Journal of Business Research 55 (2002) 157 – 162

Foreign operation mode combinations and internationalization

Bent Petersena,*, Lawrence S. Welchb
a
Department of International Economics and Management, Copenhagen Business School, Howitzvej 60, 2nd floor, DK-2000 F, Denmark
b
University of Western Sydney-Nepean, Australia

Abstract

As firms seek to extend their global activities in the new millennium, an important issue for them is the means by which they enter and
penetrate foreign markets. In this article, the role of mode combination is examined. Although several occurrences of mode combinations are
reported in the international business (IB) literature, the phenomenon has not yet been made the subject of direct analysis. The paper
introduces a classification of multiple mode appearances based on the degree of interaction between modes (which varies considerably).
Special attention is paid to ‘‘mode packages’’, i.e. the concerted use of several operation modes in an integrated, complementary way. A
framework for analysing the roles within packages is presented and it is argued that the creative use of ‘‘mode packages’’ may offer the
multinational firm scope for improved international market penetration capacity. D 2001 Elsevier Science Inc. All rights reserved.

Keywords: Foreign operation; Mode combination; Mode package

The new millennium is likely to see a continuation — 1. Literature review

perhaps a fulfillment — of the age of globalisation. Firms
will have to become more globally oriented in their
operations. This will place a high demand on the ability
to extend and deepen their use of various forms of
international operations in multiple foreign markets. As a
result, there has been an increasing focus in international
business (IB) research on the foreign market operation
methods (or modes) firms use, such as licensing, franchis-
ing, exporting, or foreign direct investment. (Hill et al.,
1990; Calof, 1993; Buckley and Ghauri, 1999). In the
literature, ‘‘foreign operation mode’’ has tended to be
treated as a singular entity, even though firms often use
multiple or mixed modes in the same foreign market
(Benito and Welch, 1994).
In this article, we examine the issue of foreign operation
mode combinations and the implications for research. We
propose a conceptual framework for analysing the nature of
mode combinations and their effect on firms’ internationa-
lisation. In addition, the managerial implications of mode
combinations are discussed. While there is evidence that
firms are reluctant to consider a wider range of mode
options (Calof, 1993), extended mode combinations may
lead to improved international market penetration.
* Corresponding author. Tel.: +45-381-52510; fax: +45-381-52500.
E-mail address: bp.int@cbs.dk (B. Petersen).
Some evidence regarding multiple mode phenomenon
can be found in three different streams of IB literature: (1)
entry mode choice studies; (2) studies of particular interna-
tional operation modes; and (3) studies of internationaliza-
tion patterns. In the following, we will review each of them
in terms of their contribution to understanding operation
mode combinations.
1.1. Entry mode choice studies
The multiple mode phenomenon is seldom mentioned in
the entry mode literature. Entry mode researchers have
viewed entry mode choice mainly as a choice between
mutually exclusive modes and in its most simple version —
a make-or-buy choice (Hill et al., 1990). The aim has been to
understand why firms choose one mode rather than another,
e.g. a production subsidiary vs. a licensing arrangement.
Multiple modes are often ruled out by the way questions
are framed in empirical studies, or because responding
managers report only their main or primary mode. Also, it
is possible that researchers regard cases of multiple modes as
anomalies and exclude them from the defined population.
An exception is a study by Valla (1986). He examined
a sample of 45 French exporting manufacturers and their
165 export marketing organizations in four European

0148-2963/02/$ – see front matter D 2001 Elsevier Science Inc. All rights reserved.
PII: S 0 1 4 8 - 2 9 6 3 ( 0 0 ) 0 0 1 5 1 - X
158 B. Petersen, L.S. Welch / Journal of Business Research 55 (2002) 157–162
countries (Italy, UK, West Germany, and Sweden). In 120
cases, firms used one of five types of operating modes:
(1) export via home-based sales force; (2) export via sales
branch; (3) export via local sales agent; (4) export
through an export group subsidiary; and (5) export via
own sales subsidiary. In the remaining 45 cases (27%),
combinations of these modes were used. Valla explained
this ‘‘important finding’’ as ‘‘mode addition’’ behaviour
by the French firms.
1.2. Studies of specific operation modes
In a number of studies of specific operation modes,
multiple mode phenomena emerge quite strongly. For
example, Brooke’s (1985) research on management con-
tracts indicated that they are mainly used as part of broader
foreign market servicing strategies (see also Sharma, 1983;
Welch and Pacifico, 1990) and foreign licensing has been
found to be used often in association with joint ventures
and other forms of foreign direct investment (Contractor,
1981; Luostarinen and Welch, 1990). Franchising opera-
tions in foreign markets are carried out often through other
modes such as joint ventures, wholly owned subsidiaries,
or master licensing arrangements (Welch, 1990). Recent
research on international franchising by Danish clothing
firms indicates how much a move into franchising depends
on prior and continuing non-franchising activities and
operations, including foreign direct investment in upstream
areas such as subcontracting and wholesaling, and later in
downstream retailing (Petersen and Welch, 2000). It is
surprising that, given this clear indication of multiple
modes being used, the issue has not been discussed to
any great extent in the other streams of literature.
Fig. 1. Different types of multiple mode operations.
1.3. Internationalization studies
To our knowledge, only two studies of operation mode
sequences (or ‘‘establishment chains’’) have reported
mode combinations in individual markets, i.e. Young
and Hood (1976) and Clark et al. (1997). The compre-
hensive study by Clark et al. (1997) revealed that so-
called ‘‘mixed mode’’ shifts, i.e. mode (or modes) added
to an existing mode, accounted for 18% (36) of all mode
changes recorded (203). Nine different mode combina-
tions were observed, involving five modes: exporting,
licensing, joint venture, sales subsidiary, and manufactur-
ing facilities. The most common mode combination was
licensing and joint venture (10 instances).
2. Classifying multiple modes
The extent of mode combinations depends, in part, on
how ‘‘mode’’ is defined, in particular how broad the
categories are. The entry mode literature reveals a wide
range of mode classifications. For example, contrast the
six categories in Hill’s (2000) IB textbook with that of
Luostarinen and Welch’s (1990) 20 different modes. The
large number of modes in the latter book results from the
authors’ extended classification of various types of for-
eign subsidiaries by type of operation.
A firm may combine modes to enter or develop a given
foreign market in several ways, ranging from unrelated
activities to a closely co-ordinated total business package.
More specifically, we can identify four forms of multiple
modes: unrelated, segmented, complementary, and compet-
ing (see Fig. 1).
 B. Petersen, L.S. Welch / Journal of Business Research 55 (2002) 157–162
2.1. Unrelated modes
Unrelated modes occur when a firm uses more than one
mode in a foreign market, but there is no connection
between their uses within that market. This may reflect
the operations of a firm that conducts business across
different industries or markets. Thus, the operations of
large, diversified multinationals in a foreign country are
likely to be handled by different business units of the same
firm. The Norwegian multinational Norsk Hydro’s opera-
tions in India are an example of this. Five of its product
divisions, using different market servicing modes, operate
relatively independently (Tomassen et al., 1998). Of course,
if business units are the unit of analysis instead of firms as a
whole, no mode combinations are used in this case.
2.2. Segmented modes
A firm may use multiple modes in the same industry or
market to serve different segments. Valla (1986) suggests
segmentation as one explanation of the multiple modes
observed in his study of French exporters: ‘‘In some cases,
[the incidence of multiple modes] means that separate
segments of the customer portfolio are handled differently.
For instance, the largest customers may be handled directly,
while others are handled through distributors or sales sub-
sidiaries’’ (p. 33).
Various bases of segmentation may be used including
geographical regions, households vs. business organizations,
and infrequent buyers vs. repeat buyers. An example of the
latter is a multinational fastfood restaurant chain’s use of
firm-owned outlets at locations where customers tend to be
infrequent buyers (e.g. outlets close to freeways) and fran-
chised outlets where customers are mainly frequent buyers
(Brickley and Dark, 1987). More obvious is segmentation on
the basis of geography. Large countries (both in terms of area
and population), like the USA and the People’s Republic of
China, do not lend themselves to servicing by a single
business unit. Two or more units are often needed to cover
separate geographical regions, and they may not use identical
operation modes. Although they are related through a shared
product concept, foreign operations for different segments
can exist independently of each other. A production sub-
sidiary in North Carolina may operate independently of a
licensee in Oregon producing for, and marketing to, the east
and west of the USA, respectively.
2.3. Complementary modes
Here, multiple modes are used in a combined mutually
supporting way to achieve the firm’s objectives. ‘‘[T]he
objective of such combined approaches is clearly to increase
efficiency, without being based on any specific segmenta-
tion. An example is a firm-employed person based perma-
nently in the country in order to back up an agent or to
complement the marketing action of a subsidiary’’ (Valla,
159
1986, p. 33). Here, the multiple modes focus is on the same
segment, but is concerned with different activities in the
value chain. For example, a multinational corporation
(MNC) may hand over manufacturing in a foreign country
to a licensee, but carry out sales and marketing through its
own sales subsidiary and a clear division of labour exists
between the two operation modes. The separation of man-
ufacturing and marketing in foreign operations is seen most
strongly in the global activities of sports shoe and clothing
firms such as Nike and Reebok.
The division of labour may be subtle. A sales subsidiary
and local franchisees could both be subordinate to the same
principal (e.g. a multinational franchisor) and cater to the
same customer segment, but the franchisees act as retailers,
whereas the sales subsidiary takes care of wholesaling
activities. This kind of vertical division of responsibilities
exists among Danish clothing firms (Petersen and Welch,
2000). Lotus Development’s servicing of the European
market has a similar vertical division of tasks between
subsidiaries and independent dealers. At the beginning of
the 1990s, the European subsidiaries undertook local market
research, customisation of the base spreadsheet program,
training of the dealers’ sales staff, advertising, and dealer
support. The independent dealers were responsible for retail
sales, product demonstrations, and user training and support
(Williamson, 1992).
Even for the same product, a division of labour might
exist because economies of specialization relate to particular
activities and processes rather than to production and
marketing activities as a whole (Dixon and Wilkinson,
1986). Take as an example a home-based, large-scale
production plant and a foreign-based, small-scale produc-
tion subsidiary, both plants producing the same product line.
Some processes are more sensitive to scale economies and
are undertaken in the domestic plant. Other processes can be
run cost-effectively at a low scale and are labour-intensive.
Due to the availability of cheap labor and in order to
minimize value-added tariff payments, these processes are
undertaken by the local production subsidiary. In this case,
the firm exports and produces abroad simultaneously for the
same line of products and the same foreign country. The two
operation modes, exporting and the production subsidiary,
complement each other. Almost by definition, any assembly
plant operation in a foreign country will involve export to
that country (Cavusgil et al., 1993), but sourcing from the
country-of-origin is a common occurrence among ‘‘fully
fledged’’ production subsidiaries as well (Moxon, 1982).
For example, component sourcing from the parent is a
frequently used strategy for European and Japanese manu-
facturing subsidiaries in the People’s Republic of China
(Schroath et al., 1993).
In all these cases, the division of labour necessitates co-
ordination among the different modes; they operate in a
complementary way. Hence, multiple modes are a package
that cannot be easily unbundled. Our focus here is on this
form of multiple modes, with modes working together in an
160 B. Petersen, L.S. Welch / Journal of Business Research 55 (2002) 157–162
integrated, cohesive manner in order to achieve foreign
market objectives.
2.4. Competing modes
In this case, a firm uses more than one mode that compete
with each other. They target the same segment(s) and perform
the same business activities, but the ownership (in-house vs.
outsourcing) and location (home country vs. host country
location) differ. The concept of ‘‘dual distribution’’ found in
the marketing channel literature (e.g. Dutta et al., 1995) may
apply in the choice of international distribution channels.
‘‘Dual distribution’’ enables the manufacturer to exercise
better control over independent dealers by keeping house
accounts served by their own sales people in a dealer’s sales
district. This enables the manufacturer to monitor the effort
and capabilities of the dealers. The two modes, direct sales
and sales via dealers, focus on the same activities and same
segment, and are in direct competition. Competing modes
may also occur when a firm attempts a hostile takeover of an
export market. The existing local distributor might be able to
resist giving up the market, depending on the nature of
existing contractual obligations, but the exporter nevertheless
establishes a wholly owned, local sales organization. A study
of Danish firms indicated that 27% of them retained their
independent intermediaries after a subsidiary had been estab-
lished (Pedersen and Petersen, 1998). Three types of multiple
modes were found: unrelated, segmented, and complemen-
tary, with complementary modes most common.
In some situations, the distinction between these four
types of multiple modes becomes blurred because of
changes in the foreign market and in a firm’s strategy and
organization, e.g. when separate distribution operations in a
market are co-ordinated by a new subsidiary, creating a
more integrated system. The degree of integration or co-
ordination of complementary modes can vary across differ-
ent foreign markets even for the same firm. Even though
unrelated and segmented modes do not support each other,
indirect support might be provided in a more general way,
such as common staff training programs, staff transfers,
sharing of some overheads, sharing of market information
and contacts, and the like.
Mode use is a dynamic process subject to transitions and
modifications such as mode additions or deletions over time.
Changes in mode combinations will occur in ways that are
not reflected in studies of individual mode establishment
chains (Buckley and Ghauri, 1999) and some combinations
may be deliberately temporary, as firms seek to better
position themselves for a move to a preferred form of
operations in the foreign market.
3. The use of mode packages
Mode combinations may appear in a variety of forms in
foreign market operations. In this section, we explore the
roles played by mode combinations in achieving foreign
market outcomes and their impact on the internationaliza-
tion of firms. Particular modes can be used in different
ways to achieve various objectives such as enhancing the
impact of another mode or by achieving outcomes beyond
that possible through a single mode. The existence of
multiple modes in an integrated system does not, of itself,
indicate what roles they are performing and how they are
interrelated. In addition, the role played by individual
modes may change over time and vary across markets
for the same firm. For example, licensing might be the
primary market penetration mode leading to some asso-
ciated export sales, or it could be used in a supportive role
to a foreign joint venture, creating additional income and
facilitating control (Welch, 1985).
The role played by different modes in achieving foreign
market objectives can vary in importance. One mode is
likely to play a primary role in ensuring foreign market
penetration and revenue generation and the remainder plays
various types of supporting roles. These include further
market penetration and revenue generation, or specialised
roles in relation to particular objectives such as technology
transfer or developing a positive political profile (e.g.
through a licensing or technical assistance agreement).
Fig. 2 illustrates a mode package. Here the joint venture
plays the primary role in achieving market penetration and
generating acceptable returns from the foreign operation.
The use of the joint venture might have been driven by
foreign direct investment regulations or by resource con-
straints within the firm. Management contracting and ex-
porting are also used to achieve additional revenue,
management control, and plant utilization objectives. Licen-
sing plays a primary role in ensuring contractual control
over the way the firm’s technology is used and that the
technology is not disseminated elsewhere by the joint
venture partner. The licensing agreement also has the
potential to deliver a degree of control over marketing,
management, and other aspects of the joint venture’s opera-
tions. This was found to be an important part of the use of
licensing by some Australian firms in their Malaysian joint
venture operations, when they were restricted to equity
levels below 50% (Welch, 1985). However, in the Fig. 2
illustration, the exercise of management control in addition
to technology control is strengthened through the use of a
management contract. Clearly, the driving forces regarding
mode packages and the roles of its components parts are
bound to differ as a result of variation in external factors
such as government regulations, market pressures (e.g. the
type and level of competition), the availability of suitable
partners, as well as internal factors, including control,
resource availability, and previous international experience,
including mode experience (Luostarinen and Welch, 1990).
Given the complexity of mode packages, it is difficult
to identify clearly the nature and significance of changes
in mode and mode use over time, which is a key focus of
internationalization research. A switch in roles for a given
 B. Petersen, L.S. Welch / Journal of Business Research 55 (2002) 157–162
Fig. 2. Role variation among modes in a package.
mode within a combination might amount to the equiva-
lent of an overall mode change, such as when a firm
decides to change from exporting to licensing as the
primary market penetration vehicle within an existing
mode package. The firm may have been using the foreign
licensee to assemble exported parts and distribute the final
product. Sometimes, a firm is unprepared to invest in its
own production facility within the foreign market, even
though the licensing arrangement has resulted in inade-
quate servicing of customers. In this situation, the firm
might see the alternative as more fully involving the
licensee in production and service provision, along with
a reduced exporting role for itself. The main structure of
the package remains unchanged, but there is a significant
change in the roles played by different modes.
Adding and eliminating roles within an existing pack-
age add a further complication. An example reported in the
literature is when a foreign sales subsidiary established to
undertake marketing activity in the foreign market is called
upon to assist in purchasing. Research on US firms
indicates that their foreign subsidiaries are the most fre-
quently used resource when foreign sources of supply are
being sought (Giunipero and Monczka, 1990). In a Finnish
study, some use of foreign-based sales subsidiaries for
assistance with foreign purchasing was found, but it was
not a common occurrence (Korhonen, 1990). Such changes
in roles could contribute eventually to expansion into
production in foreign markets, further deepening the firm’s
international operations. But such patterns of development
are not considered when changes in type of mode are the
focus of research.
161
The foregoing discussion of the way modes may be used
within packages indicates the potential diversity of roles
involved in foreign market entry and development. Support-
ing modes may play an important part in achieving parti-
cular outcomes that are of concern to the firm, in addition to,
or in support of those sought through the primary mode.
However, the primary mode has tended to be the main or
only focus of research interest in entry mode and interna-
tionalization studies.
4. Conclusions
We have conceptualized the nature and role of combina-
tions of foreign market operation modes in a firm’s IB
strategy, an issue that has received only limited attention in
the past. Developing this research should play an important
part in extending research on the internationalization of firms
in the new millennium. It is perhaps surprising that the way
foreign operation mode and mode change have been de-
picted in the extant IB literature has been relatively crude and
bears little resemblance to the sophisticated explanations of
the internationalization process which scholars have been
developing. This includes research on issues such as tacit
knowledge, interfirm and interperson networks, inward –
outward international connections, mode switching costs,
and de-internationalization (Welch and Luostarinen, 1993;
Benito and Welch, 1997; Benito et al., 1999; Björkman and
Forsgren, 1997; Athanassiou and Nigh, 1999). An obvious
conclusion, in view of the significance of mode combina-
tions for understanding how firms develop internationally, is
162 B. Petersen, L.S. Welch / Journal of Business Research 55 (2002) 157–162
the need for a more detailed breakdown of mode use by
firms. In order to better understand the change process, it will
be necessary to explore mode shifts within packages, includ-
ing mode additions and deletions, and the way in which they
support each other in the attainment of a variety of interna-
tional market objectives. There is much to learn about the
diverse roles played by different parts of the mode package
over time.
4.1. Managerial implications
While the IB literature provides little guidance regarding
the nature and use of mode combinations, the new millen-
nium is likely to see firms using mode combinations in ever
more diverse and creative ways, as they seek to become
more effective and flexible in global markets. We have
described cases where added revenue, foreign market
penetration, and other benefits can be achieved through
more extensive and appropriate mode packaging. The
analysis demonstrates that adding a mode to an existing
operation, or changing the roles of modes within an un-
changed overall package may be a more effective way of
responding to a change in market circumstances, than
undergoing the disruption and dislocation of a complete
mode switch. It also assists in maintaining knowledge, staff,
and network assets developed through a pre-existing mode
arrangement. At the same time, there is a danger that firms
become too narrow and fixed in the range of modes they
employ. Studies show a relatively high degree of concen-
tration in mode use (Calof, 1993) and there is a risk of
becoming locked-in to a particular mode. An operation
mode that may have been used at first by chance becomes
the mode best understood, or one bad experience means
that a particular operation mode is locked out. In general,
therefore, a major task for the internationalising firm is to
ensure a high level of awareness and knowledge among key
staff of the full range of operation forms and their potential
to be packaged and used in ways that strengthen the process
of foreign market penetration.
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