International Market

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Received September 2002 Revised March 2003 Accepted March 2003
International market entry mode strategies of manufacturing rms and service rms
A resource-based perspective
Ikechi Ekeledo
Northeastern Illinois University, Chicago, Illinois, USA, and
K. Sivakumar
Lehigh University, Bethlehem, Pennsylvania, USA
Keywords Market entry, Manufacturing industries, Service industries, Resources Abstract This research has two major purposes: developing and testing a resource-based framework for entry mode choice and ascertaining the extent to which the determinants of foreign market entry mode choice in the manufacturing sector apply to foreign market entry mode choice in the non-separable service sector. Using mail survey data collected from top-level managers of US rms that had been engaged in international business, the article tests a number of research hypotheses concerning foreign market entry mode choice in the manufacturing and service sectors. The managerial and research implications of the ndings are delineated and directions for future research are offered.
International Marketing Review Vol. 21 No. 1, 2004 pp. 68-101 q Emerald Group Publishing Limited 0265-1335 DOI 10.1108/02651330410522943
Introduction An entry mode is an institutional arrangement that a rm uses to market its product in a foreign market in the rst three to ve years, which is generally the length of time it takes a rm to completely enter a foreign market (Root, 1994). The selection of an appropriate entry mode in a foreign market can have signicant and far-reaching consequences on a rms performance and survival (Davidson, 1982; Gatignon and Anderson, 1988; Root, 1994; Terpstra and Sarathy, 1994). For example, an inappropriate entry mode may block opportunities and substantially limit the range of strategic options open to the rm (Alderson, 1957); it may result in substantial nancial losses to the rm, including exit from the foreign market, as Federal Express, Allianz (the German insurance giant) and McKinsey learned the hard way in Europe (Mathe and Perras, 1994). Merrill Lynch failed in its rst attempt to enter the private client services market in Japan in the 1980s largely because of using a mode of entry that was at odds with the restrictive regulations in Japan at that time (Hill, 2002). To facilitate the adoption of an appropriate entry mode, therefore, it is necessary to have conceptual models that are rooted in sound theories (Anderson and Gatignon, 1986; Dunning, 1977). Extant frameworks for entry mode strategy range from those with roots in neoclassical economics to those based on organization behavior (Anderson and Gatignon, 1986; Buckley and
Casson, 1976; Rugman, 1980; Williamson, 1975; Cyert and March, 1963). But none of those frameworks provide a complete explanation of entry mode choice by rms in todays business environment (Madhok, 1997). The eclectic model, which combines theories from neoclassical economics with those from organization behavior, attempts to address the shortcomings of those individual theories. Even so, according to Madhok (1997), extant eclectic models with empirical support do not completely explain entry mode strategies by rms in todays international business environment. It has been suggested that organizational capabilities provide the richest explanation and prediction of entry mode choice in foreign markets (Madhok, 1997). The resource-based theory views rm-specic resources (assets and capabilities), as the drivers of a rms business strategy. But despite agreement among scholars that the resource-based view promises to be the richest theory of strategy (Aaker, 1989; Amit and Schoemaker, 1993; Barney, 1991; Bharadwaj et al., 1993; Conner, 1991; Grant, 1991), application of the theory to international market entry mode strategies has been primarily conceptual and descriptive. Systematic empirical research on entry mode choice, using the resource-based perspective, is lacking despite the recognition that rm-specic resources drive successful business strategy. Another major objective of this study is to investigate whether foreign market entry mode strategies of manufacturing rms are applicable to service rms. Most research studies on entry mode strategies have focused exclusively on manufacturing rms. The question of whether ndings from these studies are applicable to the service sector has not been empirically investigated (Ekeledo and Sivakumar, 1998). Services being the fastest growing component of international trade (Mathe and Perras, 1994), it is important for managers of service businesses to know the extent to which entry mode concepts, practices and theories developed for manufacturing rms are applicable to service rms. At present, there are two seemingly conicting views about the applicability of determinants of entry mode choice to service rms. One group of scholars takes the position that the determinants of entry mode choice for manufacturing rms are generalizable to service rms without much modication (see Agarwal and Ramaswami, 1992; Terpstra and Yu, 1988; Weinstein, 1977), while another group argues that those determinants need substantial modication when applied to services (see Erramilli, 1990; Erramilli and Rao, 1990, 1993). Our prediction is that the extent to which those determinants are generalizable to service rms depends on the category of service involved: hard (separable) service versus soft (non-separable) service. Separable services, such as musical entertainment, college education and television programs, allow production and consumption to be decoupled (Boddewyn et al., 1986; Erramilli, 1990; Erramilli and Rao, 1990; Sampson and Snape, 1985). The techniques for marketing manufactured goods in foreign countries may be applied without much modication to separable services
Market entry mode strategies
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(Bhagawati, 1984; Sampson and Snape, 1985). For example, separable services can be exported to foreign markets just like manufactured goods (Bhagawati, 1984; Palmer and Cole, 1995; Sampson and Snape, 1985). In contrast, non-separable services (restaurants) require simultaneity of production and consumption. A consumer or a consumers possession receiving this type of service must be in close physical proximity with the service provider at the time and place of service production for consumption of the service to take place (Boddewyn et al., 1986; Erramilli, 1990; Sampson and Snape, 1985). Because it is location bound, a non-separable service can only be provided to consumers in a foreign market through foreign direct investment (FDI) or through a local rm under license to the foreign producer. For example, hospitals, restaurants, or automobile repair facilities must be located within reach of customers in the target foreign market (Bhagawati, 1984; Dunning, 1993; Palmer and Cole, 1995; Sampson and Snape, 1985). Research involving entry mode strategies by service rms have hitherto focused mostly on individual service industries, such as banking, equipment leasing, or advertising (e.g. Agarwal and Ramaswami, 1992; Nigh et al., 1986; Sabi, 1988; Terspstra and Yu, 1988; Weinstein, 1977). Bell (1981) and Lovelock (1996) have called for cross-industry studies in the service sector because such studies may suggest ways to extend marketing concepts and strategies beyond the connes of one service industry. Yet, only a handful of empirical studies have examined how the service sector as a group selects international market entry modes (see Erramilli, 1990 and Erramilli and Rao, 1990, 1993 for those studies.) Even then, none of the existing empirical studies has made any effort to resolve the seemingly contradictory ndings regarding the generalizability of entry mode determinants to service rms. Therefore, a major task of this study is to ascertain the generalizability of determinants of foreign market entry mode choice to non-separable service rms. We focus on non-separable services because it has been predicted that this category of service rms will differ signicantly from manufacturing rms in their choice of entry mode (Sampson and Snape, 1985). In the goods-services continuum, manufactured goods and non-separable services represent extreme points. With these research needs in mind, our objectives are twofold. First, we want to develop and test a conceptual framework, rooted in the resource-based perspective, for selecting appropriate foreign market entry mode. Second, we want to use this conceptual framework to help resolve the issue of the extent to which determinants of entry mode for manufacturing rms can be generalized to service rms, focusing on manufacturing rms and just non-separable service rms at this time. Theories of international entry mode choice Before presenting our conceptual framework, we present a brief discussion of the two major theories of international entry mode: the internalization theory
and the eclectic theory. Because the internalization theory and the eclectic theory have empirical support and are the best-known theories of entry mode strategy, our discussion focuses on these two theories and the resource-based theory. Our discussion highlights the shortcomings of the internalization theory and the eclectic theory regarding entry mode strategies to help make the case for investigating the resource-based approach. The internalization theory The internalization theory explains why a rm would own and operate a production facility in a foreign market instead of using licensing or supply agreement with a local business entity in the foreign market. In addressing this issue, the internalization theory relies heavily on transaction costs analysis. Hence, internalization theory and the transaction cost (TC) theory are viewed as the same theory (Madhok, 1997; Rugman, 1980). A market transaction involves transaction costs; that is, costs associated with negotiating, monitoring, and enforcing a contract (Coase, 1937; Williamson, 1975). Foreign direct investment (FDI), meaning sole ownership or joint venture, is more likely to occur when transaction costs are high (Coase, 1937). The internalization theory considers low-level modes of entry, such as licensing, supply agreement or management contract, to be the default mode of operation; that is, a low-level mode of entry is preferable until proven otherwise (Anderson and Gatignon, 1986). The internalization theory, like other industrial organization-based theories of the rm, assumes perfect competition, homogeneous rms and mobility of resources among rms, including perfect transferability of know-how between a parent company and its foreign subsidiary. The ability of the internalization theory to explain entry mode choice in todays international business milieu has been found wanting in a number of areas. The theory is not appropriate for comparing FDI with exporting because it focuses on conditions that lead to market failure, which in turn lead to FDI (Erramilli and Rao, 1993; Hennart, 1989). Market failure arises when there are barriers to free ow of products between countries and when there are obstacles to the sale of know-how. Barriers to the free ow of products between countries reduce the protability of exporting, while obstacles to the sale of know-how increase the protability of FDI relative to licensing. Also, the theory fails to recognize that strategic consideration, such as capability development or enhancement, may be the motivation for adopting a collaborative mode of entry (Kogut, 1988). While the internalization theory explains why a rm may choose FDI as an entry mode, it does not explain the role of location advantages in entry mode choice. The eclectic theory To overcome some of the shortcomings of the internalization theory, Dunning (1977, 1980, 1988) propounded an eclectic theory of FDI, which has ownership advantage, location advantage, and internalization advantage as its key
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components. Ownership advantage refers to competitive or monopolistic advantage that helps a foreign rm overcome the disadvantages of competing with local rms. Location advantage refers to market potential and country risks that make conducting business in the foreign market protable. And internalization advantage refers to contractual risks that make controlling the foreign afliate through FDI more benecial than licensing a local rm to offer the product in the foreign market (Agarwal and Ramaswami, 1992). Despite partial acceptance, the eclectic model does not provide a unied perspective in the explanation and prediction of entry mode choice (Tallman, 1991). The model does not explain why two rms in the same line of business and with similar ownership, internalization, and location advantages would not necessarily choose the same entry mode in the same foreign market (Dunning, 1993). Furthermore, extant eclectic models ignore the impact of broad product characteristics (goods versus services), home country factors, and boundary variables (weight to value ratio of the product, logistics or transportation costs and currency exchange rates between home and host countries) on choice of entry mode. Both the internalization theory and the eclectic theory predict no FDI when there is no market failure, but rms are known to engage in alliances to enhance their competitive advantage, or competitive position (Denekamp, 1995). Also, the internalization model and the eclectic model have been criticized for ignoring a rms internal characteristics, factors considered to be among the fundamental drivers of a rms strategic behavior (Bartlett and Ghosal, 1991; Zou and Cavusgil, 1996). This shortcoming is not trivial because it has been demonstrated that a rms idiosyncratic internal characteristics may inuence the rms strategic behavior and performance, even when the rm and other members of the industry face identical external forces (Dunning, 1993; Zou and Cavusgil, 1996). The resource-based theory The resource-based theory views the rm, not the industry, as the source of competitive advantage, (Capron and Hulland, 1999). Competitive advantage resides in the resources (assets and capabilities) available to the rm (Barney, 1991; Peteraf, 1993; Teece et al., 1997). The theory recognizes the fact that resources are both heterogeneous across rms and imperfectly mobile (Barney, 1991; Hunt and Morgan, 1995). It accepts industrial-organization-based (IO-based) theories view that the rm is a combiner of input and seeker of efciency in production and distribution. But it goes farther than IO-based theories by pointing out that a rms success in the marketplace may depend not only on the environment in which the rm operates but also on the rms contribution in shaping that environment (Conner, 1991). Regarding entry mode selection, the resource-based theory, unlike competing theories, explains not only the differences in entry mode choice
observed across rms in an industry, but also why all rms in the industry do not and cannot pursue strategies that are likely to offer the highest returns. Instead, rms adopt strategies that their resources can support. Thus, the resource-based approach to entry mode choice incorporates the core notion of strategic management: the notion that a rm competes well in a setting in which there is a t between the rms resources and external opportunities (Conner, 1991; Vasconcellos and Hambrick, 1989). The resource-based approach assumes sole ownership to be the default entry mode; it is the preferred entry mode until proven otherwise. Sole ownership is an ideal mode of operation (Stopford and Wells, 1972). This assumption is consistent with empirical research that found that US rms preferred sole ownership entry mode (Anderson and Gatignon, 1986; Erramilli and Rao, 1993). There is also documented evidence that Japanese rms view alliance as a second-best alternative to sole ownership (Ouchi and Johnson, 1974; Hamel, 1991). This fundamental assumption of the resource-based approach is in sharp contrast with that of the transaction cost approach. The transaction cost approach, consistent with its basic assumption of perfect competition, views shared-control mode, such as franchising, licensing, management contract, or supply contract, as the default mode of entry (Anderson and Gatignon, 1986). Conceptual framework and hypotheses Figure 1 presents the conceptual framework for this study. It is based on the resource-based perspective. The framework portrays appropriate entry mode as a function of the interplay of rm-specic resources (which are the sources of competitive advantage that drive a rms marketing strategy), home country factors, host country factors, nature of the product, and degree of control sought by the rm. The study focuses on the shaded components of the framework, namely, rm-specic resources together with strategic issues raised by those resources, nature of the product, and degree of control: entry mode. The critical role of some of the listed rm-specic resources in selecting entry mode have not been examined before, let alone ascertaining how their interaction with the nature of the product (goods versus services) may inuence choice of entry mode. This focus allows us to examine the main effects of rm-specic resources on entry mode choice as well as the moderating effects of the type of product (manufactured good versus non-separable service) on entry mode selection. Although they may have signicant impact on entry mode selection, hypotheses are not developed for home country and host country factors. The impact of a rms home country or host country on choice of entry mode is extensively covered in international business texts (such as Root, 1994; Terpstra and Sarathy, 1994; Douglas and Craig, 1995). However, since each of these variables also moderates the main effect of a rm-specic resource steps
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Figure 1. A model of resource-based view of a rms entry strategies (this article focuses on the variables in the shaded areas)
were taken to either hold the variable constant or ascertain the signicance of its inuence on the entry mode strategies of the rms involved in the study. The inuence of home country factors was held constant by using only rms from the USA for the study. Since the inuence of host country factors cannot be held constant in the same way, because the rms in the survey entered many different countries during the time period covered in the study, a contingency table analysis involving cross-tabulation, using host country and entry mode as variables, was done to ascertain the signicance of host country factors. This piece of information is then used as a caveat in interpreting the results of the study. In the real world, however, it is not difcult for a rm to isolate the impact of host country factors on the selection of entry mode. For example, against the prescription of other variables in the framework, a rm may adopt a collaborative mode of entry in a country because host country restrictions make it impossible for the rm to use sole ownership mode of operation. Control and entry modes Because the hypotheses for this study are couched in terms of level of control, it is necessary to briey review the preeminent role of control in selecting entry mode before presenting these hypotheses. Control refers to level of authority a rm may exercise over systems, methods, and decisions of the foreign afliate. Entry mode literature focuses on control because it is the most important determinant of risk and return (Anderson and Gatignon, 1986).
Each entry mode falls into one of two levels of control: (1) high- or full-control modes (sole ownership); or (2) low- or shared-control modes (collaborative modes of operation). Generally, a full-control mode requires the highest commitment of company resources, exposes the company to the highest level of business risk, and allows the highest return on investment; while a shared-control mode requires low-to-moderate commitment of resources, exposes the company to low-to-moderate business risk, and allows the company low-to-moderate return on investment (Anderson and Gatignon, 1986; Douglas and Craig, 1995). Hence, there is a mapping from an entry mode to the level of control the entry mode allows, with sole ownership usually affording the investor maximum control of the foreign afliate and highest return on investment, but subjects the investor to maximum risk exposure (Anderson and Gatignon, 1986). This mapping is general and exceptions can be found. It is possible for a rm to exercise control out of proportion to the rms equity share in the business venture for some other reason.
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Firm-specic resources and strategic issues Firm-specic resources include a rms capabilities, organizational culture, specialized assets, large size, reputation, and business experience (Aaker, 1989; Amit and Schoemaker, 1993; Arogyaswamy and Byles, 1987; Barney, 1991; Grant, 1991; Hall, 1992; Wernerfelt, 1984, 1989; Williams, 1992). Company executives cite these resources as the drivers of a rms competitive advantage (Wernerfelt, 1984). Strategic issues emanate from rm-specic resources; they refer to marketing options open to a rm because of its resources as well as constraints that the rm faces because of lack of certain resources. A rm may adopt a collaborative mode of entry, such as joint venture, in order to enhance its capabilities or to develop new capabilities (Ghoshal, 1987; Kogut, 1988). Also, a rm can use collaborative modes of operation to gain new knowledge where the rm lacks the requisite level of knowledge and cannot develop such knowledge within an acceptable period of time (Huber, 1991). Hence, strategic consideration plays an important role in the selection of entry modes in foreign markets (Hill et al., 1990). Previous research treated strategic consideration as a separate moderating factor (see, for example, Hill et al., 1990). But strategic consideration is rooted in a rms resources, hence deviations from sole ownership, which is the default entry mode, according to the resource-based approach, is the result of constraints placed on the rm by its resources. The rst eight hypotheses deal with rm specic resources and strategic issues raised by these resources. These hypotheses make no distinction between manufacturing rms and service rms because each rm-specic resource is believed to have an effect on entry mode choice for both business
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sectors. The hypotheses on the moderating effects of the nature of the product follow the eight hypotheses (H9-H13). Firm specic capabilities Firm-specic capabilities refer to what a rm can do with its assets. They include the cognitive processes by which the rm understands and translates its valuable tangible assets into action (Fiol, 1991); they are superior managerial skills and knowledge often embodied in and jointly provided by employees of the rm (Day and Wensley, 1988; Hall, 1992; Hofer and Schendel, 1978). Firm-specic capabilities set employees of a rm apart from those of other rms and make it possible for a rm to perform activities in its business process advantageously (Day, 1994). Some variables that have been used to operationalize rm-specic capabilities include proprietary technology, tacit know-how, and business experience (Anderson and Gatignon, 1986; Erramilli and Rao, 1993; Hill et al., 1990; Madhok, 1997). Proprietary technology. Proprietary technology normally resides in a rms product, process, or management technology. To be a competitive advantage, technology innovations must be held proprietary (Bharadwaj et al., 1993). A technology is held proprietary through a patent, trademark, brand image or copyright, or trade secrets. Wernerfelt (1989) characterizes such assets as blueprints that play a signicant role in strategy formulation. The need to protect a proprietary asset that is a sustainable competitive advantage in a foreign market and to control the use of the asset in the market will discourage a rm from using a collaborative mode of operation to enter the market. In fact, some studies found a positive relationship between proprietary technology and sole ownership of foreign subsidiaries (Agarwal and Ramaswami, 1992; Gatignon and Anderson, 1988). While the internalization theory and the eclectic theory explain this nding primarily in terms of cost minimization, the resource-based theory takes the position that preserving a rms competitive advantage is the primary explanation for the positive relationship between proprietary technology and sole ownership of a foreign afliate. International business literature associates sole ownership with full control mode (Douglas and Craig, 1995; Hill et al., 1990). A company-owned export subsidiary qualies as a full control mode although it is essentially a marketing organization. A manufacturing rm can use a company-owned export subsidiary to protect the companys proprietary asset and to fully participate in the foreign market. Therefore, a company-owned export subsidiary is a sole ownership mode. H1. A rm with a proprietary technology that is a sustainable competitive advantage in a foreign market will use a full control mode to enter the market: the rm will adopt sole ownership as an entry mode.
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Tacit know-how. Tacit know-how refers to routines of a rm that drive the rms competitive advantage but are difcult to articulate, teach or transfer to another business entity. Tacit know-how is usually lodged in the rms employees. Because another rm is unable to duplicate a tacit know-how in a foreign location, a licensee of this type of know-how is unable to maximize the rent from the know-how (Teece, 1981, 1988). Therefore, to exploit a tacit know-how in a foreign market, the rm that owns it is forced to use a full control (sole ownership) mode of operation as entry mode (Hill et al., 1990; Kogut and Zander, 1993). H2. A rm with a valuable tacit know-how that is a competitive advantage in a foreign market will use a full control mode to enter the market: the rm will adopt sole ownership as an entry mode. Business experience. Extensive experience in international business can be a potential source of competitive advantage for a rm. Some studies found that sole ownership of a foreign subsidiary is associated with high levels of international business experience (Davidson, 1982; Anderson and Gatignon, 1986; Gomes-Casseres, 1989; Johanson and Vahlne, 1977). There is also evidence that international business experience does not always lead to sole ownership mode of entry (Erramilli, 1991; Kogut and Singh, 1988; Sharma and Johanson, 1987). Perhaps these contradictory ndings were due to the type of experience tested in those studies. Two types of experience are useful in international business, namely, geographic experience and industry experience (Gomes-Casseres, 1989). Geographic experience comes from a rms familiarity with the region of the world in which the target foreign market is located. Industry experience is a function of a rms age in its industry and the extent of the rms familiarity with how its industry functions in other countries. A rm that possesses both substantial industry experience and geographic experience will favor sole ownership mode. H3. A rm with extensive geographic experience and industry experience will use a full-control mode to enter a target foreign market: the rm will adopt sole ownership as an entry mode. Specialized assets. Specialized assets are physical or human investments that are valuable only in a narrow range of uses or to one or a handful of users (Anderson and Gatignon, 1986; Erramilli and Rao, 1993; Williamson, 1981). Specialized physical assets include a piece of equipment that makes parts to the specication of one user only (Anderson and Gatignon, 1986; Klein et al., 1978). Specialized human assets include special working relationships between a rm and its partner that allow the partner to gain intimate knowledge of the rms activities and idiosyncrasies (Anderson and Gatignon, 1986; Erramilli and Rao, 1993). Specialized asset also relates to a situation where a foreign partner is
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required to construct expensive production facilities that are less valuable if not used in the collaborative venture. It is difcult to persuade a rm to make such an irreversible commitment of large nancial resources to another rm (Wernerfelt, 1989). For service rms, specialized assets include a high level of professional skills, specialized know-how, or customization of the service offered (Erramilli and Rao, 1993). For example, customization, such as that required for data processing tailored to an individual client company, tends to involve specialized assets. A rm whose competitive advantage in a foreign market derives from a specialized asset is unlikely to adopt a collaborative mode of operation. When a specialized asset makes a signicant contribution to performance, the local partner who acquires the asset may become irreplaceable, thus increasing the likelihood of the partner engaging in opportunistic behavior (Klein et al., 1978). Sole ownership allows a rm to protect a specialized asset from such risks. H4. A rm with a specialized asset that is a sustainable competitive advantage in a target foreign market will use a full-control mode to enter the foreign market: the rm will adopt sole ownership as an entry mode. Firm size. The size of a rm is often an indicator of its competitive advantage in nancial, physical, human, technological, or organizational resources. Firm size places a constraint on what a rm can do (Grant, 1991). Large rm size reects a rms ability to absorb the high costs and risks involved in international expansion through sole ownership of foreign afliates (Buckley and Casson, 1976). Empirical evidence indicates a positive relationship between large rm size and sole ownership of a foreign afliate (Buckley and Casson, 1976; Terpstra and Yu, 1988; Caves and Mehra, 1986; Kimura, 1989; Yu and Ito, 1988). Small manufacturing rms are known to favor exporting over 100 percent ownership of a foreign afliate (Porter, 1990). Note that what is important here is the relative size of the manufacturing rm compared to its competitors in a foreign market. In other words, a medium-sized rm in one country may be a large rm in comparison with the rms it competes with in a foreign market. H5. A rm that is relatively large compared to its competitors in a foreign market will use a full-control mode to enter the market: the rm will favor a sole ownership mode of entry. Organizational culture. Organizational culture has been identied as an important source of sustainable competitive advantage for a rm (Coyne, 1986; Hall, 1992). There is evidence in management literature that successful rms are often associated with a strong and cohesive culture that is of the adaptive, entrepreneurial nature (Bartol and Martin, 1998). For best performance, there should be a high degree of t between organizational culture and strategy
(Arogyaswamy and Byles, 1987). A number of rms may have similar congurations of physical assets, but only very few of these rms may have the organizational culture to fully take advantage of these assets in implementing strategy (Wilkins, 1989). A rm with a valuable culture may be hesitant to engage in a collaborative venture for fear of dissipating such an advantage (Wernerfelt, 1989). Sole ownership allows the rm to exploit its valuable culture without the fear that a foreign partner might clone this competitive advantage. H6. A rm with a culture that is a sustainable competitive advantage in a foreign market will use a full-control mode to enter the market: the rm will favor sole ownership entry mode. Company reputation. A positive reputation implies that an organization has a good name and is highly regarded. Good reputation is a key asset that can also be a sustainable competitive advantage for the rm (Dollinger et al., 1997; Hall, 1992; Mahoney and Pandian, 1992). But reputation is a fragile resource; it can be damaged easily. A rm with a good reputation is an attractive candidate for alliances (Dollinger et al., 1997), but alliances are risky in that an alliance partner could engage in a behavior that ruins the other partners good reputation (Bresser, 1988; Bresser and Harl, 1986; Nielsen, 1988). The need to protect a good reputation is more likely to compel a rm to adopt an entry mode that provides the rms reputation maximum protection. H7. A rm with a reputation for superior product, process, or management technology will use a full-control mode to enter a foreign market: the rm will favor sole ownership entry mode. Complementary resource. It has been suggested that a collaborative mode of operation can be used to enhance marketing capabilities. For example, a rm may own a valuable asset, say a patent, and needs another co-specialized resource in order to leverage the asset in a foreign market, but the co-specialized resource belongs to another company. In 1973, EMI wanted to exploit its CATSCAN technology in the USA but lacked an organization with a selling, service and training capability geared to US hospitals, so EMI teamed up with General Electric to market the technology in the USA. Wernerfelt (1989) characterizes market entries involving the need for complementary skills from another business organization as a paired application. According to Wernerfelt (1989), if a new foreign market entrant has an asset but lacks appropriate production or marketing skills to leverage the asset in a foreign market, a merger or a joint venture is an appropriate entry mode. Small rms often lack the knowledge and nancial resources to successfully handle most of the costs and risks of international expansion through wholly-owned subsidiaries; therefore, such rms are forced to rely on collaborative modes of operation in foreign markets (Zacharakis, 1997). Small
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rms often ally themselves with other entities that are familiar with the foreign market in order to have a successful entry in the foreign market. According to Zacharakis (1997), local agents often provide foreign entrepreneurial businesses with complementary skills, such as market specic sales expertise, distribution channels or easy access to local authorities. H8. A rm that needs a complementary resource in a target foreign market to be able to exploit its asset will use a shared-control mode to enter the foreign market: the rm will adopt joint venture as an entry mode. Nature of the product: non-separable services versus manufacturing goods. Earlier in this paper we mentioned the seemingly conicting ndings about the generalizability of determinants of entry modes for manufacturing rms to those of service rms. We predicted that the application of some of those determinants to non-separable service rms would lead to different entry mode choices compared to entry mode choices made by manufacturing rms. The hypotheses for testing this prediction are presented in this section. The nature of a rms product, which refers to both macro and micro characteristics of the product, including the rms industrial sector, have enormous inuence on the mode of operation the rm uses in a foreign market (Ekeledo and Sivakumar, 1998). The macro characteristics of a product such as perishability, tangibility, separability of production and consumption, heterogeneity, characteristics that distinguish goods from services (Zeithaml et al., 1985), play a key role in determining entry mode options available to a rm seeking to enter a foreign market (Erramilli and Rao, 1993). Existing frameworks for foreign market entry mode strategies have focused on micro characteristics of a product such as content, weight, brand name or image, and so forth. Appropriate entry mode in a foreign market requires that both macro characteristics and micro characteristics of a product be considered in selecting an entry mode (Ekeledo and Sivakumar, 1998). Erramilli and Rao (1990, 1993) revealed the need to consider inseparability of production and consumption in selecting entry mode for service rms. Because their service offerings require simultaneity of consumption and production, non-separable service rms must locate production facilities in the target foreign market in order to make their service offerings accessible to local consumers. Furthermore, key technologies in service offerings tend to be embodied in the service rms trade secrets instead of in a patent or copyright protection (Grosse, 1996; Teece, 1988). Compared to manufacturing rms, therefore, a greater percentage of non-separable service rms will favor sole ownership as mode of entry in foreign markets. H9. When the proprietary content of product, process, or managerial technology is high, a larger percentage of non-separable service rms (compared to manufacturing rms), will favor sole ownership mode of entry in foreign markets.
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Inseparability of production and consumption may lead to the simultaneous adoption of multiple entry modes in a foreign market. Inseparability of production and consumption often requires the use of multiple service sites to make the service offering available to a greater number of consumers (Bharadwaj et al., 1993). Non-separable services, especially those in the consumer service category, are likely to require multiple sites. Because of the enormous costs of making a service available in multiple sites, service rms can reduce their cost of operation by simultaneously adopting sole ownership or joint venture and franchising (a form of licensing) as modes of foreign market entry. Although manufacturing rms such as beverage makers like Coca Cola or Pepsico can use independent bottlers (an institutional arrangement closer to franchising than traditional licensing) to market their beverages, franchising is a popular mode of operation for services that involve multiple sites; it allows the franchiser substantial control of units operating under the franchisers name, with franchisees nancing much of the horizontal expansion of the rm (Cross and Walker, 1987). Because of inseparability of consumption and production for non-separable services, we predict that a larger percentage of non-separable service rms enter foreign markets using sole ownership together with licensing than do manufacturing rms. H10. Compared to manufacturing rms, a larger percentage of non-separable service rms favor combining sole ownership with licensing as entry mode in foreign markets. It was argued earlier, in the section on rm size, that large rms are more likely to prefer sole ownership entry mode. However, the impact of rm size in selecting sole ownership as an entry mode varies across service industries because of investment capital requirement for each service industry (Erramilli and Rao, 1993). Investment capital is viewed as a key factor responsible for the differences in entry mode choice between manufacturing rms and service rms (Erramilli and Rao, 1993), leading Terpstra and Yu (1988) to suggest that most service rms use FDI because capital requirements are much lower for many service businesses. However, the issue here is the impact of size on choice of entry mode. A clearer picture of the impact of rm size on entry mode choice for manufacturing rms and service rms is likely to come from comparing entry mode strategies of small manufacturing rms with those of small service rms. Our prediction is that a signicantly higher percentage of small non-separable service rms compared to small manufacturing rms will favor sole ownership mode of entry if it is true that low investment capital is related to full-control mode of entry. H11. Compared to small manufacturing rms, a larger percentage of small non-separable service rms will favor sole ownership mode of entry in foreign markets.
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Erramilli (1991) found a U-shaped relationship between experience and adoption of sole ownership as entry mode by service rms. He found that service rms with limited international business experience favor sole ownership as entry mode, those with moderate level of international business experience favor collaborative mode of entry, and those with substantial international business experience favor sole ownership as mode of entry. This pattern of entry mode choice is different from the linear pattern of entry mode choice followed by manufacturing rms. For manufacturing rms, preference for sole ownership increases with increasing international business experience (Davidson, 1982). This U-shaped pattern of entry mode choice is likely to be associated with non-separable service rms for a number of reasons. Service rms that follow their domestic client abroad tend to favor sole ownership mode (Weinstein, 1977). These rms are already familiar with their market niche in the foreign location and so do not need the support of a local rm in learning about the market. But service rms that go abroad in search of new customers and are not very familiar with the region of the world in which the target foreign market is located, may need substantial local help in understanding the culture of the foreign country where the market is located in order to quickly and successfully enter the market. Familiarity with the local culture may affect a non-separable service rms choice of entry mode because the delivery of non-separable services often involves close physical proximity between the consumer and the service provider. Because there is close afnity between the culture of a society and the services demanded in that society (Dahringer, 1991; Patterson and Cicic, 1995), a service rms activities must be consonant with the demands of the host countrys cultural norms and values. Familiarity with the culture of the foreign market is important for successful interaction with local customers. Therefore, a non-separable service rm that lacks knowledge of the culture of prospective customers in the foreign market is likely to favor a collaborative mode of operation in the foreign market. H12. Compared to manufacturing rms, a larger percentage of non-separable service rms that are not familiar with the region of the world in which a target foreign market is located will use a joint venture as a mode of entry in that foreign market. As noted previously, a rms reputation for quality products has been identied as a key competitive advantage (Aaker, 1989; Hall, 1992). Aaker (1989) found that service rms ranked reputation for product quality highest among sustainable competitive advantages, while high technology manufacturing rms rated reputation for product quality second to technical superiority. This nding is not surprising due to the intangible nature of service offerings. Reputation for quality is particularly important for services because of the inability of the consumer to evaluate the quality of most service
offerings prior to consumption (experience attributes), or inability of the consumers to evaluate the quality of some service offerings even after consumption (credence attributes) (Bateson, 1992). As a result, a prospective consumer relies on the reputation of the non-separable service rm as an indicator of quality product. Reputation for quality is likely to be a key success factor for most service businesses, especially non-separable services. The need to maintain a good reputation by offering a service that is consistently high in quality is likely to inuence the choice of entry mode for a non-separable service rm. For a rm that depends on multi-site operations, FDI and franchising are often helpful in nancing horizontal expansion. The popularity of business format franchising among non-separable service businesses is partly explained by the rms need to maintain control of and ensure consistent product quality across outlets bearing the companys name (Lovelock, 1996; Palmer and Cole, 1995). Because a manufacturing rm does not require multisite manufacturing plants to reach customers, it does not have the need to enter a foreign market with FDI and licensing as much as non-separable service rms do. Although manufacturing rms can enter a foreign market with a combination of FDI and exporting, the use of combination mode of entry is not likely to be as high for manufacturing rms as it is for non-separable service rms. H13. Compared to manufacturing rms, a larger percentage of non-separable service rms enter foreign markets with a combination of FDI and a franchising entry mode. Method Data collection and sampling frame A mail survey was used to collect data for this study. Surveys may be used to gather information about motives, circumstances, and sequence of events or mental deliberations. Surveys also facilitate the division of respondents into subgroups for comparison, one of the important tasks of this data analysis. Entry mode selection was studied post hoc to gain insight into the entry mode decision process. Much of the information needed for the study was unpublished and involved the perceptions of top managers who usually participate in formulating international market entry strategies. When the interest in a study is a decision made during the process of formulating a strategy, especially when the selected alternative depends on the managers beliefs at the time of the decision, measuring the perception of those involved in such a decision is appropriate (Burke, 1984; Lilien, 1979). The sampling frame consisted of all US manufacturing rms and non-separable service rms that entered a foreign market between 1985 and 1995 and had been in the foreign market for at least ve years before the survey. The unit of analysis, as was the case with similar studies done in the past, was individual entry mode decision made by companies in foreign
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markets (see Agarwal and Ramaswami, 1992; Erramilli and Rao, 1993; Terpstra and Yu, 1988). The key informant approach was used for data collection. The role of a key informant is to aggregate information about organizational activities or outcomes; hence, informants should be selected on the basis of expertise (McKendall and Wagner, 1997). Accordingly, the informants for this study were upper level managers that are usually heavily involved in formulating international market entry strategies. Research on strategic management issues has traditionally relied on chief executive ofcers (CEOs), presidents or vice-presidents in charge of international marketing for this kind of information (Huber and Power, 1985). Several studies that involved strategic management behavior of rms obtained retrospective information from upper level managers because retrospective reports provide information not available from secondary data. Consistent with studies of entry mode strategies published previously, a convenience sample was used in this study (Erramilli and Rao, 1990; Zikmund, 1997). Moreover, a convenience sample is acceptable for theory testing (Hunt, 1991). A mailing list was generated from the following publications: the 1996 edition of the Directory of American Firms Operating in Foreign Countries, published by Uniworld Business Publications, Dun and Bradstreets Million Dollar Directory, Consultants & Consulting Organizations Directory, Standard & Poors Register of Corporations and Wards Business Directory of Service Industries USA. Some of these publications were the sources of mailing lists for previous studies on the issue of entry mode selection (for example, Erramilli and Rao, 1993; Kim and Hwang, 1992).
Measures The independent variables are proprietary technology, tacit know-how and international business experience (all representing rm-specic capabilities), specialized assets, rm size, organization culture, company reputation, paired application, and nature of the product (manufactured goods versus services). Operational measures for these variables came from established measurement items or, in some cases where appropriate question items were not readily available, were developed from theoretical denitions based on prior research that denes foreign market entry mode concept. As was the case for most previous studies, the dependent variable, degree of control, is dichotomous for those hypotheses involving logistic regression full control mode versus shared control mode (see Anderson and Gatignon, 1986; Erramilli and Rao, 1993; Hill et al., 1990). Sole ownership and a wholly-owned export subsidiary was used to operationalize full control entry mode, while joint venture, licensing, franchising, or management contract was used to operationalize shared control entry mode.
The rst draft of the questionnaire was discussed with three experts from academia: one international business expert, one international marketing expert, and one mail survey research methodology expert. The questionnaire resulting from feedbacks from these academic experts was pilot tested on 100 managers drawn from the sample developed for the study, using the administrative procedures recommended by Dillman (1978) for a self-administered mail questionnaire. Comments from the 20 managers who completed and returned the questionnaire in the pilot test primarily focused on length of the questionnaire and clarity of instructions. Feedback from these managers was used to improve the nal draft of the questionnaire. Statistical analysis techniques Two statistical analysis tools were used. Binary logistic regression was used to assess the main effects of each rm-specic resource and to determine the moderating effect of the product (manufactured good versus service). Contingency table analysis involving cross tabulation was used to ascertain ways, if any, in which the product being a non-separable service offering may have an impact on entry mode choice. Binary logistic regression technique appears to be the data analysis tool of choice for this kind of study. Logistic regression is the recommended data analytic tool when the dependent measure is binary, the independent measure is qualitative or quantitative, and the assumptions of multivariate normality are not met (Ball and Tschoegl, 1982; Cox, 1970; Kachigan, 1986). Most previous research studies on foreign market entry mode strategies favor binary logistic regression technique as data analysis tool for these reasons (for an example, see Agarwal and Ramaswami, 1992; Erramilli and Rao, 1993; Gatignon and Anderson, 1988; or Kim and Hwang, 1992). The logistic regression model is as follows: Probability of a full control=shared control mode 1={1 e Y } where: YB0 +B1X1+B2X2+. . .+BpXp., X1, X2,. . . Xp are independent variables, B1, B2,. . . Bp are coefcients of the independent variables, and B0 is the intercept term. The individual effect of each rm-specic resource, which is addressed by a specic hypothesis, was tested to determine the signicance of the resource in entry mode selection for the rms in the survey. The resources involved in the main effect only test are covered by H1-H8. This involved estimating an equation for each variable. Then, a combined logistic regression run, involving all independent variables as a group, was conducted. The purpose of this exercise was to determine whether the independent variables are signicant predictors of the dependent variable in the presence of other variables. Two-way contingency table analysis was used to test H10-H13. Two-way contingency table analysis is often used to assess statistical relationship
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between two variables (Green et al., 1997). It involves a test of independence between two variables, using x2 test of independence. The x2 test of independence is widely used in both the social sciences and business research studies in general (Lehmann et al., 1998; Ott et al., 1992) and have been specically advocated for studies involving entry mode choices (e.g. Ekeledo and Sivakumar, 1998). Data analysis Survey response Of the 975 packets mailed out to key informants, 271 came back undelivered because of wrong address and 39 addressees refused to participate in the survey for various reasons, such as company policy not to participate in surveys and time constraint, and some for no reason. A total of 16 packets came back with addressee no longer with the company written on them. Follow-up telephone calls did not yield the names of current senior executives in charge of international marketing for the 16 companies. As a result, 649 potential participants were left for the study. Of the 649 potential participants, 130 returned usable questionnaires. This number represents a response rate of about 20 percent, which is not unusual for a mail survey involving top-level managers in US rms. The typical response rate for mail surveys that targeted this category of US managers ranged from 15 percent to 24 percent (see Achrol and Stern, 1988; Anderson et al., 1987; Dwyer and Welsh, 1995; Samiee and Walters, 1991). Non-response bias To determine whether non-response bias was a serious problem for the study, two comparisons were made, using chi-squared test of independence. The rms represented by respondents were compared with rms represented by non-respondents (in terms of rm size) to determine whether respondents were systematically different in some important way from non-respondents. The classication analysis, using total number of employees as a proxy for rm size, as was done in similar studies before (for an example, see Erramilli and Rao, 1993; Erramilli and DSouza, 1995; Terpstra and Yu, 1988), found no signicant difference between respondents and non-respodents; respondents were found to be typical of all rms in the entire sample of 649 rms. Because it took a long time to receive the 130 usable questionnaires from respondents, the rms that responded early were also compared with those that responded late, using entry mode choice as a comparison criterion. Again, the comparison found no signicant difference in the distribution of entry mode choice between early respondents and late respondents. Thus, evidence from the two chi-squared analyses suggests that there may not be any serious problems with non-response bias for the rms in our sample.
Before testing the hypotheses, we made one more effort to purify and validate the measurement items because some of them were being used for the rst time. Perhaps, the ideal time for factor analysis is during the pilot test, but the number of questionnaires returned for the pilot test (less than 50 observations) was inadequate for a meaningful factor analysis judging from the minimum number of observations required for a meaningful factor analysis according to Hair et al. (1998). Measurement items were subjected to factor analysis, using principle components analysis with varimax rotation, to assess the degree to which measures met a priori notion about the structural relationships among the variables based on theoretical support and previous research. The measurement items loaded on all the factors as we expected, with a minimum of two measurement items loading on each factor. Items with high cross loading or poor item-to-total correlation were dropped using ^ 0.50 as the minimum factor loading criterion; this is the lowest factor loading considered practically signicant (Hair et al., 1998). The remaining measurement items were then subjected to Cronbachs reliability analysis to assess the degree of consistency among the multiple measures of each construct. The cut-off point of 0.70 for theory testing as recommended by Nunnaly and Bernstein (1994) was used to select the measurement items retained for the constructs and used to test the hypotheses. The scaled multiple-item measures, as well as their Cronbachs alpha values, are presented in Table I. Results of hypotheses testing The results of the hypotheses tests are summarized in Tables II-IV. Table II presents the results from the logistic regression analysis using one independent variable at a time, while Table III presents the result of the combined logistic regression model including all the relevant independent variables. Table IV summarizes the results of the contingency table analyses used to compare entry mode choices of non-separable service rms with those of manufacturing rms. In interpreting the results of the logistic regression analyses presented in Tables II and III, a positive sign for the coefcient of an independent variable implies that increasing values of the independent variable enhance the relative utility of the dependent variable, while a negative sign implies the opposite (Erramilli and DSouza, 1995). In other words, the odds of adopting the predicted entry mode increase when the coefcient of the independent variable is positive and the test statistics are signicant (Pampel, 2000; SPSS, 1999). Result of hypotheses testing: individual logistic models The outcome of the individual estimation results is summarized in Table II. As Table II shows, there is empirical support for H1, H3, H4, H5, H6, H7, and H8. As we predicted, proprietary technology, experience, specialized asset, rm size, organizational culture, or positive reputation increases the odds of selecting a full control mode (sole ownership). H2 is not supported, suggesting
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Proprietary technology (PROPTECH) 1. Unique patent(s) 2. Trademark 3. Brand name recognition in host country Tacit know-how (TACITKNO) 1. Difculty in writing a useful manual describing rms production/service delivery process 2. Difculty in documenting critical parts of our rms production/ service delivery process 3. Difculty in learning how to manufacture our product/deliver service by studying blueprints 4. Difculty in educating and training new production personnel/ customer contact personnel 5. Level of complexity of our rms manufacturing/service delivery know-how 6. Difculty in transferring our rms manufacturing/service delivery know-how 7. Difculty in assessing the proper price of our rms manufacturing/marketing know-how Organizational culture (ORGCULTR) 1. Our rm encourages open discussion 2. Our rm de-emphasizes status distinction 3. Our rm encourages experimentation and tolerates mistakes 4. Our rm favors promotion from within International business experience (BUSNEXPR) 1. Our rms knowledge of this foreign market at the time of this entry 2. Cultural similarity between the host country and the United States 3. At the time of this entry, how do you rate your rms geographic knowledge of the area of the world in which this foreign market is located? Specialized asset (SPEASSET) 1. Production equipment tailored to the needs of our industrial clients 2. Specialized physical or human investment that are valuable only in a narrow range of uses or to one or a handful of users 3. Specialized piece of equipment that makes parts to the specication of one or a handful of users only 4. Construction of expensive production facilities that are less valuable if not used in our rms production process Positive reputation (REPUTATN) 1. How do you rate the importance of protecting your rms positive reputation in your choice of entry mode in the foreign market you have in mind?
Item-total correlation 0.49 0.70 0.42
Coeff. a
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0.71
0.81 0.85 0.83 0.75 0.79 0.85 0.85 0.66 0.66 0.58 0.56 0.95
0.79
0.79 0.69 0.65 0.86 0.87 0.89 0.81 0.94 0.83
Table I. Reliability analysis for operational measures
0.55 (continued)
Item-total correlation 2. 3. 4. 5. Reputation Reputation Reputation Reputation for for for for superior production process superior management superior quality technological innovativeness 0.64 0.61 0.54 0.53
Coeff. a
0.79
89
Paired application (PAIRDAPP) 1. Your rms ability to exploit its product technology or process technology in the foreign market without the need to engage in a collaborative venture 2. Condence that your rms standard for product/service quality could be maintained in a collaborative mode of operation 3. Risk of dissipation or misuse of your rms competitive advantage by a partner in a joint venture 4. Cost of making and enforcing business transaction contracts in the host coutry
0.51 0.62 0.73 0.20 0.72 Table I.
that tacit know-how does not have a signicant impact on choice of entry mode for the rms in our sample. These results are explored later in the discussion section. Result of hypotheses testing: combined logistic model By running each hypothesis one at a time, the assumption is that the independent variables are orthogonal, meaning that each independent variable affects the dependent variable separately without any interaction with any other independent variable. An orthogonal design may be used to isolate the main effect of an independent variable (Green, 1974; Lehmann et al., 1998). Testing each hypothesis separately helps ascertain the main effect of each independent variable. But in reality, the chosen entry mode is a function of at least one rm-specic resource and other mediating variables as presented in Figure 1. To simultaneously assess the role of all the constructs of interest highlighted in our conceptual framework, we ran the combined logistic regression model. Table III presents the summary of the output from the logistic regression with all independent variables. The table shows that the model is statistically signicant (Model x2 114:016; p , 0:00005). The model correctly classies 96.15 percent of the cases. This statistical outcome suggests that the independent variables have signicant impact on the dependent variable. The logistic regression includes nine independent variables: business experience, a dummy variable for organizational culture with strong or cohesive culture (of the adaptive entrepreneurial type) coded 1, paired application, proprietary technology, reputation, a dummy variable for business sector with non-separable service coded 1, specialized asset, a dummy variable for rm size with large rm coded 1, and tacit knowledge. Using the guidelines
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Hypothesis Variable
H1 Proprietary technology PROPTECH* 1.3006 2 5.8353 13.45 ( p 0.0002) 18.34 ( p 0.0005) H2 Tacit knowledge TACITKNO 0.2047 2 0.0326 2.14 ( p 0.14) 2.39 ( p 0.12) H3 Business experience BUSNEXPR* 0.5692 2 2.1070 7.34 ( p 0.007) 7.84 ( p 0.005) H4 Specialized asset SPEASSET* 0.2802 2 0.1668 6.28 ( p 0.01) 6.69 ( p 0.0097) H5 Firm size FIRMSIZE2*(1) 1.1150 2 2.5298 16.71 ( p 0.0005) 19.28 ( p 0.0005) H6 Organizational culture ORGCLTR(1)* 0.5080 2 2.5298 5.24 ( p 0.02) 5.37 ( p 0.0205) H7 Reputation REPUTATN* 0.9098 2 4.5705 23.19 ( p 0.0005) 31.16( p 0.0005) H8 Paired application PAIRDAPP* 21.7707 2 6.9716 31.24 ( p 0.0005) 51.16 ( p 0.0005) Notes: * Variables signicant at 0.05; Dependent variable: 1 if full control mode (FULCNTRL), 0 otherwise
Table II. Individual logistic regression models (H1-H8) Label Coefcient Intercept WALD (Signicance) Model x2 (Signicance) Correct classications (%) 71.54 67.69 66.92 67.69 68.46 70.00 76.15 83.08
Hypothesis H1 H2 H3 H4 H5 H6 H7 H8
Variable
Label
Coefcient
WALD (Sig)
Proprietary technology PROPTECH** 2.5704 11.0561(0.0009) Tacit knowledge TACITKNO 0.3611 0.8690 (0.3512) Business experience BUSNEXPR** 2.0459 10.7211 (0.0011) Specialized asset SPEASSET** 0.7908 6.6414 (0.0100) Firm size FIRMSIZE2(1) 0.3602 2.0775 (0.1495) Organizational culture ORGCLTR(1)* 1.5691 3.0942 (0.0786) Reputation REPUTATN** 0.8185 4.4821 (0.0343) Paired application PAIRDAPP** 2 2.3117 0.9335 (0.0133) Business sector BUSECTOR(1)** 2.7256 6.2209 (0.0126) Intercept CONSTANT** 22.5669 Notes: * Variables signicant at 0.1; ** Variables signicant at 0.05; Dependent variable: 1 if full control mode (FULCNTRL), 0 otherwise; N 130; Model x2 114:016 with df 12 and p , 0:00005; 2 2 Log Likelihood: 49.568; Correct classication rate: 96.15 percent
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Table III. Combined logistic regression model (H1 to H8)
Variable H9: High proprietary technology Sole ownership Other entry models H10: Nature of the rm Sole ownership and franchising Other entry modes H11: Small rms Sole ownership Other entry modes H12: Lower experience level Joint venture Other entry modes H13: High reputation Sole ownership and franchising Other entry modes
Type of business Manufacturing Services 27 28 0 65 25 15 14 11 0 52 48 15
Pearson x2
p value
9.311 11 54 12.017 3 22 16.001 22 6 3.088 9 48 8.949
0.281
0.002
0.304
0.001
0.496
, 0.001
0.241
0.079 Table IV. Summary of contingency table analysis for H9 to H13
0.287
0.003
provided by Pampel (2000) and SPSS (1999), the coefcient for each variable in the regression equation is interpreted as follows: a positive coefcient represents an increased odds of choosing a full-control mode, while a negative coefcient represents a reduction in the odds of choosing a full-control mode or an increased odds of choosing a shared-control mode. Using the usual signicance level of 0.05, the level of signicance for business experience, paired application, proprietary technology, reputation,
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business sector, and specialized asset is equal to or less than 0.05, while organizational culture is signicant at the 0.079 level. Firm size and tacit knowledge are not signicant. Notice that paired application has a negative coefcient, which is the expected sign in that a negative coefcient implies a shared-control mode, the opposite of a full-control mode. Notice also the positive coefcient for business sector, which is coded 1 for non-separable service. The positive coefcient for business sector conrms our prediction that a non-separable service strengthens the odds of selecting a full-control (sole ownership) mode of entry. Comparing manufacturing rms with non-separable service rms We postulated that manufacturing rms and non-separable service rms would differ in their choices of entry mode even when faced with similar foreign market entry situation. H9-H13 were used to test those predictions. Table IV provides a summary of the cross tabulation output for H9-H13. As Table IV shows, the data support hypotheses H9, H10, H11, and H13 using the usual signicance level of 0.05 as a benchmark. H12 is supported only at the 0.079 level. Discussion The data support the two primary propositions of this study: (1) the resource-based theory has good explanatory abilities for entry mode strategies; and (2) entry mode concepts and practices in the manufacturing sector are not always generalizable to non-separable service rms. Although the rm-specic resources used in this framework are considered valuable strategic tools for both manufacturing and service businesses, the study reveals that their individual impact on entry mode choice do not always lead to the same entry mode choice for both business sectors. This fact supports Erramilli and Raos (1993) contention that the unique characteristics of services affect a service rms choice of entry mode in a foreign market. The resource-based framework appears to explain entry mode choice well for manufacturing rms and non-separable service rms. It helps identify determinants of entry mode strategy that may not be generalizable to non-separable service businesses. Results from data analysis do not support the predictions of H2. Results indicate tacit know-how does not have a signicant impact on choice of a full control mode of entry. This nding is inconsistent with that of Kim and Hwang (1992). A possible explanation for this result is that Kim and Hwang (1992) used wholly-owned subsidiary or joint venture versus licensing agreement as dependent variable, while this study used full control mode (wholly-owned subsidiary) versus shared control mode (joint venture, licensing, or
management contract) as dependent variable. So, the dependent variables for the two studies are not the same. There is inconsistency in the support for H5 and H6 in the individual regression output and the combined regression output. The individual model supports H5 and H6, while the combined model does not. For H5, the individual model strongly supports the hypothesis: large rms appear to favor full control mode. The combined model does not support H5. These results are consistent with the contradictory ndings reported by some studies. Some studies found a positive relationship between large rm size and sole ownership of foreign subsidiaries (Buckley and Casson, 1976; Buckley and Pearce, 1979; Horst, 1972), while others did not nd such a relationship (Erramilli and Rao, 1993; Terpstra and Yu, 1988). The studies that found no relationship between large rm size and sole ownership as entry mode included a large number of service rms. The size of a rm appears not to be a good predictor of sole ownership mode of entry in the presence of the other independent variables. H6 predicts that a rm whose organizational culture is a potential competitive advantage in a foreign market is more likely to adopt a full-control mode in that market. As is the case with H5, H6 is supported by the individual regression model but not supported by the combined model. Again, other variables in the equation appear to have weakened the impact of this variable on the dependent variable. Comparing manufacturing rms to non-separable service rms, the data do not support the prediction made by H12. Geographical knowledge of the region in which a new market is located has no signicant impact on joint venture as a mode of entry for service rms compared to manufacturing rms. Acquisition is an alternative method for a foreign rm to gain market specic experience quickly. Since data on acquisitions were not collected, it is hard to say with certainty that this is the reason for the lack of support for this hypothesis. Managerial implications The ndings of this study demonstrate that managers make entry mode choices based on considerations of rm-specic resources that afford their rm competitive advantage in the target foreign market as well as for enhancing their resources. Because our hypotheses were able to correctly predict most of the entry mode choices made by the rms in the survey, rm-specic resources and nature of the product (manufactured goods versus non-separable service) appear to be good predictors of entry mode choice. Extant theories of entry mode strategy focus on cost efciency. The resource-based approach suggests that appropriate entry mode is one that balances cost efciency with effective marketing. Our framework is designed to facilitate the balancing of cost efciency with effective marketing by recognizing the role of a rms strategic goals and objectives in choice of entry mode. Unlike the two dominant theories of entry mode strategy (the internalization theory and the eclectic theory) that
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focus on market imperfections and FDI, the resource-based framework can be used to evaluate not just FDI but also other modes of entry, such as exporting, licensing, management contract, and so forth. In addition, manufacturing rms and non-separable service rms can use this framework to evaluate and select entry modes. The transaction cost approach requires substantial adaptation when used to select entry mode for services (Erramilli and Rao, 1993). Managers can draw other useful lessons from this study. The resource-based framework presented in this report appears to be a good tool for evaluating alternative entry modes. The level of control that each entry mode provides should be carefully considered in light of company goals and objectives together with the nature of the product. The protection of resources that are the source of a rms competitive advantage should also be an important consideration when choosing entry mode. The ndings of this study suggest that full control mode provides the best protection for a competitive advantage. The diversity and number of extant theories of international trade, together with their often narrow and conicting prescriptions for resolving entry mode issues, have created a great deal of ambiguity and confusion for managers. As Zou and Cavusgil (1996) point out, if not addressed, this kind of ambiguity and confusion is likely to discourage practical application of the useful insights provided by some of those theories. This study is an effort to clarify some of the seemingly contradictory ndings from previous studies on the issue of entry mode selection for service rms. Our study suggests that generalizing determinants of entry mode to non-separable service rms should be done with caution. Managers of non-separable service rms should nd our framework useful in identifying specic factors to consider in selecting entry mode. An entry mode should not be selected simply because it works well for manufacturing rms. For example, decision makers should recognize the impact of inseparability of production and consumption in evaluating entry modes for non-separable service rms. All costs and benets associated with each entry mode should be carefully evaluated. As noted before, a rm can exercise control greater than what a rms equity share in a shared control business enterprise traditionally allows. Therefore, it is not a bad idea for a rm that contributes the driving resource of a joint venture in a foreign market to insist on having greater control of the foreign afliate. However, managers should exercise great care in adopting shared control modes that may expose a rms competitive advantage to expropriation by a business partner. Theoretical and research implications Hunt and Morgan (1995) called for a new theory of competition that is in line with marketing activities. The evolving resource-based theory of the rm in the strategy literature has been suggested as one such theory (Barney, 1991; Conner, 1991). Not long ago, Madhok (1997) argued that a framework based on
organizational capabilities (a key element of the resource-based theory) provides a better explanation of entry mode strategies. This study appears to support Madhoks (1997) view that a resource-based approach has good explanatory ability. Perfect competition, the foundation on which the internalization theory and eclectic theory rest, contends that resource-based theory encourages the creation of market imperfection and, therefore, is economically undesirable from a public policy perspective (Hunt and Morgan, 1995). But the resource-based approach is consistent with the nature of marketing activities: marketing is essentially a rent-creating endeavor. Further, the theory recognizes not just cost effectiveness but also rm-specic resources as important determinants of foreign entry strategies. The framework presented in this study appears to have good explanatory abilities. The framework recognizes the importance of rm-specic resources in developing foreign entry strategies; rm-specic resources drive entry mode strategy. The framework also highlights some of the recognized rm-specic resources that international marketing managers should evaluate when selecting entry mode. While recognizing that rm-specic resources provide similar competitive advantages to both manufacturing rms and service rms, the framework also highlights the fact that the nature of the product (manufactured goods versus a service) may mediate the impact of those resources on entry-mode decisions. It has been posited that the transferability of any entry mode concept, practice or theory from manufacturing rms to service rms depends on the type of service involved (Ekeledo and Sivakumar, 1998). This study appears to support this hypothesis. The data supports the prediction that entry mode strategies for non-separable service rms differ signicantly from those of manufacturing rms because of simultaneity of production and consumption for non-separable services.
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Limitations and future research directions The study used a convenience sample (consistent with all research done in this domain), which reduces the likelihood of the sample representing a cross section of foreign market entries by US companies. Hence, it may not be appropriate to generalize ndings based on a convenience sample beyond the rms in the sample (Zikmund, 1997). Future research studies involving entry mode selection are likely to face a similar challenge the challenge of avoiding the use of a non-probability sample. Another issue is the appropriate unit of analysis in entry mode studies. As Erramilli and Rao (1993) point out, the unit of analysis in entry mode studies is the individual entries and not the rm itself. Therefore, to obtain a representative sample, the sample frame should be one that contains all entry decisions made by US rms during the period studied. No such sample frame was available. Even if such a sample frame existed, it would have been
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unusable because of difculty in matching randomly selected entries with respondents who can still remember the details of those entries. Finally, the assumption that a rms equity share in a joint venture determines the rms level of control may not always be true. A rm may gain control through non-equity means (Dunning and McQueen, 1982; Heide and John, 1992). As noted previously, it is possible for a rm to exercise a level of control disproportionate to its equity share in a partnership by possessing a key technology that is crucial to the success of the joint venture. Future researchers should recognize this fact and incorporate non-equity methods of control in their research.
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Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Item-total correlation 0.49 0.70 0.42

0.79 0.69 0.65 0.86 0.87 0.89 0.81 0.94 0.83

Table I. Reliability analysis for operational measures

Market entry mode strategies

0.51 0.62 0.73 0.20 0.72 Table I.

Market entry mode strategies

Table III. Combined logistic regression model (H1 to H8)

Type of business Manufacturing Services 27 28 0 65 25 15 14 11 0 52 48 15

9.311 11 54 12.017 3 22 16.001 22 6 3.088 9 48 8.949

0.079 Table IV. Summary of contingency table analysis for H9 to H13

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

Market entry mode strategies

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