New perspectives on the internationalization of service firms

Citation

Rammal, H. and Rose, E. (2014), "New perspectives on the internationalization of service firms", International Marketing Review, Vol. 31 No. 6. https://doi.org/10.1108/IMR-09-2014-0309

New perspectives on the internationalization of service firms

Article Type: Editorial From: International Marketing Review, Volume 31, Issue 6.

Introduction

Services represent the dominant economic sector, in terms of employment, for most developed economies, and many emerging ones as well (World Bank, 2014). Historically, service offerings have primarily been focussed on domestic markets; however, technological advancements and reductions in trade barriers have encouraged the internationalization of service firms. Although increasingly critical to global business, the internationalization of services remains under-researched, with academic work lagging far behind practice.

One of the triggers for internationalization in the service sector has been the increase in the provision of services through information technology-based virtual platforms. This development has allowed firms to reassess the nature of their service offering, and, in some instances, has made it possible to trade services by introducing greater separation between the processes of production and consumption, thereby reducing the constraint of simultaneity that is a key feature of service delivery. Despite these developments and the rapid growth of the sector, though, rather little is known about internationalization processes in the service sector or the barriers faced by service firms in the process of delivering services across borders.

Internationalization in the service sector

With some exceptions, including Japanese trading companies (sogo shosha), the internationalization of services is a relatively recent phenomenon. Historically, the activities of service firms have been focussed primarily on consumers in the domestic market, and international ventures were often the result of service-sector firms following their manufacturing clients into new markets (e.g. Grnroos, 1999; Lievens and Moenaert, 2000; Yu and Terpstra, 1988). However, technological advancements, and the reduction of barriers as a result of liberalization of the sector, have allowed service firms to be more proactive with respect to accessing international markets.

The manner in which these firms enter foreign markets is influenced by the nature of the service being provided. Soft services, in which production and consumption occur relatively simultaneously (e.g. medical services and many other personal services such as transportation and tourism), are typically viewed as internationalizable via contractual entry modes, such as licensing and franchising, or through foreign direct investment (FDI); in contrast, the production and consumption processes of hard services (e.g. software development or on-line education) can be decoupled, making them more readily exportable (Erramilli, 1991, 1992). Ekeledo and Sivakumar (2004) noted similarities between foreign market entry behavior for manufacturing and hard services, but clear differences between manufacturing and soft services. Of course, hard and soft services are not mutually exclusive, leading to consideration of services as a continuum from quasi-manufacturing to pure (e.g. Chase and Tansik, 1983)[1]. Moreover, many goods include intangible aspect (services) and many services have some tangible components, blurring the distinction between goods and services. The fact that many service-related activities can be performed through contractual or collaborative relationships also creates complex ownership strategies with respect to internationalization (e.g. Ball et al., 2008; Pla-Barber et al., 2010). Managers are thus faced with the need for rather sophisticated decision making, involving fine slicing of activities and efforts to optimize location allocations at the level of the activity (Buckley and Ghauri, 2004).

The decoupling of the production and consumption of services has, in some cases, been achievable due to the advances in technology, especially the widespread use of the internet. For example, banking services were traditionally viewed as requiring interpersonal interaction with clients; thus, banks provided their services through a large network of physical branches. However, the introduction of electronic banking that offers services using automated teller machines, internet, and smartphones has made it possible for consumers to have remote access on-demand banking services. Such developments have contributed in huge increases in service-sector FDI. According to United Nations Conference on Trade and Developments World Investment Report, in 2013 the announced greenfield FDI in services was valued at US $385 billion, while cross-border mergers and acquisitions (M&As) in sector were valued at US $155 billion (UNCTAD, 2014). These service-sector international investments exceeded those in the manufacturing sector, where greenfield projects and M&As were valued at US $258 and US $126 billion, respectively (UNCTAD, 2014).

Of course, technological advances do not explain everything. The General Agreement on Trade in Services (GATS) treaty of 1995 gave new impetus to the liberalization of the service sector. The treaty, which was signed under the Uruguay Round of negotiations that led to the establishment of the World Trade Organization, aimed to provide a platform through which services could be part of the free-trade discussion, including a consideration of issues such as mutual recognition of skills and experience between countries. GATS classifies the supply of services and market access conditions under four modes (Konan and Maskus, 2006):

• Mode 1: cross-border supply covers the flow of services from the territory of one member state into that of another member state. In Mode 1, the service provider does not leave its home territory, and services are provided virtually.

• Mode 2: consumption abroad is when a consumer moves into another the territory of another member state, in order to obtain a service. Under this mode, the service provider does not leave its home territory, but the consumer travels to the providers country. Key Mode 2 services include tourism and higher education.

• Mode 3: commercial presence involves a service supplier of one member state establishing a territorial presence in another member state, in order to provide a service. Mode 3 includes the service providers opening a subsidiary or a representative office in another member country.

• Mode 4: presence of natural persons occurs when a person from one member state enters the territory of another member state, to provide a service. When service provider firms or independent professionals utilize fly-in, fly-out options, moving temporarily to the customers home territory to deliver a service, this is Mode 4.

Despite extensive negotiations, though, efforts to liberalize international service-sector trade under the GATS treaty are still in their infancy. With the lack of progress on the Doha round of talks (Hoekman, 2011) and, in the absence of any binding agreement, countries that are signatory to the GATS treaty retain the option to decide for themselves which services and delivery will be gradually made accessible to providers and professionals from other countries. Complications are rife. For example, even if a country permits the Mode 4 mode of supply, governments have the option, in order to protect domestic service firms and professionals, to restrict the movement of professionals beyond national territories through the lack of mutual recognition of educational qualifications and experience of foreign professionals and requirements related to the holding of country-specific professional body qualifications (Findlay and Rammal, 2010).

Emerging markets

Another rapid development in emerging economies has also provided new opportunities for internationalization in the service sector. While the percentage of the population employed in the service sector tends to be lower than in developed economies, much of the economic liberalization in emerging markets during the last few decades has been achieved through the sale of state-owned service-sector assets, which has resulted in increased inward FDI and greater competition (UNCTAD, 2014). The ongoing opening of these markets offers opportunities for service firms to internationalize, using their experience and knowledge to serve new groups of consumers. However, these opportunities are also accompanied by a number of challenges for service providers.

While, as highlighted earlier, improvements in technology have allowed the decoupling of production and consumption for some services, allowing them to be packaged and traded more readily, the use of technology is not as widespread in emerging economies and the supporting infrastructure may not be fully developed. Therefore, service providers targeting emerging markets may be more restricted in their use of technology- and telecommunication-based supply options, such as those associated with the GATS Mode 1. For example, banking had become a relatively hard service in most developed countries, remains more of a soft service in many emerging economies. The scope of the distinction becomes clear when considering services-related data for the 15 most populous countries in the world. As shown in Figure 1, service-sectors share in value-adding activities, as a percentage of GDP, is at least 50 percent in many of the most populous emerging economies. However, for most of these countries, employment in the sector remains below the 50 percent level (World Bank, 2014). It may be that, as purchasing power in these large emerging countries continues to grow, consumers will access more personal services; this would, of course, lead to increases in employment and the sectors contribution to GDP. Also highlighted in Figure 1 is the disparity between internet access in developed and developing countries. Even in India, which is known for its important role in various aspects of the information technology sector, from software development to service provision, there are only 13 internet users per 100 people (World Bank, 2014). This low level of technology adoption by consumers in emerging markets undoubtedly serves to restrict the cross-border supply options available to service firms.

Figure 1 Service sector in the 15 most populated countries (for the year 2012)a

In addition to technology, social, cultural, and economic factors also represent important considerations for service-sector firms intending to operate in emerging markets. Literacy levels, consumer demographics, income levels, cultural beliefs, and social structure differ across countries, and the distinctions between emerging and developed economies can be stark. In particular, greater cultural and institutional distances between the service providers home country and the target market generates a stronger need for adaptation and learning, in order to provide high-quality service that meets customers needs in various markets (Cavusgil et al., 2013; London and Hart, 2004); arguably, this is even more critical for services than for the manufacturing sector, given more extensive provider-customer interaction in the delivery of services.

About this special issue

Despite the importance of services to the global economy, there is a great deal that we need to learn about the cross-border activities of this sector. The four articles in this special issue of International Marketing Review, representing a mix of theoretical and empirical perspectives, provide unique insights and new perspectives on the internationalization of service firms.

The paper by Peter rberg Jensen and Bent Petersen utilizes the perspective of value creation logics (Stabell and Fjeldstad, 1998) to develop a theoretical framework to explain how service firms approach international markets, in terms of both form and pace. Consideration of value creation logics, which combines aspects of marketing (customer focus) and strategic management (resource focus), offers new insights into how and why service-sector firms internationalize.

In the next paper, Pervez Ghauri, Misagh Tasavori, and Reza Zaefarian consider the context of service-sector firms that internationalize to base of the pyramid markets, focussing on corporate social entrepreneurship. Using case studies of three Europe-based multinational corporations (MNCs), the authors argue that engaging non-government organizations through a network of relationships can help the MNC to learn about specific market needs and assist in the development of a positive image for the MNC in the target market.

In the third paper, Alex Mohr and Georgios Batsakis consider determinants of internationalization speed, in the context of the retail sector. Building on the resource- and knowledge-based views of the firm and using panel data pertaining to 144 international retailers from a range of home countries, this study finds that both intangible assets and international experience are important for rapid internationalization.

The final paper in the special issue, by Jos Pla-Barber, Cristina Villar, and Fidel Leon, utilizes a knowledge-based perspective to assess internationalization in the context of soft services, considering the role of resource-augmenting and resource-exploiting strategies in a quantitative analysis using data from the Spanish global hotel industry. The findings suggest that cultural distance is a critical factor for resource augmentation, and that firms with stronger brands are more likely to employ resource-augmenting modes in the early stages of internationalization.

We would like to express our gratitude to John Cadogan and Tansy Fall, of International Marketing Review, the reviewers, and the authors for making this special issue a possibility. We hope that this it will provide some much-needed impetus for further research on the internationalization processes of service-sector firms.

Reviewers for the special issue

We are extremely grateful to the following colleagues, who were so generous with their time and expertise, and whose suggestions were crucial in assisting the authors to develop their ideas:

Dr Hussain G. Rammal - School of Commerce, University of South Australia, Adelaide, Australia

Professor Elizabeth L. Rose - Department of Management, University of Otago, Dunedin, New Zealand and Department of Management and International Business, Aalto University, Espoo, Finland and Indian Institute of Management, Udaipur, India

Note

1. Similarly, an overlap exists between services and manufacturing (e.g. Chowdhury and Miles, 2006), as many manufacturing firms offer and rely heavily on the service aspects of their businesses.

References

Ball, D.A., Lindsay, V.J. and Rose, E.L. (2008), Rethinking the paradigm of service internationalisation: less resource-intensive market entry modes for information-intensive soft services, Management International Review, Vol. 48 No. 4, pp. 413-431

Buckley, P.J. and Ghauri, P.N. (2004), Globalisation, economic geography and the strategy of multinational enterprises, Journal of International Business Studies, Vol. 35 No. 2, pp. 81-98

Cavusgil, S.T., Ghauri, P.N. and Akcal, A.A. (2013), Doing Business in Emerging Markets, Sage Publications Ltd, London

Chase, R.B. and Tansik, D.A. (1983), The customer contact model for organizational design, Management Science, Vol. 29 No. 9, pp. 1037-1050

Chowdhury, S. and Miles, G. (2006), Customer-induced uncertainty in predicting organizational design: empirical evidence challenging the service versus manufacturing dichotomy, Journal of Business Research, Vol. 59 No. 1, pp. 121-129

Ekeledo, I. and Sivakumar, K. (2004), International market entry mode strategies of manufacturing firms and services firms: a resource-based perspective, International Marketing Review, Vol. 21 No. 2, pp. 68-101

Erramilli, M.K. (1991), Entry mode choice in service industries, International Marketing Review, Vol. 7 No. 5, pp. 50-62

Erramilli, M.K. (1992), Influence of some external and internal environmental factors on foreign market entry mode choice in service firms, Journal of Business Research, Vol. 25 No. 4, pp. 263-276

Findlay, C. and Rammal, H.G. (2010), Australia-European union trade in services: the case of professional services firms, in Chan, T.S. (Ed.), Academy of International Business-South East Asian Regional Conference Lingnan University, Ho Chi Minh City, Vietnam

Grnroos, C. (1999), Internationalization strategies for services, Journal of Services Marketing, Vol. 13 No. 4, pp. 290-302

Hoekman, B. (2011), The WTO and the doha round: walking on two legs, World Bank, Washington, DC, available at: https://openknowledge.worldbank.com/handle/10986/10075

Konan, D.E. and Maskus, K.E. (2006), Quantifying the impact of services liberalization in a developing country, Journal of Development Economics, Vol. 81 No. 1, pp. 142-162

Lievens, A. and Moenaert, R.K. (2000), Project team communication in financial service innovation, Journal of Management Studies, Vol. 37 No. 5, pp. 733-766

London, T. and Hart, S.L. (2004), Reinventing strategies for emerging markets: beyond the transnational model, Journal of International Business Studies, Vol. 35 No. 5, pp. 350-370

Pla-Barber, J., Sanchez-Peinado, E. and Madhok, A. (2010), Investment and control decisions in foreign markets: evidence from service industries, British Journal of Management, Vol. 21 No. 3, pp. 736-753

Stabell, C.B. and Fjeldstad, .D. (1998), Configuring value for competitive advantage: on chains, shops, and networks, Strategic Management Journal, Vol. 19 No. 5, pp. 413-437

UNCTAD (2014), World Investment Report 2014. Investing in the SDGs: An Action Plan, United Nations Conference on Trade and Development, Geneva

World Bank (2014), Database, available at: http://data.worldbank.org/ (accessed April 15, 2014).

Yu, C.-M. and Terpstra, V. (1988), Determinants of foreign investment of US advertising agencies, Journal of International Business Studies, Vol. 19 No. 1, pp. 33-46

Further reading

Kundu, S. and Merchant, H. (2008), Service multinationals: their past, present and future, Management International Review, Vol. 48 No. 4, pp. 371-377

Nonaka, I. and Takeuchi, H. (1995), The Knowledge Creating Company: How Japanese Companies Create the Dynamics of Innovation, Oxford University Press, New York, NY

About the Guest Editors

Dr Hussain G. Rammal is a Senior Lecturer in International Business and Strategy, and an Associate Director of the Australian Centre for Asian Business, at the University of South Australia, Australia. He is the Vice President of the Australia and New Zealand International Business Academy (ANZIBA), and the Area Editor for the Journal of Asia Business Studies. His research interests include internationalization of firms, trade in services and governance in MNCs.

Elizabeth L. Rose is a Professor of International Business at the University of Otago, New Zealand. She is also a Visiting Professor of International Business at Aalto University, Finland, and an Adjunct Professor in Business Policy and Strategy at the Indian Institute of Management Udaipur, India. She serves as a Vice President of the Academy of International Business (AIB) and has previously been the President of both the Australia and New Zealand International Business Academy (ANZIBA) and the Association of Japanese Business Studies (AJBS). With research interests that include various aspects of internationalization, particularly in the service sector, she serves on various editorial review boards and is a Senior Editor for the Asia Pacific Journal of Management. Professor Elizabeth L. Rose is the corresponding author and can be contacted at: mailto:elizabeth.rose@aalto.fi