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Choice of foreign
Choice of foreign market entry market entry
mode in service firms mode
Anders Blomstermo and D. Deo Sharma
Stockholm School of Economics, Stockholm, Sweden, and 211
James Sallis
Department of Business Studies, Uppsala University, Uppsala, Sweden Received February 2004
Revised October 2004
Accepted August 2005

Abstract
Purpose – The purpose of this study is to examine the relationship between foreign market entry
modes and hard- and soft-service firms. The paper investigated which foreign market entry modes
service firms opt for, and if this is influenced by systematic differences between types of service
industries. A secondary purpose is to test the generalizability of the research findings from
manufacturing sector to service sector firms.
Design/methodology/approach – Our sample consisted of 140 Swedish service firms. These firms
were investigated using a mailed questionnaire survey, and logistic regression analysis was used for
testing the hypotheses.
Findings – The statistical analysis shows that, in general, soft-service firms are much more likely
than hard service firms to choose a high control entry mode over a low control entry mode.
Furthermore, as cultural distance increases, the likelihood of this choice increases even more.
Research limitations/implications – The implications are that while hard service suppliers can
learn from the experience of manufacturing firms going abroad, soft services are unique. Given the
importance for soft-service suppliers to interact with their foreign customers, they should opt for a
high degree of control over their foreign market entry mode. In future research on foreign market entry
mode selection in service firms more attention should be given to social processes that exercise control.
Originality/value – The findings enhance knowledge on foreign market entry by service firms.
Keywords Market entry, Foreign trade, Service industries, Sweden
Paper type Research paper

Introduction
There is a growing interest in researching the internationalization process of service
firms (Aharoni, 1993; Aharoni and Nachum, 2000; Andersson, 2002; Bouquet et al.,
2004; Dawson, 2001; Godley and Fletcher, 2001; Li, 1995; Lindbom and von Koch, 2002;
Nachum, 1999; Ochel, 2002; Roberts, 1999), and in the last decade, research on how
service firms enter foreign markets has accelerated. Frequently these studies are
industry specific, for example, hotel industry (Gannon and Johnson, 1997; Littlejohn
and Roper, 1991), retailing (Andersson, 2002; Burt et al., 2003), technical consultancy
(Sharma and Johanson, 1987), financial industry (Grosse, 1997), and tourism (Björkman
and Kock, 1997). However, as noted by Clark et al. (1996), for international services

The authors would like to thank the Jan Wallander and Tom Hedelius Research Fund for
International Marketing Review
supporting our research. Vol. 23 No. 2, 2006
Anders Blomstermo was an Associate Professor at the Stockholm School of Economics. He pp. 211-229
q Emerald Group Publishing Limited
published extensively in international journals and books. Tragically, he died during the writing 0265-1335
of this paper. His input was invaluable and we miss him greatly. DOI 10.1108/02651330610660092
IMR many issues await addressing. Contractor et al. (2003) state, “. . . there is little
23,2 research on the growth and internationalization of service firms. . . (p. 9),” and point out
“. . . there are substantial differences among different types of services . . . (p. 9).”
Thus, we observe a number of important gaps in the literature. First, our knowledge is
deficient on which foreign market entry modes service firms apply, and similarly, on
target market selection. Next, it is also important to investigate if there are systematic
212 differences within service industries in foreign market entry mode selection. Finally,
are the internationalization theories and models developed for manufacturing
industries applicable to firms in service industries? Or, is the internationalization
process of services so unique that there is a need to develop separate theory to explain
the internationalization of service firms?
Service firms may enter foreign markets using a variety of entry modes, for
example, exports, licensing, joint ventures, or establishing a subsidiary abroad. The
choice of foreign market entry mode is critical and related to control. Control is crucial
as it ensures achievement of the ultimate purpose of the organization. Also, control is
the single most significant factor that determines both risks and returns, the amount of
relational friction between buyers and sellers, and ultimately, the performance of the
investment abroad (Barkema et al., 1996; Barkema and Vermeulen, 1998; Khoury,
1979). Control over foreign market entry mode allows service firms to supply timely
and good quality services to international clients, which protects reputation. Therefore,
research concerning control and entry mode for internationalization of services is
important. More research is also needed, as results obtained from manufacturing firms
may not necessarily generalize to service firms (Bell, 1995; Erramilli and Rao, 1990,
1993; Sampson and Snape, 1985; Sharma and Johanson, 1987).
The purpose of this paper is twofold. Primarily we aim to improve our
understanding of the foreign market entry mode decision by service firms. We
investigate which foreign market entry modes service firms opt for, and if this is
influenced by systematic differences between types of service industries. A secondary
purpose is to test the generalizability of the research findings from manufacturing
sector to service sector firms. We develop hypotheses, which we test with empirical
data on service industries from Sweden. The paper, thus, contributes to theory
development in the field of internationalization processes of service firms.
We start with a review of the service literature on foreign market selection and entry
mode selection. A distinction between hard and soft services is made. Four general
hypotheses are developed, methodology and data are presented, and then the empirical
results are presented and discussed. Finally, managerial and theoretical implications
are addressed.

Hard and soft services

As stated earlier, services are varied and within sector differences between services
are large. We make a distinction between hard and soft services[1]. We selected
this typology for two main reasons. Firstly, there seems to be a tradition to use the
distinction between hard and soft services to investigate the internationalization
process of service firms. In the past, among others, Erramilli (1991), Erramilli and Rao
(1990), Ekeledo and Sivakumar (1998), Hellman (1996) and Majkgård and Sharma
(1998) have applied this typology in their research on the internationalization process
of service firms. Moreover:
 The hard/soft service classification scheme meaningfully reduces the large diversity of the Choice of foreign
service sector and uncovers useful insights about international entry modes that extend
beyond individual service industries (Ekeledo and Sivakumar, 1998, p. 278). market entry
mode
The use of the hard/soft services distinction also allows us to compare our research
findings with results of other researchers in the field, thus increasing the
generalizability of our findings. In order to understand this distinction we need to
discuss services and their characteristics. 213
Services are defined as:
. . . an activity or series of activities of a more or less intangible nature that normally, but not
necessarily, take place in interactions between the customer and service employees and/or
physical resources or goods and/or systems of the service provider, which are provided as
solutions to customer problems (Grönroos, 1990, p. 27).
An analysis of this definition shows that services are characterized by intangibility, and
inseparability of production and consumption, which, in turn, are related to perishability
and heterogeneity. These four characteristics are central to the analysis of the
international operations of service firms (Aharoni, 2000; Bouquet et al., 2004; Bradley,
1995; Cowell, 1992; Kotler, 1999; Palmer, 2001; Shostack, 1977). Intangibility entails that
there is no physical product to act as a catalyst to bind international business units and
business partners together. This gives rise to a greater need for internal marketing and a
stable partner relationship. Intangibility also affects perceptions of service quality.
For many internationally marketed services a decoupling of production and
consumption is feasible (Erramilli and Rao, 1993; Sampson and Snape, 1985). Many
services, however, are delivered in real time, implying that both the supplier and
customer must be present during performance of the service (e.g. management
consulting, medical treatment, and education). There are important implications of
simultaneous production and consumption. Because of inseparability, many services
cannot be exported (Root, 1987). Customers may demand specific adaptations and
information exchange to suit local requirements in foreign markets (Edvardsson, 1988).
Services with a high degree of intangibility and buyer-seller interaction frequency, and
simultaneous production and consumption, are location-bound and must be available
in-full from the day of foreign market entry (Anand and Delios, 1997; Carman and
Langeard, 1980; Vandermerwe and Chadwick, 1989). Physical display is often
impossible, and demonstration risks giving the service away. Because services are to a
large degree experience-based and dependent on individual perceptions in time and
space, they are difficult to evaluate before and even after consumption, thus it is
difficult to perform quality control in traditional ways (Darby and Karni, 1973). With
customer as co-producer, service outcomes are highly variable, making provision of
service guarantees difficult (Nayyar, 1993). Finally, because many services cannot be
stored, buffering demand fluctuations through holding inventory is impossible.
Hard services are those where production and consumption can be decoupled. For
example, software services and architectural services can be transferred in a document,
a diskette, or some other tangible medium. They can often be standardized, making
mass production feasible. With soft services, where production and consumption occur
simultaneously, decoupling is not viable. The soft-service provider must be present
abroad from their first day of foreign operations. As Palmer and Cole (1995) note,
suppliers of soft services are an integral part of their product, requiring higher control
IMR over the production process. For example, hotels, management consultancies, and
23,2 hospitals require local proximity of service providers and service buyers.

High vs low control entry modes

Foreign presence can take the form of:
.
a high control mode (e.g. wholly owned subsidiary, majority owned subsidiary,
214 etc.); or
.
a low control mode (e.g. licensing, different types of contractual relationships, etc.).

High control entry modes demand more resource commitment abroad, and the
foreign-going firm is exposed to a higher degree of uncertainty. Low control modes
require a more limited resource commitment, thus reducing the uncertainty exposure of
the foreign-going firm. The high control entry mode offers the highest mode of
integration/control, whereas low control entry modes, such as cooperative agreements,
offer the lowest (Anderson and Gatignon, 1986; Erramilli and Rao, 1993; Vandermerwe
and Chadwick, 1989). Our discussion of high-low control entry mode is summarized in
Table I.
High control entry modes may be preferred in order to build up personal
relationships, conduct on-site research, and adapt to the needs of the foreign buyers
and markets (Hastings and Perry, 2000). Zahra et al. (2000) reported that high control
foreign market entry modes are more conducive to fast technology learning. As firms
gain experience they gain confidence, gain a better estimate of risks and opportunities,
and opt for high control entry modes. High control entry modes are also preferred when
brand name value is high (Klein and Leffler, 1981). Firms opt for low control entry
modes and low resource commitment when they are exposed to risk, or when the
demand conditions are uncertain (Gatignon and Anderson, 1988; Kim and Hwang,
1992). Given the necessity for customizing soft services to client needs, which requires
more experiential knowledge of foreign markets and foreign clients, soft-service firms
are more likely to opt for high control foreign market entry modes. Consequently:
H1. To enter a foreign market, soft-service firms are more likely to choose a high
control entry mode than hard service firms.

Foreign market selection and entry modes

Research on service firms shows that the process of going abroad is slow and gradual.
The behavioral internationalization process models explain the gradual

Relational
Entry mode Form Control friction Commitment

Wholly owned Subsidiary High Low High

subsidiary
Partly owned Minority/majority ownership, High/moderate Low/moderate High/moderate
subsidiary affiliates, etc.
Contract, alliances Relationship Moderate High/moderate Low
Table I. Market Exports Low High Low
Characteristics of firms
entering foreign markets Sources: Anderson and Gatignon (1986); Erramilli and Rao (1990, 1993)
internationalization process of firms, and are a relevant starting point for our Choice of foreign
investigation of service internationalization. As our point of departure, we use the market entry
u-model by Johanson and Vahlne (1977). We do so because the u-model is quite general
and theory driven (Andersen, 1993)[2], and it is one of the most frequently cited models mode
(Edvardsson, 1988; Eriksson et al., 1997; Lovelock, 2001).
The behavioral internationalization process models are based on the work by
Aharoni (1966) and Cyert and March (1963), and view foreign market entry as a 215
reactive, incremental learning process. In the process models, the cause-effect
relationship runs from knowledge accumulation to internationalization of firms. Based
on the theory of the growth of the firm by Penrose (1959), a distinction is drawn
between objective and experiential knowledge. Objective knowledge is a type of public
good readily available to any firm, whereas, experiential knowledge is firm specific and
accumulated by being active in the market. The internationalization process of firms is
driven by a firm’s experiential knowledge. A firm’s foreign market entry is explained
as a process of increasing accumulation of experiential knowledge about business
partners, and of committing human, technical, and administrative resources.
Experiential knowledge is important in the detection of opportunities and risks
(Chang, 1995; Kogut and Singh, 1988; O’Grady and Lane, 1996), because market
research is often not a feasible option since firms find it difficult to conduct effectively
in international markets (Ayal and Zif, 1979; Denis and Depelteau, 1985).
The behavioral internationalization models argue that a lack of knowledge
about foreign markets creates uncertainty (Aharoni, 1966). Firms inexperienced
in international markets are less likely to know how to evaluate foreign contexts.
They tend to overstate risks and underestimate return on international markets
(Davidson, 1980). This has consequences for the selection of foreign market entry
mode. In manufacturing industries, foreign market entry mode may be characterized in
the initial years by indirect exporting, followed by establishing a part or wholly owned
subsidiary (Johanson and Wiedersheim-Paul, 1975). Gatignon and Anderson (1988)
observed an increasing propensity to select wholly owned subsidiaries as experiential
knowledge increased. Davidson (1983) found that prior experience of producing in a
market is positively related to a firm’s preference for wholly owned subsidiaries.
Daniels et al. (1976), on the other hand, detected a propensity to move to licensing
and contract-based entry modes with increasing experiential knowledge abroad.
Stopford and Wells (1972) and Shetty (1979) reported that less experienced firms
preferred wholly owned subsidiaries. Evidence from service firms in international
markets is scant. In the hotel industry, firms such as Best Western and Holiday Inn
showed no movement from contract- to ownership-based entry modes (Littlejohn and
Roper, 1991). In a recent study by Majkgård and Sharma (1998), they showed that
software firms moved to licensing with increasing foreign experiential knowledge.
Although somewhat contradictory, the majority of the evidence suggests that firms
with high foreign market experience seem to prefer high control foreign market entry
modes (Hörnell et al., 1973; Johanson and Wiedersheim-Paul, 1975; Kogut and Singh,
1988). Consequently, we hypothesize:
H2. The greater the previous foreign market experience, the more likely service
firms will choose a high control entry mode than a low control entry mode.
IMR Earlier, we argued that hard services with a relatively high degree of tangibility
23,2 and low demand for physical interaction between producer and customer could be
exported or licensed. Today it is even possible to export software development services
and accountancy services via links and satellites from, for example, India to the US.
Conversely; soft services, where production and consumption occur simultaneously,
are difficult to export (Carman and Langeard, 1980; Erramilli and Rao, 1993). To
216 supply timely and good quality services to international clients, and in order to protect
reputation (or brand), soft-service providers must interact with clients and adapt
offerings to individual client needs. If this interaction takes place through a third party,
as opposed to a subsidiary, the loss of control may result in more relational friction.
Relational friction may develop due to divergent interests of firms, differences in
business and organizational culture, and misunderstandings or misinterpretations.
For example, some third parties may simply try to appropriate the greatest share of the
“pie,” despite that the size of the “pie” may be grown through more cooperation and
less friction (Jap, 2001). Thus, presence abroad through a high control entry mode may
reduce the relational friction generated by dissimilar partners (Barkema et al., 1996;
Barkema and Vermeulen, 1998; Khoury, 1979). Therefore, we hypothesize:
H3. To reduce relational friction, service firms are more likely to choose high
control entry modes than low control entry modes.
In the behavioral internationalization process models cultural distance is an important
factor when determining which foreign markets to enter (Bilkey and Tesar, 1977;
Eriksson et al., 1997; Majkgård and Sharma, 1998). Firms with little foreign market
experience prefer markets at a short cultural distance. This is due to the fact that a
firm’s existing experiential knowledge is less relevant in culturally dissimilar
environments. The empirical findings are, however, contradictory. On the one hand,
Hörnell et al. (1973), Johanson and Wiedersheim-Paul (1975), Nordström (1991) and
Kogut and Singh (1988) found that firms prefer to enter foreign markets that are
culturally similar to the domestic market. Vernon (1966) observed a gradual move from
culturally familiar to the less familiar markets. On the other hand, research on
born-global firms (i.e. firms that are active in foreign markets from their inception
(Sharma and Blomstermo, 2003)) shows that this need not be the case (Knight and
Cavusgil, 1996; Oviatt and McDougall, 1994). Born-global firms may start
internationalization with countries at a large cultural distance from the domestic
market.
With regard to control, findings from manufacturing industries are conflicting. For
example, Davidson (1983) observed that US manufacturing firms resort to joint
ventures and licensing to a lesser extent in markets at small cultural distances. The use
of licensing and joint ventures increased in markets that were dissimilar to the
US market. Goodnow and Hansz (1972) and Kogut and Singh (1988) found that
US firms move from ownership to non-ownership-based foreign market entry modes as
they move away from culturally similar markets.
Findings with respect to service industry firms are also contradictory. Erramilli
(1991) found that as service firms internationalize they increasingly enter culturally
distant markets. Terpstra and Yu (1988) and Perry (1990) found that advertising firms
prefer culturally similar markets. Erramilli and Rao (1993) found that US-based
service firms start their foreign market entry in countries at a short cultural distance.
On the other hand, Sharma and Johanson (1987) found no evidence that Swedish Choice of foreign
technical consultancy firms first enter markets at a small cultural distance. Majkgård market entry
and Sharma (1998) found that through domestic operations, firms occasionally
establish strong network ties with internationally active firms. Such firms are client mode
followers, and as such, may start their internationalization process at a long cultural
distance. Andersson (2002) reported a similar finding for channel intermediaries.
Although the empirical findings are contradictory, services are unique and service 217
firms do often start the internationalization process in countries at a long cultural distance,
as with client followers (Majkgård and Sharma, 1998). Cultural distance inhibits the flow
of information between buyers and sellers. Presence abroad through a high control entry
mode may buffer the consequences of culturally distant markets. Hence:
H4. The greater the cultural distance between the investing firm and the country
of entry, the more likely service firms will choose a high control entry mode
over a low control entry mode.

Methodology
Churchill’s (1979) approach to questionnaire development was used. We began our
research with a review of the internationalization literature for service and
manufacturing firms. Thereafter, we conducted 71 qualitative interviews with
managers in service firms that had international operations. The managers had direct
responsibility for international operations, and we usually interviewed one to three
managers per firm. Interviews typically lasted about two hours. The purpose of these
interviews was to seek knowledge on various aspects of the internationalization
process of service firms, their selection of foreign markets and entry modes, and how
the internationalization process started. No pre-formulated questions were provided to
the respondents, thus they were free to describe in their own words their firm’s
internationalization process.
In the next stage, results of the interviews were combined with findings from
previous research and the literature review to develop a questionnaire to collect
empirical data. An initial draft of the questionnaire was tested in an interview situation
in a pilot study with 11 Swedish service firms with international operations.
Respondents within each firm completed the questionnaire, and were subsequently
interviewed about their responses. After revisions, the questionnaire was mailed out to
our sample. Except for the dichotomous variables, all of the questions were
close-ended, using five-point Likert scales ranging from “not at all important” to “very
important.” The questionnaire was in Swedish.

Sample
Since, there was no adequate sampling frame of the international operations of
Swedish service firms, we compiled a list from trade registers, business newspapers,
and industry branch registers. In all, 774 Swedish service firms with international
experience were identified and included in the mail survey. We mailed the
questionnaires with a cover letter to the firm president asking them to please have the
most competent person respond. In all cases, as expected, this was either the president
or a vice-president with the firm. We sent follow-up letters and made telephone
reminders. A total of 73 questionnaires were returned as undeliverable and 49 of the
firms neither had nor were preparing international operations, leaving an actual
IMR population size of 652. From this, 409 questionnaires were received from presidents
23,2 and vice-presidents engaged in international operations, giving a response rate of
63 percent (409/652). A total of 47 questionnaires were not usable because of missing
values and we filtered out small firms (less than 20 employees). The size limitation was
imposed to assure that respondents came from formal organizations as opposed to, for
example, family operated companies where routines may be highly idiosyncratic.
218 Formal organizations are often assumed to have hierarchies, division of labor,
subgroups, and other characteristics that are best captured by imposing a size
constraint (Weick, 1987). This reduced our effective sample to 140 service firms.
Sample size is a rather controversial issue, with rule-of-thumb suggestions ranging
from a minimum five observations per independent variable, up to a minimum 20
observations per independent variable (Hair et al., 1998; Hosmer and Lemeshow, 2000).
In our case we have five independent variables, giving a ratio of 28-1, far exceeding the
recommendations, without being so large as to make the model excessively powerful.
Within the sample there is a broad representation of sectors (Table II). Group sizes on
the dependent variable were reasonably balanced, with high control accounting for
43 percent of the sample, and low control accounting for 57 percent of the sample. If group
sizes vary widely, the larger group has a disproportionately higher chance of classification
(Hair et al., 1998), which must be taken into account when comparing the hit rate to the base
model. The hard-soft variable was also fairly balanced with 61 percent hard services and
39 percent soft. The oldest service firm in the sample was started in 1905, and from about
1920 onward there was an even, but growing number of firms being established. Firm size
ranged from 20 to 27,000, with a median size of 82. The average and median experience
with international operations was approximately 30 years.

Measure development
As stated earlier, our goal is to contribute to the development of theory on the
internationalization process of service firms. Consequently, in developing our
measurements, to the extent possible, we have relied on existing and generally
accepted measures for our variables. Following Churchill (1979), through background
research we established the domain of the constructs, then from our interviews and
previous scales generated a sample of items, which we then edited based on further
testing. References are included in the discussion of individual scales.

Variable
Friction Experience Culture Size
Scale
Frequency 1-5 Years 0-7 Number of employees

Lawyers 11 2.7 40 2.6 83

Architects 11 3.1 35 2.6 264
Computer software 23 3.3 25 1.9 318
Data processing 13 2.8 25 1.7 226
Accounting 11 2.6 25 2.4 576
Table II. Education consultants 4 4.1 25 1.9 255
Average industry Management consulting 15 3.2 25 1.1 329
characteristics by Engineering consultants 42 Missing 40 3.0 260
variable Other consultants 10 3.5 25 1.3 4,960
Dependent variable Choice of foreign
Entrymode is conceptualized as a dichotomous decision between a low control entry market entry
mode (coded 0), and a high control entry mode (coded 1). Our scale is based on previous
research (Anderson and Gatignon, 1986; Erramilli and Rao, 1993; Vandermerwe and mode
Chadwick, 1989). As per Table I, high control involves some degree of ownership,
whereas low does not.
219
Independent variables
Hardsoft is a dichotomous variable coded 0 for hard and 1 for soft. Scales were based
on research studying the internationalization process of firms (Ekeledo and
Sivakumar, 1998; Erramilli, 1990, 1991; Hellman, 1996; Majkgård and Sharma, 1998).
Examples of hard services are computer software and data processing, architecture,
and miscellaneous engineering services. Soft services include lawyers, accounting,
education, and management consulting. The decision of group membership was based
on the feasibility of decoupling production from consumption (Erramilli and Rao,
1990).
Relational friction was measured with three questions reflecting that it is both easier
and cheaper to adapt to clients in high control relationships. We based our scales on
previous research (Barkema et al., 1996; Barkema and Vermeulen, 1998; Jap, 2001; Khoury,
1979). The coefficient a was 7.734, indicating that the scale is reliable (Nunnally, 1978). The
responses were summed to form a single indicator. The items were (translation):
.
it is easier to work with an owned subsidiary than with a cooperative partner;
.
an owned subsidiary adapts services to local circumstances easier than a
cooperative partner; and
.
an owned subsidiary adapts services to local circumstances more cheaply than a
cooperative partner.

Experience was conceptualized as the firm’s previous experience in international

markets. Previous experience in foreign markets is a frequently used measure for
experience in internationalization and export research, for example, Bilkey and Tesar
(1977), Cavusgil (1980) and Erramilli (1991). It was operationalized as the number of
years since the first assignment abroad. It was measured as an ordinal level variable
(i.e. in groups of years like 1970-1974) for two reasons. First, relatively few Swedish
service firms went abroad prior to 1970 (33 percent in our sample). Second, being
historical information, managers were unsure of precisely which year the firm started
foreign operations. Asking for more precision may have resulted in a large number of
missing values.
Cultural distance was operationalized in line with Hofstede’s (1980) cultural index.
Hofstede’s indices were transformed into a composite index based on the cultural
distance of each country from Sweden (Table III). Using Kogut’s and Singh’s (1998)
formula:
X
4
CDj ¼ {ðI ij 2 I is Þ2 =V i }=4
i¼1

where, CDj, cultural distance from Sweden to country j; Iij, index for cultural dimension
i of country j; Vi, variance of index of dimension i; s, indicates Sweden.
IMR
Country Index value
23,2
Denmark 0.19
Norway 0.20
Netherlands 0.36
Finland 0.73
220 East Africa 2.52
USA 2.63
South Africa 2.74
Great Britain 2.79
Ireland 2.83
Spain 2.88
France 3.13
Germany 3.20
India 3.23
Switzerland 3.36
Taiwan 3.41
Hong Kong 3.51
Singapore 3.55
West Africa 3.65
Arab countries 4.00
Italy 4.09
Belgium 4.12
Portugal 4.23
Peru 4.24
Austria 4.91
Malaysia 5.10
Table III.
Cultural distance index Sources: Kogut and Singh (1988); Majkgård and Sharma (1998)

The deviations were corrected for differences in the variances of each dimension and
then arithmetically averaged. The index imposes a weighted scaling method based on
the index variance where no measurement error can be expected to correlate with the
other variables because they are independent and reduce the significance of the
statistical relationship (Kogut and Singh, 1988).

Control variable
Size is an important variable and has been investigated in several studies of export and
foreign market entry (Bonaccorsi, 1992; Calof, 1994). It was measured as the number of
employees.

Logistic regression equation

To test our hypotheses we used logistic regression, which is common in studies related
to entry mode choice (Davidson and McFetridge, 1985; Gatignon and Anderson, 1988;
Kim and Hwang, 1992; Kogut and Singh, 1988). Logistic regression is recommended
when:
.
the dependent variable is dichotomous;
.
there are qualitative and quantitative independent variables; and
.
the underlying assumptions of multivariate normality may not be met (Hair et al.,
1998).
The logistic regression equation we tested was: Choice of foreign
Y ¼ b 0 þ b1 X 1 þ b 2 X 2 þ b3 X 3 þ b4 X 4 þ b5 X 5 þ e market entry
mode
where, Y, entry mode (high control entry mode-low control entry mode); X1, hard-soft
services; X2, relational friction; X3, experience; X4, cultural distance; X5, size of firm;
e, error.
221
Results
Using maximum likelihood estimation, logistic regression predicts the probability of
an event occurring, in this case foreign market entry mode. Good model fit is indicated
by a significant model x 2 statistic and an insignificant Hosmer-Lemeshow x 2 statistic,
which is the case for this model (Table IV) (Hair et al., 1998). For the sake of
completeness, R 2 is not recommended for assessing the fit of a logistic regression
model (Hosmer and Lemeshow, 2000).
The classification accuracy is measured by the hit-rate compared with naive and
random models. The naive model is simply the accuracy if all observations were placed
into the largest group in the sample, which in this case is 57 percent in the low control
group. The goal of logistic regression, however, is to accurately place members into
the correct group. This means that, against the odds, it places members in the
smaller group as well. To compensate for this, the random model is calculated as
a 2 þ ð1 2 aÞ2 ; where a is the proportion in group 1 and a 2 1 is the proportion in
group 2 (Hair et al., 1998). In our case this yields 0:432 þ ð1 2 0:43Þ2 ¼ 0:51; meaning
we want a hit rate higher than 51 percent for the smaller group (random model), and
57 percent for the larger group (naive model) (Morrison, 1969). Referring to Table V, the
present model performs very well in this respect. The low control hit rate is just over
87 percent, and the high control hit rate is just over 69 percent, thus far exceeding
either base model.
The Wald statistic indicates the significance of each estimated coefficient, providing
tests for individual hypotheses. The summary of coefficients is promising (Table VI).
The hard/soft variable is significant and the correct sign ðB ¼ 1:725; p ¼ 0:014Þ as is
the cultural distance variable ðB ¼ 0:638; p ¼ 0:009Þ: Relational friction ðB ¼ 20:532;
p ¼ 0:118Þ; and experience ðB ¼ 20:455; p ¼ 0:053Þ; are the wrong sign, however,
neither variable is significant. The control variable, size, is not significant ðB ¼ 0:000;
p ¼ 0:471Þ:

Model x 2 22.206 (df ¼ 5; p ¼ 0.000) Table IV.

Hosmer-Lemeshow x 2 11.800 (df ¼ 7; p ¼ 0.107) Assessing the model

Predicted
Low control High control Correct (percent)

Observed Low control 34 5 87.2

High control 8 18 69.2 Table V.
80.0 HIT rate
IMR The results can be interpreted as follows. H1 and H4 are supported, whereas H2 and
23,2 H3 are not. The model fits the data well and has very good predictive accuracy. The
exp(B) is the antilog of the b coefficient, and is interpreted as the probability of an
event. For example, the exp(B) for the hard-soft variable is 5.611 and the b coefficient is
positive. This means that soft-service firms are about 5 1/2 times more likely to choose
a high control entry mode than hard service firms. Likewise, the likelihood of high
222 control entry mode is nearly two times greater at high cultural distances, or more
generally, the greater the cultural distance, the more likely the service firm will choose
a high control entry mode.

Conclusions and future research

Researchers are showing a growing interest in the internationalization process of
service firms. However, our knowledge on the market entry mode selection by service
firms is still limited. Our goal is to contribute to this stream of research. In this paper
four hypotheses are developed and tested on a sample of 140 service firms. H1 and H4
are fully supported, whereas H2 and H3 are not. These findings have improved our
knowledge on foreign market entry by service firms.
H1 (supported) stated that to enter a foreign market, soft-service firms are more likely
to choose a high control entry mode than hard service firms. This addresses the
secondary purpose of our paper in that it shows that, given that hard services are
equated with physical products and soft services are not, research findings from
manufacturing firms are not always generalizable to services. Our finding supports the
arguments by Erramilli (1991) and Erramilli and Rao (1993) that soft-service firms are
more likely to choose high control entry modes in comparison to hard service firms. This
may be explained in that soft-service firms need more buyer-seller interaction frequency.
Soft service-supplying firms believe that formal organizational arrangements abroad
facilitate the collection and interpretation of information in order to build unique
competence and thereby affect perceived service quality. Foreign presence allows firms
to become familiar with the requirements of foreign buyers, and to manage buyer-seller
interaction, as well as to adapt services to meet buyer’s requirements.
H2 (not supported) stated that the greater the previous foreign market experience,
the more likely service firms will choose a high control entry mode than a low control
entry mode to enter a foreign market. One reason for our finding may be that as service
firms accumulate more experiential knowledge abroad, they develop skills,
administrative processes, routines, and processes to exercise control over their
foreign operations without resorting to high control entry modes. For example, these
firms may be engaged in a wide network of business and social relationships abroad,
which are a source of knowledge on foreign clients and institutions. These firms, thus,

B SE Wald df Sig. ( p) Exp (B)

Hard/soft 1.725 0.698 6.098 1 0.014 5.611

Relational friction 20.532 0.340 2.440 1 0.118 0.588
Experience 20.455 0.235 3.746 1 0.053 0.634
Cultural distance 0.638 0.246 6.739 1 0.009 1.893
Table VI. Size 0.000 0.000 0.520 1 0.471 1.000
Model coefficients Constant 0.907 1.654 0.301 1 0.584 2.476
possess more and better quality information on foreign markets and foreign clients. Choice of foreign
Moreover, based on their accumulated foreign experience, these firms have developed market entry
search routines and screening processes that facilitate selecting the right business
partner and the right business market abroad. More research on this issue is suggested. mode
Research on inter-organizational exchange shows that control over a counterpart can
be exercised by developing dependence. This line of argument is supported by, for
example, Davidson and McFetridge (1984). They argue that experience is negatively 223
correlated with the probability of using a high control entry mode. Also, there are
alternative means to gain control over foreign market operations, such as veto power
over certain decisions. Another possibility is to develop trust in relationships. Thus,
service firms may exercise control over their foreign operations through social
processes such as trust and dependence. In future research, these social processes that
exercise control over a counterpart abroad could be integrated and investigated.
A similar line of reasoning may explain our finding on H3 (not supported). H3
stated that to reduce relational friction, service firms are more likely to choose high
control entry modes than low control entry modes. As just stated, development of
better administrative routines, organizational processes, and informal network
mechanisms, such as trust and dependence, to exercise control over foreign operations
may explain this finding. This is a limitation in our study. Firms may exercise control
over their foreign operations through alternatives mechanisms, e.g. veto rights over
certain decisions. In future research this line of reasoning may be integrated into
developing and testing hypotheses.
As discussed earlier, research on manufacturing firms shows that with increasing
cultural distance firms rely more on low control entry modes. Research on service firms
is less conclusive. Support for H4 suggests that the greater the cultural distance
between the investing firm and the country of entry, the more likely service firms will
choose a high control entry mode over a low control entry mode. Establishing high
control entry modes allows firms to learn about cultural and other institutional factors
abroad. High control entry modes allow more freedom of action for service firms.
Another explanation could be that these service firms aim to learn and accumulate
knowledge that is not available in the domestic or neighboring markets. Investing in
countries at a large cultural distance from the domestic market is an effort to widen
and enrich a firm’s knowledge base. These goals are better served by establishing
foreign operations based on high control entry modes. Another possible explanation
could be that these service firms in going abroad are pursuing the strategy of client
following (Majkgård and Sharma, 1998). Service firms pursuing the strategy of client
following value relationships with their established clients. Their strategy is to supply
more or less the same services to their clients abroad as in the domestic market, and to
nurture and strengthen relationships with their clients. Thus, if clients of these service
firms enter foreign markets at a large cultural distance from the domestic market, the
internationalizing service firms would follow. The internationalizing service firms may
achieve its goals better by establishing a high control foreign market entry mode. This
may allow a relatively less cumbersome transfer of domestic market-based
administrative, marketing, and production routines and knowledge in foreign
markets. These issues need more research.
There are some other notable limitations in our study. First, our analysis provides a
static picture of foreign market entry mode selection. How entry mode choice changes
IMR over time is not considered. Second, our sample consists of only Swedish service firms,
23,2 thus future research could extend the generalizability of our findings by including
other countries in the sample. A third limitation is that our sample consists of
professional service firms with relatively high knowledge content, thus it is important
that future researchers investigate non-professional service firms.
A general conclusion from the above may be that in future research on foreign market
224 entry mode selection in service firms more attention should be given to social processes
that exercise control. In particular, more attention could be paid to the issue of trust. One
suggestion is that researchers may benefit from integrating clues from network theory
and the relational view of firms in developing hypotheses. With respect to our second
purpose, the generalizability of manufacturing industry research to service industries, a
general conclusion seems to be that the fundamental process of internationalization and
foreign market entry mode selection is similar for hard services, yet there are some
unique aspects for soft services. This is in line with the view expressed by Boddewyn
et al. (1987). Thus, in our view, the existing behavioral internationalization process
models are applicable on hard service firms. The differences between soft-service firms
and manufacturing firms are more of degree than in kind.

Managerial implications
Our findings have important managerial implications. First, our paper shows that
there are significant differences between hard and soft-service industries with regard
to the selection of foreign market entry mode. Specifically, managers in soft services
are much more likely to choose a high control entry mode than hard services. It is
important for soft-service suppliers to interact with their foreign customers, thus they
should opt for a high degree of control over their foreign market entry mode. Second,
hard service suppliers can learn from the experience of manufacturing firms going
abroad, because the issues they face in foreign market entry mode selection are very
similar. We caution, however, that starting the internationalization process with
countries at a short cultural distance need not be positive and conducive for the
performance of service firms. Such a strategy may generate a false perception of
security. Managers may overlook problems and under-estimate differences between
the domestic market and foreign markets. A myopia may emerge.

Notes
1. A number of other classification schemes exist, for example, people- vs possession
processing vs information-based services (Lovelock and Yip, 1996), location free professional
services vs location bound customized projects, standardized service packages, and value
added customized services (Patterson and Cicic, 1995), Contact-, vehicle-, asset-, and
object-based services (Clark et al., 1996).
2. Those interested in economic theories may, for example, refer to Dunning (1988) and Buckley
and Casson (1988). In these theories learning by firms is not considered.

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About the authors

D. Deo Sharma is Professor for the Department of Marketing and Strategy at the Stockholm
School of Economics, as well as Coordinator for the PhD program in business administration. His
research interests cover a wide spectrum of areas within marketing, on which he has published
extensively in international journals and in books. E-mail: deo.sharma@hhs.se
James Sallis is an Assistant Professor at the Department of Business Studies, Uppsala
University. He has published in international journals on such topics as product development,
internationalization of services, and organizational learning. James Sallis is the corresponding
author and can be contacted at: james.sallis@fek.uu.se

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