization's size increases, consistent with the economy of scale arguments in the international business literature (Blomström and Lipsey, 1991; Hennart, 2007), suggesting that scaling enables foreign hybrid organizations to lower the per-unit cost of transferring their advantages from their home country to the host country. Relatedly, there is partial evidence that scaling improves foreign hybrid organizations' social performance compared to that of their domestic counterparts. In contrast, we also discover that the foreignness-related lower financial performance for achieving social performance is partly important in large organizations but diminishes in smaller organizations. This reflects the difficulties that large organization size poses for foreign hybrid organizations, with greater visibility posing greater challenges to maintaining their legitimacy in the host country (Kostova and Zaheer, 1999; Eden and Miller, 2004).

Furthermore, the negative effect of foreignness on financial performance does not depend on the organization's tenure in the host country. By contrast, the negative effect of foreignness on social performance decreases as the length of tenure increases. Similarly, the negative interaction effect of foreignness and social performance on financial performance diminishes over longer tenure.

These results on tenure have two corollaries that collectively or individually explain the findings. First, foreign hybrid organizations exhibit a gradual adaptation to the host context: they leverage their advantages, increase social performance, and reduce the costs of achieving it. By doing so, foreign hybrid organizations may prioritize social performance as long as financial performance is sustainable. Second, liabilities of foreignness reduce but persist in hybrid organizations due to their highly context-dependent nature. This ongoing liability of foreignness may continue to overshadow overall financial performance improvements, even if the foreignness costs of achieving social performance appear to decrease. As a result, foreign hybrid organizations prioritize social performance as a means of addressing this persistent liability.

## 6.1. Contributions

This study follows Alon et al.'s (2020) call to leverage international business theories to better understand the performance of foreign hybrid organizations. In particular, we respond to the authors' call to address how internationalization influences the trade-off between social performance and financial performance that characterizes foreign hybrid organizations.

By connecting the liability of foreignness literature with the hybrid organization literature, we provide empirical evidence that liability of foreignness decreases the social and financial performance of hybrid organizations. We also demonstrate that despite the strategic importance of social performance in reducing liability of foreignness, social performance strengthens the negative effect of foreignness on financial performance, especially during the initial years of tenure in the host country.

Our findings also enhance our understanding of how foreignness impacts the dual performance of hybrid organizations, especially in weaker institutional settings where these organizations are prevalent. While institutionally weaker countries exacerbate the financial challenges of foreignness, they do not alter its effect on social performance. The later observation highlights the potential for offsetting effects that foreign hybrid organizations may prioritize social performance but at the same time encounter heightened challenges in achieving social performance in institutionally weak countries.

Moreover, we extend the previously observed moderating benefit of scale economy on the financial performance of regular for-profit firms to the dual goals of social and financial performance of foreign hybrid organizations. In emphasizing the crucial role of scaling, we document an unexpected finding: scaling, typically advantageous, can have a negative moderating effect. Specifically, it exacerbates the financial performance challenges of foreignness linked to achieving social performance. In emphasizing the role of scaling, we draw attention to the advantages and disadvantages of scaling for foreign hybrid organizations.

Additionally, we build upon prior research that has demonstrated the moderating role of organization tenure in a host country (Johanson and Vahlne, 1977, 2009; Zaheer and Mosakowski, 1997). Our study diverges from previous findings by revealing that tenure does not significantly alter the negative effect of foreignness on the financial performance of hybrid organizations, indicating the persistent nature of liabilities of foreignness in context-dependent organizations or the gradual adaptation of advantages of foreignness potentially shaping the strategic choice of foreign organizations over their dual performances once they meet a viable level
of financial sustainability or both. Besides, our study yields two notable insights. First, tenure mitigates the negative effect of foreignness on social performance, suggesting a gradual adaptation of firm-specific advantages and evolving strategic choices influenced by the disadvantages and advantages of foreignness. Second, tenure partially mitigates the foreignness-related trade-off between social and financial performance, suggesting a gradual leveraging of the advantages of foreignness, a reduction of liability of foreignness, or both.

Overall, by integrating the hybrid organization literature and the liability of foreignness literature, we have bettered our understanding of the dual performance of foreign hybrid organizations. By integrating these two bodies of literature and employing an empirical context, we delve into the advantages and disadvantages of foreignness. By doing so, we demonstrate how foreignness, whether directly or indirectly influencing the strategic choices of foreign hybrid organizations, impacts the dual performance goals of these organizations and, in particular, the trade-off between them.

Our findings can be used as a source of practical advice for global impact investors and social entrepreneurs seeking to launch hybrid organizations across national borders. As evidence-based input for practitioners and policymakers, our findings imply that establishing hybrid organizations in overseas locations requires more than a mere interest in addressing a development challenge in a low-income part of the globe. Investors who start up hybrid organizations should be aware of the impact of liability of foreignness on the financial and social performance of their organization, and that these financial challenges can be more formidable when the institutional quality of the host country is lower. These findings also imply that foreign hybrid organizations should try to mitigate liability of foreignness by scaling up their size, as well as by increasing their tenure in the host country. However, it is crucial to note that scaling up may also carry potential drawbacks, which we highlight. Therefore, before expanding abroad, socially motivated entrepreneurs and investors should have access to deep financial pockets to scale up and prolong their tenure in order to mitigate liability of foreignness.

## 6.2. Limitations and future research

We suggest that future research address the liability of foreignness of hybrid organizations in other industries beyond microfinance, such as the aid sector, the education sector, or in relation to development-oriented private equity financing. Hopefully, this can test the generalizability of the present study. Moreover, since our categorization of a foreign versus domestic microfinance institution is binary (yes or no), we suggest that future research explore any differential effect that is dependent on the level of foreign involvement. It would also be interesting to explore how foreign origin influences the characteristics of the top-management team or intermediate outcomes such as portfolio at risk (PAR), in order to uncover any mediated effects. Future research should explore how foreignness interacts with the different service offerings and activities within the hybrid organization. This would better our understanding of the many ways in which foreignness affects the overall performances of organizations.

To remove systemic variance and isolate other explanations, we have tried to account for a possible confounding effect by applying a number of control variables suggested by prior research. Future research can continue to address other possible explanations in this respect and verify our study. Since all the analyzed organizations in this study are hybrid, simultaneously aiming for social and financial goals, we are not able to test the effect of organizational purpose. This should be done in future studies, both as theory-generating qualitative research or by going beyond hybrid organizations by further exploring the nature and strength of organizational purpose. However, such studies should be conducted cautiously, owing to complexities in comparing distinct settings.

## Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

## CRediT authorship contribution statement

Tigist Woldetsadik Sommeno: Data curation, Formal analysis, Investigation, Methodology, Validation, Visualization, Writing – original draft, Writing – review & editing, Conceptualization. Roy Mersland: Writing – review & editing, Data curation, Resources, Supervision, Conceptualization. Trond Randøy: Supervision, Writing – original draft, Writing – review & editing, Conceptualization.

## Declaration of competing interest

None.

## Data availability

The authors do not have permission to share data.

## Acknowledgments

We would like to thank the Associate Editor, Andreas Schotter and two anonymous reviewers for their constructive comments. We are also thankful for the participants at the following conferences and workshops for their insightful comments: CERSEM Research Day (Kristiansand. April 2018), 7th Aalborg International Business Conference (Aalborg. May 2018), 1st Joint CERSEM – CERMi Workshop
(Kristiansand. November 2019), 44th European International Business Academy Conference (Poznań. December 2018), EIBA Doctoral Consortium (Poznań. December 2018), FIBE Doctoral Colloquium (Bergen. January 2019), 6th European Research Conference on Microfinance (Paris. June 2019), Academy of International Business 2019 Annual Meeting (Copenhagen. June 2019) and AIB-Journal of World Business Paper Development Workshop (Copenhagen. June 2019), SNF Researcher Lunch (Bergen. September 2023).

## Appendix A. Supplementary data

Supplementary data to this article can be found online at https://doi.org/10.1016/j.intman.2024.101133.

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