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5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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Service intangibility, cultural factors, and entry mode
selection in service firms: a conceptual framework and
research propositions
Abstract
A considerable amount of research has focused on entry mode selection in international
business and marketing academia, yet existing research has not explored the relationship
among service intangibility, cultural factors, and entry mode selection. Accordingly, this
study highlights how service intangibility needs to be seen from the perspectives of both
service providers and service recipients and how cultural factors (cultural distance and
host country culture) moderate the relationship between service intangibility and entry
mode selection for international service firms. After a literature review, seven
propositions are proposed and the authors question whether the foreign market entry
mode selection differs significantly with the degree of service intangibility; whether the
greater the cultural distance is, the greater the difference is in level of involvement during
market entry between service firms embodied in different degrees of service intangibility;
and whether the level of each host country’s culture characteristic that service firms face
in the host market with the extent of service intangibility exhibits interactive effects on
entry mode selection. The authors further discuss other possible sources that may affect
the relationship between service intangibility and entry mode selection for future
empirical testing, and some practical suggestions and academic directions are also
provided.
Keywords: service intangibility; entry mode selection; host country culture; cultural
distance
Introduction
Service firms in an age of globalization. According to World Bank statistics in 2004,
the global service industry occupied 63% of global GDP and 1,249 service firms ranked
among the Forbes list of the best 2,000 firms. These reports reflect the phenomenon that
service firms have the most development potential in the future trend of globalization
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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(Martin Wolf, 2005).1 The significant expansion of entering foreign markets for service
firms during the last decade has actually received growing attention among researchers,
corporate managers, and policy makers (Li and Guisinger, 1992). However, Boddewyn et
al. (1986) suggest that, although theories of entry strategies (e.g., FDI) and the
multinational enterprise can be applied to multinational service firms, this must be done
with extreme caution due to the distinctive characteristics of international services.
Therefore, it is necessary for us to consider the service characteristics of service firms
when discussing their entry strategies in a foreign market.
Entry mode selection of service firms. Globalization means service firms have great
opportunities to conduct their business in foreign markets. Therefore, the primary
consideration and the most critical issue in an international market entry strategy is the
selection of an appropriate entry mode (Terpstra and Sarathy, 1994). Entry mode selection
is interpreted to mean a suitable way for enterprises to enter foreign markets so as to
operate their international businesses by exploiting their advantages (Root, 1994). As to
the entry strategy of service firms, Erramilli (1990) is one of the first to discuss the entry
mode choice in service industries and points out that the foreign market entry behaviour
in the service sector is characterized by considerable diversity, especially in comparison
with the manufacturing sector. To understand the reason for this, the author suggests that
researchers examine the unique characteristics of services: intangibility, perishability,
heterogeneity, and inseparability (Zeithaml et al., 1985). Of particular importance is
intangibility, because among the characteristics which differentiate services from
products, it is recognized by a large number of specialists as the most important one
(Rushton and Carson, 1989; Rust et al., 1996; Bebko, 2000) and all services can be
evaluated according to their degree of intangibility (Shostack, 1977; Zeithaml and Bitner,
2000). It is our belief that intangibility is one of the important factors that is responsible
for distinguishing entry behaviour in the service and manufacturing sectors. Therefore, in
this study we discuss the feature of intangibility in service firms and how it affects the
entry mode selection of service firms.
Cultural factors. Cultural distance (differences between national cultures) and the
home country culture of a firm (i.e., uncertainty avoidance) have frequently claimed to
influence the entry mode selection (Kogut and Singh, 1988). However, Hennart and
Lariomo (1998) conclude that ‘culture distance between the home base of the investor
1This digest is from 2005 Business Weekly (volume 911, p.50-52), a special issue discussing the
future development trends of the service industry by Martin Wolf.
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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and the target market exerts a powerful influence on ownership of subsidiaries, but
cultural characteristics of the home base (i.e., power distance and uncertainty avoidance)
do not.’ Cultural distance is a widely used construct in international business, and entry
mode is one of its applied concerns (Shenkar, 2001). Scholars (Brouthers and Brouthers,
2001; Tihany et al., 2005) point out that it is apparent to see that the conflict between a
firm’s culture and the inconsistency toward a firm’s cognition all result from
discrepancies in national cultures, which also result in a highly uncertain environment for
investors when considering the mode of entry.
Synthesizing the above discussions, we assume that cultural distance is an important
factor needed to be considered which influences the entry mode selection of service firms,
but cultural characteristics of the home base do not conclude the same result. These issues
inspire us to look at a service firm’s entry mode selection from the viewpoint of the host
country’s characteristics (Kwon and Konopa, 1992) and the impact of the host country’s
culture on entry mode selection (Root, 1994; Douglas and Craig, 1995). Some research
studies treat the host country’s culture as a moderating effect (Ekeledo and Sivakumar,
2004) and they also suggest that researchers can view culture as a quasi-moderator
variable altering the form if not the strength of the relationship between environmental
and strategic variables (Shenkar, 2001). This focus allows us to see the main effects of
service firms’ specific characteristics on entry mode selection as well as the moderating
effects of two types of culture (cultural distance versus host country’s culture
characteristics) on entry mode selection, which may help us to understand whether
cultural distance or a host country’s culture strongly moderate the entry mode selection of
service firms.
Figure 1 shows our conceptual framework that explains the relationship among service
intangibility, cultural factors, and entry mode selection.
Figure 1 Service intangibility, cultural factors, and entry mode selection
Cultural Factors
(Cultural Distance vs.
Host Country Culture)
Degree of Control:
Entry Mode Selection
Service Intangibility of
Service Firms
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Literature Review and Propositions
The literature review contains several portions and seven main propositions for
discussing the moderating effect of two types of culture (cultural distance versus host
country culture) on the entry mode selection of service firms.
The Effect of Service Characteristics on Entry Mode Selection
Service intangibility. Compared to the physical product, customers encounter and
perceive an extreme degree of risk and uncertainty when purchasing a service product
due to service intangibility, which is one of the fundamental characteristics of services
(Wolak et al., 1998). This is the major threat to service quality and customer acceptance
sequentially (Parasuraman, et al., 1988). In the past three decades, extant research has
devoted much effort in understanding the tangibility and intangibility in service industries.
Although achievement still in its infancy (Santos, 2002), some remarkable findings have
identified numerous consequences of intangibility. For example, research has looked into
the impacts on the difficulties of evaluating a service before, during, and after a purchase
(Bateson, 1979; Rushton and Carson, 1989; McDougall and Snetsinger, 1990), selecting
between alternatives (Breivik, et al., 1998), as well as the perceived risk (Kurtz and Clow,
1998). The intangibility of services apparently increases customers risk (Flipo, 1988),
anxiety (Rushton and Carson, 1989), and uncertain perception in various stages of the
decision-making process (Trivedi and Morgan, 2003). This may consequently result in a
negative attitude toward the services (Rushton and Carson, 1989).
Service firms need to consider how their providing services embodied on a different
level of service intangibility will be received or perceived by customers, which will
influence how service firms would like to operate their business in the host country
through an appropriate entry strategy. Considerations for foreign entry mode, such as an
inexpensive and ample labor force, an extensive internal market, cheap land and raw
materials (Hu, 1996), and some degree of preferential treatment (e.g., service intangibility
and cultural differences) for investments in the host country, entail different entry
strategies by international service firms.
Continuum of service intangibility. Shostack (1977) is the earliest to discuss this
content and creates a single dimension to describe the continuum of in/tangibility. The
difference between physical goods and service product is the degree of tangible elements
included in the respective objects. McDougall and Snetsinger (1990) develop a relevant
instrument for measuring service intangibility. This instrument provides an elementary
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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measurement for service in/tangibility, as well as the customers’ basic impression toward
services. In response to the necessity of gaining mental tangibility, Santos (2002)
suggests to classify service characteristics on a continuum from “tangible dominant” to
“intangible dominant” along the continuum of in/tangibility and to provide “tangible
evidence”. As indicated in Figure 2, services can be on any point in the continuum either
at the left end that is characterized with high intangible components (and low tangible
components) or vise versa at the right. In this study we use the term “the degree of
service intangibility” to describe the service characteristics of a firm.
Figure 2 Continuum of service tangibility and intangibility
Entry mode selection. Due to complexity and variety in the international business
environment, each firm has its own circumstances to consider with regard to entering a
foreign market to its best advantage. In other words, each mode of entry is taken into
account by firms in light of their own resources and capabilities in the changeable
environment and fluctuating conditions of the host country. Firms have to stress the
differences in the international environment when instituting globally competitive
strategies so as to exhibit their overall power to obtain competitive advantages. “Mode of
entry,” or “entry strategy,” is interpreted to mean an appropriate way for enterprises to
enter foreign markets to operate their international businesses by exploiting their
advantages (Root, 1994). Terpstra and Sarathy (1994) state that one of the most critical
issues in an international market entry strategy is the selection of an appropriate entry
mode. Consequently, service firms also need to consider which modes and styles of
operation they are going to adopt before they conduct any foreign market investment.
Herein, the importance of entry mode selection is obvious. This research assumes a
simplified involvement of licensing/franchising and exporting for “low involvement entry
mode selection” and management contract, joint venture, or sole ownership for “high
involvement entry mode selection” (Ekeledo and Sivakumar, 1998).
Entry mode selection and service characteristics. Though entry mode selection is
important for service firms in considering their foreign market entry, most entry mode
High in Intangible Components Low in Intangible Components
Low in Tangibility Components High in Tangible Components
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selection-related studies on service firms tend to explore the effects of strategic
consideration such as customer orientation and market targeting (Grönroos, 1999),
economic environment such as economic development (Weinstein, 1977), task factors
such as the ability to develop differentiated products/services (Agarwal and Ramaswami,
1992), and tangible resources like capital intensity (Erramilli and Rao, 1993) on entry
mode selection.
Some recent studies have started to concentrate on the roles of service characteristics
in service industries. Erramilli (1990) discusses that the “inseparability of service” is the
factor that is responsible for distinguishing entry behaviour in the service and
manufacturing sectors. The author assumes “services for which production and
consumption of a service can be decoupled can be termed hard services, and those for
which production and consumption occur simultaneously can be described as soft
service”. As a result, hard services (embodied in some tangible form) can be exported,
and soft services (should be in close physical proximity, enabling production and
consumption to take place simultaneously) are limited to contractual entry, licensing or
franchising, and foreign direct investment. Ekeledo and Sivakumar (1998, 2004) also
discuss foreign market entry mode choices by dividing service firms into two service
characteristics of “soft service” and “hard service” to explore the differences. This
classification scheme, developed by Sampson and Snape (1985), Patterson and Cicic
(1995), and Clark et al. (1996) for internationally-traded services, can be compressed into
the hard services/soft services classification scheme (Erramilli, 1990) in which products
are divided into three categories - that is, manufactured goods (e.g., toys, automobiles,
and shoes), hard services (computer software, advertising, and equipment leasing) and
soft services (restaurants, hotels, and health care) and each has its own preferred entry
options for firms.
We agree with this kind of classification due to its clearness to distinguish services by
their some unique characteristics (e.g., hard services have the characteristics of storability,
homogeneity, and separability versus soft services which have the characteristics of
perishability, inseparability, and heterogeneity). However, one service characteristic can
be noted obviously among these two types of service - that is “intangibility”. It means no
matter how a soft or hard service can be distinguished by some unique characteristics, it
still embodies an intangible service characteristic varying in different degrees, where the
degree of service intangibility is the key point embraced in any service type (i.e., high
service intangibility or low service intangibility). Some scholars have argued that
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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intangibility and service are not to be defined exactly, but one should instead evaluate
services according to the degree of intangibility (Zeithaml and Bitner, 2000), and they
propose that services vary in terms of degree of perceived intangibility by service
recipients (Miller and Foust, 2003). This reminds us to examine service intangibility in a
concrete way instead of viewing it as an abstract concept.
Due to services embodying intangibility to some extent, service firms operating their
businesses in a foreign country will consider how their services can be received by the
service recipients in that market. According to the study whereby service processes can
be compressed into two categories of service digitization by Lovelock and Wirtz (2004),
we assume that four service processes can also be compressed into the two categories of
service intangibility, as shown in Figure 3. The high service intangibility category
includes services directed at people’s minds (mental stimulus processing) and those
directed at intangible assets (information processing). The low service intangibility
category includes services directed at people’s bodies (people processing) and those
directed at physical possessions (possession processing). In fact, different types of
services are affected by the process involved in creating and delivering services (Ekeledo
and Sivakumar, 2004). This consideration interfaces the degree of service intangibility
with service recipients so as to consider a proper strategy into a foreign market.
Services belonging to people processing and possession processing are low intangible
services, because customers need to come on the scene personally to receive the service
in terms of the services directed at people’s bodies and directed at physical possessions,
such as lodging and refueling services that require physical proximity between the service
provider and customers (Eramilli and Rao, 1990). Producers of this kind of service are an
integral part of their product and require greater control over the production process
(Palmer and Cole, 1995). Thus, a high involvement entry mode selection (management
contract, joint venture, or sole ownership) should be appropriate.
Services belonging to mental stimulus processing and information processing are high
intangible services, because customers receive the services through a more virtual form -
for example, the service providers would like to use the Internet or television media to
provide data or remote-education services to customers. This kind of service belongs to
high intangible services that provide services directed at people’s minds and those
directed at intangible assets, which require a lower control to deliver services. Thus, low
involvement entry mode selection (licensing/franchising and exporting) may be
appropriate. With the degree of service intangibility, we assume a proposition for service
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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intangibility between entry mode selections. Other scenarios may involve additional
differences (e.g., more intangible services will choose low involvement entry modes than
less intangible services do as described in the following propositions).
Degree of Service Intangibility
High Intangibility Low Intangibility
People Mental stimulus processing (advertising,
education, entertainment, psychotherapy)
People processing (lodging, restaurants,
passenger transportation)
Direct
Recipient of
the Service
Possession Information processing (data processing,
insurance, software programming)
Possession processing (retail distribution,
freight transportation, refueling)
Figure 3 The degree of service intangibility
(modified from Lovelock and Wirtz, 2004; Ekeledo and Sivakumar, 2004)
Proposition 1. Considering the way that a service is received by service recipients in
the host country, the foreign market entry mode selection of service firms
differs significantly with the degree of service intangibility.
Moderating Role of Cultural Factors
Cultural factors are variables over which the firm has little or no control. They include
(1) cultural distance and (2) host country culture. In addition to moderating the impact of
service characteristics on entry mode selection, cultural factors also have a direct
influence on entry mode selection, as some remarkable research have shown evidence of
this (e.g., Kogut and Singn, 1988; Hennart and Larimo, 1998; Brouthers and Brouthers,
2001; Shenkar, 2001; Tihanti et al., 2005). Our concern here is how cultural factors
moderate the service characteristics on entry mode selection by altering the number of
possible entry mode alternatives available to a service in an entry situation. Different
cultural factors lead to significant differences in entry mode selection with the degree of
service intangibility. These differences are the main focus in this study.
The effect of cultural factors on entry mode selection. Culture has a multitude of
definitions in the literature. Pizam and Mansfeld (1999) state that culture is an umbrella
terminology that encompasses a wide range of elements, including shared beliefs,
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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traditions, values, and expectations of a particular group or people. Hence, each culture
has its own specific values and norms that guide their members and their behaviors.
Cultures also affect the way people perceive a particular problem and the ways in which
they deal with it (Min, 2001). The literature in the service management field shows the
diversified variable and the metaphor for a specific cultural issue (Jaworski, 1988). In
early years, some cross-cultural comparisons found divergent entry mode patterns
between firms from different countries of origins (Stopford and Haberich, 1978; Wilson,
1980). Some articles even focus on the separate effects of cultures on entry mode
selection with theoretical and empirical efforts. Johanson and Vahine (1977), for instance,
link psychic distance with entry mode selection, while Puxty (1979) works to clarify the
relationships between cultural distance and entry mode selection.
Some articles have studied the entry mode selection with factors concerning
organizational fit, such as the match between administration and cultural practices
(Jemison and Sitkin, 1986) and cultural conflicts (Sales and Mirvis, 1984). Therefore, due
to the importance of cultural factors for international firms entering foreign markets, until
now the issue of the impact of cultural factors on entry mode selection has been
continually discussed by scholars (e.g., Kogut and Singh, 1988; Shane, 1994; Brouthers
and Brouthers, 2001; Hennart and Larimo, 1998; Shenkar, 2001), Tihanyi et al. (2005)
use meta-analysis to clarify the relationship between cultural distance and entry mode
selection from previous related studies.
Cultural distance. Kogut and Singh (1988) work to clarify the relationship among
firm-level, industry-level, and culture-related variables and they use econometrician
methods to explore the choice of entry mode. They employ two cultural variables. The
first is cultural distance indices quantified by Hofstede’s (1980) dimensions. The second
one is uncertainty avoidance (the culture of the investing firm), which originates from
one of Hofstede’s efforts as well. The statistical results confirm the explanation of
cultural factors on entry mode selection. However, although Hennart and Larimo (1998)
also find that cultural distance between the home base of the investor and the target
country exerts a powerful influence on the ownership of subsidiaries, cultural
characteristics of the home base do not. These two studies imply that the cultural distance
is a more convincible variable to influence the entry mode selection of firms.
Brouthers and Brouthers (2001) show that past studies concerning the relationship
between national cultural distance and entry mode selection indicate greatly diversified
results. Cultural differences present an inverse relationship with the degree of control in
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
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the host markets (Know and Konopa, 1992). This means firms prefer investing in a
foreign market through FDI when franchising/licensing if the culture in the host markets,
such as religion and language, is similar to that of the home country (Davidson and
McFetridge, 1985). Tihanti et al. (2005) use meta-analysis to find that there is no
statistical evidence of significant relationships between cultural distance and entry mode
choice and conclude that cultural distance is not directly related to entry mode choice.
This implies that researchers may consider cultural distance not only as an independent
variable, but also as a quasi-moderator variable (Shenkar, 2001). Regardless of the
divergent argument, these articles reveal cultural distance as a considerable determinant
on entry mode selection.
Cultural distance implies that the greater the cultural distance is from the country of the
investing firm to the home country, the more likely the choice is to set up a joint venture
over sole ownership (Kogut and Singh, 1988). While some scholars reveal that a higher
cultural distance leads to a higher tendency toward wholly-owned modes (Hill, et al.,
1990), others reveal that a higher cultural distance leads to a preference for joint ventures
(Makino and Neupert, 2000). Ekeledo and Sivskumar (1998) propose that the greater the
cultural distance is between a firm’s home country and the host country, the more likely
soft-service firms are to adopt franchising, a management contract, or a joint venture, and
hard-service firms are more likely to adopt exporting. As we discussed previously,
service firms have the characteristic of service intangibility in nature, but differ in the
degree. We want to clarify the interaction effect of service characteristics and cultural
distance on entry mode selection, whereas the moderator variable (cultural distance)
specifies when certain effects hold (Baron and Kenny, 1986).
When the cultural distance is great, service firms that like to provide the service with
high service intangibility directed at people’s minds or directed at intangible assets (e.g.,
providing digital service forms) are most likely to adopt low involvement entry modes
(e.g., exporting). For example, international services export their products through the
Internet including accounting services, design and engineering services, data entry and
data processing services, and remote education (Czinkota and Ronkainen, 2004). On the
other hand, when service firms like to provide services with low intangible services that
are directed at people’s bodies and directed at physical possessions, they are most likely
to adopt high involvement entry modes to a operate business, because this kind of service
requires frequent and close interaction between supplier and consumer (Dahringer, 1991).
Moreover, service firms rely on people for the simultaneous production and delivery of
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the service product, which results in greater difficulty over managing foreign operations
(Brouthers and Brouthers, 2003). Consequently, when perceiving high levels of
behavioral uncertainty due to cultural distance, service firms tend to prefer high
involvement entry modes (e.g., joint venture) to operate a business (Brouthers and
Brouthers, 2003).
Proposition 2. The greater the cultural distance is between a firm’s home country
and the host country, the greater the difference is in the level of involvement
during market entry between service firms providing high intangible services
and service firms providing low intangible services. Service firms providing
high intangible services are more likely to adopt low involvement entry mode
selection while service firms providing low intangible services are more likely
to adopt high involvement entry mode selection.
The effect of host country culture on entry mode selection. As mentioned above,
Kogut and Singh (1988) provide a typical norm to study the cultural issues in the entry
mode selection-related fields. However, four facts need noting. First, Hofstede’s (1980)
cultural mix consists of four elements and even more elements in his continuing research
studies (Hofstede and Bond, 1988). Kogut and Singh (1988) solely employ one element
(i.e., uncertainty avoidance), which produces problems of variable omission. Second,
they employ existing secondary data as the source of an empirical test. Since cultural
factors are very deeply seated in organizational activities and members, it might be
relatively hard and problematic to quantify cultural conditions accurately with secondary
data. Third, to examine the industry-specific effect, the database Kogut and Singh (1988)
use involves a great variety of industries, such as advertising, services, and manufacturers.
Since so many studies argue on the divergence of entry mode selection between
manufacturing and service sectors, it seems reasonable to separate observations from the
two parties. What this study is concerned with is the case of services. Fourth, the most
important one is that they do not consider the effect of culture from the angle of the host
country’s environment which may be the reason why service firms make a certain
decision on their entry mode selection, such as considering hiring employees from the
host market whose working attitude may be influenced by their culture. Therefore, this
study employs Hofstede’s cultural dimensions (i.e., individualism/collectivism,
uncertainty avoidance, power distance, masculinity/femininity, and long-term orientation)
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with the degree of service tangibility to explore their effects on the entry mode selection
of international service firms.
Individualism/collectivism and foreign entry mode. The first of Hofstede’s cultural
elements that this paper examines is the degree of individualism/ collectivism (IND/COL)
in the host markets. IND refers to a loose social framework wherein members are
concerned primarily with themselves and their immediate families/relatives. Oppositely, a
collectivist society indicates “a social preference for a tightly knit social framework in
which individuals expect their relatives, clans, or other groups to look after them with
unquestioning loyalty” (Fam and Merrilees, 1998). In terms of IND/COL, Punnett and
Ricks (1992) mention that the working attitudes and characteristics are heterogeneous
under different cultural conditions of IND/COL. Under a high IND (low COL) culture,
work is more likely to be designed for an individual, and people accept responsibility for
their own work and expect to be evaluated on the basis of personal performance, rather
than that of teamwork. By contrast, work is designed by groups under a high COL (low
IND) culture, with all members sharing responsibility and authority. People perform for
the benefit of the whole group, and they remain an accepted part in the group.
The different level on IND/COL in the host country leads to a distinctive necessity for
entry mode selection. Ekeledo and Sivakumar (1998) point out that entry mode selection
differs significantly between soft and hard services. Soft services (e.g., health care
services) require high physical proximity between the provider and clients (or their
possession). Hence, soft services need entry modes that are effective in keeping closer
contact with the clients or that are familiar with local customers (Sampson and Snape,
1985). From the practical perspective, a provider of soft services plays an integral role in
the service mix/content and requires greater control over the service process, especially
during encounters with the clients (Palmer and Cole, 1995). This makes them tend to
select entry modes with a higher involvement to ensure controllability and governance
toward the service employees. The above inferences also mean the providers of soft
services rely more on aggressive enthusiastic and responsible service manpower (i.e.,
high IND) in the host markets than do the hard service firms. By contrast, hard-service
providers (e.g., computer software services) may adopt low-involved entry modes such as
exporting (Ekeledo and Sivakumar, 1998).
Based on the above studies, this study infers that, under a high IND (low COL) culture,
international service firms providing low tangible services (whose services require
physical proximity to the consumer, i.e., soft service) tend to employ highly-involved
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entry modes such as a management contract, a joint venture, or a sole ownership in order
to get closer to the foreign market. On the other hand, those that provide high tangible
content (i.e., hard service) prefer to select low-involved modes when
licensing/franchising or exporting. As for service firms under a high COL (low IND)
culture, the above inferences are inferred as reverse directions. Based on the previous
inference, the third proposition of this study can be built as the following.
Proposition 3. For service firms, the level of individualism and collectivism they face
in the host market and the extent of service intangibility exhibit interactive
effects on their entry mode selection.
Uncertainty avoidance and foreign entry mode. Uncertainty avoidance (UA) is the
only one of Hofstede’s cultural factors that Kogut and Singh (1988) employ. UA relates
to an individual’s anxiety for uncertainty and ambiguity (Fam and Merrilees, 1997). High
UA indicates that members of a culture feel uncomfortable with, and intolerant of,
uncertainty and ambiguity (Fam and Merrilees, 1997). People in a high UA culture are
used to asking for works performed and implemented under a well-planned, controllable,
and comprehensible manner. By contrast, people in a culture with low UA get
accustomed to works that are flexible, ambiguous, unfamiliar, and challenging. Again,
employees are open to variance and are willing to try new ways to work (Punnett and
Ricks, 1992).
UA plays a significant role in entry mode selection. Under a high UA culture, the work
contents and procedures need the design to be simple and clear in order to decrease the
sense of uncertainty/risk of the providers and clients. Related efforts include standardized
disciplines, detailed SOP, and delicate planning. Shostack (1977) notes that high-tangible
services make the customers feel easy to assess them and are less risky for the service
contents, thus helping the service firms to not deliberately control and get highly involved
in the services. Therefore, it may be reasonable to infer that international service firms,
under a high UA culture, tend to select lowly-involved entry modes such as
licensing/franchising or exporting, whereas those in a low UA culture prefer to choose
highly-involved modes, such as a management contract, joint venture, or sole ownership.
Except for considering the working content, Davidson (1982) and Ekeledo and
Sivakumar (1998) indicate that firms in high-tech industries favor selecting entry modes
that involve intensive control over the ownership in foreign markets (e.g., sole
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ownership). The primary reason is that, for high-tech industries, high-technology
intensity and R&D expenditure make firms suffer from uncertainty, and the tacit
knowledge and chaotic environment force the firms to meet an intangible condition
(Nonaka and Takeuchi, 1995). To ease the sense of uncertainty and intangibility,
international service firms tend to select a highly-involved entry mode in the host markets
in order to raise their controllability. Here, we assume that, under a high UA culture,
international service firms with low tangibility tend to choose more highly-involved
modes. In the low UA conditions, however, international service firms tend to select
lower involved entry modes. Accordingly, the fourth proposition of this study can be built
as the following.
Proposition 4. For service firms, the level of uncertainty avoidance they face in the
host market and the extent of service intangibility exhibit interactive effects on
their entry mode selection.
Power distance and foreign entry mode. Power distance (PD) is defined as the extent
to which the members of a society accept inequality of power across the hierarchy/level
within institutions and organizations (Erramilli, 1996; Makino and Neupert, 2000). In a
high PD culture, people are likely to accept an uneven distribution of power without
much consideration for justification. In a low PD society, by contrast, people request
more justification and defense for power inequalities (Fam and Merrilees, 1997). Thus,
employees in high PD cultures are more likely to feel nervous and worried about
expressing their own opinions to their superiors, while those from low PD ones are more
used to regarding their superiors as being equivalent (Murphy, 1999). Therefore, people
in high PD cultures are more obedient to and are easily controlled by their supervisors
than those in low PD cultures.
It is reasonable to link PD and entry mode selection with the perspective of obedience
and control. Ekeledo and Sivakumar (1998) mention that international service firms
prefer to adopt a joint venture or sole ownership when they expect to hold control of the
foreign markets. Since high centralization and standardization are basic requirements for
these international service firms, they look for accompanying partners with good
discipline and high consistency as with their parent firms. Here, it is rational to infer that
international service firms, with high and low intangibilities, favor a highly-involved
entry mode when they conduct their services in high PD cultures. Thus, we set up the
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
14
fifth proposition regarding entry mode selection and PD as the following.
Proposition 5. For service firms, the level of power distance they face in the host
market and the extent of service intangibility exhibit interactive effects on their
entry mode selection.
Masculinity/femininity and foreign entry mode. The masculinity/femininity
(MAS/FEM) dimension refers to the distribution of personal traits based on the
stereotyping of gender heterogeneity. High masculinity stands for a preference for
competition, aggressiveness, and reality. A society with high femininity represents that
people are apt to place harmony above competition and are willing to help and to care for
others (Fam and Merrilees, 1997). Punnett and Ricks (1992) point out that, under a high
MAS/low FEM culture, employees get used to being carefully separated from their
families and social life. People in such conditions take precedence over family and social
matters. They feel accustomed to long work hours, tight schedules, fame from success,
and they seek challenging tasks and perform them well. However, under a culture of high
FEM/low MAS, employees like to arrange flexible working hours to suit their own
demands and those of their families. They often schedule working time within the context
of the welfare of their families.
Dahringer (1991) argues that most soft/intangible services require frequent encounters,
constant interaction and communication, and closer contacts between the providers and
clients, which signify that service providers need to spend longer time on the services to
keep the relationship with the clients and to ensure the service quality and their
satisfaction. Entrepreneurship is another feature in high MAS cultures. Toncar et al.
(1999) state that people in such cultures tend to support international franchising and
exports, because the franchisees and the exporting partners in host countries present
higher entrepreneurship. Thus, international service firms operating in high MAS/low
FEM countries favor selecting low involved entry modes when the services are highly
tangible. Conversely, international service firms with low service tangibility should
expend more time and efforts to get involved in the service process and encounters. Thus,
they favor selecting highly involved entry modes when entering foreign markets.
In a high FEM (low MAS) society, people prefer spending more time and efforts on
their own and families to provide services, and this leads to being short of time and
encounters with clients, especially when the services are intangible and thus need more
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
15
experienced and trained workers. To raise the efforts and commitment to customers,
international service firms providing low tangible services tend to conduct
lowly-involved entry modes like licensing/franchising or exporting in order to escape the
possible lack of qualified labor, while high tangibility helps service firms to hire
sufficient and qualified labor. Thus, international service firms whose services are highly
tangible are used to employing highly-involved entry modes such as a management
contract, joint venture, or sole ownership. Following the above inference, we build the
sixth proposition.
Proposition 6. For service firms, the level of masculinity/femininity they face in the
host market and the extent of service intangibility exhibit interactive effects on
their entry mode selection.
Long-term orientation and foreign entry mode. Bond (1988) states that “western
thinking is concerned with truth (knowing what is certain), while Eastern thinking is
concerned with virtue (knowing how to live).” Based on this, Bond and his colleagues
work to detect the value complexity to explain the economic achievement in Asian
cultures, particularly the Chinese. Thus, long-term orientation concentrates on Eastern
values and identifies a core set of Asian values that are essential to compare with those
Western-developed instruments (Hofstede and Bond, 1988; David et al., 1993).
The impacts of long-term orientation have been deeply seated in working and service
styles, especially in eastern Asian cultures. Relative to those tangible services, customers
of low tangible services perceive the service content as harder to evaluate, more
expensive in price/cost, and a higher involvement. It makes them more loyal to the brand
equity, depend on word-of-mouth and interpersonal networking, and they demand more
personal encounters (Shostack, 1977; Tarn, 2005). These features force international
service firms to commit more manpower and exertions, build robust interpersonal
relationships, and employ teamwork to raise tangibility, which fit in with the condition in
cultures of high long-term orientation tendency. Thus, international service firms in such
cultures pay less effort in host countries than those in low ones, including the
involvement on entry modes. The above understanding logically infers that
international service firms providing low tangible services, under high long-term
orientation tendency, tend to employ lower involved entry modes. Conversely, their
counterparts in low long-term orientation tendency cultures are apt to employ higher
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
16
involved entry modes to ensure that service providers in the host countries perform well.
This study concerns the interactive effects of long-term orientation tendency and
intangibility which we build as the seventh proposition.
Proposition 7. For service firms, the level of long-term orientation tendency they
face in the host market and the extent of service intangibility exhibit
interactive effects on their entry mode selection.
Table 1 Summary of the propositions from p3-p7
Service Tangibility
Entry Mode
Cultural Elements
Service of High Intangibility Service of Low Intangibility Propositions
High Individualism licensing/franchising or exporting management contract, joint
venture, or sole ownership
High Collectivism management contract, joint
venture, or sole ownership licensing/franchising or exporting
P3
High Uncertainty Avoidance licensing/franchising or exporting management contract, joint
venture, or sole ownership
Low Uncertainty Avoidance management contract, joint
venture, or sole ownership licensing/franchising or exporting
P4
High Power Distance management contract, joint venture, or sole ownership
Low Power Distance licensing/franchising or exporting
P5
High Tendency of Masculinity licensing/franchising or exporting management contract, joint
venture, or sole ownership
High Tendency of Femininity management contract, joint
venture, or sole ownership licensing/franchising or exporting
P6
High Long Term Orientation management contract, joint
venture, or sole ownership licensing/franchising or exporting
Low Long Term Orientation licensing/franchising or exporting management contract, joint
venture, or sole ownership
P7
Discussions
Regarding the entry mode selection issue in service industries, some recent studies
have started to concentrate on the roles of cultural factors in service industries. Erramilli
(1990) reveals that service firms, by frequency, tend to select licensing/franchising as
their entry mode of choice, followed by subsidiary or branch office openings and joint
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
17
ventures. The primary purpose for them to select a joint venture is to pacify the pressure
emanating from unfamiliar local laws, and the selection of licensing/franchising is due to
the need to ease risk from the host market conditions (Hackett, 1976). The above studies
reveal one critical cultural factor - risk avoidance - which has been investigated in the
literature. Cultural differences again have been treated as a crucial factor for determining
the foreign market entry mode in recent service-related literature (Anderson and Gatignon,
1986; Goodnow, 1985; Root, 1987). Compared to manufacturing industries, cultures are
much more influential in service sectors. Services need more adaptation and localization,
and they are more highly culture-driven than tangible goods. As service industries go
global, service firms need a more detailed comparative examination and cross-cultural
considerations to clarify the differences across the countries/markets (David et al., 1993;
Triandis et al., 1986).
In academia, many studies have worked to provide a good norm to the cross-cultural
effort, with the most famous likely being Hofstede (1980, 1988). These articles
successfully and continually measure cultural conditions in a great amount of cultures
with four typical factors (i.e., individualism/collectivism, uncertainty avoidance, power
distance, and masculinity/femininity). This study also attempts to discuss cultural impacts
on entry mode selection from an Eastern perspective (Matthews, 2000). Hence, a
long-term orientation is employed to measure and assess the cultural factors together with
Hofstede’s. In our study we not only consider the service characteristics of service firms,
but also employ cultural factors (the host country culture and cultural distance constructs)
to explore their impact on entry mode selection in international service firms. The host
country couture is discussed using Hofstede’s (1980, 1988) five cultural dimensions, and
the cultural distance construct is an index compiled by Kought and Singh (1988) from
Hofstede’s five cultural dimensions in which long-term orientation is suggested to be
added when East-Asian countries are involved (Shenkar, 2001). In summary, the goal of
this study is to combine these two considerations: service characteristics and culture
factors. We expect to clarify that the preferred entry modes chosen by international
service firms are, in fact, selected on the basis of their different service characteristics in
combination with the different cultural distances and host country cultures in order to
explain how and why international service firms select their entry modes.
In this study we try to use the five cultural dimensions (individualism and collectivism,
uncertainty avoidance, power distance, masculinity and femininity, and long-term
orientation provided by Hofstede in 1980 and 1988) with the degree of service
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
18
intangibility to explore the choice of entry mode (management contract, joint venture,
and sole ownership as high-involvement entry modes, while licensing/franchising and
exporting as low-involvement entry modes) for international service firms. The
international business or marketing academy has studied entry mode selection for decades.
Relatively few articles, however, pay attention to the cases of service firms. Most, if not
all, of the studies in the literature indicate the distinctions between services and tangible
goods, including intangibility, perishability, inseparability, and heterogeneity. These
characteristics of services produce managerial problems for service providers (Sasser et
al., 1978, Tsaur et al., 2002; Tarn, 2005) and make the decision process of service firms
much more complicated than their manufacturing counterparts, including entry mode
selection.
Among these characteristics, intangibility might be the most critical feature of services
(Bateson, 1979; Zeithhaml et al. 1985; Tarn, 2005). It not only makes it harder for the
services firms to provide substantial content to clients, but even the consumers feel more
uncertainty and risk when making purchasing decisions. Thus, intangibility is
recognized as the most cited feature and the most operated element in service studies
(Orsini and Karagozoglu, 1988). This study proposes to involve intangibility as a factor
that impacts the entry mode selection of service firms and to clarify its interaction with
cultural factors.
The literature shows that there is significant relationship between a firm’s country of
origin and the mode of entry and industry type. As we know, there are industrial
preferences for particular entry modes (e.g., Kogut and Singh, 1988). Tihanti et al. (2005)
suggest some moderator variables that should be considered, such as MNE origin
(U.S.-based versus MNEs from other countries), investment country type (developed or
developing countries), and sample time frame (international business activities in the
1980s (early) versus the 1990s (late)). Therefore, in a future empirical test, we need to
add some possible control variables to clarify the real relationship between service
intangibility and entry mode selection.
Many studies involve individual service industries, such as banking, equipment leasing,
and advertising (e.g., Agarwal and Ramaswaswami 1992; Nigh, et al., 1986; Sabi 1988;
Terspstra and Yu 1988), yet few investigate the broad categories of service industries.
Cross-industry studies in the service sector are needed, because they may suggest ways
that marketing concepts and strategies can be extended across service industries
(Lovelock and Wirtz 2004). There are many manufacturing examples of Taiwanese firms
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
19
that have transformed their business into the service field using their brand power to
serve customers (e.g., Nissan of Taiwan and D-Link Corporation). In the near future,
most manufacturing firms will follow IBM or HPQ and focus on providing services
instead of manufacturing. However, when these manufacturing firms want to transform
into service firms, questions arise as to what are their advantages and how do they present
their competitive power to customers? The answer to both is “service” and service
characteristics are needed to be noticed by firms so as to understand what kind of service
they can offer to customers and what unique service needs to be designed to differentiate
from others.
Practical Suggestions and Limitations
The following suggestions are provided for international service firms when investing
in foreign markets.
In contrast to the firms of a host country, cultural characteristics should be taken into
account by international service firms, especially the cultural differences between the
West and the East. The Confucian dimension should be a greater concern as more and
more service firms try to operate businesses in mainland China. For example,
relationships with others in a firm are often influenced by the desire for harmony between
colleagues and greatly affect the overall operational performance of a firm.
On the side of execution, managerial executives from the parent company should have
a deeper understanding of the culture of the host country as it would certainly help the
foreign subsidiary company perform better. The more plentiful the experiences and
knowledge are of foreign operations obtained by the parent company, the less risk and
uncertainty that the company would face.
As to the performance of firms, except for the consideration of cultural variables, it is
important that managers understand the strategic implications of foreign market entry
mode choice for different categories of services - namely, the degree of service
intangibility for international service firms themselves. In our survey the cultural factors,
service tangibility, and entry mode choice are related in influencing the performance of
firms.
This study suffers from several limitations, such as excluding the discussion of
non-profit and transportation service industries at this time. In future empirical tests,
sample collecting should be expanded to approach a more accurate external validity and
generalization.
5. Strategies for Entry, Expansion and Operations Abroad (Interactive Sessions)
20
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