Overcoming the liability of foreignness in US capital markets: the case of Alibaba and Coupang

ABSTRACT

Drawing on signalling theory and using the cases of Alibaba and Coupang, we investigate whether and how venture capital-backed companies from emerging markets use CSR to overcome the liability of foreignness when going public in the US. Our findings suggest that such firms strategically increase their CSR activities prior to their IPO in order to signal legitimacy to investors. They also suggest that firms with both strong and weak CSR signalling strategies (as measured by signal cost, frequency and consistency) are equally likely to have successful IPOs when they are backed by reputable venture capital firms.

KEYWORDS:

• Alibaba
• Coupang
• IPO
• liability of foreignness
• signalling theory
• strategic CSR
• venture capital
• China
• Korea

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Capital market liability of foreignness has been defined as ‘the liabilities faced by firms accessing host-country capital markets” (Bell, Filatotchev, and Rasheed 2012a, 108) and, more recently, as “the extra costs firms experience when accessing a foreign capital market’ (Tupper, Guldiken, and Benischke 2018, 556).

2. Following Connelly et al. (2011, 43), quality is defined as ‘the underlying, unobservable ability of the signaller to fulfil the needs or demands of an outsider observing the signal’.

3. Signal costs are the costs associated with signalling, while penalty costs are the costs associated with false signalling. Different types of signals are associated with different types of costs. Zerbini (2017, 6–7) distinguishes between ‘dissipative signals’, which imply high upfront signalling costs regardless of the truth of a claim, and ‘penalty signals’ which only lead to high costs if a claim is untrue.

4. In 2017, SBG launched SoftBank Vision Fund 1 (SVF 1) – the world’s largest technology-focused venture capital fund, with USD 100 billion in capital. Only two years later, it set up the Vision Fund 2 (SVF2) with USD 38 billion in capital commitments (Softbank Group 2022).

5. According to Lenhard and Winterberg (2021), only a few dozens of the world’s more than 2,900 venture capital firms have made public commitments to ESG/CSR. Likewise, only 5 of the top 50 largest venture capital funds mention ESG or a commitment to sustainability in their websites.

6. Over the years, they also received numerous awards from prestigious Chinese and international organizations. Alibaba was named “Best Employer of the Year” by China Central Television in 2005, ‘Most Responsible Company’ by China News Weekly and the Red Cross Society of China in 2007, and one of ‘China’s top 50 philanthropic companies’ by the China Charity Federation in 2008, (Alibaba Group 2007, 2008). In 2010, Alibaba received Finance Asia’s ‘Best Corporate Social Responsibility’ award, and the Chinese Ministry of Civil Affairs’ ‘China Charity’ Award. (Alibaba Group 2010). In 2013, it was awarded the ‘China Poverty Alleviation Award’ by the China Foundation for Poverty Alleviation and the ‘Outstanding Partner for Poverty Alleviation Award’ by the One Foundation (Alibaba Group 2013a). In 2013 and 2014, Alibaba topped Fortune’s list of ‘China’s 50 Most Admired Companies’ (People’s Daily 2016). It was also named one of ‘China’s Top 100 Green Companies’ by the China Entrepreneur Club (Alibaba Group 2015).

Jack Ma, in turn, was named one of the ‘25 Most Powerful Businesspeople in Asia’ by Fortune in 2005, ‘Businessperson of the Year’ by Businessweek in 2007, one of the ‘30 World’s Best CEOs” by Barron’s in 2008. In 2009, he was selected by Forbes China as one of the ‘Top 10 Most Respected Entrepreneurs in China’. He was also named by Time as one of the ‘World’s 100 Most Influential People’ (Alizila 2013). In 2010, Forbes Asia named Ma one of ‘Asia’s Heroes of Philanthropy’, and in 2012, he was recognized by Fortune China as one of ‘the 15 Businesspeople Who Have Changed China’. He was named ‘Person of the Year’ by the Financial Times in 2013, and one of the ‘World’s 50 Greatest Leaders’ by Fortune in 2014 (Alizila 2013; Fortune 2014).

7. For example, the press cited Alibaba.com’s 2011 fraud scandal and applauded Ma’s response to it (McGregror 2014). The scandal resulted from Alibaba.com’s high-ranked employees setting up fraudulent sellers and certifying them as ‘Gold Suppliers’ (Epstein 2011). 100 of Alibaba’s 5,000 sales representatives were fired for their involvement in the fraud. The site’s CEO and COO were also forced to resign and take responsibility for what had been a systemic breakdown in the company’s ‘culture of integrity’ (BBC 2011). When asked about their resignation, Ma was quoted saying: ‘we must send a strong message that it is unacceptable to compromise our culture and values’ (McGregror 2014, 1).

8. Coupang and its founder won several awards in the years prior to the company’s IPO, although few of them were directly related to their CSR efforts or impact. In 2016, Bom Kim was named one of the ‘Global Game Changers’ by Forbes (Schaefer 2016). Three years later, he was selected by Fast Company as one of the ‘100 Most Creative People in Business’ (Coupang 2019c). In 2016, Coupang was named one of the world’s 50 Smartest Companies by MIT Technology Review (MIT Technology Review 2016). Four years later, it was ranked second on both CNBC’s Disruptor 50 List and Fast Company’s list of the World’s Most Innovative Companies for the Asia Pacific region (CNBC 2020; Coupang 2020e). It also received a commendation from the Minister of Employment and Labour at the ‘2020 Employment Promotion for People with Disabilities’ for promoting an inclusive work environment (Coupang 2020f).

9. More than 7,000 people joined public petitions on South Korea’s presidential office website calling for Coupang executives, including Bom Kim, to be held accountable over labour practices and workplace safety (Song and White 2021).

10. South Korea’s top antitrust regulator found evidence that between January 2017 and September 2020 Coupang forced hundreds of sellers to increase the prices of their products sold at rival online stores, so as to ensure it could sell such products at the cheapest prices. It also forced suppliers to purchase ads and shifted the burden of promotional expenses to them (Yi 2021).

11. Other scholars refer to costly and costless signals as ‘dissipative’ and ‘penalty’ signals (Zerbini 2017).

Additional information

Funding

This work was supported by Incheon National University Research Grant in 2021.

Notes on contributors

Vanesa Pesqué-Cela

Vanesa Pesqué-Cela is a Senior Lecturer in International Business Management and a China specialist at Liverpool Business School, Liverpool John Moores University. She is also a Research Associate at the School of Finance and Management, SOAS University of London, and an Affiliated Researcher at the Stockholm China Economic Research Institute, Stockholm School of Economics.

Jiarong Li

Jiarong Li is a PhD candidate in the Graduate School of Business Administration at Hitotsubashi University, Tokyo, Japan. Her main research interests include corporate social responsibility, corporate social responsibility communication, stakeholder engagement, and non-market strategy in emerging markets.

Yun Kyung Kim

Yun Kyung Kim is Assistant Professor in the School of Northeast Asian Studies, Incheon National University, Incheon, Korea. She received her PhD in Economics at Columbia University. Prior to INU, she was a research fellow at Korea Economic Research Institute where she served as Director of Corporate Research Department. Her main research topics include corporate governance, organization structure and regulations.