The influence of dissemination risks, strategic control and global management skills on firms' modal decision in host countries

International Business Review 10 (2001) 323–340www.elsevier.com/locate/ibusrev

The influence of dissemination risks, strategiccontrol and global management skills on firms’

modal decision in host countries

Benjamin Tan a,*, Krishna Erramilli a, Tan Wee Liang b

a Nanyang Technological University, Nanyang Business School, Nanyang Avenue, Singapore 639798,Singapore

b Singapore Management University, Singapore, Singapore

Abstract

This paper examines how firms’ modal choice is influenced by their exposure to dissemi-nation risks, need for strategic control and possession of global management skills. A proba-bilistic model is specified. The following hypotheses are incorporated in the model: the prob-ability of choosing a more advanced entry, ceteris paribus, is a function of (1) the risk-adjustedexpected net benefits of a firm’s possession of certain types of intangible, transportable assets;(2) parent company attributes that necessitate control over its strategic resources overseas; and(3) possession of certain global resources that are specific to the firm such that their effectiveinternalization calls for higher entry mode. The models are estimated using polychotomousregression analysis. Results generally confirm that size and possession of some knowledge-based, firm-specific strategic assets, are significantly related to advanced entry modes. Theyalso confirm that firms opt for higher entry mode to gain control of competitive pricing in theforeign markets. 2001 Elsevier Science Ltd. All rights reserved.

Keywords: Entry mode; Ordinal progression; Modal choice decision; Polychotomous regression

1. Introduction

A common thread linking most of the traditional models of the internationalizationprocess of firms is the depiction of the progressive involvement of firms while staying

* Corresponding author. Fax: +65-792-4217.E-mail address: [email protected] (B. Tan).

0969-5931/01/$ - see front matter 2001 Elsevier Science Ltd. All rights reserved.PII: S 09 69 -5931( 01 )0 0019-1

324 B. Tan et al. / International Business Review 10 (2001) 323–340

in the overseas markets. For instance, the “sequential” argument portrays anincremental pattern of internationalization in which firms go through an exportingphase to understand the market before switching first to market-seeking foreign directinvestments (FDI) and then to cost-oriented investments (Vernon, 1983). An anal-ogous view held by other researchers sees the firms’ overseas activities as one involv-ing a modal change, i.e., firms start with contractual modes such as exporting tolicensing to gain valuable knowledge and resources in the markets and then upgradedto FDI modes such as joint ventures and wholly owned subsidiaries (Aharoni, 1966).Further, the Scandinavian “stages” model of market entry, proposed by the UppsalaSchool, suggested a step-by-step pattern of entry accompanied by an increasing scopeof commitment to each market (Johanson & Wiedersheim-Paul, 1975; Johanson &Vahlne, 1977).

The traditional models, which thrived predominantly on the notion of FDI as anincreasing commitment over time, are based on a static modeling of cost and benefits.This notion has now been increasingly challenged. There are many instances in whichfirms that have delayed entry to a later point in time may have accumulated theirresources to the point where the use of lower entry modes is deemed inadequate interms of risk-adjusted net benefits to justify an investment. While most of the pastresearches have concentrated on the escalating involvement of firms either throughincreasing their scale of operation within a particular mode or through a modalchange, there is no study that could provide a satisfactory explanation as to whyfirms often forgo the lower modes and choose more advanced modes of entry modesin the first instance.

In this paper, we add to the literature by proposing a probabilistic frameworkthat models firms’ modal choice decision as an intrinsically dynamic process whichconsiders the risks that firms face in the dissemination of their transportable assets,the extent of strategic control they are able to exert over their operations and thepossession of applicable global resources. The first part of the paper describes thetheoretical underpinning of the entry modes. Next, relevant literature and the hypoth-eses are discussed. Later, the methodology, analysis, and results are presented.Finally, some important implications of the research are explored.

2. Theoretical background

According to the resource-based theory, a firm may be viewed as a collection ofproductive resources (Penrose, 1959) that are worth more than their individual marketvalues because of specialized linkages between them within the firm (Wernerfelt,1984). In those instances where there are under-utilized productive resources, thefirm can reap additional benefits by diversifying into new or overseas markets inorder to exploit the “public goods” nature of its resources (Chatterjee & Wernerfelt,1991). A firm’s venture in foreign countries requires choosing the most appropriatemode of entry for organizing and conducting international business transactions(Anderson & Gatignon, 1986). This is a critical decision as it can potentially deter-mine the firm’s overseas business performance (Terpstra, 1987; Root, 1987). In

325B. Tan et al. / International Business Review 10 (2001) 323–340

effect, the mode of entry acts like a conduit through which the products and servicesof the firms are channeled to the end consumers in the foreign markets.

There are several entry modes available to the firms. Firms can either sell theirproducts/services through independent marketing intermediaries, licensing, or set upintegrated (company-owned) channels (Anderson & Coughlan, 1987). They can alsoresort to using foreign direct investment modes (joint ventures and wholly ownedsubsidiaries). Exporting or licensing requires minimal resources from the firms asmost of the activities and responsibilities for conveying the products and services tothe consumers are placed on the foreign partner. On the other hand, the formationof a joint venture or setting up wholly owned subsidiary calls for the devotion of ahigher level of resources required for the production and distribution of the firms’output. From a transaction cost perspective, exporting requires the least internaliz-ation effort, while wholly owned subsidiaries the most (Buckley & Ghauri, 1993;Contractor, 1984). In view of the differential commitment associated with each modeof entry, Erramilli and Rao (1990) suggest a hierarchical order of modes that issynonymous with the level of involvement of the firm. Tsang (1997) asserts thatresource commitments (physical, human and organizational) of the firm are the leastin exporting and the most in a wholly owned subsidiary.

Our order of entry mode is based on four salient characteristics that are embeddedin each modal choice decision. These are (a) the sunk cost that is to be expendedby the firm in the foreign market, (b) the degree to which the resource commitmentis specific to that particular market, (c) the scope of value-added chain of corporateactivities (such as logistics, production, marketing, and others) necessary to managethe foreign operation and (d) the portion of the absolute economic gains that isattainable by the firm. Table 1 shows the order of the entry modes based on thecharacteristics.

While the establishment of a wholly owned subsidiary results in the highest levelof sunk cost, specificity of commitment and scope of corporate activities, it alsoprovides the highest economic gain for the firm. Thus, we consider it as the mostadvanced mode of entry. A moderate level of entry is found in joint ventures, wherecosts and benefits are mutually shared between the partners. In licensing or franchis-ing, the licensee incurs the sunk cost, performs a wider scope of activities and realizes

Table 1Order of entry mode

Level Mode of entry Sunk cost Specificity of Scope of Economic gainscommitment activities

1 (lowest) Exporting Very low Very low Very limited Very limited2 Licensing/ Low Low Limited Limited

franchising3 Joint venture Moderate to Moderate Moderate to Moderate

high high4 (highest) Wholly owned High High High Full

subsidiary


a major portion of the overall economic gains. On the other hand, the firm’s economicgain is limited to the royalties and licensing fees that are received from the licensees.Exporting, which results in the lowest level in all the characteristics, represents thelowest entry mode.

The theoretical approaches advocated in the literature (Dunning, 1988; Ander-son & Gatignon, 1986; Hill, Hwang, & Kim, 1990; Caves, 1982; Davidson, 1980;Root, 1987) have widely relied on the risk-adjusted cost-benefit internalization calcu-lus to explain firms’ entry mode. The tenet of their arguments is that the modalchoice of the firm depends on how well it can fully exploit its capabilities to reducethe costs or increase the benefits of operating a prospective overseas venture. Wherethe benefits are in excess of the costs in the higher modes of entry, there is greaterincentive for the firm to opt for these modes and vice versa. While the utilizationof the resources abroad generates rent for the firm, it exposes the firm to the risksthat the values of the resources may be expropriated by its overseas partner (Hill &Kim, 1988; Agarwal & Ramaswami, 1991; Driscoll & Paliwoda, 1997). Suchresources form the life-blood of many firms (Caves, 1982; Davidson & McFetridge,1985). The firms in possession of valuable resources are thus wary of seeing themdisseminated, as it would mean earning lower quasi-rents.

We argue that the modal choice decision of the firm extends beyond the costbenefit calculus. From a strategic perspective, the firm is concerned with the extentof its power to control strategically those corporate activities that are critical to theviability of its foreign operation. Here, the crucial issue lies in its prospect of manag-ing the activities of the new venture such that its objectives are aligned with thoseat home and with other affiliated entities forming the firm’s global network (Hill etal., 1990). Obviously, strategic control is highest when firms establish wholly ownedsubsidiaries in which decisions over daily operations and some strategic decision-making, whether or not delegated to the subsidiaries, remain within the purview ofthe firm (Hill et al., 1990). The extent of strategic control consistent with joint ven-tures falls in between those of licensing and the wholly owned subsidiary and isdetermined by the extent of equity owned by the firm. Exporting offers the leastopportunity for the firm to manage its activities freely in the foreign market.

When the firm moves to a foreign market, it is often more optimal to transfer itshome-based resources to the foreign market, rather than develop new resources fromscratch (Hu, 1995). The degree to which the firm is able to transfer its home-basedresources abroad depends largely on its global management skills (Davidson, 1980;Caves & Mehra, 1986; Tallman, 1991). A modal choice decision involving the estab-lishment of a wholly owned subsidiary or joint-venture requires the transfer of moreresources (due to higher sunk cost and scope of activities), compared to anothermodal choice, say licensing or exporting. Unless the firm possesses the necessarylevel of global management skills, its ability to opt for a higher mode of entry willbe curtailed.

2.1. Dissemination risks

Foremost among its resources is the technological competence of the firms. Thereis ample empirical evidence pointing to firms’ proclivity to internalize when they


face dissemination risks in their technological competencies (Houston, 1986;Caves & Mehra, 1986; Yu & Ito, 1988; Tan & Vertinsky, 1995). Chang (1995)observed that the higher the research and development (R&D) intensity in Japanesefirms, the more likely the firms are to initiate foreign entry.

The levels of dissemination risks associated with technological competence varywith the different modes of entry. Ceteris paribus, dissemination risks are highestwhen firms export their products and lowest when they set up their own whollyowned subsidiaries in foreign markets. Exporting requires transaction through a thirdparty, i.e., an importer or distributor, and often necessitates disclosure of technologyaccompanying the transaction; this technological transfer subjects the know-how tothe risk of being siphoned for use in an unauthorized manner (Hill & Kim, 1988).This problem is partially mitigated in licensing which offers a higher level of pres-ence and monitoring to ensure proper utilization of technology. The risk of expropri-ation of know-how is also possible in joint ventures, albeit at a lower level sincethere is mutual consultation on the exploitation of the technology. Obviously, whollyowned subsidiaries would safeguard the technology within the knowledge of thefirm. Our hypothesis is thus:

Hypothesis 1 (H1). The higher the importance of technological competence of thefirm, the higher is its mode of entry.

Exporting and licensing of products in another country subject the firms to risk ofpiracy and possible compromise of its reputation through the unwarranted activitiesof their overseas partners. With joint venture, the firm might be able to monitorclosely the use of the firm’s brand names and reputation by the host partner, sinceit is a part-owner. The risk is much less in the case of a wholly owned subsidiaryas the firm has the ultimate control, and can always take action to ensure greatercongruence of goals and values thereby preserving its reputation in the foreign mar-ket. Based on the above arguments, we hypothesize that:

Hypothesis 2 (H2). The higher the importance of reputation of the firm, the higheris its mode of entry.

When a transaction concerns a firm’s products that are superior in proprietarycontent, there are dissemination risks that can be brought about by reverse engineer-ing or unintended transfer of technology in the foreign markets. This proprietarycontent is reflected in its design and quality (Houston, 1986; Hollins & Pugh, 1990;Berkowitz, 1987; Jacobson & Aaker, 1987) and firms with superior products arelikely to garner a stronger market position (Phillips, Chang, & Buzzell, 1983). Ander-son and Gatignon (1986) suggested that firms face a higher risk of market failuresas the proprietary content of their products increases. Another study by Hu and Chen(1993) has found that the proprietary nature of products of a firm is highly correlatedwith its level of ownership in joint ventures. We therefore argue that firms thatpossess strong product superiority have greater incentives to internalize their overseasventures and would opt for more advanced entry modes.


Hypothesis 3 (H3). The higher the importance of product superiority of the firm,the higher is its mode of entry.

2.2. Strategic control

To compete successfully in global markets, firms are keen to build a pricing struc-ture that is consistent with the intangible and tangible factors surrounding their output(Lancioni, 1998). An incongruous pricing structure is likely to bring about graymarketing practices, parallel trading and conflicts among the firms’ partners. Thiscalls for the implementation of a unified global pricing system and this is only poss-ible if the firms have effectual control over its foreign operations. Clearly, firms thathave wholly owned subsidiaries would enjoy the complete control over its pricingstrategy and those that are engaged in exporting the lowest. We therefore argue that:

Hypothesis 4 (H4). The higher the importance of price competitiveness of the firm,the higher is its mode of entry.

Another critical area in which control is important lies in advertising and pro-motion activities. The “public goods” nature of advertising results in the failure tofully exploit all rents that can accrue from the use of the strategic assets created byadvertising. Such risks of failures can only be reduced or eliminated through appro-priate modal choice synonymous with the firms’ level of involvement. Past empiricalanalyses have provided ample support on the relationship between positive advertis-ing and a firm’s propensity to expand abroad (Caves & Mehra, 1986; Terpstra &Yu, 1988; Kim & Lyn, 1990). The threat to the firms’ control of their advertisingand promotion activities may influence firms to seek greater domination through theirchoice of entry mode. This has been demonstrated by Gatignon and Anderson (1988)in their study that showed that the higher the foreign firm’s advertising expenditure,the higher the level of ownership in a joint venture. Hence, it could be argued thatfirms that are strong in advertising and promotion are inclined to seek greater controlover these activities in foreign markets and are more likely to opt for highermodal choices.

Hypothesis 5 (H5). The higher the importance of advertising and promotion of thefirm, the higher is its mode of entry.

The production competencies of firms will be limited if they are only used indomestic markets. In order to fully capitalize on their potentials, the logical way isfor firms to replicate them overseas. The replication process can only be successfulif the firms are given ample opportunities to plan and effect the transfer of productionsystems and techniques to the foreign markets. The control over firms’ productioncompetencies is uppermost in wholly owned subsidiaries, diminishing in joint ven-tures due to inherent mutual consultations, less so in licensing in which the firms’licensees own the production infrastructures, and is absent in exporting. Firms withstrong production competencies are hence motivated to increase their level of


involvement overseas. This is confirmed in a study by Caves and Mehra (1986) whofound a positive and significant relationship between firms’ production competenciesand their propensity to expand investment abroad. In a similar vein, we extend thisnotion of expansion of investment to encompass advancement in entry modes asboth courses of action involve a higher level of resource commitment from the firm.

Hypothesis 6 (H6). The higher the importance of production capability of the firm,the higher is its mode of entry.

2.3. Global management skills

A firm’s ability to capitalize on its competencies is affected to a certain extent byits global management skills. These skills include knowledge of distribution networksand the possession of global synergies that enable the firm to place their productscloser to the customers. These capabilities extend a firm’s sound understanding offoreign cultures and governmental regulations that will greatly help in penetratingoverseas markets distribution networks. Indeed, in markets where different languagesare used, staff proficiency in the foreign language acts as a strong catalyst in theprocess of building up a firm’s distribution networks. Smooth foreign operations willalso be ensured as the occurrences of communication breakdown are greatly reduced.This proficiency is also important in understanding customers’ need and buildingtheir loyalty to the firm’s products. From an entry mode decision standpoint, theforeign market knowledge capabilities are best utilized when the firms set up whollyowned subsidiaries and least when they are doing exporting. It therefore stands toreason that firms that possess strong market knowledge are more likely to opt for amore advanced mode of entry.

Hypothesis 7 (H7). The higher the importance of foreign market knowledge of thefirm, the higher is its mode of entry.

Global synergies arise when the inputs of multinational firms are shared, or utilizedjointly with ease of interface (Willig, 1978). When there is potential for global syn-ergies, firms will tend to favor capitalization on the benefits of sharing resourceswithin their groups. Firms with the global synergies in the form of a network ofplants strategically located in many countries are able to enjoy economies of scale(Davidson, 1980). They can easily shift production among the various plants to takeadvantage of the benefits of their geographical diversification of input and outputmarkets (Tallman, 1991). As higher modes of entry provide greater ease of interfaceamong these units, we assert that firms that are geographically diversified are moreinclined to choose higher modes of entry.

Hypothesis 8 (H8). The higher the level of geographic diversification of the firm,the higher is its mode of entry.

As foreign investments often incur high fixed costs and relatively high risks, the


size of firms has been identified as an important source of strategic advantage(Grubaugh, 1987; Yu & Ito, 1988; Tan & Vertinsky, 1996). Though higher returnsare expected in firms engaged in more advanced entry modes, only the larger onesare better at handling the high costs and significant risks present in the modes. Forthis reason, Swedenborg (1979) found a positive relationship between the domesticsize of a firm and the size of its foreign operations. Clearly, large firms have a largerand better network for collecting and processing information. These economies ofscale give them the advantage of discovering potential investment opportunitiesbefore their smaller competitors. As a result, they are better able to capitalize onthese opportunities. Moreover, potential host government agencies and financial insti-tutions, in their attempts to attract foreign investors, often focus their attention onlarger companies.

Hypothesis 9 (H9). The bigger the size of the firm, the higher is its mode of entry.

3. Methodology

We postulate that firms that experience higher dissemination risks, strive to exertgreater control of their foreign operations, and possess a higher level of global man-agement skills would opt for a more advanced mode of entry (e.g., going on jointventures or establishing their own branches or subsidiaries). Whilst the literaturepoints to firms’ modal choice as extending from its possession of strategic capabili-ties to include their aspiration to manage well the risks and uncertainties in theenvironment, no study has to the best of the authors’ knowledge examined thisrelationship. This study seeks to examine whether such a relationship exists.

A summary of the variables depicting a firm’s specific advantages and the decisionfactors they fall under is given in Table 2. The operationalization of their measuresis shown in Appendix A.

Table 2Summary of the variables

Firm’s specific advantages and decision factors Hypothesized relationship withmode of entry

(A) Dissemination RisksH1 Research and Development (RD) +H2 Reputation (REPUTN) +H3 Product Superiority (PROD) +(B) Strategic ControlH4 Price Competitiveness (PRICECOM) +H5 Advertising and promotion (ADV) +H6 Production Competencies (PRODCAP) +(C) Global Management SkillsH7 Foreign Market Skills (FMKT) +H8 Geographic Diversification (GEODIVER) +H9 Size (SIZE) +


4. Model specification

In view of the multiple modal choices available to the firms, coupled with theirvarying resource commitment, it is important that these characteristics are incorpor-ated in our analysis. An appropriate statistical method of estimation is the polycho-tomous regression analysis cast in an ordinal framework (see Maddala, 1993, andGreen, 1990). Unlike probit and logit methods which consider the differences instrategic advantages between firms in only two modes, the polychotomous methodallows for multiple modes to be considered simultaneously and therefore depicts afirm’s decision choice more precisely. In the analysis, the dependent or responsevariable y is the various modes of entry and takes the values of 1, 2, . . ., j. Theindependent variables are the factors of modal choice decision and may either becategorical or continuous. If the entry modes are treated as being ordinal, we canestimate the proportion of occurrences higher than the jth level. The modelassumes that,

p[y�J]�euj

1+euj

such that uj=a+b1 RD+b2 PROD+b3 REPUTN+b4 ADV+b5 PRICECOM+β6

PRODCAP+b7 FMKT+b8 GEODIVER+b9 SIZE.Our entry choice decision model thus assumes that there is a log–linear relation-

ship between the underlying entry mode and the covariates. Estimates of bs areobtained by the maximum likelihood function.

5. Sample

A questionnaire survey covering firms from Australia and Hong Kong was carriedout with the assistance of the Association of Asian Management Organizations(AAMO). The organization represents firms that are involved in or are keen to pursueoverseas markets. The instrument included questions on the variables described inthe earlier section.

The survey was conducted over a six-month period from April to September 1997,before the onset of the Asian economic crisis in 1998. More than 700 questionnaireswere mailed to AAMO members. The unit of analysis was the firm and the surveytargeted chief executives and managers in the firm who were responsible fordecisions on international business matters. A total of 384 firms responded; thisrepresented a response rate of 54.9 percent. Only firms in the manufacturing sectorwere used. These comprised 206 firms from Australia and 178 firms from HongKong. Respondents did not significantly differ from nonrespondents in terms of theindustry distribution and mean firm size (measured in terms of annual revenue).Therefore, nonresponse bias, if any, was negligible.


6. Results

6.1. Factors of modal choice decision

Our conceptualization regarding the factors of modal choice decision was testedusing factor analysis. The results are shown in Table 3. The magnitude of the factorloadings (�0.60) and eigenvalues (�1) revealed that the factors were internally con-sistent and well defined by the variables (Hair, Anderson, Tatham, & Black, 1995;Tabachnick & Fidell, 1989). Three factors, extracted using a varimax rotationmethod, were identified and retained in our model. The groupings of the variablesunder each factor were in line with our proposition of modal choice decision offirms. The factors were: (1) Dissemination Risks which comprised research anddevelopment (RD), product superiority (PROD) and reputation (REPUTN), (2) Stra-tegic Control which entailed advertising and promotion (ADV), pricing competi-tiveness (PRICECOM) and production capability (PRODCAP) and (3) Global Man-agement Skills which included foreign market skills (FMKT), geographicdiversification (GEODIVER) and size (SIZE).

6.2. Polychotomous regression

The polychotomous regression model was estimated for the pooled and subsamplesof firms. Our motivation for carrying out these separate analyses is to test theextraneous sources of variations in the modal choice decision of firms in the twocountries by partialling out the effect of (a) the types of market entered, and (b)their home country endowment. Table 4 shows the results of the polychotomousregression analysis. Column A shows the pooled and columns B and C show theresults of the subsamples, Australia and Hong Kong. It also reports the model stat-istics and the estimates of the coefficients for the pooled sample and for the two

Table 3Rotated factor loadings

Factor 1 Factor 2 Factor 3

RD �0.853 �0.138 �0.352PROD 0.831 0.233 0.186REPUTN 0.792 0.291 �0.130ADV �0.084 0.688 0.344PRICECOM 0.008 0.832 0.027PRODCAP �0.097 0.639 0.260FMKT 0.468 0.067 0.671GEODIVER 0.220 �0.289 �0.716SIZE 0.368 �0.151 0.627

Eigenvalue 1.620 1.452 1.295


Table 4Results — Mode of Entrya

A. Pooled Sample B. Australia C. Hong KongVariables Coefficient t-value Coefficient t-value Coefficient t-value

Dissemination RisksRD 0.2046 1.98* 0.2242 1.91* 0.1739 1.50REPUTN �0.6977 �8.53*** �0.8218 �8.65*** �0.7919 �4.17***PROD 0.8382 5.55*** 0.9462 5.67*** 0.7877 4.09***Strategic ControlPRICECOM 0.3429 3.15** 0.3757 3.16** 0.2834 2.08*ADV 0.2265 1.61 0.1958 1.31 0.0226 0.16PRODCAP �0.2316 �1.17 �0.2210 �1.70 �0.1241Global Management SkillsFMKT 0.6881 6.51*** 0.6438 5.53*** 0.6386 5.02***GEODIVER 0.5670 8.47*** 0.6434 7.94*** 0.4408 5.80***SIZE 0.1626 3.87** 0.1727 3.39** 0.1129 2.28*Home–Host Country VariationsMARKETS 0.5873 5.94*** 0.8073 6.84*** 0.8057 6.51***HOMECTYY �0.4424 �3.30**

a Goodness of Fit, Chi Square and corresponding p value: Pooled: 759.409, p=1.000; Australia:613.602, p=1.000; Hong Kong: 540.098, p=1.000. Test of Significance (two-tailed): * p�0.05; **p�0.01; *** p�0.001.

subsamples. The similarities in the signs and coefficients suggest the robustness ofour model.

7. Discussion of results and implications

7.1. H1: Research and development (RD)

H1 predicts that the higher the research and development of the firm, the higherwill be its mode of entry. The coefficient b1 is positively signed and moderatelysignificant in both the pooled and Australian samples, but not in the Hong Kongsample. H1 is therefore partially supported by the data. The results lend moderatesupport to findings of past studies (Houston, 1986; Caves & Mehra, 1986; Tan &Vertinsky, 1995) on the influence of research and development.

7.2. H2: Reputation (REPUTN)

We postulate that firms with strong reputation face high dissemination risks andare likely to adopt a higher mode of entry. Surprisingly, the results reveal that b2 issignificant but negatively signed. Prima facie, these result run counter to expectationsand show that the reputation of a firm does not necessarily translate into a need tointernalize its assets. A plausible explanation for this finding may be the public imagethat is associated with the country of origin of the firm is better preserved by the


firm choosing to remain in its home country. Abstinence from overseas productionparticularly in high entry modes allows a firm to retain its “imported goods” imagewhich manifests itself most commonly in the search by customers for the countryof manufacture (i.e., the “Made in”) label. This image might be dampened shouldthe firm choose to establish manufacturing plants in the host countries.

7.3. H3: Product superiority (PROD)

The expectation is that firms that have superior products face high disseminationrisks and are likely to choose a higher mode of entry. This hypothesis finds strongsupport from both the pooled and subsample data. Accordingly, b3 is highly signifi-cant and positively signed. This finding corroborates suggestions of past studies thatfirms are likely to internalize their operations to reduce the risk of market failuresas the proprietary content of their products increase (Anderson & Gatignon, 1986;Hu & Chen, 1993).

7.4. H4: Price competitiveness (PRICECOM)

b4 which indicates the effect of price competitiveness is significant and positivelysigned. H4 is supported by the data. This suggests that firms seeking to maintain acompetitive pricing structure in the global markets are more likely to choose a highermode of entry. It affirms the assertion by Hill et al. (1990) that firms often seek toexert strategic control over their foreign ventures whenever the prevailing situationspermit such intervention.

7.5. H5: Production capability (PRODCAP)

b5 is not statistically significant for the pooled and subsample data. Therefore, H5has no support. The sources of a firm’s production competencies may be tied to thedomestic environments of a firm’s operations. In such an instance, it may not bepossible to replicate the cost efficient production overseas. The production com-petency may also vary depending on the nature of the products. Future research mayneed to examine this variable in greater depth.

7.6. H6: Advertising and promotion (ADV)

The results reveal that b6 is not significant. They indicate that advertising andpromotion have no influence on the modal choice decision of the firms. H6 finds nosupport from the data.

7.7. H7: Foreign market skills (FMKT)

As predicted, b7 is statistically significant and positively signed. This confirms ourconjecture that firms with formidable foreign markets skills are able to place theirproducts closer to the customers. They are thus more likely to choose a higher mode


of entry to realize their potential. H7 finds support. This result reinforces Erramilliand Rao’s (1990) finding that firms will opt for higher level of market involvementin relation to their foreign market skills.

7.8. H8: Geographic diversification (GEODIVER)

We hypothesize that firms that are geographically dispersed will have greateradvantage over others in setting up foreign operations. They are better able to reducethe risk of market failures (Davidson, 1980; Tallman, 1991). The results show thatb8 is significant and positively signed. H8 is supported by the data.

7.9. H9: Size (SIZE)

Finally, we postulate that bigger firms are better able to increase their level ofinvolvement and are thus more likely to opt for advanced modes of entry. The resultsshow that b9 is highly significant and positively signed, which are consistent withfindings found in the literature (Swedenborg, 1979; Grubaugh, 1987; Yu & Ito, 1988;Kimura, 1988). They indicate that larger firms would have sufficient internal assetsto venture overseas through a more advanced mode of entry. Moreover, size wouldenable them through internalized overseas operations to obtain extraordinary rents,without having to share their earnings with other firms such as agents and licenseesin the host countries.

8. Home–host country variations

In view of the different political and financial environment of the home countriesof the firms, our analysis further considers their possible influence on firms’ modalchoice decision. This source of variation, though not explicitly considered in thestudy, could originate from home country endowment of the firms such as govern-ment assistance polices and so on. To test this proposition, we included a dummyvariable, HOMECTY, in the pooled sample. The significant results of HOMECTYrevealed that the home country location of the firms have considerable influence onthe modal decision of firms.

Controlling for the type of markets produces further insights into the modal choicedecision of firms. Given that the external environment in advanced markets is gener-ally favorable to integration (Gatignon & Anderson, 1988; Davidson, 1980), it islikely that firms would vary their entry strategies in those markets. We added avariable, MARKETS, to differentiate between the advanced markets such as theUnited States, Canada and European Union (EU), and secondary markets such asASEAN, Asia and Oceania (see Appendix A for measures). Although this variableis based on a broad agglomeration of countries and regions, nevertheless its delin-eation in term of their economic status is useful for our analysis. The significanceof MARKETS provides an indication of the critical role of host-country attractive-ness on the modal choice of firms.


8.1. Effects

This section describes how the results could be used to predict the modal choicethat is likely to be adopted by the firm. The fitted models are based on the exponentialrelationship between the coefficients of the variables and the likely entry mode. Fora distinct pattern of independent variables of the firm, the models provide a distri-bution of probabilities of the entry modes. The predicted modal choice correspondsto the entry mode with the highest probability.

From the results of the pooled sample, a prognostic model (see column 2 of Table4 for the coefficients) may be structured as follows:

P[Entry Mode�Exporting]�exp(−5.341+D)

1+exp(−5.341+D)

P[Entry Mode�Licensing]�exp(−11.040+D)

1+exp(−11.040+D)

P[Entry Mode�Joint Ventures]�exp(−13.480+D)

1+exp(−13.480+D)

where D=0.2046×R&D�0.6977×REPUTN+0.8382×PROD +%+0.1626×SIZE.To illustrate our computation, consider a firm with perceived scores of 3.00, 2.00,

4.50, 5.00, 4.00, 4.00, 3.50, 1.00, 10.00, 1.00 and 1.00 on RD, REPUTN, PROD,PRICECOM, PRODCAP, ADV, FMKT, GEODIVER, SIZE, MARKETS andHOMECTY, respectively. The distribution of probabilities of entry modes wouldhence be 0.0190 (exporting), 0.8340 (licensing), 0.1322 (joint venture) and 0.0148(wholly owned subsidiary). The highest probability associated with licensing pointsout that the firm is most likely to adopt this mode of entry in the host country. Onthe other hand, another firm with perceived scores of 4.0000, 4.0000, 3.5000, 4.0000,1.0000, 3.0000, 4.5000, 8.0000, 10.0000, 1.00 and 1.00 will have a probability distri-bution of 0.0012, 0.2686, 0.5395 and 0.1907, respectively, thus favoring a joint ven-ture.

9. Conclusion

This study has attempted a broad-based theoretically guided field study of howmodal choice is affected by the dissemination risks, strategic control and globalmanagement skills of the firms. While past studies view the expansion of foreignoperations in terms of the scale of the investment, we have broadened this under-standing to include this growth as depicted in the firms’ modal choice. Using aprognostic framework, our study provides a more coherent explanation of entrymodes of firms by demonstrating that firms need not necessarily follow a conven-tional path of progression in modal change, especially in circumstances where thecost–benefit calculus favors more advanced modal choices. By employing polycho-tomous regression on firm-level data, we make improvement to the traditional analy-


ses that were limited to comparison between two modal choices. Rather than treatingthe entry modes as nominal choices, we ordinalize the modes in a prescribed hier-archy that corresponds to the magnitude of resource commitment and economic gainsby firms.

The findings in this study tie in well with the theories of foreign direct investmentsthat have been widely elucidated in the literature. They lend support to the predictionof the eclectic framework that firms with strong specific advantages, such as researchand development, reputation and product superiority, seek to expand their foreigninvolvement through employing higher modes of entry. This decision to move over-seas has certain strategic implications; in our study, we have determined that controlover competitive pricing is one of the areas crucial to the firms’ global strategy.Further, the findings augment the argument of past studies that the firms’ ability tointernalize their competencies overseas depends on their global management skillsas reflected in their foreign market skills, geographic diversification and size. Theseresults have important implications as they contribute to justifying greater attentionto areas important to firms in their process of internationalization. Findings of thisarticle could provide valuable input to the development of normative modelsdesigned to improve entry modes decision.

In conclusion, two principal limitations of this research must be noted. Firstly,our measures of home–host country variations of HOMECTY to proxy home countryadvantages and MARKETS to represent the types of markets could be furtherimproved in future studies. The micro treatments of HOMECTY by adding severalmore precise measures and MARKETS through breaking down into specific countrieswill shed greater light on the impact of home country endowment of the firm andattractiveness of host markets on firms’ modal choice. Secondly, the influence oflocation factors in our study has been measured on an ex post facto basis. It ispossible that respondents may have chosen entry modes in a particular way, butpost-rationalized their choice in a different way. Consequently, the influence on entrymode choice of some effects may have been overrated and others underrated by therespondents. Ideally, to prevent this problem, measurement must be made just beforethe entry mode choice is made and implemented. However, such a data collectionapproach represents a formidable challenge.

Appendix A. Operationalization of Dependent and Independent Variables

(a) Mode of entryThe method of assigning the levels of entry mode follows that adopted by Erram-illi & Rao (1990). It is conceivable that firms could be adopting different modesof entry and operating in several countries. In order to avoid linear dependency ofthe observations pertaining to firms in such cases, we take the highest mode ofentry that has been adopted by these firms. Our rationale is based on the argumentof the resource-based view that firms will opt for the highest possible mode toachieve utmost exploitation of their resources.

(b) Research and development (RD)


Single-item scale based on response to the following question.Please rate the importance of the following in gaining competitive advantage(1=Extremely Unimportant, 5=Extremely Important)“Research and Development”

(c) Importance of Reputation (REPUTN)Single-item scale based on response to the following question.Please rate the importance of the following in gaining competitive advantage(1=Extremely Unimportant, 5=Extremely Important)“Reputation of product/service”

(d) Product Quality (PRODUCT)Two-item scale based on responses to the following questions.Please rate the importance of the following in gaining competitive advantage(1=Extremely Unimportant, 5=Extremely Important)“Design of product/service”“Quality of product/service”

(e) Price Competitiveness (PRICECOM)Single-item scale based on response to the following question.Please rate the importance of the following in gaining competitive advantage(1=Extremely Unimportant, 5=Extremely Important)“Price of product/service”

(f) Production Capability (PRODCAP)Single-item scale based on response to the following question.Please rate the importance of the following in gaining competitive advantage(1=Extremely Unimportant, 5=Extremely Important)“Production capability”

(g) Advertising and Promotion (ADV)Please rate the importance of the following in gaining competitive advantage(1=Extremely Unimportant, 5=Extremely Important)“Advertising and Promotion”

(h) Foreign Market Skills (FMKT)Two-item scale based on responses to the following questions.Please rate the importance of the following in gaining competitive advantage(1=Extremely Unimportant, 5=Extremely Important)“Staff proficient in foreign languages”“Knowledge of foreign market”

(i) Geographic Diversification (GEODIVER)The firms in the sample indicated the markets entered from the following list: (1)ASEAN, (2) East and NE Asia, (3) S. Asia, (4) Middle East, (5) Oceania, (6)European Community, (7) USA, and (8) Canada. This list was developed keepingin mind that the firms studied are based in Asia. GEODIVER is the number ofmarkets entered by the firm.

(j) Size of the Firm (SIZE):This measure is based on organization’s annual revenue.

(k) Home-country Location (HOMECTY):


This is a dummy variable based on 1 for firms from Australia and 0 for firms fromHong Kong.

(l) Type of Markets (MARKETS):This is a dummy variable based on 1 for firms from Australia or Hong Kongentering markets in (1) ASEAN, (2) East and NE Asia, (3) S. Asia, (4) MiddleEast, (5) Oceania; and 0 in (6) European Community, (7) USA, and (8) Canada.

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The influence of dissemination risks, strategic control and global management skills on firms' modal decision in host countries