We investigate the effect of operating in service industries, in which separability and human capital intensity factors influence the choice of foreign entry mode and expatriate staffing decisions. To look into this issue, we compared 14,863 instances of Japanese foreign direct investment (FDI) into manufacturing and three service industries (wholesale trade, retail trade, and financial services). Our theoretical and empirical analyses support the assertion that in situations where required capabilities must be developed through (1) close contacts with end customers and (2) high levels of professional skills, specialized know-how, and customization, wholly owned subsidiaries and expatriate staff are preferred. From our results, we draw implications for the FDI literature and offer a novel perspective on the factors influencing the internationalization of service firms.
When expanding internationally, a firm must determine the appropriate mode for entering foreign markets. It must also decide whether to staff foreign subsidiaries with local and/or expatriate managers. Both decisions have important consequences for a firm's competitive advantage in new international markets Edstrom and Galbraith, 1977 and Hill et al., 1990. Indeed, while wholly owned subsidiaries and expatriate staff provide foreign investors with greater control over foreign operations, they also entail substantial resource commitments, such as capital and managerial resources, in the host country that cannot be easily redeployed to alternative locations.
Research on the choice of entry mode and expatriate staffing strategies has expanded considerably for some years, with a traditional focus on manufacturing firms Anand and Delios, 1997 and Li and Guisinger, 1992. However, the increased importance of services in developed economies and the fast growth of foreign investment in the service sector have fueled research on service multinationals Aharoni and Nachum, 2000, Boddewyn et al., 1986 and Dunning, 1989. Still, scholars have debated whether the determinants of foreign entry decisions are the same for service and manufacturing firms. One group suggests that theories of foreign direct investment (FDI) apply to global service firms Dunning, 1989, Miller and Parkhe, 1998 and Yannopoulos, 1983. Another group argues that crucial differences between goods and services make it difficult to generalize FDI theories across industry sectors Boddewyn et al., 1986, Erramilli, 1992 and Gronroos, 1999.
To widen the focus of this debate and enhance our understanding of foreign investment in the service sector, we developed an analytical framework for examining interindustry differences in entry mode and expatriate staffing strategies among multinational firms that compete in services and manufacturing industries. This framework suggests that wholly owned subsidiaries and expatriate staff are preferred by MNCs competing in industries where required capabilities must be developed through (1) high levels of professional skills, specialized know-how, and customization and (2) close interactions with end customers. Empirical tests using a sample of 14,863 entries of Japanese multinational firms entering the Asian, North American, and European markets provide supporting evidence.
