Strategic Variables That Influence Entry

Mode Choice in Service Firms

This work investigates how a firm’s international strategy ABSTRACT

affects choice of entry mode in the service sector. The inherent
complexity associated with studying a heterogeneous sector
such as services requires researchers to investigate variables
that go beyond those drawn from traditional empirical work on
the manufacturing sector. The adoption of a broader theoretical
perspective and the introduction of these new variables may
well provide further evidence of the determinants of service
firms’ entry mode choices. On the basis of 174 entry decisions of
service firms, this study’s results support the necessity of
including additional strategic variables that specifically
address this complex phenomenon, a decision that is not
always associated just with efficiency and value-based consid-
erations but with strategic issues as well. In addition, some
variables that are routinely used in studies of the manufactur-
ing sector were not significant or exhibited different results in
different groups of service activities.

Despite the importance of the service sector in world markets

and the growth of foreign investments in this area during the Esther Sanchez-
last decade, the research on services in an international con- Peinado,
text is still limited compared with research on the manufac-
turing sector (Clark, Rajaratnam, and Smith 1996; Grönroos Jose Pla-Barber, and
1999; Patterson and Cicic 1995; Samiee 1999). A critical Louis Hébert
issue in international market entry strategy is the selection of
an appropriate entry mode. Although some important stud-
ies have analyzed entry mode choice in the service context
(see, e.g., Agarwal and Ramaswami 1992; Bouquet, Hébert,
and Delios 2004; Erramilli and Rao 1993; Li and Guisinger
1992), they analyze specific service sectors and thus fail to
address the heterogeneity problem of the service sector as a
whole.

The existing literature has not reached an agreement on

which theoretical framework should be used to explain a
firm’s foreign market entry mode. Hill, Hwang, and Kim
(1990) emphasize the need for a unifying theoretical frame-
Submitted July 2005
work within which different factors can be analyzed. We pro- Accepted July 2006
pose an integrative theoretical approach in which not only Journal of International Marketing
traditional variables from transaction cost analysis (TCA) © 2007, American Marketing Association
Vol. 15, No. 1, 2007, pp. 67–91
and organizational capability perspective (OCP) are analyzed ISSN 1069-031X (print)
but also strategic variables that have yet to be considered in 1547-7215 (electronic)

67

BACKGROUND
Traditional Frameworks for
Analyzing Entry Mode Choice
68
conventional studies. In the current dynamic and competi-
tive environment, entry mode choice is a decision based not
only on efficiency (transaction cost minimization) and value-
based (development of capabilities) considerations but also
on other aspects, such as strategic motives of internationali-
zation or the firm’s competitive position in the global envi-
ronment (Aulakh and Kotabe 1997; Harzing 2002; Hill,
Hwang, and Kim 1990). In addition, the high costs of integra-
tion that economic theories stipulate may not be strictly true
for many service firms. For example, professional services
are characterized by low capital intensity (Erramilli and Rao
1993). For many service firms, the switching costs may be
comparatively small because valuable assets rest more on
human capital than on physical assets; thus, investment pat-
terns observed in the manufacturing sector could be different
in the service sector (Carman and Langeard 1980).
The purpose of this study is to complement prior studies by
introducing new considerations in the entry mode analysis
that contribute to a better understanding of the internation-
alization processes within the service sector. In addition, in
this article, we analyze the antecedent factors to manufactur-
ing firms’ entry mode choice in the service sector context.
We aim to provide evidence about which of the underlying
principles observed in the manufacturing sector are directly
applicable to the service sector and which may be modified
to the specific characteristics of services.
To achieve these objectives, we structure the article as fol-
lows: We provide a short overview of the conventional
theories that explain entry mode choice and introduce the
need to consider new influences on the internationalization
process of service firms. Next, we present this study’s spe-
cific hypotheses, which we developed on the basis of our
theoretical framework. Subsequently, we provide detailed
information about our research design and methodology.
Finally, we present the empirical results of the study and dis-
cuss the most relevant implications for further research.
Several studies have attempted to identify firm-level and
country-level determinants of foreign market entry decisions
(Hill, Hwang, and Kim 1990). Frequently, TCA is used to
explain how companies enter foreign markets (Davis, Desai,
and Francis 2000). Various entry modes are available to
firms, from full-control modes, such as greenfield or
acquired wholly owned subsidiaries, to shared-control
modes, such as partial acquisitions and joint ventures.
Within a TCA framework, firms that possess a rent-yielding
specific advantage are motivated to enter foreign markets to
exploit this benefit most efficiently. Full-control modes
increase the degree of control that a firm can exercise over its
foreign subsidiaries and reduce its exposure to opportunism
Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert
and expropriation risks (Anderson and Gatignon 1986; Hen-
nart 1991). Shared-control modes enable foreign firms to
access locally based complementary assets and to reduce the
uncertainty they face, particularly when they enter culturally
distant and high-country-risk markets (Inkpen and Beamish
1997).

In recent years, the OCP has also received attention. This

perspective broadens the focus from minimizing transaction
costs to incorporating the management of value that is inher-
ent in a firm’s capability and knowledge base (Kogut and
Zander 1993). The key issue in entry mode choice is the com-
patibility between the firm’s existing capabilities and those it
needs to be successful in a particular market (Johanson and
Vahlne 1977). As Madhok (1997) proposes, an operation
seeking the development of capabilities to create future
value will result in a greater proclivity toward collaborative
ventures. Firm-specific capabilities, such as firm size, inter-
national experience, and tacit know-how, may also play a
role. Larger and more experienced firms typically favor full-
control modes. Furthermore, the tacitness of know-how that
is involved in the market entry may limit its transferability to
another firm without loss of value (Kogut and Zander 1993).
These circumstances increase the efficiency of resource uti-
lization and the effectiveness of its in-house transfer (Mad-
hok 1997).

Although empirical research has shown that TCA- and OCP-

related variables affect entry mode choice, there is evidence New Considerations for
that other factors may also play a role. The strategic motiva- Service Firms
tions and competitive pressures underlying market entry and
the particular nature of services may be relevant for the entry
decision. Firms tend to use higher control modes to coordi-
nate more effectively strategies in a multinational network
(Hill, Hwang, and Kim 1990), to extend market power by
entering new markets, and to exploit market knowledge
when following domestic clients or competitors to foreign
countries (Li and Guisinger 1992). Strategic motivations,
such as setting up a strategic outpost for future expansion,
setting up a global sourcing site, and achieving economies of
scale by concentrating the important activities in a limited
number of locations, may also lead firms to rely on full-
control entry modes (Harzing 2002). Consistent with the
work of Dunning (1993), we argue that the introduction of
strategic dimensions into the analysis of entry mode choice
is essential in a world characterized by increasing globaliza-
tion and the proliferation of cross-border collaborative
alliances. Firms are increasingly competing in global rather
than national markets. With growing global competitive
interdependence, the actions taken in one market often have
repercussions in other national markets (Kim and Hwang
1992). Such strategic and competitive factors may gain even

Strategic Variables That Influence Entry Mode Choice 69

 more importance with the increasing globalization of serv-
ices and with the different internationalization patterns
observed in various service industries (Bouquet, Hébert, and
Delios 2004). We believe that an attempt to provide further
understanding of the entry mode decisions in service indus-
tries needs to account for the influence of these strategic fac-
tors. These variables should be integrated with others that
are drawn from conventional theories to build a research
model that reflects current competitive conditions. More-
over, because manufacturing and service firms face a multi-
plicity of pressures, these variables may also provide insight
for managers into how to handle interfirm relationships.

Furthermore, researchers have claimed that entry mode

options for manufactured goods cannot be transferred to
services because of service firms’ idiosyncrasies (Erramilli
1990). First, services are largely intangible and cannot be
touched, transported, or stored. Second, services tend to be
inseparable, so production usually cannot be separated from
consumption. Third, services are perishable and thus must
usually be consumed at the time of production. Finally, serv-
ices are heterogeneous, so each service encounter is unique
and highly customized (Zeithaml, Parasuraman, and Berry
1985).

However, it is important not only to ask the key question of

whether manufacturing and service sectors differ but also to
emphasize the differences within the service sector. To cope
with service sector heterogeneity, a distinction among serv-
ices is necessary to understand different patterns among dif-
ferent service firms. The traditional separation between serv-
ices and products may be too simplistic because economic
activity ranges from pure goods to pure services; most goods
embody some intermediate services, and most services
embody some intermediate goods. Even pure services require
people to supply them. Therefore, highly tangible goods
could be placed at one end of the continuum, and highly
intangible services could be placed at the opposite end of the
continuum; the goods–service bundle is located somewhere
in between these two extremes.

As a result, classifying services can become a perilous task.

Still, several classifications of services have been proposed.
For example, Boddewyn, Halbrich, and Perry (1986) distin-
guish services according to the degree to which they are
internationally tradable. Vandermerwe and Chadwick (1989)
develop a matrix of services based on the relative involve-
ment of goods and the degree of consumer–producer inter-
action. Erramilli (1990) divides internationally traded serv-
ices into two groups: hard services and soft services. In hard
services, consumption can be separated from production and
thus can be exported. Services for which production and

70 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

consumption occur simultaneously are labeled soft services
because they cannot be exported and require a major local
presence.

In this article, we focus on two groups of services according

to their level of capital and knowledge intensity, as Contrac-
tor, Kundu, and Hsu (2003), Hertog (2000), and Windrum
and Tomlinson (1999), among others, propose. The level of
capital intensity represents a magnitude relative to the vol-
ume of investment in fixed assets that are necessary to begin
production and carry out operations in a given industry
(Erramilli and Rao 1993). The presence of these services
abroad demands sizable investments in installations and
equipment that may result in internationalization patterns
similar to those of manufacturing firms.

For knowledge-intensive firms, direct foreign investment

does not imply a large investment of resources in the host
country, because it does not require sizable investments in
plants, machinery, buildings, and other physical assets; a
firm’s presence may be a single office (Erramilli and D’Souza
1995). As such, traditional variables could be less important
for these firms, and thus their entry mode choices may be
influenced more by strategic reasons than by traditional
variables (especially those derived from an economic
perspective).

In this article, we explore how differences between services

and manufacturing and within the actual service sectors may
influence entry mode decisions. In the following section, we
develop specific hypotheses that examine (1) TCA- and OCP-
related variables and (2) the aforementioned strategic
variables. We empirically investigate the relationships for
capital- and knowledge-intensive services.

Cultural Distance and Host-Country Risk. When entering

new markets, foreign investors must cope with the unpre- HYPOTHESES DEVELOPMENT
dictability of an investment in a politically, economically,
and culturally different environment. To mitigate this uncer- The Impact of TCA and OCP
tainty within a TCA framework, firms have been advised to Factors
retain flexibility and avoid high levels of ownership
(Williamson 1975). Firms should reduce their ownership
levels, seek locally based assets, and solicit the participation
of local partners (Anderson and Gatignon 1986; Hennart
1991; Hill, Hwang, and Kim 1990). One major source of
uncertainty is cultural distance. Perceptions of significant
cultural distance between the country of origin and the target
country in terms of culture, economic systems, and business
practices have been found to support the use of modes that
involve smaller resource commitment (Johanson and Vahlne
1977). Setting up in an environment with a culture that is
different and unfamiliar to the investor increases the diffi-

Strategic Variables That Influence Entry Mode Choice 71

 culty of arriving at a judgment about how staff should
behave, how to quantify the necessary inputs, and what
results to expect. The cost of acquiring information about the
new environment increases integration costs considerably.
Consequently, cultural distance should lead firms to adopt
shared-control modes or collaboration with local companies
for market entry rather than full-control modes. Thus:

H1: The greater the cultural distance between the coun-

try of origin and the target country, the lesser is the
likelihood that the firm will choose a full-control
mode.

Another factor of uncertainty is host-country risk. Host-

country risk reflects uncertainty about the continuation of
current economic and political conditions and government
policies that are deemed to be critical to the survival and
profitability of a firm’s operations in that country (Agarwal
and Ramaswami 1992). A highly volatile environment will
result in firms that want to minimize exposure to risk
through entry methods that offer the necessary flexibility in
the face of environmental variability (Erramilli and D’Souza
1995; Kim and Hwang 1992). By reducing resource commit-
ment in risky environments, firms minimize their financial
exposure in cases in which they can be adversely affected or
forced to cease their activity by unforeseen events (Hill,
Hwang, and Kim 1990). Therefore, in countries with unsta-
ble political and economical conditions, firms should avoid
full-control modes and seek shared-control modes.

H2: The greater the host-country risk, the lesser is the

likelihood that the firm will choose a full-control
mode.

Marketing Intensity. Under TCA assumptions, the risk of

undesired dissemination of a firm’s specific advantage or
proprietary asset is an important transaction cost. These
expropriation hazards can limit the potential rent an investor
may obtain for the exploitation of its specific assets in a for-
eign investment (Lu and Hebert 2005). Brand name, reputa-
tion, marketing skills, and the firm’s strength in sales are key
specific assets for international firms. These assets are espe-
cially vulnerable to problems related to divulging informa-
tion to or the misuse of information by third parties. Brand
development and sales strength are established over many
years and are rooted in a firm’s culture, systems, and rou-
tines. The less control the firm exercises, the more exposed it
will be to its partner’s possible hostile or opportunistic
actions. Given that the process of creation and maintenance
of product differentiation requires time, the undesired dis-
semination of commercial capabilities to third parties could
become the subject of possible misuse and could damage a

72 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

firm’s reputation and prestige. In such conditions, we expect
that firms will prefer full-control modes to shared-control
ones.

H3: The greater the marketing intensity, the greater is the

likelihood that the firm will choose a full-control
mode.

Tacit Know-How. Within an OCP framework, the nature of

the know-how being transferred, which is often tacit in
nature, is a major determinant of foreign entry decisions. It
may be embodied not only in technological blueprints but
also in the human capital of the firm and in informal operat-
ing procedures or routines. When the know-how necessary
to sell or manufacture new products is tacit, it is more likely
to be transferred within the firm than in the market because
firms are more efficient mechanisms for know-how transfer
(Hill, Hwang, and Kim 1990; Kogut and Zander 1992). The
difficulties and costs involved in transferring tacit know-
how provide incentives for firms to use high-control modes
of foreign entry to facilitate the intraorganizational transfer
of tacit know-how by relying on human capital, drawing on
organizational memory, and using existing organizational
routines to structure the transfer problem (Hill, Hwang, and
Kim 1990). Therefore, in the presence of tacit know-how,
firms should rely on full-control modes rather than on
shared-control ones.

H4: The greater the tacitness of know-how, the greater is

the likelihood that the firm will choose a full-
control mode.

Size. The establishment of wholly owned subsidiaries

abroad entails significantly higher resource commitments
and carries greater risk than other options. Consequently,
larger firms have a greater ability to expend resources and
absorb risks than small and medium-sized ones and thus are
more likely to select high-control and resource commitment
modes (Agarwal and Ramaswami 1992). Firms can obtain the
necessary resources for investments internally through their
own cash flow or externally from financial markets. Inter-
national activities are time consuming and demanding of
managers, and small firms are not always able to sustain the
high information costs that are required. Thus, consistent
with OCP logic, limits on the availability of financial, mana-
gerial, and political resources implies the need for small and
medium-sized firms to engage in entry modes on the basis of
risk and commitment minimization. Therefore, we expect
the following relationship:

H5: The greater the firm size, the greater is the likeli-
hood that the firm will choose a full-control mode.

Strategic Variables That Influence Entry Mode Choice 73

 International Experience. A positive relationship between
international experience and the use of full-control entry
modes is well documented in the literature (Chang and
Rosenzweig 2001; Madhok 1998). International strategies
consist of entering into complex environments in which
firms must overcome market-specific factors, among others.
According to OCP assumptions, the lack of knowledge about
host-country conditions could be considered an important
obstacle in the development of international activities
(Johanson and Vahlne 1977). The novice investor may make
inappropriate decisions about matters such as the location,
adaptation of services to local requirements, management of
the workforce, and customers or banking relationships. Con-
sequently, firms initially begin the international expansion
through low resource commitments. As they increase their
international involvement, they acquire knowledge of for-
eign markets and become more confident about taking part in
high-control and resource commitment modes. Therefore,
we propose the following relationship:

H6: The greater the international experience, the greater

is the likelihood that the firm will choose a full-
control mode.

Type of International Strategy. Regarding the pursuit of inter-

The Impact of Strategic national opportunities, we can distinguish between two
Factors broad types of strategies: a global strategy and a multidomes-
tic strategy. In a global strategy, firms typically attempt to
take advantage of the homogeneity of tastes and preferences
of customers across countries through a standardized prod-
uct or service offering. Interconnections among markets also
enable these firms to seek substantial integration and
economies of scale on a global level. In general, these charac-
teristics reflect a firm’s ethnocentric orientation (Pelmutter
1969), which implies (1) the development of international
operations in the same way as in the market of origin, (2) the
transmission of information and knowledge from the parent
company to affiliated companies, and (3) the maintenance of
a national identity by having people from the country of ori-
gin fill management posts in international operations. Thus,
service firms that employ a global strategy prefer full-control
entry modes to achieve a high level of coordination, synergy,
and asset transfer among units.

In turn, firms that adopt a multidomestic international strat-

egy compete mainly at the local level, adapting products and
business policies to local markets. Local subsidiaries typi-
cally enjoy considerable autonomy with their own commer-
cial and production infrastructures. Such firms are comfort-
able with shared-control modes, such as joint ventures,
which allow greater flexibility (Hill, Hwang, and Kim 1990;
Tallman and Shenkar 1994). Their organization is often poly-

74 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

centric (Pelmutter 1969). Because international operations
are viewed as a group of independent companies, control
and evaluation methods are determined at a local level, and
communications between the parent company and the sub-
sidiaries are limited. In conclusion, service firms with a mul-
tidomestic strategy are more likely to rely on shared-control
modes than firms with a global strategy. Therefore, we pro-
pose the following hypothesis:

H7: The greater the global nature of a strategy, the greater

is the likelihood that the firm will choose a full-
control mode.

Trend-Following Motives Versus Market-Seeking Motives of

Entry. To explain the internationalization of the firm, some
authors distinguish between defensive motives, which are
based on the protection of current markets, and offensive
motives, which are based on the exploitation of new markets
(Dunning 1995). Among defensive motives, trend-following
motives are commonly cited in the literature as involving
“following the national client” and “following the competi-
tors or leaders” (Dunning 1995; Li and Guisinger 1992).
Many service firms follow internationalizing manufacturing
companies abroad to offer their services to these companies
in overseas markets. Client followers can be expected to
select high-control modes to protect their competitive advan-
tage based on the knowledge of specific customer needs.
Banking, insurance, consulting, legal services, accounting,
and other professional service industries are examples of this
type of internationalization motive (Bouquet, Hébert, and
Delios 2004). In oligopolistic markets, internationalization
may also take a defensive dimension. Firms may react to
overseas expansion of competing service firms to achieve a
global market power position and head off potential com-
petitors proactively. Wholly owned subsidiaries enable firms
to respond to competitors’ actions more quickly than collab-
orative modes, so service firms are more likely to select a
full-control mode (Erramilli and Rao 1990; Li and Guisinger
1992).

Market-seeking motives are offensive in nature and are

related to servicing new foreign clients, seeking countries
with a growing market potential, or locating in specific geo-
graphical areas. Under such circumstances, pioneering serv-
ice firms lack the knowledge of the local market and its
needs. Thus, it is necessary to balance the risks and benefits
of being the “first mover.” These firms are more likely to seek
collaborative agreements to access external resources and
local customers, in addition to overcoming their liability of
foreignness (Dunning 1993; Erramilli and Rao 1990). In sum-
mary, we expect that a firm’s motivations underlying its mar-
ket entry will influence entry mode selection as follows:

Strategic Variables That Influence Entry Mode Choice 75

 H8a: The greater the trend-following motives of market
entry, the greater is the likelihood that a firm will
choose a full-control mode.

H8b: The greater the market-seeking motives of market

entry, the lesser is the likelihood that a firm will
choose a full-control mode.

Exploitation Versus Exploration Motives of Entry.

Researchers have suggested a necessary dynamic balance
between the exploitation of existing capabilities (or asset
exploitation) and the development of new capabilities (or
asset seeking) for the continued success of the firm (Chang
1995; Makino, Lau, and Yeh 2002; March 1991). Tradition-
ally, foreign investment has been associated with the
exploitation of existing assets because it could involve the
transfer of a firm’s proprietary assets across borders. How-
ever, from the asset-seeking perspective, firms also engage in
international markets to acquire strategic assets, such as
technology, marketing, and management expertise, that may
be available in host markets. Asset-seeking motivations
include experimentation with new options that can enable
firms to enhance competitive advantages through comple-
mentary assets (Vermeulen and Barkema 2001). Some
resources, such as capital and labor resources, can easily be
obtained through markets. However, other resources, such as
host-market knowledge, local contacts, and technology,
would be costly to obtain through replication or acquisition.
Thus, firms are more likely to collaborate with local firms
through alliances to obtain them (Hennart 1991). In short,
exploration motives for entry may result in firms using
shared-control modes to a greater extent than full-control
modes. In contrast, asset exploitation motivations involve
transferring existing capabilities to foreign markets. To pro-
tect these capabilities and to ensure their proper transfer,
firms are likely to prefer the use of full-control modes to
shared-control ones.

H9a: The greater the asset exploitation entry motive, the

greater is the likelihood that the firm will choose a
full-control mode.

H9b: The greater the asset-seeking entry motive, the

lesser is the likelihood that the firm will choose a
full-control mode.

Types of Services. Services can be classified according to

their level of capital and knowledge intensity (Contractor,
Kundu, and Hsu 2003; Hertog 2000; Windrum and Tomlin-
son 1999). Capital intensity is related to the level of invest-
ment in fixed assets that is necessary to begin production
and carry out operations in a given industry (Erramilli and

76 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

Rao 1993). In turn, in knowledge-intensive services, knowl-
edge has more importance than other inputs, and thus
human capital dominates instead of physical or financial
capital, as is the case in capital-intensive services. The key
resource in knowledge-intensive firms is often referred to as
human capital or intellectual property (knowledge, informa-
tion, and experience), which can be put to use to create
wealth. We expect that this difference among services affects
the type of variables that explain entry mode selection. For
example, in capital-intensive services, TCA- and OCP-
related variables are likely to play a greater role in explaining
entry mode decision than in knowledge-intensive services.
In turn, strategic variables may be of greater importance in
knowledge-intensive services.

Capital-intensive services, such as energy, telecommunica-

tions, electricity, and hotels, require sizable investments in
installations and equipment. Consequently, they are
expected to show internationalization patterns similar to
those of manufacturing firms. In addition to their costs, the
investments required for the provision of these services in
foreign countries may create significant exit barriers in situa-
tions in which the cessation of the activity is advisable
(Anand and Delios 1997). Firms are likely to be reluctant to
commit a high amount of resources to enter into countries
under uncertainty conditions. Moreover, their most valuable
assets are often linked to their brand and reputation in such a
way that when firms expand internationally, they tend to
protect these assets from being wrongfully used by third par-
ties. They also want to avoid damages to their international
image. As a result, it could be expected that TCA- and OCP-
related variables have a great impact on entry mode choice.

For knowledge-intensive services, such as accounting, man-

agement consultancy, engineering and architecture, market-
ing and advertising, and research-and-development consul-
tancy, foreign direct investment does not imply a large
investment of physical assets in the host country. A single
office may represent a firm’s presence in another country
(Erramilli and D’Souza 1995). The provision of knowledge-
intensive services mainly requires investments in human
resources, given that such services depend on the skills, tal-
ent, and knowledge necessary to satisfy consumers’ needs
and expectations (Erramilli and Rao 1993). Moreover, the
intangible nature of knowledge-intensive services makes it
difficult for clients to appreciate the performance of the serv-
ice rendered. Consequently, personalized service and treat-
ment are the best forms of innovating and differentiating the
firm’s service. This can be achieved by gathering information
about clients and adapting the service to the nature of the
demand and needs. Therefore, it would be expected that
knowledge-intensive service firms exhibit internationaliza-

Strategic Variables That Influence Entry Mode Choice 77

 tion patterns different from manufacturing firms and, as we
suggested previously, from capital-intensive services (Bou-
quet, Hébert, and Delios 2004). If these patterns are indeed
different (Anand and Delios 1997; Bouquet, Hébert, and
Delios 2004), factors explaining entry mode choice may also
be different. In particular, strategic motivations may play a
more important role in knowledge-intensive services than in
capital-intensive ones. Thus:

H10a: TCA- and OCP-related variables have a greater

influence on entry mode choice in capital-
intensive services than in knowledge-intensive
services.

H10b: Strategic variables have a greater influence on

entry mode choice in knowledge-intensive serv-
ices than in capital-intensive services.

Dun & Bradstreet (2002) compiled an international database

METHODS of Spanish companies with subsidiaries outside Spain in
2002. This amounted to 660 Spanish-based multinational
Sample service companies. Several academics who specialize in
international management and the service sector pretested
the survey (an extensive mail questionnaire) to ensure face
validity of the instrument. Moreover, to confirm the conver-
gent and discriminant validity of the measures, a pretest was
conducted through personal interviews with executives who
were responsible for international operations of service firms
(not included in the sample).

The questionnaire was mailed to senior-level managers who

were most likely to be involved in the market entry decision
process in their firms, including chief executive officers and
directors in charge of international operations. Two weeks
later, each firm was contacted by telephone to encourage
managers to participate in the study. Finally, a reminder let-
ter was sent to nonrespondents with a copy of the question-
naire. From October 2002 to February 2003, we received 113
questionnaires, and firms provided data on 174 entry deci-
sions that were deemed to be usable for our analyses, repre-
senting a wide variety of service industries (see Table 1). The
response rate of 17% compares favorably with rates reported
in other surveys that involve chief executive officers (Chang
and Taylor 1999; Samiee and Walters 1991).

We designed the questionnaire to gather information on the

initial entry mode to two foreign countries that are important
to the firm (in terms of sales volumes, strategic aims, or
resource commitments) and about which the manager had
sufficient information to be able to respond (the most recent
entries or cases in which the manager intervened in the deci-
sion). Consequently, in the majority of cases, a single respon-

78 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

dent per firm provided us with information on two entry
decisions. Thus, the final number of observations we
obtained for the study was 174 entries. We did not provide a
list of markets, so respondents chose countries in which they
were operating. Their perceptions about some variables and
the entry modes their firms used were different in each coun-
try, and thus some questions had two columns to answer
depending on the country analyzed. This practice has been
used in other research on entry decisions carried out with
postal questionnaires (see Agarwal and Ramaswami 1992;
Erramilli and Rao 1990, 1993).

Some of the main characteristics of the sample we used for

this study appear in Table 2. We analyzed questionnaires
using the time-trend procedure that Armstrong and Overton
(1977) propose. First, we sampled nonrespondents and asked
them ten questions contained in the original questionnaire.
We found no significant differences between the respondent
and the nonrespondent samples on these questions. Second,
we used the midpoint of the data collection period (October
2002–February 2003) as the cutoff point for distinguishing
between early and late respondents: 62% of the responses
(70 of 113) were from early respondents, and the remaining
38% were from late respondents (43 of 113). To ensure that
the early respondents and the late respondents did not sys-

Sectors Percentage
Table 1.
Capital-Intensive Services
Service Sectors
Transport 17.24
Distribution 23.56
Public services 12.06
Knowledge-Intensive Services
Financial services 12.06
Commercial services (standardized) 25.28
Professional services (customized) 9.80
Total 100

Firm Characteristics (N = 113) M SD Mdn

Foreign salesa 1.92 .98 2
Table 2.
Foreign assetsa 1.27 .64 1
Sample Characteristics
Number of employees 871.32 2,478.41 105.00
Number of foreign countries (exports) 14.31 17.26 8
Number of foreign countries (investments) 3.50 4.14 2
Export experience (number of years) 9.20 14.43 2.50
Investment experience (number of years) 4.98 9.54 0
aIntervals: Value 1 (<25%), Value 2 (25%–50%), Value 3 (51%–75%), and Value 4 (>75%).

Strategic Variables That Influence Entry Mode Choice 79

 tematically differ, we compared these two groups of respon-
dents on their demographic data, including foreign sales, for-
eign assets, number of employees, number of countries in
terms of exports, number of countries in terms of sub-
sidiaries, international experience in exports, and inter-
national experience in investments. We used independent
sample t-tests to check for equality of means. Analysis indi-
cated no significant differences in the variables of interest
between late and early respondents.

In addition, we compared responding firms with a random

sample of 20 nonrespondents regarding size (sales volume)
and experience (years since foundation). We found no sig-
nificant differences (p < .05), providing no evidence for non-
response bias. Finally, when possible, we cross-checked
variables from the survey responses against company reports
and published data. We found a high degree of correspon-
dence between published data and survey responses, in sup-
port of the veracity of the survey responses.

We tested the hypothesized relationships using logistic

Dependent Variable Measure
regression. We measured the dependent variable (i.e., entry
mode) with a dichotomous variable coded as 1 for full-
control modes (greenfield investments and full acquisitions)
and as 0 for shared-control modes (contractual agreements,
partial acquisitions, and joint ventures). Entries consisted of
67 shared-control modes (38.5%) and 107 full-ownership
modes (61.5%).

The TCA-related variables included cultural distance, host-

Independent Variables country risk, and marketing asset intensity. First, we derived
Measures country risk from the host-country-risk index published in
Euromoney the year before each entry. This publication pres-
ents annual ratings of countries based on composite meas-
ures of both political and economic risks. This measure has
been used in previous studies (e.g., Delios and Beamish
1999). Second, we computed cultural distance according to
the composite index that Kogut and Singh (1988) use. This
index measures the deviation along each of Hofstede’s (1980)
four cultural dimensions (i.e., uncertainty avoidance, indi-
viduality, power distance, and masculinity–femininity) from
the score of a given focal country for each country. We cor-
rected the deviations for differences in the variances of each
dimension and averaged them. We calculated cultural dis-
tance between the country of origin (Spain) and the host
country (j) as follows:

CDSpain/j = 1/4 Σ[(IiSpain – Iij)2/Vi],

where Iij is the index value for the cultural dimension i of

country j, IiSpain is the index value for the cultural dimension
of Spain, Vi is the variance of the index dimension i, and

80 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

CDSpain/j is the cultural difference of country j from Spain.
Finally, we assessed marketing intensity using a three-item
scale based on Kim and Hwang’s (1992) measure.

The OCP variables included tacit know-how, firm size, and

international experience. First, we measured firm size as the
firm’s sales volume the year before entry. Second, we repre-
sented international experience as the number of years from
the firm’s first investment abroad. Finally, we measured tacit
know-how with a four-item scale that we derived from the
work of Kim and Hwang (1992) and Madhok (1998).

Strategic variables included the type of international strat-

egy, trend-following versus market seeking-motives of the
entry, and asset exploitation versus asset-seeking motives.
First, we measured international strategy as a four-item scale
that we derived from the work of Harzing (2002). Second, we
measured strategic motives related to trend-following
motives and market-seeking motives using a multiple-item
scale based on the work of Weinstein (1977). Finally, for
asset-seeking and asset exploitation motives, we drew from
the work of Chang (1995) and Makino, Lau, and Yeh (2002).
In addition, we used an alternative measure to capture such
motivations. In line with the work of Lu (2002), the greater
the need of a firm to access complementary resources, the
higher is its propensity to decide to enter by a shared-control
entry mode. Large investments, diversified entries, and
entries made into resource-intensive industries motivate the
use of shared-control modes as a way to gain access to
required resources and to share the risk under such condi-
tions (Delios and Beamish 1999; Lu 2002). We used the
variable “previous experience with the entry mode” as a
proxy of asset exploitation motivations and asset-seeking
motivations. We measured this with dichotomous variables
coded as 1 for prior entries made using full-control modes
and as 0 for prior entries made using shared-control modes.
We assume that prior experience in shared-control modes is
linked to asset-seeking motivation and that prior experience
in full-control modes is linked to asset exploitation
motivation.

To test how variables of a different nature influence the

firm’s entry mode choice depending on the type of service,
we divided the sample into two groups, capital-intensive
services and knowledge-intensive services, according to
Contractor, Kundu, and Hsu’s (2003) classification of serv-
ices. We used a dummy variable coded as 1 for the capital-
intensive services group (e.g., energy, telecommunications,
electricity) and as 0 for the knowledge-intensive services
group (e.g., consulting, engineering, financial, and architec-
ture services).

Strategic Variables That Influence Entry Mode Choice 81

 We centered all variables before we conducted data analysis.
Table 3 contains our measurement of the independent
variables. We measured multi-item scales with the same con-
structs used in other studies of entry modes in an inter-

Measurement of Variables
Table 3. Country risk Country risk index of the journal Euromoney, which
Measurement of Independent measures the country risk for the year before the entry year
Variables (value of 1–100; 1 = “high country risk,” and 100 = “low
country risk”).
Delios and Beamish (1999) and Lu and Hebert (2005),
among others, use this measure.

Cultural Kogut and Singh’s (1988) index, based on Hofstede’s (1983)

distance index.
Intensity of Value of (1) the firm’s reputation, (2) the international
marketing recognition of the brand, and (3) the quantity of investment
in marketing (1 = “very low,” and 5 = “very high”).
Cronbach’s α = .7486.
We based these items on the work of Kim and Hwang
(1992).

Tacit know- Managers’ perception about (1) the difficulty in transferring

how skills and knowledge, (2) the difficulty in valuing a priori
the exact price of the service, (3) the difficulty in copying
skills and knowledge, and (4) the difficulty in
understanding the know-how (1 = “very low,” and 5 =
“very high”). Cronbach’s α = .8396.
We based these items on the work of Kim and Hwang
(1992) and Madhok (1998).

Size Sales volume the year before the time of entry.

Agarwal and Ramaswami (1992) use this measure.
International Number of years abroad (having subsidiaries).
experience
Fladmoe-Lindquist and Jacque (1995) and Harzing (2002)
use this measure.
International Respondents were asked to assess the following statements
strategy (1 = “strongly disagree,” and 5 = “strongly agree”): (1) Firm
desires to achieve economies of scale by concentrating the
important activities in a limited number of locations. (2)
Competitive position is defined in worldwide terms, and
markets are closely linked and interconnected. (3) Each
subsidiary competes on a domestic level as markets are too
different (reverse coded). (4) Firm responds to national
differences by adapting products to the local market
(reverse coded).
We constructed a composite index with these items
(Cronbach’s α = .6959). High values indicate global strategic
approaches.
We derived the items from the work of Harzing (2002).
Market- Managers’ perceptions about the importance (1 = “very
seeking low,” and 5 = “very high”): (1) of taking advantage of a
motives market with a large and growing potential, (2) of
establishing the company name in markets that will be
important in the future, and (3) of capturing new clients.
Cronbach’s α = .8539.
We derived the items from the work of Weinstein (1977).

82 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

 Measurement of Variables
Table 3.
Trend- Managers’ perceptions about the importance of the
following following motives (1 = “very low,” and 5 = “very high”): (1) Continued
motives overcoming the rapid overseas expansion of other service
firms, (2) following the clients, and (3) following the
competitors. Cronbach’s α = .7537.
We derived the items from the work of Weinstein (1977).
Exploration Managers’ perceptions about the firm’s orientation toward
motives asset and capability seeking in the entry decision (1 = “very
low,” and 5 = “very high”).
Exploitation Managers’ perceptions about the firm’s orientation toward
motives asset exploitation in the entry decision (1 = “very low,” and
5 = “very high”).
Previous We measured this with dichotomous variables, coded as 1
experience in the for prior entries made by full-control modes and as 0 for
entry mode prior entries made by shared-control modes.
We based this item on the work of Lu (2002).
Type of service This is a dummy variable, which we coded as 1 for capital-
intensive services group (energy, telecommunications,
electricity, and hotels) and as 0 for knowledge-intensive
services group (consulting, engineering, financial, and
architecture services).
We based this item on the work of Contractor, Kundu, and
Hsu (2003).

national context; thus, we used Cronbach’s alpha as an indi-

cator of the reliability of the construct. As Table 3 shows, the
coefficient alphas for all constructs exceeded or came close
to Nunnally’s (1978) .7 criterion for basic research. Thus, we
deemed the reliabilities of these constructs to be sufficient
for our study.

Before running the statistical analyses, we examined the cor-

relation matrix. Most of the correlations among the variables RESULTS
were small. Furthermore, the variance inflation factor reveals
that most of these were close to 1. The largest variance infla-
tion factor value is 3.058, which is well below the cutoff of
10 (Hair et al. 1999). This evidence reduces concerns about
multicollinearity problems.

We carried out logistic regressions to analyze the influence of

the independent variables in each of the groups defined by
the dependent variable (full-ownership control versus
shared control). We analyzed the sign of the coefficients that
were significant. A positive coefficient indicates that the
independent variable increases the probability of choosing
full-ownership control, whereas a negative sign suggests a
preference for shared-control modes. We used one-tailed
tests because they are more appropriate to assess directional-
ity. To test differences between services, we conducted logis-
tic regressions for the two groups of services, in accordance
with Contractor, Kundu, and Hsu’s (2003) classification of

Strategic Variables That Influence Entry Mode Choice 83

 services (i.e., capital-intensive services and knowledge-
intensive services).

We observe different results depending on the services group

(see Table 4). The logistic regression for the capital-intensive
services group shows the importance of TCA and OCP
variables over strategic factors. Full-control modes are pre-
ferred to enter into stable countries (p < .01) and in situations
in which marketing assets are an important competitive
advantage (p < .05). However, firms prefer to share control to
operate in high-cultural-distance (p < .10) and high-country-
risk (p < .01) markets. These results indicate that firms in this
service group seek greater control and make greater resource
commitments in countries that are both politically and eco-
nomically stable. This result coincides with those found in
the majority of studies carried out on manufacturing firm
samples (Gatignon and Anderson 1988; Kim and Hwang
1992; Luo 2001). However, firms in this group prefer to limit
the risks to which they are exposed by minimizing their
resource commitment in countries that are culturally distant
from the country of origin. Moreover, the group of capital-
intensive service firms includes firms that belong to sectors
that offer more homogeneous services, such as telecommuni-

Capital- Knowledge-
Table 4. Intensive Intensive
Logistic Regression for Groups Variables Services Services
of Services Constant –13.952*** (4.691) –8.164 (19.639)
Country risk .041** (.017) –.011 (.035)
Cultural distance –1.029† (.763) –.281 (1.513)
Marketing intensity .804* (.496) .173 (1.234)
Tacit know-how –.269 (.487) .171*** (1.067)
Size .955 (.760) .134 (1.075)
International experience –.050* (.050) .143 (.106)
International strategy .665 (.427) 3.948** (2.002)
Trend-following motives 1.550*** (.562) 1.240 (1.509)
Market-seeking motives .584 (.424) –2.273** (1.884)
Exploitation motives .523 (.536) 1.649* (1.355)
Exploration motives .308 (.407) –.777*** (.595)
Experience in the entry mode –.525 (.389) 1.240* (.657)
Chi-square 60.674*** 89.873***
–2 log-likelihood 43.178 20.992
Overall classification rate (%) 86.7 94.7

*p < .05.
**p < .01.
***p < .001.
†p < .10 (one-tailed).
Notes: Standard errors are in parentheses. Dependent variable: shared control (0) and full
control (1).

84 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

cations, energy, hotels, and airlines, among others. In these
sectors, the most valuable assets are typically linked to
brand, reputation, or business skills in such a way that when
these firms expand internationally, they tend to protect these
assets from being wrongfully used by third parties to avoid
damaging their international image. This could explain the
positive relationship between marketing intensity and the
use of full-control methods in capital-intensive service firms.

With regard to OCP variables, contrary to traditional argu-

ments, the international experience variable presents a nega-
tive sign (p < .05). Thus, firms with international experience
tend to use shared-control modes to enter new markets, prob-
ably because they are more able to negotiate with local firms
than are firms in the beginning of their international expan-
sion. Finally, we observed that only the trend-following
motive is statistically significant in the capital-intensive
services group (p < .001). The positive sign indicates that
firms prefer full-control modes when defensive reasons moti-
vate entry.

In knowledge-intensive services, entry mode decisions are

influenced to a greater extent by strategic variables than by
traditional variables. Specifically, the results show that
global approaches (p < .01), asset exploitation motives (p <
.05), and previous experience in full-control modes (p < .05)
determine the preference of full-control modes, whereas
firms prefer to share control with local firms when their
entry is motivated by offensive considerations (p < .01) and
asset exploration (p < .001) and when they have prior experi-
ence in shared-control modes (p < .05). With regard to tradi-
tional variables, the results show a positive relationship
between tacit know-how and the preference for full-control
modes (p < .001). For knowledge-intensive service firms,
competitive advantages lie in employees’ knowledge and
firm know-how. Typically, such knowledge cannot be easily
articulated, and thus it is difficult to transfer to local partners
without it suffering a significant loss in value. Because this
knowledge is also difficult to patent, there is a greater risk of
it being wrongfully disseminated and appropriated, thus
weakening the firm’s competitive advantage. In such a situa-
tion, service firms show a greater tendency to adopt full-
control entry modes to protect their competitive advantage.

This work attempts to cast some light on how a firm’s inter-

national strategy affects choice of entry mode in the service DISCUSSION
sector. Because of the inherent complexity associated with
studying a sector as heterogeneous as services, it is critical
for researchers to investigate variables that go beyond those
that are drawn from conventional theories and adapted to the
manufacturing sectors. Introducing these new variables may

Strategic Variables That Influence Entry Mode Choice 85

 well provide further evidence of the determinants of the
entry decision into foreign markets in services.

Our study suggests that determinants of entry mode choice

that are traditionally analyzed in manufacturing firms cannot
be directly transferred to all types of service firms. Some
variables often used in manufacturing studies are not signifi-
cant or exhibit different results, depending on the specific
groups of service activities. In particular, we observed that
TCA variables were key determinants of entry mode choice
for capital-intensive service firms. These firms prefer to hold
a flexible position in countries with high levels of political
and economic instability and high cultural distance or to
protect their commercial assets from undesired dissemina-
tion by entering with full-control modes. These results sup-
port the contention that capital-intensive service firms fol-
low entry mode patterns similar to those observed by other
studies in the manufacturing sector.

Entry mode choice patterns in knowledge-intensive service

firms are determined mainly by the protection of tacit know-
how and strategic considerations. For these service firms,
exit costs are comparatively lower given that their valuable
assets lie in employees’ knowledge and not in physical
assets. This type of knowledge is difficult to codify and
patent, and therefore it is more difficult to transfer through
contractual processes. As a result, hierarchical coordination
through full-ownership control modes appears to be a more
efficient option. Furthermore, strategic variables signifi-
cantly influence entry mode choice for the knowledge-
intensive group. Firms are more likely to use full-control
modes when they pursue global strategies and when they are
driven by asset exploitation motives. However, shared-
control modes are preferable when firms enter into markets
to search complementary assets and new clients.

Our results provide some evidence for researchers about the

importance of adopting an integrative approach to obtain a
more robust perspective of a firm’s internationalization.
Such an approach appears to be essential, considering the
complexity and variety of competitive pressures that con-
front manufacturing and service firms in international busi-
ness. In this article, we draw from the entry mode literature
based on TCA and the OCP and incorporate new determi-
nants derived from a more strategic approach. Collectively,
these approaches provide greater explanatory power and
new insights into the complex phenomenon of entry mode
choice.

This study also provides guidelines for management about

how to match control and resource requirements not only
with host-country conditions and firms’ existing capabilities

86 Esther Sanchez-Peinado, Jose Pla-Barber, and Louis Hébert

but also with strategic objectives, firms’ international
approaches, and the specific characteristics of the sector in
which they operate. Specifically, managers of service firms
should evaluate the characteristics of the service that will be
offered in international markets and assess the international
potential that they present. Therefore, industrial characteris-
tics should be viewed as facilitators or restrictions to inter-
national commerce. In addition, managers should take into
account that for many service firms, the switching costs may
be comparatively small because valuable assets rest more on
human capital than on physical assets (Erramilli and Rao
1993). Therefore, their entry mode decisions should be
guided by considerations other than only cost minimization
reasons.

This study has several limitations. The empirical analysis is

based on data collected from a single respondent, though LIMITATIONS AND FUTURE
several decision makers may make entry mode decisions. RESEARCH AVENUES
The use of multiple respondents could have increased the
validity of the data and reduced concerns about potential
response bias. To address this potential problem, we selected
well-informed respondents and mailed the questionnaire to
senior managers who had been involved in the entry mode
decision. Caution should also be exercised in the generaliza-
tion of results because this study focused on Spanish service
firms. Therefore, further research could provide insight into
the applicability of our results in different settings. In addi-
tion, although the effective response rate to the survey (17%)
is comparable to other similar surveys, it must be acknowl-
edged as a limitation.

Consistent with other studies that focus on entry mode

choice, the unit of study is an individual foreign market
entry decision made by the firm. To obtain a more represen-
tative sample, it would be necessary to identify all foreign
market entry decisions made by target firms. However, this
approach would also entail limitations because respondents
may not be in the position to remember details of all those
entries. We conducted this study post hoc, so some
responses are likely to be exposed to the ex post or retrospec-
tive rationalizations of managers. Case studies could add
more in-depth evidence about the reliability of our measure-
ments and the necessity to assess the impact of some other
factors.

In this study, we did not consider some factors that have

been identified in the literature as determinants of entry
mode choice. The appeal of large countries with growth
potential in terms of profitability and future potential for
growth may lead firms to prefer high resource commitment
modes to enter into these countries. Legislative and fiscal
barriers could also influence the openness of the host coun-

Strategic Variables That Influence Entry Mode Choice 87

 try to foreign direct investments and may force firms to
choose certain entry modes because of host-government
regulations, an eventuality that other entry mode studies
should consider. However, we believe that this variable does
not significantly affect entry mode choice in our study,
because many entries have been located in European and
Latin American countries in which legal restrictions to for-
eign investment are not important barriers. Finally, determi-
nant factors and entry mode choice should be linked to firm
performance to provide insights into whether the proper
alignment of entry modes with such factors actually leads to
better results.

Agarwal, S. and S.N. Ramaswami (1992), “Choice of Foreign Mar-

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