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Drawing on the Eclectic Theory, this empirical study reports a test of the influence of intangibility on the receipt of revenues from foreign markets, and the moderating influence of management international experience. To insure sufficient variance in service intangibility while also controlling for extraneous sectoral and national variables, this study obtained extensive cross-sectional data from U.S.-based manufacturing and services firms in the environmental control industry. For this sample, the findings indicate that tangibility is positively related to the receipt of foreign revenues and to the use of higher control entry mode, supporting the view that intangibility is an important variable for understanding internationalization and value creation.

As the value of international services increases, the need to understand the effect of service characteristics, notably intangibility, on value creation becomes increasingly important. This study reports a test of the influence of intangibility on the receipt of revenues from foreign markets, and the moderating influence of management international experience. The results extend the Eclectic Theory to include intangibility as a necessary variable associated with ownership and internalization advantages, two of the three advantages central to the creation of value in international production. To insure sufficient variance in service intangibility, while also controlling for extraneous sectoral and national variables, this study obtained extensive cross-sectional data from U.S.-based manufacturing and services firms in the environmental control industry. For this sample, the findings indicate that tangibility is positively related to the receipt of foreign revenues and to the use of a higher control entry mode, supporting the view that intangibility is an important variable for understanding internationalization value creation, and suggesting that service characteristics, such as intangibility, are influential variables in determining the success, as well as the patterns, of internationalization. Today, the value of service exceeds the value of manufactured, tangible outputs. Service accounts for more than half of the gross domestic product in all developed countries and in most developing economies Clark and Rajaratnam, 1999 and U.N., 1994b. In the United States, the service sector now employs approximately 82% of the overall work force (Hilsenrath, 2002). As the barriers to trade in services have continued to decrease Campbell and Verbeke, 1994, Dunning, 1993 and U.N., 1994b, the value of international services has also begun to surpass that for manufactured goods Dunning, 1993 and U.N., 1994b. This trend is expected to continue. Freer global trade in services is central to current EU and U.S. trade policies (King, 2003). The delivery of services and products is also increasingly linked. Even when trade is permitted, firms may choose to link, or embody, services with goods to export the services through the merchandise flow, where barriers tend to be lower (Dahringer, 1991). To compete in today's global market, manufacturers often find that they must combine more services with their goods (Ansberry, 2003). Services, such as banking, also rely heavily on physical products, such as automatic teller machines, in that the service is embedded in the product. In fact, there are few pure goods or services Dunning, 1989, Hirsch, 1993 and Shostack, 1977. Interestingly, the research examining the internationalization of services remains notably sparse Boddewyn et al., 1986, Clark and Rajaratnam, 1999, Coviello and Martin, 1999, Dunning, 1993, Organisation for Economic Co-operation and Development (OECD), 1997 and Westhead et al., 2001. Research has labored under the traditional assumption that services are best suited for domestic markets. Despite phenomenally successful international growth in services, like fast food, service have been treated blithely (Palmer, 1985). The relative neglect in the literature regarding the role of services in creating value abroad is surprising because the growth in international services speaks of the importance of services from a managerial perspective. In addition, from a theoretical perspective, services have long been acknowledged to differ from purely manufactured goods Dunning, 1989, Hirsch, 1993 and U.N., 1994b. Pure services are typically modeled as exhibiting four key characteristics: (1) intangibility, because services outputs are not objects; they cannot be seen, touched, tasted, lifted, or dropped, (2) perishability, because service outputs cannot be inventoried, (3) inseparability, because service outputs are produced as they are consumed with the customer participating in the production of the service rather than merely receiving the service, and (4) heterogeneity, because service outputs vary widely (Aharoni, 1993). Because of these differences, by 1980, for instance, the field of marketing recognized the need to develop a body of knowledge related to services (Upah et al., 1983). Similarly, the need to examine how strategy differed for services was acknowledged (Dan, 1978). Of particular interest to researchers has been the greater intangibility of services compared with manufactured goods Aharoni, 1993 and Arvidsson, 1997. For example, in a series of articles, Parasuraman et al. (1988) refine tangibility as a component of service quality. Yet, a decade later, the internationalization of services and the influence of service characteristics on internationalization remained largely unstudied. With the exceptions of banking and financial services, few sectors had been closely examined (Dunning, 1993). Today, our understanding of services, and its internationalization, continues to lag. Services involved in the production of physical goods are not well understood either, although, in the United States today, they constitute approximately 48% of the jobs in the highly globalized manufacturing sector (Ansberry, 2003). In addition, few studies have examined the role that the actual characteristics of services, such as intangibility, play in value creation and the generation of revenues (Cloninger, 2000). This study seeks to help address this omission in the literature. The primary objective of this study is to examine the influence of service intangibility on internationalization and the creation of value. Drawing on the Eclectic Paradigm, this research examines traditional and emerging views regarding the influence of service intangibility on ownership and internalization advantages, two of the three advantages central to the creation of value in international production, and finds that the implications of traditional and emerging views conflict. Although both the traditional and the emerging views suggest that intangibility influences the extent and pattern of internationalization and the resulting revenues earned, the traditional views suggest that increasing tangibility of products and service will increase the ability of firms to create value and, hence, foreign revenues. In contrast, the emerging view suggests that increasing intangibility will increase their ability to create value and, hence, foreign revenues, subject to the moderating influence of management's international experience, a variable that is also examined. This research has important implications for both business theory and practice. First, it extends the Eclectic Paradigm by exploring traditional and emerging views related to the influence of intangibility on internationalization, and the associations of intangibility on the paradigm's ownership and internalization advantages that are central to value creation. Second, it develops and tests theoretical arguments that explain the influence of intangibility on the creation of value as measured by the receipt of revenues from foreign markets. Third, it sheds light on the influence of management experience on revenues when internationalizing intangible products and services. Fourth, unlike many studies that use nonrandom case studies to examine the internationalization of service firms and smaller firms, this study provides empirical evidence based upon a large sample drawn from a comprehensive sampling frame. Finally, it discusses some reasons why the empirical findings for this sample may be more supportive of the traditional view of the influence of intangibility on internationalization. This paper is organized in four sections. In the first section, the theoretical model is developed. Services and intangibility are defined, key studies on the characteristics and internationalization of services are reviewed, theory that associates intangibility with the ownership and internalization advantages of the Eclectic Paradigm as sources of value creation is developed, and hypotheses are presented. In the second section, the sample, data, measures, and the validity of the study are discussed. In developing operational measures, a scale for measuring service characteristics is introduced. In the third section, the analysis of the data and the results are presented. The final section of the paper discusses the findings and the implications of the findings for theory and practices in the context of the study sample. It also states the limitations of the study and lists issues to be explored in future studies.

This research presents what is believed to be the most advanced measure of intangibility available today. More importantly, the results of the regression analyses in this sample lend support for the premise of this research: that service intangibility is an important variable in understanding value creation internationally. The degree of intangibility influences both the revenues earned and the entry modes used. Tangibility (rather than intangibility) was found to be positively related to the receipt of foreign revenues for both of the measures used, foreign sales growth and international sales intensity. These findings tend to support the traditional view about the difficulty of internationalizing services, and suggest that despite the lessening barriers to trade in services, creating value internationally continues to be easier with tangible outputs. However, it may also be possible that one or more of the arguments relating to the emerging view do not hold, or do not hold for the firms in this sample. For example, few of the firms in this sample indicated that their outputs were significantly more innovative than those of their competitors. Thus, the argument that firms with intangible outputs might be pushed to internationalize to avoid appropriation seems less applicable to this sample, or it may be that the intangible assets, in general, are more ambiguous and difficult to copy, decreasing the risk of appropriation. Similarly, this research relied on a sample of young firms because organizational inertia can inhibit the internationalization of established firms (McDougall et al., 1994), and some evidence suggests that newer firms are more likely than old firms to internationalize because of the characteristics of, and demand for, the product (Brush, 1995). Yet, younger firms might lack sufficient resources to adequately support internationalization efforts. One possible alternative for future research would be to examine independent young divisions or groups within larger corporations that have ample resources. Regarding entry mode, intangibility, as predicted, was a significant predictor of entry mode. However, the sign was opposite to that predicted. In other words, firms whose products and services are more tangible (like traditional manufactured goods) are more likely to use a higher control mode. The opposite had been hypothesized because it seemed that firms with intangible products and services would require a higher control mode to maintain quality, reputation, confidential, idiosyncratic, or tacit information, etc., to create value internationally. One interpretation of this finding suggests that firms may be able to maintain control of their intangible products and services without using what are traditionally considered high control entry modes. Most international firms in the sample conduct most of their work “at home”. Few firms had employees living abroad or travelling frequently. Another interpretation of this finding, however, is that firms fail to understand the need for a higher control mode when firm outputs are more intangible. In this sample, firms whose products and services are more intangible receive significantly less foreign revenues. This seems to supports this view, as it implies that firms may not be very successful in exerting control and, as a result, fail to create as much value overseas as firms with more tangible outputs do. However, the lack of adequate resources may be a factor in this finding as well. Perhaps, managers understood the need for control but lacked the resources to maintain personnel or facilities overseas. Supporting expatriate in positions abroad may be too expensive of a proposition for many young firms. Future research should examine these possibilities. In addition, in light of the findings that service intangibility has an important influence on internationalization, the other service characteristics, heterogeneity, perishability, and simultaneity, merit further examination as well. Each may potentially impact internationalization, revenues earned, and the selection of entry mode in some way. For example, heterogeneity among service providers may have a strong influence on exerting control over the service output and, hence, on creating value overseas. Another possibility for future research relates to theoretically and empirically examining and comparing alternative characterizations of service content such as “soft” and “hard”, or by their transportability. For example, one study of the banking industry ranked the transportability of each possible banking output, such as credits cards, prepayment cards, and financial loans, as very good, fair, and good, etc. (U.N., 1994a). In addition, although this research presents what is believed to be the most advanced measure of intangibility available today, future research should also seek to replicate the findings regarding the influence of intangibility on internationalization, and the finding that service intangibility is an independent dimension (from the other service characteristics). Yet, another possibility for future research relates to the continued existence of trade barriers and legal differences. It is possible that it is simply more economically viable to ship manufacturing overseas and to keep higher skilled, intangible service jobs at home (Ansberry, 2003). This may be partly due to the trade barriers that continue to exist in services. Tradability might be more important in sectors with lingering trade barriers. For example, until recently, in the insurance industry, only 7 out of 133 countries allowed foreign companies to operate freely, 35 countries excluded foreign companies altogether, and the other countries imposed various degrees of control (U.N., 1993a). In addition, the legal qualifications and standards for professionals like doctors, lawyers, and accountants continue to vary from country to country (Snape, 1993). For example, in the United States, some states have residency and citizenship requirements for practicing law, and accountants must use U.S. accounting standards rather than international standards that are used in Europe (King, 2003). Similar restrictions might influence the strategic decisions of the engineering and technical services and of the management and business services firms in this sample. Thus, all in all, despite the care taken in designing the research reported here, the emerging view of the influence of intangibility on internationalization can certainly not be ruled out and merits further study. In addition, future research should consider examining service characteristics in terms of different theoretical frameworks and methodologies. This research supports the idea that the Eclectic Paradigm may need to systematically incorporate additional variables, as suggested by Dunning, 1995 and Dunning, 1988. In addition, the internationalization literature has traditionally emphasized the activities of large manufacturing firms. Findings for smaller firms and firms involved in the production of services might be inherently different (Coviello and Martin, 1999). For one thing, managers in smaller firms may lack the experience or the resources to follow a rational decision-making process regarding entry mode (Kumar and Sabramaniam, 1997). In addition, the internationalization concept itself may be too broad a concept to be examined within a single theoretical framework (Coviello and Martin, 1999). For managers, there are several important implications. First, managers, like many researchers, need to broaden their strategic thinking. Internationalization and the creation of value must not be limited by thinking in rather outdated product- or service-oriented terms. The language of practicing managers must begin to be more inclusive and recognize that service intangibility applies to most firm outputs today. Second, managers need to heighten their awareness of the implication that service intangibility has on the issue of managerial control and of the potential impact of service intangibility on firm profitability. The service intangibility of their firm outputs is an important variable. Third, managers need to begin explicitly incorporating the service intangibility of their firm outputs into their decision making. Evidence suggests that service intangibility should be considered when deciding to internationalize and when making entry mode decisions. Finally, the findings related to the control variables suggest that the internationalization of newer ventures may be different from old ventures. Foreign nationals in top management, managers with marketing and new ventures experience, differences in travel undertaken, etc., appear to be influential variables in determining the success in creating value internationally, as well as in determining the patterns of internationalization. This is yet another interesting area for future research.