Asia Pacic Journal of Management, 18, 443460, 2001 c 2001 Kluwer Academic Publishers. Manufactured in The Netherlands.

An Investigation of Market Entry Strategy Selection: Exporting vs Foreign Direct Investment ModesA Home-host Country Scenario
HENRY F.L. CHUNG henry.chung@manukau.ac.nz Manukau Business School, Manukau Institute of Technology, Private Bag 94006, Manukau City, Auckland, New Zealand PETER ENDERWICK University of Waikato, Department of Marketing and International Management, Private Bag 3105, Hamilton, New Zealand

Abstract. A critical issue for rms considering conducting business overseas is the choice of market entry mode. The two most widely options are exporting and foreign direct investment. This study examined a number of factors which have been suggested in the literature as important determinants of the choice between these two entry modes. Key factors examined included international business experience, immigrant effect, service requirements, and market size. The study employed a logistic regression analysis method to examine the market entry mode decisions of 124 New Zealand rms operating in a single foreign market (Taiwan). Signicant factors identied included product type and proxy experience (rms experience with Japan), and an immigrant effect which impacted on the choice of FDI mode. Keywords: international market entry mode, foreign direct investment, exporting, immigrant, Taiwan, New Zealand

1.

Introduction

Firms deciding to enter a foreign market face a critical decision in choosing the best market entry mode to service the market. This decision is crucial because it can have an ongoing impact on a rms international business performance (Anderson and Coughlan, 1987; Klein and Roth, 1990). Of the many options available to rms, the two modes considered most often are exporting and foreign direct investment (FDI). These two methods represent extreme approaches. Firms adopting the rst approach initially establish themselves in a foreign market through exporting. After gaining knowledge and experience in the host country, they may then expand their operations in that country through ownership of production or distribution facilities. This is an incremental approach (Johanson and Vahlne, 1977; Root, 1994). Exporting allows a rm to internationalize without major investment in a foreign market (Mahoney et al., 1998). It is a low resource commitment and a low risk entry mode. However, it is also associated with a low prot return and provides little control to the rm (Agarwal and Ramaswami, 1992).

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In contrast to the gradual internationalization approach, some rms enter an international market through direct investment in the host country. This is the strategic approach (Kwon and Konopa, 1993). In contrast to exporting, FDI offers the rm a higher degree of control over its international business operations in the host country. The prot returns generated by FDI modes are usually greater than those generated by exporting. However, FDI modes are also associated with greater risks and imply higher management complexity than exporting. The most widely used FDI modes include wholly owned subsidiary (production and marketing), joint venture and strategic alliance (Anderson and Coughlan, 1987; Kwon and Konopa, 1993; Mahoney et al., 1998; Jeannet and Hennessey, 1992). The current study examines a number of factors potentially inuencing the choice of exporting and foreign direct investment modes and utilizes data on New Zealand (the home country) and Taiwan (the host country). Past studies have suggested that location-specic advantages encourage rms to choose FDI over exporting modes (Dunning, 1977, 1979; Agarwal and Ramaswami, 1992). This study will examine the impact of four location related factors on the choice of market entry mode and includes international business experience, immigrant effect, service requirements and market size. Unlike previous studies which have examined the impact of rms direct experience with the host market on the choice of market entry modes (Kim and Hwang, 1992), this study examines the entry behaviour of rms which have no past experience with the host market. It investigates whether rms utilize their experience with other countries, which might have similar market characteristics, when making market entry mode decisions. Furthermore, unlike previous studies which have focused primarily on the choice behaviour of manufacturing rms (Anderson and Coughlan, 1987; Kim and Hwang, 1992; Kwon and Konopa, 1993; Ramaseshan and Patton, 1994), this study examines market entry decisions of rms from various industries (e.g. industrial, consumer and service sectors). The outcomes of this study are likely to add new insights to the market entry mode literature. This study rst reviews relevant literature and presents a conceptual framework. It then provides an empirical investigation of the framework using data collected via a postal survey. The article concludes by discussing the research ndings and their implications for business management and future research. 2. Literature review

International market entry modes can be classied according to level of control, resource commitment, and risk involvement (Anderson and Gatignon, 1986; Erramilli and Rao, 1993; Hill, Hwang and Kim, 1990). For example, in a study of the international operations of service rms in the United States, Erramilli and Rao (1993) classify market entry modes into two categories based on their level of controlfull-control (i.e. wholly owned operation) and shared-control mode (i.e. contractual transfer or joint venture). The classication system adopted by Kim and Hwang (1992) is three fold: licensing, joint ventures and wholly owned subsidiaries. Kim and Hwang believe that these methods provide three distinctive levels of control and require different levels of resource commitment. Kwon and Konopa (1993) indicate that each foreign market entry mode is associated with advantages and disadvantages in terms of risk, cost, control, and return. Their study was

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designed to examine the impacts of a series of determinants on the choice of foreign production and exporting adopted by 228 U.S. manufacturing rms. Agarwal and Ramaswami (1992) suggest that the most commonly used entry modes are exporting, licensing, joint venture and sole venture. These methods involve varying levels of resource commitment. Based on the location of products produced, Terpstra and Sarathy (2000) divide market entry methods into three major categoriesindirect exporting, direct exporting and foreign manufacturing. Because many factors inuencing the choice of market entry modes have been suggested in the literature, it is not possible to include all the factors in a single study (Anderson and Coughlan, 1987). The conceptual framework regarding the choice of foreign market entry modes used in this study is based on the results of studies in the literature, mainly those in the area of the eclectic framework. The eclectic framework was rst proposed by Dunning (1977, 1980, 1988) and was then expanded by other researchers (e.g. Hill, Hwang and Kim, 1990; Kim and Hwang, 1992). The eclectic approach has been widely used in explaining the choice between FDI and other market entry modes (e.g. Agarwal and Ramaswami, 1992; Kim and Hwang, 1992). This study will focus on one of its three key elementslocationspecic factors. It has been suggested that location and ownership endowments are the most likely factors determining the choice of FDI or exporting modes (Dunning, 1973, 1977). The inuence of location factors on the choice of market entry modes has been specically or partially examined in a number of studies (e.g. Kwon and Konopa, 1993; Brouthers, Brouthers and Werner, 1996; Hill, Hwang and Kim, 1990; Kim and Hwang, 1992; Terpstra and Yu, 1988). Prior studies have offered a number of subthemes for examining the impact of host country location factors on the market entry decision. As these items have been reviewed and reported thoroughly in several recent studies (Sarkar and Cavusgil, 1996; Tatoglu and Glaister, 1998), a complete review on this literature might seem to be redundant. This study summarizes the ndings of several relevant studies. A brief discussion regarding each category of factor in the conceptual framework is presented below. A detailed discussion of each factor is offered in Section 3. Past studies have suggested that the choice of FDI modes is related to a rms familiarity with the host market (Gatignon and Anderson, 1988; Sarkar and Cavusgil, 1996; Kim and Hwang, 1992). It has been found that rms which have prior host market experience are more likely to choose a FDI mode (Kim and Hwang, 1992). Although it has not yet been included in the market entry mode literature, the immigrant effect has been widely discussed in the general business literature (e.g. Gould, 1994; LeverTracy et al., 1991). These studies suggest that immigrants from the host market are likely to act as a bridge between the foreign rm and the host market. Immigrants often have signicant knowledge about their country of origin and understand the culture of the host market well. The ndings of previous studies have implied that the immigrant effect could be considered as a location endowment of a rm. In this study, this variable is suggested as a factor of location-specic endowment in the FDI literature. A number of studies assert that target country market characteristics affect the choice of market servicing modes. Research has indicated that the size of the host country is an important attraction to foreign direct investment (Agarwal and Ramaswami, 1992; Kwon and Konopa, 1993; Root, 1994; Terpstra and Yu, 1988).

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Finally, several studies have suggested that the service requirements of a product can also affect the choice of market entry mode. It has been suggested that when a manufacturing rms product requires a higher level of before or after sales service, it tends to produce products in the host market or to have a local presence in order to ensure that adequate services are performed (Anderson and Coughlan, 1987; Ramaseshan and Patton, 1994). The same conclusion is reached by research on the internationalization of the service sector where it appears that service providers whose products require a high degree of supplier-buyer interaction tend to choose a FDI mode to serve the market (Vandermerwe and Chadwick, 1989; Patterson and Cicic, 1995). 3. Research hypothses

International experience Previous studies have suggested that location familiarity is signicantly related to the choice of market entry mode. Firms with greater location familiarity are more likely to adopt a direct investment mode (Hill, Hwang and Kim, 1990; Kim and Hwang, 1992). Past research has asserted that one way to acquire location familiarity is by having direct experience with a market. High location familiarity will reduce the perceived distance between the home and host markets. It has also been suggested that when rms rst enter a country which is culturally different from the home country, they tend to be reluctant to adopt a FDI mode. However once the barriers of language and culture are overcome, the likelihood of foreign direct investment increases (Hirsch, 1976; Luostarinen, 1978). Thus, experience with the host market is likely to be an important factor inuencing the choice of market servicing mode. However, the ndings of existing studies may need to be amended when rms have no previous experience with the host market. This study is designed to examine the experience of New Zealand rms rst entry into Taiwan i.e. no prior experience with the host market. In such a case, New Zealand rms might use their experience in a country which has similar market characteristics to Taiwan (e.g. Japan) or a market which is culturally similar (e.g. Chinese Family Business countries) when making a market entry mode decision. Past studies have pointed out that Taiwan is similar to Japan in many areas including business practices, culture, language (Kanji), and distribution system (Kuo, Rains and Fei, 1981; Long, 1991; Chang and Sternquist, 1993; Chung, 2001). These similarities are mainly created through Japans 50 (18951945) years of colonization. Moreover, Taiwan is considered a member of the Chinese Family Business group of countries which share many common characteristicse.g. small size, centralized management structure, importance of family in business (Whitley, 1992; Redding, 1993; Chung, 1999). Therefore, when direct experience with Taiwan is absent, rms experience with these countries might be expected to inuence the market entry mode decision. Based on the above considerations, the following hypothesis is presented: Hypothesis 1. Firms that have proxy experience with the host market are more likely to adopt a FDI market entry mode, while those who do not have such experience tend to commence with an export mode.

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Immigrant effect Although immigration variables have not been included in the market entry literature, the effect of immigrants on business in general has been discussed in a number of studies. A survey-based study (Lever-Tracy et al., 1991) conducted in Australia about businesses established by Chinese and Indian immigrants indicated that a large proportion of the respondents had nancial resources and business experience when they migrated to Australia. The ndings of this study noted that nearly half of the respondents had had prior experience as owner operators and a number of their businesses were direct branches or offshoots of a family business in other countries. Likewise, the study by Chappel et al. (1995) on the economic impact of immigration also pointed out a similar result. Their study found that entrepreneurship was more commonly observed in immigrants than in the base population. Some explanations for this tendency included their business experience in the originating country and networks of collaborators in the host markets. In a study of the role immigrant links played in facilitating trade between the destination country and the originating country, Gould (1994) revealed that immigrant links to their originating country including knowledge of the market, languages, and business contacts, had a positive impact on bilateral trade ows between these two countries. Furthermore, a New Zealand study (Duncan, Bollard and Yeabsley, 1997) on the interaction between trade, investment and migration concluded that immigrants often bring with them important skill sets, knowledge and networks which have provided a foundation for New Zealand to build international trade and investment relationships with immigrants source countries or regions. In addition, a number of other studies have pointed out that rms international family heritage (e.g. foreign born parents or relatives) is likely to be a factor in the choice of market entry modes (Wiedersheim-Paul, Olson and Welch, 1978 cited in Ramaseshan and Patton, 1994). In a study of export channel strategies adopted by 62 small U.S. companies in the water lter and purication industry, Ramaseshan and Patton (1994) examined the impact of this factor and found a reverse relationship. Export decision makers who were more familiar with a foreign culture and environment were less likely to select a direct channel. The authors suggested that this is likely because of an understanding of the nancial risks involved and the problems associated with using direct channels in the foreign country. In summary, although immigrant effect has not yet been included in market entry mode research, the ndings of past studies indicate that this effect is likely to inuence choice of FDI or exporting modes. The immigrant effect might be viewed as a location advantage because such an effect could provide a rm with a better knowledge and understanding of the market it intends to enter. It is likely that rms with the host market immigrant effect would face fewer psychic distance barriers (Dunning, 1979) and would be in a better position to adopt a FDI mode when entering the host market. Hypothesis 2. Firms with an immigrant effect are likely to adopt a foreign direct investment mode while those which do not have such a location advantage will tend to choose an exporting mode.

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It has been suggested that the present and projected size of the target market country are important inuences on entry mode selection (Root, 1994; Aharoni, 1966). The commonly examined issues relating to host market characteristics are attractiveness and market size of a host country (Sarkar and Cavusgil, 1996). Root (1994) suggests that small markets favour entry modes which require a low break-even sales volume (e.g. exporting) while markets with high sales potential justify the employment of high resource commitment entry modes (e.g. FDI modes). A number of empirical studies have examined the impact of market size on the choice of market entry mode. In a study of U.S. manufacturing rms choice of exporting or FDI modes, Kwon and Konopa (1993) conrmed that the target market size of rms adopting FDI modes was higher than the target market size of those adopting exporting methods. The nding of Kwon and Konopa supported Dunnings hypothesis that the attractiveness of the location-specic endowment affected the form of foreign market entry involvement. In a recent investigation of the choice between joint ventures and wholly owned subsidiary by a number of European and USA based MNCs operating in Turkey, Tatoglu and Glaister (1998) found that size of the host market was the most signicant factor in the choice of FDI modes. In an early attempt, based on factors identied by Basi (1963) and Aharoni (1966), Green and Cunningham (1975) examined the impact of a set of variables (including market potential, political instability, cultural differences and geographical proximity) on U.S. foreign direct investment activities. Their study concluded that the most important factor in the allocation of U.S. foreign investment was market potential. As revealed in the literature, the focus of past studies was mainly on examining European or U.S. rms international business operations in foreign countries. The present study is designed to examine New Zealand rms international business activity in the Taiwanese market. The research hypothesis is described below. Hypothesis 3. An exporting entry mode is likely to be selected when market size of the industry in the host market is small. A foreign direct investment mode is likely to be chosen when the market size of the industry in the host market is large. Service requirements A number of theoretical studies have indicated that service requirements can also affect the choice of market entry mode. It has been suggested that when the rms marketing strategy calls for a high level of service (before or after sales), a high resource commitment entry mode helps the rm ensure that adequate services are performed (Anderson and Coughlan, 1987; Etgar, 1978; Keegan, 1984; Terpstra, 1989). A number of empirical studies have conrmed this effect. Based on the experience of U.S. lter manufacturing exporters, Ramaseshan and Patton (1994) found that a rms product servicing was positively related to that rms overseas channel selection. Firms whose products need more back-up support services are more likely to adopt a higher resource commitment entry mode such as a wholly owned subsidiary. Wiedersheim-Paul, Olson and Welch (1978) and Root (1994) reached similar conclusions.

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Thus it is likely that rms are motivated to shift their location closer to the market when their products require a high degree of before or after sales services. By having a local presence, rms will be in a better position to serve their customers. This is evident in some major manufacturing industries such as the automobile industry (e.g. General Motors in Australia, Mahoney et al., 1998:114). Besides the manufacturing sector, this proposition also applies to service industries. Studies examining the internationalization of the service sector have concluded that the extent of interactions between supplier-buyer is positively associated with the choice of FDI modes (Vandermerwe and Chadwick, 1989; Patterson and Cicic, 1995). Because interaction is vital for high contact services, providers of this type of service often choose a FDI mode (e.g. overseas marketing subsidiary) to serve their customers. High contact services include project management, consulting, and legal services (Chase, 1978; Patterson and Cicic, 1995). Based on the ndings of the literature, the following hypothesis is suggested. Hypothesis 4. Firms whose products require a greater degree of before or after-sales service are likely to choose a foreign direct investment mode while those whose products have low before or after-sales service tend to commence with an exporting mode. 4. Research methodology and measurement

Research measurement The dependent variable (RESOURCE) was coded as 0 or 1; 0 when a low resource commitment entry mode (i.e. exporting) was chosen; 1 when a high resource commitment entry mode (i.e. foreign direct investment) was selected. This dichotomous classication has been widely used in studies of market entry selection (e.g. Erramilli and Rao, 1993; Ramaseshan and Patton, 1994). As indicated, this study was designed to investigate rms rst operation in the host market (i.e. no previous experience with the host market). The international experience effect is measured by a proxy. In order to examine whether a rms experience in a particular market was related to its choice of market entry mode, respondents were asked to identify the countries they had operations in. These countries included Japan, Korea, China, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Brunei, Philippines and Vietnam. These dummy variables were coded 1 when a respondent company operated in any of these countries, 0 otherwise. Two coding systems were adopted with rms proxy experience. In the rst coding system, these countries were viewed individually. In the second coding system, a number of countries were grouped togetherChinese business countries (CFBCOUN, including China, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, and Brunei), and other Asian countries (OTHEASIA including other ASEAN countriesPhilippines and Vietnam). Japan and Korea were viewed individually in both coding systems. Although it has not been identied in the literature as a country which might be related to Taiwan, Korea is a member of the four Asian tigers (Korea, Taiwan, Hong Kong and Singapore). Its business environment might be somewhat similar to Taiwans and thus rms experience with Korea might be worth including in the statistical analysis. Similarly, rms experience with the Philippines and Vietnam is also included due to their membership of Asean and

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where overseas Chinese are vital to their economy. A little wider denition has been adopted with the CFB countries within this study. The CFBCOUN variable was determined based on the percentage of a countrys economy controlled by Chinese (Lasserre and Schutte, 1995:100). If 50% or more of a countrys economy is controlled by Chinese it was classied as CFBCOUN. Product type was coded using two variablesPRODCONS and PRODSERV. PRODCONS was coded 1 when a consumer product was indicated, 0 otherwise. PRODSERV was coded 1 if a service was indicated; 0 otherwise. For industrial products, both variables were coded as 0. Respondents were also asked to identify how much before or after-sales services were required for their products marketed in Taiwan (SERVICE coded 1 = little, 4 = moderate, 7 = high). Respondents were asked to identify the size of the industry in Taiwan when compared with their largest overseas market at the time their rm rst entered the market (coded as MARKSIZC). Originally, this variable was coded as a discrete continuous variable and measured by a 7-point scale (where 1 = smaller, 4 = similar, 7 = larger). Because some respondents only operate in Taiwan, MARKSIZC was converted to a categorical variable where 0 indicated when a New Zealand rm only operated in Taiwan, 1 = smaller, 2 = similar, 3 = larger. Finally, respondents were requested to identify the ownership of the company (OWNTAIWA, 1 = controlled or established by Taiwanese immigrants; 0 = otherwise). Sampling frame and data collection The data were obtained via a self-administered questionnaire mailed to a sample of 580 New Zealand companies with business experience in Taiwan. The postal survey questionnaire was sent to the respondents in Summer 1997. The mailing package consisted of: the questionnaire, a cover letter, an endorsement letter from a former CEO of Trade New Zealand, an appendix which explained the terminology used in the questionnaire and a free postal envelope. A copy of research results was also offered to respondents as a response inducement. A total of 124 useable questionnaires were returned. Additionally, 142 questionnaires were returned due to a number of reasons which included not conducting business with Taiwan, importing products from Taiwan instead of exporting to Taiwan, wrong addresses and those not applicable. After examining these reasons, it was decided to exclude these companies from the research sampling frame which was adjusted to 438 companies. Based on this sampling frame, the number of useable returned questionnaires represents a 28.3% response rate. This response rate is comparable to the average response rate of other studies on market entry mode (28.1%, see Driscoll and Paliwoda, 1997:75). 5. Statistical analysis methods

Logistic regression analysis Logistic regression has been used extensively in studies on choice of market entry modes as a method to predict the occurrence of the dependent variable (e.g. Gatignon and Anderson,

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1988; Agarwal and Ramaswami, 1992; Erramilli and Rao, 1993). Logistic regression analysis is often chosen for predicting the occurrence of an event when (1) the dependent variable has only two values, (2) there are a combination of categorical and continuous independent variables, and (3) the assumption of multivariate normality is violated (A and Clark, 1984; Erramilli and Rao, 1993; Press and Wilson, 1978; SPSS, 1993). As this current study displays each of these three conditions, logistic regression has been chosen as the method of analysis. The logistic regression equation is often expressed as p (event) = 1/(1 + eY ), where p is the probability of the event occurring, in this case the choice of foreign direct investment entry mode. Y is the linear function of the independent variables (A and Clark, 1984; Erramilli and Rao, 1993). 6. Research ndings

Sample prole As reported in Table 1, the results of this study conrmed that average size of New Zealand rms is small. The majority of the respondents had less than 100 full time employees. For most, annual sales revenue was less than NZ$50 million. The international business experience of the respondents was also short. About 75% of the rms studied had operated in international business for ten years or less. This short business experience is reected by the number of years they had been operating in Taiwan. About 83% of the rms had been operating in Taiwan for ten years or less. The majority of the rms studied were operating in the consumer products category while a number of them were industrial products marketers. About ten per cent of the rms were services providers. Within the service sector, 43% of the respondents indicated that they were consulting providers; 15% offered education services and another 15% provided aviation maintenance services. The rest of them were in the legal services, freight and telecommunication service sector. In terms of ownership of the rm, about six per cent of the respondents indicated that they were controlled or established by Taiwanese immigrants when they entered the host market. The rest of the rms were either New Zealand owned, or owned by rms from other countries. With respect to the choice of market entry modes, 87.1% of rms indicated that they chose exporting entry modes while only 12.9% of the rms entered the market by foreign direct investment modes. Exporting modes used included distributors, agents, international trading companies, export management companies, direct marketing and Japanese trading houses. Three types of foreign direct investment methods were employed by the respondentswholly owned marketing subsidiary, joint venture and production-based strategic alliance. These results are consistent with initial expectations. Bivariate correlation analysis result (multicollinearity) As shown in Table 2, the highest correlation coefcient in the independent variable set is less than 0.445. This result suggests that this study does not have a problem of multicollinearity (Anderson and Coughlan, 1987; Cohen and Cohen, 1975; Green and Tull, 1978).

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Table 1.

Proles of respondents ( N = 124). % of rms

A. Firm Sizenumber of full-time employees 10 or less 1199 100 ore more Missing values B. Firm Sizetotal sales Under NZ$5 million NZ$5 millionNZ$49,999,999 NZ$ 50 million or more C. International Business Experience (worldwide, prior to entry to Taiwan) 0 15 610 1115 15 or more D. Number of years operating in Taiwam 05 610 1115 15 or more E. Product type Consumer products Industrial products Services Missing value F. Ownership of the rms Immigrant effect (Taiwanese owned) Non-immigrant effect (Non-Taiwanese owned) Missing value G. Market entry modes selection Exporting modes Foreign direct investment modes 87.1 12.9 5.7 92.7 1.6 62.1 26.6 10.5 0.8 52.4 31.5 8.1 8.1 18.5 46.0 9.7 11.3 14.5 42.7 36.3 21.0 45.2 33.0 20.2 1.6

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Table 2. Correlation matrix of independent variables.
CFBCOUN CFBCOUN JAPAN KOREA OTHEASIA OWNTAIWA PRODCONS PRODSERV SERVICE 1.00 .382 .157 .377 .187 .208 .013 .018 1.00 .407 .113 .263 .067 .077 .042 .407 1.00 .109 .086 .161 .038 .148 .113 .109 1.00 .125 .243 .037 .024 .263 .086 .125 1.00 .117 .0822 .103 .067 .161 .243 .117 1.00 .445 .128 .077 .038 .037 .082 .445 1.00 .266 JAPAN KOREA OTHEASIA OWNTAIWA PRODCONS PRODSERV

453

SERVICE

.042 .148 .024 .103 .128 .266 1.00

Logistic regression analysis results Factor analysis is widely used in the international market entry literature (e.g. Anderson and Coughlan, 1987; Klein, Frazier and Roth, 1990; Agarwal and Ramaswami, 1992) as a method of identifying underlying constructs in a study. It is used to reduce the number of dimensions or to assess the psychometric properties of research constructs. Factor analysis is used to group interval or ordinal variables (Klein, Frazier and Roth, 1990; Agarwal and Ramaswami, 1992). Since this study employs a mix of interval and categorical variables, factor analysis does not appear to be a suitable analysis method for the study. Instead it was decided to treat each variable in the study as a separate variable. The statistical analysis package employed in the study was SPSS Release 6.0. The two functions used were the Spearman bivariate correlation and logistic regression analysis (SPSS, 1993). The Spearman bivariate two-tailed correlation function was used to examine the relationship between all independent variables, except the categorical variable of market size (MARKSIZC). The model building method adopted was a logistic regression forward likelihood-ratio (LR) stepwise procedure with a chosen cut-off value of 0.05. All variables were tested in a bivariate correlation before they were entered into the logistic regression analysis. The nal set of independent variables is listed in Table 2. Each variable listed in the correlation matrix and MARKSIZC were entered into the SPSS simultaneously. As indicated, rms proxy experience was coded in two systems. It was found that the results of both coding systems were no different from each other. It was decided to adopt the second coding system as the nal version due to its wider coverage (i.e. CFB variable). The nal result of the logistic regression analysis is listed in Table 3 and the model is presented below. All variables listed in the model were signicant at p < 0.05. P (mode choice = 1) = 1/(1 + eY ), where Y = 1.949 + 2.173 PRODSERV +2.237 OWNTAIWA 1.477 JAPAN Goodness of t of logistic regression analysis The goodness of t results of the adopted model are listed in Table 3. The correct classication rates are listed in Table 4. As shown in Table 4, the overall correct prediction rate is fairly

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Table 3. Logistic regression results.

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Dependent variable: RESOURCE, 1 = foreign direct investment entry modes; 0 = exporting entry modes Coefcient label B0 B1 B2 Parameter estimate 1.949 2.173 2.237 Standard error 0.4551 0.739 0.887

Variable Constant Product typeservice (PRODSERV) Immigrant effectowned/controlled by Taiwanese immigrants (OWNTAIWA) Proxy experience with Japan (JAPAN) N= 2 Log Likelihood = Goodness of t = Model chi-square =

df 1 1 1

Signicance 0.000 0.003 0.012

B3 120 72.099 142.404 22.143

1.477

0.730

0.043

Signicance =

.0001

Table 4.

Classication table. Predicted

Observed Exporting entry modes Foreign direct investment entry modes Total

Exporting entry modes 99 7 106

Foreign direct investment entry modes 5 9 14

Total 104 16 120

Percentage correction rates (%) 95.2 56.3 90.0

good, at 90.0%. The correct prediction rate for exporting entry modes is about 95.2% and 56.3% for FDI modes. The prediction rate for the FDI modes seem to be low. However, due to the relatively small sample of respondent rms adopting FDI modes (16/120 = 13.33%), it is not surprising that the suggested logistic model predicts exporting mode better than FDI modes. This result may also suggest that the model does not capture all of the important factors underlying the choice of market entry modes. This discrepancy is discussed in a later section. Previous studies suggest that the overall classication rate should be compared with that of a random proportion mode, which would have a hit rate of p 2 + (1 p )2 , where p is the probability of an event having occurred (Gulati, 1995:103). Thus, as indicated in Table 4, on the basis of the observed proportion of events (choice of FDI modes), p is estimated to be 0.133 (16/120). The correct classication rate for a random model is 0.768. Based on this information, it is clear that the model suggested performs better than the random model.

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When comparing the current studys correct prediction rates with those generated in the previous studies, this model appears to produce a comparable result (e.g. 82% of Anderson and Coughlan, 1987; 69% of Erramilli and Rao, 1993). The correct prediction rate is a function of the occurrence of the event of interest. The higher the correct prediction rate, the greater the reliability of the model proposed. Also as shown in Table 3, the calculated Model Chi-Square for this model is highly signicant ( p < 0.005). Based on these results, we are comfortable in concluding that the suggested model ts the data well.

7.

Discussion of research ndings

Based on the logistic regression analysis results of the propositions, two hypotheses (H1 and H4) are supported. Three variables are signicant: product type (services vs other), the immigrant effect (Taiwanese owned or controlled vs other) and rms experience with Japan. These signicant variables are discussed in the following section. Possible explanations for other variables being nonsignicant will also be offered in the same section. In the light of the research results, a revised conceptual model is presented in gure 1. The logistic regression results suggest that product type (services vs other) is the most signicant variable in the choice of FDI modes. Although initially this variable was not included in the conceptual model, this nding is not surprising. The nding indicates that a respondent whose major product line marketed in the host market is a service product, is likely to adopt a FDI entry mode. The preference of service providers to choose a high resource commitment servicing mode is probably due to their special characteristics (i.e. inseparability, intangibility, perishability, variability and ownership: see Buckley, Press and Prescott, 1992; Erramilli and Rao, 1993; Patterson and Cicic, 1995). These characteristics often require service providers to market their products more directly to their overseas end customers than do tangible goods marketers. This nding is consistent with those of previous

Figure 1.

Revised conceptual model.

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studies (e.g. Vandermerwe and Chadwick, 1989; Nicoulaud, 1989; Erramilli and Rao, 1993; Patterson and Cicic, 1995). As discussed earlier, high contact service providers tend to choose FDI modes when entering an international market. It was found that the majority of the service providers in this study were operating in the high contact service category. The nding suggests that in contrast to the service providers, providers of consumer products or industrial products tend to enter the market using an exporting mode. This result is likely due to the nature of their products which can be sold through exporting methods. It is not necessary for the non-service operators to set up their own presence in the market, especially when they rst enter the market. The nding regarding product type might suggest that New Zealand rms adopt a high resource commitment entry mode only when necessary. Non-service operators tend to follow the traditional internationalization approach when they enter a foreign market in order to avoid a high operational risk. This study also conrms that immigrant effect is an inuence on the choice of market entry mode. The results suggest that rms which are controlled or established by immigrants from the host market are more likely to choose a FDI mode. This result is consistent with the ndings of more general studies on the effects of immigrants on business (Lever-Tracy et al., 1991; Chappel et al., 1995; Gould, 1994). The ndings of the present study suggest that for small economies in particular, there is a link between the immigration effect and a rms choice of FDI entry modes. As explained in the literature, this is likely due to the immigrants knowledge of, and familiarity with, the host market. Firms with such a location advantage are more likely to commit themselves highly when they enter their country of origin due to the smaller extent of perceived distance between the home and host market. This is a new nding in the market entry mode literature. Lastly this study has produced a reverse result on rms proxy experience with the host market. It has been found that rms experience with Japan is negatively related to the choice of FDI modes. This signicant nding might offer several new insights into the literature. Firms which have business experience with Japan, might have appreciated the difculties of the business environment there. These rms might have realized that the best way to serve this market is by having a local distributor or agent. These rms might have also tried to use a FDI mode to serve the market but may have failed (McEwen, 1994). Thus, based on their experience in Japan, when rms decide to enter a country which is considered to be similar to Japan, they decide to adopt a conservative mode in order to avoid operational risks. Although this study has generated a number of signicant ndings, it is surprising that the effects of international business experience with other CFB countries, market size and before or after-sales service were not conrmed. Some possible explanations are offered below. The nonsignicant result for experience with other CFB countries might suggest that Taiwan is somewhat different from other CFB countries. Firms experiences with other CFB economies might not be particularly helpful for their operations in Taiwan. Although the literature has classied Taiwan as a member of the CFB countries (e.g. Redding, 1993) and it shares a number of unique characteristics (e.g. small size, family business) with other CFB countries, however its marketing environment might be perceived as different from that of other group members. As reported, rms experience with individual CFB markets were analysed and no signicant effect emerged. This suggests that Taiwan is different

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from Hong Kong, Singapore, and the PRC as well. In fact, the ndings of the present study suggest that Taiwans marketing environment might be more similar to its former colonizer, Japan, than to its CFB counterparts. As indicated, Japan had a signicant inuence on Taiwan in its 50 years of colonization (Chang and Sernquist, 1993; Chung, 1999). A recent study found that Taiwans distribution system is similar to its Japanese counterpart (Chung, 2001). This nding deserves some attention from international marketing scholars. Besides the CFB, it was also found that rms experience with Korea, Philippines and Vietnam did not signicantly affect the choice of FDI mode. This again suggests that Taiwan is viewed differently from these markets. Also, this study is not able to conrm previous work which suggests that foreign market size is a determinant of foreign market entry mode (Terpstra and Yu, 1988; Kwon and Konopa, 1993). There is a possible reason for the nonsignicance of market size of the host country. Although Taiwans economy is larger than that of New Zealand it may not be big enough for rms to commit themselves highly when they rst enter the market. New Zealand rms might change to a FDI mode when Taiwans market size becomes larger. Lastly, it is surprising that the effect of sales service is not conrmed. The literature suggests that rms whose products require a high level of such service often serve their customers by establishing a local presence. This is not supported by the current study. This lack of support might be due to a rms insufcient understanding of the host market. Even though they realize the importance of having a local presence (Hoadley, 1993), Taiwan is viewed as culturally different from New Zealand. It is a risky market to operate in. Therefore, in order to avoid operational risks, New Zealand rms might still prefer to use a local distributor or agent to serve the market even though their products might require a high level of before or after sales service (e.g. whitewares, Chung, 2001). 8. Summary and implications

This exploratory study has investigated one of the most important issues in international business management. It has generated a number of interesting and unique ndings. The results have several implications for research into the choice of market entry modes. Firstly, perhaps the most signicant nding of the study is the immigrants effect on the choice of market entry modes. The ndings suggest that due to their familiarity with the market, rms established by immigrants originating from the host market tend to choose a FDI entry mode. This nding has added a new insight into the location-specic factors of the market entry literature. This nding has an important message for policy makers and international marketing managers; immigrants could help a domestic company to shorten its learning process regarding marketing in a foreign market and could reduce the psychic distance between the home and host market. When entering a culturally dissimilar foreign country, hiring immigrants originating from that host country could assist companies to overcome their unfamiliarity about a foreign market. Immigrants often have knowledge of the host market, languages, culture, and have business contacts. These are essential elements in doing business internationally. Future research could be conducted to examine whether this effect on market entry mode also exists in countries which have adopted a similar immigration policy, such as Australia and Canada.

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The results of this study concurs with those ndings on service providers in larger economies such as the United States. Due to the nature of their products, service providers from a small economy should consider choosing FDI entry modes even when entering a country which is culturally different from their home country. Finally, the ndings of this study have also conrmed that when direct experience with the host market is absent, rms may use their proxy experience when making the market entry mode decision. In the absence of previous direct experience, marketing managers could use their experience in a market which has similar characteristics. This nding has also added a new dimension in the measurement of location endowment. In addition to the existing knowledge on the effect of direct experience, it is also important to consider whether a rm has proxy experience with the host market in the market entry mode investigation. Moreover, the ndings on experience with Japan and the CFB countries offer some implications for marketers interested in conducting business in this region. Because of the similarities between Japan and Taiwan, rms might consider integrating their operations in these two markets. However, managers may need to separate their operations in Taiwan from other CFB countries because of perceived dissimilarities. The results of this study are likely to be helpful in the formulation of market entry strategies. However, caution must be exercised while generalising the ndings of the current study. The study has a number of limitations. Firstly, the primary weakness of this study is the limited number of respondents using FDI entry modes. This situation is likely due to the respondents unfamiliarity with the host market, which is viewed as a risky country to operate in when they rst enter the market. This deciency might also be a cause of the low correct classication rate for this type of entry mode. However, in spite of this limitation, this study is among the rst to capture the effect of immigrants on the choice of market entry modes. The results of this study could be used as a basis for extending work in this research area. Another weakness of this study is likely due to the adoption of the single item constructs. This practice is possibly another reason for the low correct classication rate for the FDI mode. As explained earlier, the rationale behind this choice reects the nature of the dataa combination of categorical and interval variables. Finally, this study focused on respondents initial entry into the market. In fact, a large number of respondents have changed their entry modes since they commenced business with Taiwan. This suggests that a longitudinal research design could be used to enrich our understanding of market entry mode choice.

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