Internationalisation of Service Firms - Identifying Unique Characteristics' Impact on Entry Mode

COLOGNE BUSINESS SCHOOL (CBS)
Internationalisation of Service Firms
- an identification of service unique
characteristics and their implications for the
choice of foreign market entry mode
Bachelor's Thesis
in partial fulfilment of the requirements for the degree of
BACHELOR OF ARTS (BA)
in International Business
with specialisation in Management Consulting
Tobias Lukaschek
Student-No. 1508019
Advisor: Mrs Zmuda
Cologne, May, 2011

Table of Contents
1. Introduction...........................................................................................................1
2. Services in a World Economy...............................................................................3
3. Factors behind the Growth of Services................................................................ 5
3.1 Market Related Factors......................................................................................5
3.2 Company Internal Motives..................................................................................8
3.2.1 Distinction of Motives......................................................................................10
3.2.1.1 Proactive Motives.........................................................................................11
3.2.1.2 Reactive Motives..........................................................................................12
3.2.1.3 Summary...................................................................................................... 15
4. Services in Today’s Economies............................................................................16
4.1 Common Division of Economic Activities........................................................... 16
4.2 Criticism on Division of Economic Activities....................................................... 17
4.3 Attempts to improve Division of Economic Activities.......................................... 18
5. Services in Statistics............................................................................................ 20
5.1 Service Statistics for Germany........................................................................... 20
5.1.1 Share of Labour Force by Sectors.................................................................. 21
5.1.2 Contribution to Gross Domestic Product.........................................................22
5.2 Service Statistics for Europe and the World.......................................................23
5.2.1 Service Statistics for EU countries.................................................................. 24
5.2.2 Service Statistics for OECD countries.............................................................25
6. Services................................................................................................................27
6.1 Defining Services............................................................................................... 27
6.2 Constitutive Features of Services and their Implications on Marketing..............29
6.2.1 Intangibility.......................................................................................................30
6.2.2 Inseparability................................................................................................... 31
6.2.3 Heterogeneity.................................................................................................. 32
6.2.4 Perishability..................................................................................................... 33
6.2.5 Summary......................................................................................................... 34
7. Borderline between Goods and Services............................................................ 35
7.1 Goods-Service Continuum by Shostack.............................................................36
7.2 Goods-Service Continuum by Graf.................................................................... 38
7.3 Summary............................................................................................................ 39
8. Foreign Market Entry Modes................................................................................40
8.1 Classification Entry Modes.................................................................................41
8.2 Description of Entry Modes................................................................................ 42
8.2.1 Non-Equity Modes...........................................................................................43
8.2.1.1 Exporting...................................................................................................... 43
8.2.1.2 Licensing...................................................................................................... 43

8.2.1.3 Franchising...................................................................................................43
8.2.1.4 Management Agreement..............................................................................44
8.3 Description Equity Modes...................................................................................44
8.3.1 Joint Ventures................................................................................................. 44
8.3.2 Foreign Direct Investments..............................................................................45
9. Foreign Market Entry Mode Selection..................................................................46
9.1 Entry Mode Selection Research.........................................................................47
9.2 Entry Mode Selection for Service Firms.............................................................48
9.2.1 Conceptualisation by Vandermerwe and Chadwick........................................ 48
9.2.1.1 Classification by Clustering.......................................................................... 49
9.2.1.1.1 Sector 1: Low Goods / Lower Interaction................................................. 50
9.2.1.1.2 Sector 2: Medium goods / Lower Interaction.............................................50
9.2.1.1.3 Sector 3: High Goods / Lower Interaction................................................. 50
9.2.1.1.4 Sector 4: Low Goods / Higher Interaction................................................. 50
9.2.1.1.5 Sector 5: Medium Goods / Higher Interaction........................................... 50
9.2.1.1.6 Sector 6: High Goods / Higher Interaction.................................................50
9.2.1.2 Correlation between Clusters and Entry Modes...........................................51
10. Conclusion..........................................................................................................52
11. Appendix.............................................................................................................56
12. Bibliography........................................................................................................61
Table of Figures
Figure 1: Maslow’s Pyramid of Need and its relationship to disposable income
Figure 2 : Stimuli, Motives and Motivation
Figure 3: Development of Labour Force Share by Sectors in Germany
Figure 4: Development of Service Sector’s Contribution to German GDP
Figure 5: Development of Service Sector’s Contribution to GDP in EU countries
Figure 6: Development of Service Sector’s Contribution to GDP in OECD countries
Figure 7: Goods-Service Continuum (Shostack)
Figure 8: Goods-Service Continuum (Graf)
Figure 9: Hierarchical Model of Entry Modes
Figure 10 : Foreign Entry Mode Continuum
Figure 11 : Six-Sector-Matrix
Figure 12 : Service Clusters and Applicable Entry Modes

1. Introduction
Many publications focus on strategies and operational functions and their application in
industries such as agriculture and manufacturing, whereas only few have attempted to
examine services from such a perspective. The reason for this neglect reflects the
complex nature of services, their unclear boundaries and shifting structures, their
intangible outputs, the perceived social and economic significance of services and their
inherent resistance to the direct transfer of manufacturing models of management
(Nankervis 2005: 1).
This textual extract from Nankervis’ publication Managing Services published in 2005
summarises and marks the starting point of my Bachelor Thesis entitled
Internationalization of Service Firms - an identification of service unique
characteristics and their implications for the choice of foreign market entry mode
by which I aim to verify the service sector’s impact in developed countries as well as
identify services’ unique characteristics and their consequences on the choice of
foreign market entry modes for service firms.
My Bachelor Thesis is structured into two coherent and mutually dependent parts, each
led by a hypothesis.
Part One (Chapter 1 - 5) : In his publication Service Is Front Stage from 2006 Teboul
states ”we are all in services now, more or less”. He argues that the tertiary sector
nowadays accounts for the most important sector of economic activities measured in
terms of contribution to gross domestic product. On the basis of his statement I
formulate Hypothesis 1: The tertiary sector has nowadays evolved to be the most
significant economic sector in developed countries’ economies. Part One of my
paper will therefore present the background and evidence to verify Hypothesis 1.
Part Two (Chapter 6 - 9) : In his publication Internationalisierung von Dienstleistungen
[Internationalisation of Services] Bruhn (2005) indicates that the main focus of scientific
research in relation to internationalisation decisions has been on internationalising
goods and has largely neglected service. In this context, Javalgi et al. (2003) question
and doubt the transferability and applicability of these goods-based results to the
internationalisation of services due to their unique constitutive features. On account of
these academics’ statements I formulate Hypothesis 2: Service constitutive features
and their implications call for distinct considerations in foreign market entry
mode selection. Part Two my paper therefore sets out to define services on account of
their constitutive feature and delimit services from goods in both their nature as well as
1

their marketing approach. Furthermore, I aim will explore the choice of foreign market
entry mode for service firms.
For the purpose of compiling this paper I employ books, articles from edited books as
well as article from journals and internet sources in rare cases.
2

2. Services in a World Economy
“The labour of manufacturer fixes and realises itself in a particular subject or vendible
commodity [...] on the contrary, the labour [of service providers] does not fixe and
realises itself in a particular subject or vendible commodity, [it] generally perishes in the
very instant of [its] performance, and seldom leaves any trace of value behind” (Smith
1776: 197).
“Services and other goods, which pass out of existence in the same instant that they
come into it, are of course not part of the stock of wealth”
(Marshall 1890: 47).
In their sentiments both Smith and Marshall discredit the significance and the role of
services in economies by arguing that services account for “unproductive labour” that
does not contribute to the creation of wealth within economies. (Smith 1776: 197, &
Marshall 1890: 47).
However, it is necessary to recognise that Smith and Marshall published these opinions
in the 18th and 19th centuries respectively. Compared with today’s givens the above
statements of these renowned economists are questionable and academics nowadays
would have to disagree with them. This indicates that a change must have taken place
(Desmet & Van Dierdonck 1998: 45).
Following Desmet & Van Dierdonck (1998: 45) “services nowadays account for the
majority of value added in terms of gross domestic product and share of labour force in
“most countries’ economies”.
Over the past decades the global economy has been subject to profound changes that
are generally summarised as globalisation1.
These changes are reflected by the increasing international interrelation of economies
and a modified division of labour amongst economies and companies.
Globalisation is mainly triggered by the combined effects of progressing trade
liberalisation, proceeding deregulation of financial-, goods- and factor markets, an
increasing integration and involvement of developing countries in international trade,
3
1 Globalisation summarises the worldwide movement towards economic, financial, trade and
communications integration and refers to the process of firms establishing activities or operations in other
parts of the world (O’Connell 1999: 145-146).

the existence and spread of modern information- and communication technologies as
well as declining transport- and transaction2 costs (Graf 2005: 2-3).
On the basis of these developments the internationalisation of firms’ operations has
become a guideline to many companies in order to claim their position for markets and
production advantages in the context of international competition.
On account of that, firms can nowadays establish export relationships or position
themselves by means of branches, subsidiaries and/or acquisition of existing
companies abroad (Graf 2005: 1-2).
The significant characteristic associated with globalisation worth exploring in this
context is the global rise of the service sector’s relevance within modern economies.
Many studies conducted by scholars have validated and described these developments
as a conversion from “industrialised- to service societies” in most European countries
(Graf 2005: 2).
4
2 Transaction costs are the expenses in time and resources that are associated with the process of buying
and selling other than the price (McAuliffe 1999: 202-203).

3. Factors behind the Growth of Services
Desmet & Van Dierdonck (1998: 49) state that “it is hard to pinpoint one determining
factor in the service sector’s growth” and they conclude that “a combination of different
factors have all played a part in the sector’s increasing importance”.
These factors can be divided into “market related factors” as Bruhn (2005: 8) coins
them and company internal motives.
3.1 Market Related Factors
Graf (2005: 3) argues that the proceeding reduction and clearance of trade barriers,
that had previously held back the transfer of services, has greatly contributed to the
expansion and increase in services related economic activities.
This is what Bruhn (2005: 5) describes as “deregulation and liberalisation of
international trade” which was heavily lead and globally enforced by the World Trade
Organisation (WTO)3 with the aim of enabling trade of services and by that the
accession of attractive foreign market for service providers, , as he reveals.
The WTO’s efforts resulted in the signing of a multilateral set of rules, the so called
General Agreement on Trade Services (GATS), in 1996, that globally promote the
internationalisation of services (Bruhn 2005: 5-6; & Graf 2005: 3).
Further, Graf (2005: 3) appoints the international “approximation of service related
needs” as a market related factor driving the service sector’s growth globally, while
Bruhn (2005: 7) explains that consequently the international similarity in needs
increases the demand for international services.
Desmet & Van Dierdonck (1998: 49-51) describes that the traditional family structure is
in the process of being increasingly replaced by dual-income families in which both,
mother and father work. This globally spread development reduces available time to
take care of everyday duties. As Desmet & Van Dierdonck (1998: 49-51) summarise
this increasingly forcing people to outsource activities, which they capture as “doing
each other’s laundry”. They further summarises that outsourcing becomes possible
while necessary at the same as economies become wealthier and people within an
economy have higher disposable incomes and less less time.
5
3 The World Trade Organisation (WTO) was founded in 1995 and formed as an independent special
organisation of the United Nations in order to promote and regulate international trade (Gabler 2009).

The correlation between income and demand patterns was observed and
conceptualised, by the statistician Ernst Engels, in what is known as the Engels’ Law
theorem 4.
Engels’ Law predicates that when “people are poor, they have to allocate all or a large
part of their income to the necessities of life - namely food and shelter”. Further Desmet
& Van Dierdonck (1998: 49-51) summarise that as soon as “incomes rise, people
spend more on food and shelter, but not all of the increase is spent on such needs,
since these needs can be saturated” and in effect, “the relative proportion of total
spending on food and shelter diminishes as income increases”. Hence, “instead of
spending their extra income on food, people spend it on clothing, recreation, personal
care, travel and luxury items” (Graf 2005: 3; & Desmet & Van Dierdonck 1998: 49-51).
Maslow’s Pyramid of Needs is a motivation theory based on a hierarchical order of
people’s needs according to their importance. According to Maslow the prioritisation for
human needs is as follows:
1. physiological needs
2. security needs
3. social acceptance needs
4. appreciation needs
5. self-realisation needs
Maslow’s Pyramid of Needs theory suggest that people satisfy needs in the fixed
sequence starting with physiological needs and followed by safety needs, social needs,
esteems need and self-actualisation needs. He also argues that there is a point of
saturation for each need (Pride et al. 2005: 283-284).
6
4 Engels’ Law is an economic theorem that argues that the proportion of income spent on food decreases as
income increases (Braun & Segura 2004: 71).

Desmet & Van Dierdonck (1998: 50) choose to combine both Engels’ Law and
Maslow’s pyramid of needs as an approach to explain the rise in demand for services
in economies.
Figure 1 : Maslow’s Pyramid of Need and its relationship to disposable income
Source: Own illustration following Desmet & Van Dierdonck 1998: 50
Applying both theories in combination, as visualised in Figure 1, it can be read that as
economies become wealthier, meaning that disposable income rises, people are in the
position to meet and saturate their physiological- and security needs. As a result, they
tend to pursue needs further up the pyramid. These needs higher up the pyramid in
return tend to be increasingly service related. This correlation is visualised and
indicates that the relative demand for goods outperforms the demand for services up to
a certain point; as disposable income rises and basic needs are fulfilled, however,
this relation changes and the demand for services, relative to goods, carries more
weight. Hence, the demand for services and the service sector’s relevance increases,
while the relative proportion of income utilised for food and shelter lessens (Graf 2005:
3; Desmet & Van Dierdonck 1998: 49-51).
The social changes that lead to a higher demand for services within societies are
further enhanced by the demographic increases “in life expectancy”. The “greying
population” hikes demand for services such as “nursing homes, health care services
and specialised travel agencies” (Desmet & Van Dierdonck 1998: 49-51).
7

Another factor that impinges on demand for services in the same manner is “the
increasing complexity of life” that has created demand for services such as legal and
tax consultants (Desmet & Van Dierdonck 1998: 49-51).
“Technological progress” such as information- and communication capabilities have
likewise supported the global rise of services by making a contribution to the
“diversification of services available and towards the creation of new services” (Bruhn
2005: 6-7; & Van Dierdonck 1998: 51).
Nevertheless, Van Dierdonck (1998: 49-51) adds without intending to diminish
technologies’ influence that there is no direct correlation between it and “the rising
importance of services”. Instead, he concludes that technological advancements have
rather played a supporting role in the economic gain of services.
3.2 Company Internal Motives
Van Dierdonck (1998: 3-10) argues that firm’s stimuli, motives and drivers to
internationalise business activities are very similar and further he states that “going
international [for companies] is leveraging a competitive asset5” for both manufacturing
and service firms.
Van Dierdonck (1998: 409-410) argues that “companies by nature want to grow” and
points out that a company can achieve growth either by diversification within its
domestic market or by expanding its business activities to foreign markets.
To his statement, Van Dierdonck (1998: 409-410) adds that in many cases growth may
be simpler to realise by selling the same product in a different market as opposed to
broadening a firm’s portfolio by developing and launching different products within the
company’s domestic market.
Nevertheless, Van Dierdonck (1998: 409-410) indicates that growth alone may not be
the only reason for firms to internationalise their business activities.
He concludes that by growing bigger, a firm will also be better able to exploit
economies of scale6 and scope7 and subsequently form competitive advantages over
8
5 An asset is an economic resources owned by a firm. Assets include productive, tangible as well as
intangible items that help generate income (Nickels et al. 2008: 464-466).
6 Economies of scale exists when increasing inputs causes outputs to rise by more than the change in
inputs. Expressed in terms of costs for a single product, the average total cost per unit declines as output
increases when there are economies of scale (McAuliffe 1999: 58-59).
7 Economies of scope exists when a company can produce two or more products at lower cost than by
producing them separately (McAuliffe 1999: 59-60).

its competitors by improving its operations supported also by experiences and
expertise gathered during the process of internationalization.
Hübner (1996: 75-80) choses a more systematic and analytical method to contour a
firm’s motivation to expand its business activities to foreign markets. He argues that
“motives and the the resultant motivation are reason and drive to offer a service [or
good] in foreign markets”. In addition, he states that there is a difference worth while
noting between motives and motivation. He describes a motive as a single reason or
impulse to expand internationally while he points out that the motivation for a company
to internationalize reflects all single motives combined.
In the same vein, Sharma (1991: 50) summarises his empirical study on companies’
internationalization motives by concluding that “no single reason was sufficient to tell
the whole story. It is rather the case that each firm had a number of different reasons
for going abroad”.
Likewise, Czinkota and Ilkka (2004) approve by stating that “in most business activities,
one factor alone rarely accounts for any given action” and that “usually a mixture of
factors results in firms taking a step in a given direction”.
Hübner (1996: 75-80) expands the model-like idea of motives and motivation by a third
dimension. According to Hübner a stimulus is what enables a motive in the first place
and therefore triggers a chain reaction consisting of stimuli, motives and motivation
with regard to a company’s internationalization desire, as illustrated in Figure 2.
Figure 2 : Stimuli, Motives and Motivation
Source: Own Illustration following Hübner 1996: 75-80
9

In return a stimulus towards internationalization itself can be triggered by any internal
or external factor, as Hübner (1996: 75-80) adds.
In principle thus there are internal and external sources that can be understood as
origin of stimuli and motives. These internal and external stimuli can each be broken
down into stimuli that act as a pull-factor like for instance attractive market condition
abroad, whereas stimuli can likewise act as a push-factor such as unfavourable market
conditions in the domestic market or country with reference to a firm’s
internationalization process (Hübner 1996: 75-80).
3.2.1 Distinction of Motives
Hübner (1996: 75-80) believes it to be useful to subdivide motives according to their
unique criteria into practical categories. He suggests that one useful partition is to
subdivide motives into defensive and offensive motives.
In support of this view Dahringer (1991: 5-17) points out the relevance of such a
subdivision into defensive and offensive motives by manifesting that “whether the
motives are defensive or offensive largely determines the firm’s commitment to global
expansion, the resources allocated to such expansion, and the way in which new
markets are entered”.
Scholars such as Czinkota & Ilkka (2004: 225-230) and Hollensen (2007: 42-53) favour
a subdivision that splits motives into proactive and reactive nature.
According to them, such a differentiation illustrates whether a firm proactively searches
for stimuli or whether it reacts to a stimulus once its impulse is powerful enough.
This differentiation yields the understanding that an active search for
internationalization stimuli or motives is often connected to a greater risk tolerance by
the firm (Hübner 1996: 75-80).
Hollensen (2007: 42) states that “proactive motives represent stimuli to attempt
strategy change, based on the firm’s interest in exploiting unique competences or
market possibilities”. In contrast, he describes reactive motives as an indication “that
the firms reacts to pressures or threats in their home market or in foreign markets and
adjusts passively to them by changing their activities over time”.
Czinkota & Ilkka (2004: 226-227) relate proactive motives to proactive behaviour and
reactive motives to reactive behaviour. On the basis of that they frankly conclude that
“proactive firms go international because they want to, while reactive ones go
international because they have to”.
10

3.2.1.1 Proactive Motives
Czinkota & Ilkka (2004: 226-230) and Hollensen (2007: 42-48) agree that proactive
motives are made up of profit and growth goals, managerial urge, technology
competence and/or unique products, foreign market opportunities and/or information,
economies of scale and tax benefits.
Czinkota & Ilkka (2004: 227) describe profit and growth goals as the most stimulating of
all proactive motives to trigger internationalization.
However, Czinkota & Ilkka (2004: 227) and Hollensen (2007: 45) agree that the
forecasted and perceived profitability tends to vary quite often from the profitability
actually generated from foreign market activities.
In addition, the three editors agree that in particular initial profitability can be
considerably low and they raise the issue that, despite thorough planning sudden
influences can drastically change expected profitability even if estimates are based on
careful market evaluation.
Managerial urge is also considered to be a proactive motive to expand a company’s
business activities abroad. Czinkota & Ilkka (2004: 227) and Hollensen (2007: 43)
define managerial urge as “a motivation that reflects the desire, drive and the
enthusiasm of management towards global marketing activities”.
Further the cited scholars point out that managerial urge oftentimes simply reflects
entrepreneurial spirt of continuos growth and market expansion. They highlight the fact
that this desire can be substantially influenced by managers liking the idea of being
part of a company that operates internationally. Besides, working for an internationally
operating firms yields a good reason for international travel (Czinkota & Ilkka 2004:
227; & Hollensen 2007: 43).
Technology competence or a unique product are often considered as one proactive
motive to internationalize throughout literature due to their similarity in reasoning.
Both Czinkota & Ilkka (2004: 227) and Hollensen (2007: 43-44) agree that profitability
issues are similar to those pointed out for profit and growth goals in the sense that real
and perceived advantages may in fact be offset.
Hollensen (2007: 43-44) describes how firms tend to believe their product or service is
unique. Unfortunately, this does not always turn out to be true in the international
market. However, if the firm’s product or service actually proves to be unique and there
is market potential, thus either technology competence or a unique product can
“provide a sustainable competitive edge and result in major business success
abroad” (Hollensen 2007: 43-44).
Provided a firm has a unique competence in its domestic market it may be advisable to
consider the opportunity costs incurring with the internationalisation of their business
11

activities, which often supports the idea of entering foreign markets, since the
opportunity costs of exploiting existing competences abroad may be comparatively low
(Hollensen 2007: 43-44).
Exclusive market information yielding foreign market opportunities is another proactive
stimulus or motive towards internationalization that is worthwhile mentioning in this
context. This motive is comprised of knowledge about foreign customers, market
places or market situations resulting from international research a firm conducted, or
specials contacts a firm may have abroad (Czinkota & Ilkka 2004: 227).
Czinkota & Ilkka (2004: 227) stress the fact that this motive represents a competitive
advantage over competitors that is however transient, since competitors may also
acquire this knowledge or may simply follow the first mover into foreign markets.
Another proactive motive for companies to expand their business activities beyond their
domestic market is the prospect of economies of scale. Czinkota & Ilkka (2004: 228)
describe economies of scale as “a major proactive motivation”.
Hollensen (2007: 44) adds that economies of scale enable a firm to “climb more rapidly
on the learning curve” due to increased outputs and the exposure to international
experiences. Achieving economies of scale through expanding into foreign market is so
desirable for companies, since it does not only yield greater turnover and profit, but in
addition to that, turning over a greater number of goods or service can lead to a decline
in average costs per good sold or per service delivered. Hence, economies of scale
make a firm more competitive domestically and internationally at the same time
(Czinkota & Ilkka 2004: 228; & Hollensen 2007: 44).
Equally, tax benefits are considered to be a motive that proactively encourages
companies to pursue internationalisation opportunities. Czinkota & Ilkka (2004: 227)
acknowledge the relevance of tax benefits and point out that “[tax benefits] have
historically [...] played a major motivating role” to encourage firms to expand
internationally.
3.2.1.2 Reactive Motives
As indicated above there is an existing consent amongst scholars that reactive motives
also contribute to the internationalisation of companies. Reactive motives can be
summarised as influences that cause “firms to respond to changes and pressures in
the business environment” (Czinkota & Ilkka 2004: 228).
Czinkota & Ilkka (2004: 226-230) as well as Hollensen (2007: 42-48) share the opinion
that reactive motives are composed of competitive pressure, domestic market
saturation and size, overproduction or excess capacity, unsolicited foreign orders and
extend sales of seasonal products.
12

Competitive pressure is the prime form of such reactive motives and is characterised
by a company’s fear of losing market share to competitors who expand internationally
and thereby may establish economies of scale which in return may lead to cost
disadvantages to a firm that limits its operations domestically. Equally, it may
strengthen a competitor’s position domestically as well as internationally regarding
aspects such as market share and market presence.
In the same vein, there is a agreement amongst scholars that firms that move first into
a foreign market have a greater chance of capturing market share as opposed to being
in the position of having to win over customers after a competitor with similar or equal
competences has successfully settled in a foreign market (Hollensen 2007: 44).
Czinkota & Ilkka (2004: 228) point out that this understanding also bears the danger of
firms entering the international market “head over heels” when it is becomes evident
that competitors are preparing and beginning to internationalize.
For this reason, Czinkota & Ilkka (2004: 228) emphasise the fact that a “quick entry
may result in a similarly quick withdrawal once the firm recognises that its preparation
has been insufficient”.
Firms may also be forced to consider international expansion if it turns out that their
home market is too small in the sense that there is too little market potential in order to
establish “sufficient economies of scale and scope” enabling a firm to be able to hold its
ground against competitors (Hollensen 2007: 46).
Likewise, a saturated domestic market may lead a company to conclude that an
international expansion is necessary to meet its objectives, whereby market saturation
can be determined either by sales volume or market share.
Besides, goods or services a firm distributes and sells in its home market may also be
at the “declining stage of their [...] life cycle” on which basis companies may opt to
introduce such products in foreign markets that yield greater market potential and
where there are fewer or no competitors in order to sustain their position (Hollensen
2007: 46). In the past there have been cases where the approach of prolonging the life
cycle of a good or a service by expanding into the international market has been
rewarded with great success as opposed to firms “attempting a push-back of the life
cycle process” in their home market (Hollensen 2007: 46).
This is due to the fact that especially developing countries tend to lag behind
developed countries in terms of demands, needs and disposable income so that goods
and services that are declining in demand may be requested in other markets, as
Czinkota & Ilkka (2004: 228) & Hollensen (2007: 46) describe.
13

Overproduction and excess capacity can also act as a reactive motivative that pushes
companies towards entering foreign markets.
A company suffering from incorrectly forecasted domestic demand that has as a result
treasured up inventories above desired levels, may enter foreign markets as Czinkota
& Ilkka (2004: 228) argue. Also they point out that this practise has been historically
relevant because markets abroad oftentimes are not simultaneously affected by
economic downturns and therefrom resulting demand fluctuations.
However, Czinkota & Ilkka (2004: 228) also add that expansion triggered and motivated
by overproduction usually is undertaken on a short terms basis as a “safety-valve
activity” as opposed to a corporate strategy.
According to Hollensen (2007: 46) excess capacity can be a “powerful motivation” to
expand a firm’s business activities abroad in the case that the utilisation degree of a
company’s assets including a firm’s man power is not working to capacity.
Under these circumstances unexploited capacity can be employed to produce goods
and deliver services for or in foreign markets.
Czinkota & Ilkka (2004: 228) present evidence that companies can thereby allocate
fixed costs to a greater number of outputs and reduce costs per good manufactured or
service delivered, besides generating more revenue. As a result this can have a
positive affect that enables companies to offer attractive pricing schemes in foreign
markets in order to quickly gather market share (Czinkota & Ilkka 2004: 228-229; &
Hollensen 2007: 46-47).
Moreover, the increasing global intertwining of economic activities may lead to foreign
orders for a good or service a company originally intended to supply solely within its
domestic market. Out of this circumstances a firm may decide to react to such an
impulse. Amongst scholars such “unsolicited foreign orders” are understood to be
reactive in nature, since companies react on account of an impulse as soon as it is
strong enough and as a result thereof “expand [...] operations
internationally” (Hollensen 2007: 47).
Extended sales of seasonal products are likewise considered to be a reactive motive to
expand business activities abroad. This motive reflects on the fact that there may be
seasonalities in demands that may differ from a firm’s domestic market to foreign
markets. The extended sales of seasonal products may act as a pull factors on
companies that aim to “achieve a more stable demand over a year” (Hollensen 2007:
47).
In the context of stimuli and motivations towards the internationalisation of companies
the concept of geographical and psychological distance is worth while outlining
(Hollensen 2007: 47).
14

Czinkota & Ilkka (2004: 229) highlight that “geographic closeness to the foreign market
may not necessarily translate into real or perceived closeness to the foreign customer”
and further they point out that “cultural variables, legal factors” as well as “other
societal norms” can make a firm realise that foreign markets that are geographically
close, can turn out to be psychologically distant and vice versa.
Also, Czinkota & Ilkka (2004: 229) advise companies that plan an internationalisation to
“begin [...] by entering the psychologically closer markets first in order to gather
experiences before venturing into markets that are [psychologically] farther away.”
In the same vein Czinkota & Ilkka (2004: 229) raise the issue that is is vital to chose
objective measures to determine how close a foreign market is in a psychological
sense to the firm’s domestic market because as they argue “some of the distance seen
by firms is based on perception rather than on reality.”
3.2.1.3 Summary
According to Czinkota & Ilkka (2004: 229-230) an “overall contemplation” of proactive
and reactive motives should include the remark that companies that proved to be
successful in their internationalisation are driven by proactive and internal factors being
either profit and growth goals, managerial urge, technology competence and/or unique
products, foreign market opportunities and/or information, economies of scale and tax
benefits (Czinkota & Ilkka 2004: 226-230; & Hollensen 2007: 42-48).
In this context Czinkota & Ilkka (2004: 229-230) suggest that the difference between a
proactive and a reactive firm can be best summarised by stating that “proactive firms
are more likely to solicit their first international marketing order, whereas reactive firms
frequently begin international marketing activities after receiving an unsolicited order
from abroad”.
This statement takes up and relate well to an earlier quote by Czinkota & Ilkka (2004:
226-227) in which they argue that “proactive firms go international because they want
to while reactive ones go international because they have to”.
15

4. Services in Today’s Economies
”We are all in services now, more or less” (Teboul 2006: 23).
Teboul’s statement makes the conjecture that services play a major role in people’s
lives and today’s economies. Also the way his testimony is phrases is indicative of that
services may not have always played such an important role.
However, Teboul (2006: 4) recognises that prior to “any analysis [of services”], we are
confronted with the complex issue of [a service] definition” in the first place to be in the
position to measure and quantify service activities.
According to Teboul (2006: 4) who refers preliminary to an issue of The Economist from
1985 to define services as intangible products that can be “sold in trade” but “cannot be
dropped on your foot”.
The Economist’s definition rightly hints at the complex nature of service, since services
in fact can vary greatly in terms of their make-up. This poses the question of whether
the definition given by The Economist is actually applicable to all services.
Thus, Tabour concedes with foresightedness that “differences of opinion rapidly
surface” when an all-embracingly correct and applicable definition of services is
attempted (Tabour 2006: 4).
This paper will deal with the issue of defining services in a later chapter. Instead, the
following elaborations will focus on the common division of economic activities for the
purpose of statistical surveys.
4.1 Common Division of Economic Activities
In economics, the idea of subdividing economic activities into three high-level sectors
has established itself and nowadays forms the basis of statistical data all over the world
(Pierenkemper 2009: 134).
The high-level division sub-classifies economic activities into a primary sector that
accounts for “the production of goods directly from natural resources” meaning the
extraction of raw materials and fishing, a secondary sector that “modifies material
goods” being manufacturing and a tertiary sector that summarises “activities which do
not produce or modify material goods” (Illeris 2007: 20).
16

This high-level classification of economic activities was already inherent in the writings
of Adam Smith, Jean-Baptiste Say as well as Karl Marx and was finally entrenched by
Fisher (1935), Clark (1940) and Fournastié (1949) in the form of the ‘three sector
hypothesis’8 (Illeris 2007: 20; & Staroske 1995: 1-17).
The basis for the devision of economic activities is the believe that these three sectors
are idiosyncratic and distinct from each other regarding their production conditions
(Pierenkemper 2009: 134).
.
In more detail, the primary sector combines all industries that are engaged in
production or extraction of natural resources such as crops, oil, ores, agriculture,
forestry, fishery and mining.
The secondary sector summarises all industries that engage in chemical, mechanical
or physical transformation of materials, substances or components into tangible
consumer or industrial goods.
The tertiary sector, also referred to as the service sector, is used as a collective term
composed of economic activities that do not produce material products9 (Pierenkemper
2009: 134).
This subdivision of economic activities is used, inter alia, to illustrate the composition of
gross domestic product (GDP) and share of total labour force by sector in economies to
describe their individual relevance and impact (Tabour 2006: 4-7).
4.2 Criticism on Division of Economic Activities
A question that has been extensively discussed in the literature is whether the three
sectors division constitutes the best high-level classification and division of economic
activities.
This explicitly raises the question of whether the tertiary sector, representing services,
is an appropriate category (Illeris 2007: 19).
Generally, it is regarded to be a problem that the boundaries between the three
categories are undoubtably blurred, especially though it seems to be difficult to draw a
clearcut line between the secondary and tertiary sector (Illeris 2007: 19).
17
8 The three-sector hypothesis is an economic theory which divides economies into three sectors of activity
and predicts their development (Pierenkemper 2009: 134).
9 A product is any physical goods or services that satisfy a want or a need and is therefore used as a
collective term for both goods and services throughout this paper (Nickels et al. 2008: G-17).

However, it is difficult to find characteristics or features which all services and no other
economic activities hold, since the activities aggregated within the tertiary sector tend
to be heterogeneous in nature (Illeris 2007: 20).
Illeris (2007: 20) stresses the fact that it is unavoidable for high-level categories to be
heterogeneous and acknowledges that the high-level categories cannot be all-
embracingly accurate.
However though, other scholars take up the position that the traditional division of
economic activities and especially the concept of services is inappropriate due to the
heterogeneity of business activities accumulated within a sector in particular regarding
the tertiary sector (Illeris 2007: 20).
Nevertheless, Illeris (2007: 21) admits it is rightly argued that manufacturing activities
are and tend to become even more similar to services, while services are becoming
increasingly industrialised or standardised at the same time. This approximation of
good and services, as he points out, further increases differentiation issues.
Despite this criticisms, Illeris (2007:21-22) emphasises on the importance of high-level
classifications and acknowledges that it may be impossible to make them clearcut and
totally satisfactory.
In effect, Illeris (2007: 22) suggest that more homogenous categories must then be
found on lower hierarchical levels.
4.3 Attempts to improve Division of Economic Activities
Due to the above mentioned issues of distinguishing the three sectors of economic
activities clearly and unequivocally from each other, numerous author have suggested
alternative or additional divisions.
Gottmann (1961: 75-80) suggests to subdivide the tertiary sector by extracting
sophisticated and highly qualified services out from the tertiary sector in order to
summarise such services separately in a “quaternary sector.
However, this suggestion had little success and did not prevail (Illeris 2007: 20-22).
18

A similar attempt regarding the methodology was formulated by Porat (1977: 54-63).
Likewise, he suggests to expand the three-sector-model, but by an ‘information sector’
in which he intends to summarise activities that produce equipment for information as
well as services dealing with information.
As it turns out, this attempt met data problems and did not manage to replace the high-
level three sector model (Illeris 2007: 20-22).
Another approach aims to distinguish a separate sector that comprises of creative
activities such as writing and publishing, composing music, creating works of art and
devising computer programs.
Such activities and their consumption by consumers have the character of services, but
their distribution operates via embodiment in medias such as books, newspapers and
records, which have the characteristics of goods. This approach turns out to be equally
unconsidered amongst economist and scholars (Illeris 2007: 20-22).
To summarise the model of structuring the economy into primary, secondary and
tertiary activities remains the widely used and accepted division of economic activities.
It is the basis of statistical data all over the world, despite the sound arguments and
weaknesses there undoubtably are regarding the blurred borderlines between goods
and services (Illeris 2007: 20-22).
Nevertheless, the traditional subdivision of economic activities into three three high-
level sectors has in fact been refined over time by introducing additional lower
hierarchical levels. In the past, international organisations and individual countries have
independently from each other developed individually modified classifications tailored
to best suit their circumstances. Inevitably, this resulted in difficulties regarding the
international comparability of statistical data due to dissent standards (Statistisches
Bundesamt 2008: 7-9, & Statistisches Bundesamt 2009: 6).
However, the increasing international interweavement of economies has created the
need for comparable economic statistics.
Consequently, a system of economic classification was developed in the late 1980s
and early 1990s under the patronage of the United Nations that addresses the need for
harmonisation among statistical standards.
In this context, national points of view had to retire behind the interest of better
comparability. As a result, existing deviations in the way that countries collect and
analyse their economic data are increasingly abolished, enabling accurate
comparability (Statistisches Bundesamt 2008: 7-9, & Statistisches Bundesamt 2009: 6).
19

5. Services in Statistics
Triggered by the outlined effects of progressing technology, increasing labor
productivity, deregulation and liberalisation of trade and advancing globalisation in
effect, the structures within economies worldwide have changed and continue to
change further.
While half a century ago the industrial sector was dominant in terms of employment
and gross value added, the service sector nowadays makes up for the the largest
contribution to gross domestic product and accounts for the highest employment share
in most developed countries.
The increased relevance of the service sector is reflected in official statistics
(Statistisches Bundesamt 2009: 6).
5.1 Service Statistics for Germany
Over the last decades profound structural changes in the German economy have been
recorded.
The tertiary sector has consistently grown in importance, while agriculture, forestry and
fishing (primary sector) as well as the manufacturing sector (secondary sector) have
lost in significance.
The structural changes are reflected in the share of labour force employed in the
service sector as well as the percentage contribution to gross domestic product (GDP)
by the service sector (Statistisches Bundesamt 2009: 6-9).
20

5.1.1 Share of Labour Force by Sectors
Figure 3 : Development of Labour Force Share by Sectors in Germany (1950-2010)
Source: Own illustration following Statistisches Bundesamt 2010
Figure 3 visualises the developments regarding the share of labour force employed by
economic sectors in Germany between 1950 and 2010. From Figure 3, it is can be
read that the tertiary sector accounted for 32,5 % of the labour force’s employment in
1950, while the primary sector made up for 24,6 % and the secondary sector
represented for the largest share of employment in 1950 with 49,9 %.
This distribution has profoundly changed since 1950. As can be read from Figure 3, the
tertiary sector had replaced the secondary sector as the sector with the largest share of
labour force by 1972 and has since expanded its position.
In the same vein, the primary and secondary sector have continuously lost in
significance regarding their share in labour force since 1950.
To specify these developments, it can be interpreted from Figure 3 that the primary
sector decreased by 22,5 % in share of labour force between 1950 and 2010, while the
secondary sector decreased by 25,5 % during the same period.
On the contrary, the service sector’s share of employment rose by 41 % between 1950
and 2010.
21

Taking a closer look at the year-on-year changes regarding the share of labour force
captured by primary, secondary and tertiary sector in Germany for the years between
1950 and 2010, it can be concluded that the primary sector’s share of labour force
decreased year-on-year by an average of -0,4 % with a standard deviation10 of 0,4 from
the mean. This quantifies that the decrease ran steady without any years in the data
set that could be classified as outliners from a statistical point of view.
The development concerning the decrease in the secondary sector’s share of labour
force ran similar in the sense that its development portrays an equally steady course in
decrease between 1950 and 2010. Year-on-year the secondary sector’s share of
employment decreased by an average of -0,3 % with a standard deviation of 0,6 from
the mean.
The tertiary sector’s share of employment, on the contrary, increased steadily for the
period between 1950 and 2010, growing by a year-on-year average of 0,7 % with a
standard deviation from the mean of 0,5 between 1950 and 2010.
5.1.2 Contribution to Gross Domestic Product
Figure 4 : Development of Service Sector’s Contribution to German GDP (1970-2009)
Source: Own illustration following The World Bank 2010a
22
10 Standard deviation (SD) is the average deviation of a set of data from its mean and computed as the
positive square root of the variance (Anderson et al. 2010: 80).

Figure 4 shows the development of the German service sector’s contribution to gross
domestic product in Germany between 1970 and 2009.
It displays that in 1970 the tertiary sector accounted for 48,2 % of the value added and
that by 2009 this share had increased by 24,5 % representing 72,7 % of the gross
domestic product in Germany.
The development regarding the gross value added ran analogous to that concerning
the development of the share of labour force employed in services for Germany in the
sense that the service sector’s contribution to gross domestic product grew likewise
continuously. The steady growth in contribution can be quantified as an year-on-year
average of 0,6 % coupled with a standard deviation of the mean of 0,8 for each
registered year.
Furthermore, it is worth while mentioning that the gross value added in Germany 2007
was more than six times greater than in 1970 (Statistisches Bundesamt 2009: 6).
5.2 Service Statistics for Europe and the World
The economic structural changes and the shift towards services in terms of gross value
added and the employment can also be observed in other European and developed
countries.
For this purpose the following section will outline and describe the developments
regarding the service sector’s growth in terms of contribution to gross domestic product
in EU 11 - and OECD 12 countries.
23
11 The European Union (EU) is economic and political union of 27 european member states that party holds
sovereign and legislative power over member states’ national dealings (EUROPA - Portal of the European
institutions 2011).
12 The Organisation for Economic Cooperation and Development (OECD) is an organisation of 34
international member states that promotes economic growth, coordinates economic policies, trade
liberalisation, foreign trade and aids economic development amongst member states (OECD Publications
2011a & OECD Publications 2011b).

5.2.1 Service Statistics for EU Countries
This section will outline the structural changes accumulated and recorded for EU
countries in terms of the accumulated service sector’s contribution to gross domestic
product across EU countries13.
Figure 5 : Development of Service Sector’s Contribution to GDP in EU Countries
(1970-2009)
Source: Own illustration following The World Bank 2010b
The service sector’s growth within the European Union becomes clear considering
Figure 5, which portrays the developments of the service sector’s contribution to gross
domestic product accumulated across EU countries.
Between 1970 and 2009 the share of the service sector's contribution in EU countries
to gross domestic product grew by 22,0 %. In 1970, the service sector’s contribution to
gross domestic product accounted for 52,7 % of gross value added, while its
contribution reached 74,7 % in 2009.
The service sector’s growth in terms of share of the service sector's contribution to
gross domestic product can be quantified as an average year-on-year increase of 0,6
24
13 Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece. Hungary, Ireland, Italy, Latvia Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal,
Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom (EUROPA - Portal of the European
institutions 2011).

% with a standard deviation of 0,5, which expresses a steady growth with no years that
can be identified as outliners from a statistical perspective.
5.2.2 Service Statistics for OECD Countries
This section will outline the structural changes recorded for OECD member states14 in
terms of the accumulated service sector’s contribution to gross domestic product
across OECD member states.
Figure 6 : Development of Service Sector’s Contribution to GDP in OECD Countries
(1970-2008)
Source: Own illustration following The World Bank 2010b
Likewise, the service sector’s growth appears in the development of the service
sector’s contribution to gross domestic product in OECD countries.
In 1970, the service sector in OECD countries made up for 55,3% of the value added,
while by 2008 this figure had increased by 18,0 % to 73,3 % in total.
25
14 Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany,
Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New
Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United
Kingdom, United States (OECD Publications 2011a).

As Figure 6 indicates, the increase in the service sector’s contribution to gross
domestic product ran consistently with no statistical outliners. This is validated when
considering its year-on-year average growth of 0,5% in combination with a standard
deviation of 0,5 from the mean.
26

6. Services
Services and goods are both considered to be products. However, there are
differences that distinguish goods from services (Nickels et al. 2008: G-17).
In this context, De Pelsmacker & Van den Bergh (1998:79) suggest that services are
unique from goods in their management and marketing approach by arguing that “a
number of distinct characteristics of services [...] determine the rules about their
management, communication and promotion”.
6.1 Defining Services
According to Teboul (2006: 4) who refers to an issue of The Economist from 1985
services can be defined as intangible products that can be “sold in trade, but cannot be
dropped on your feet”.
This deliberately awkwardly formulated definition by Teboul demonstrates that scholars
in general have found it extremely difficult to construct a rigorous definition of services.
Correspondingly, Lewis et al. (1999: 6) argue that “services have traditionally been
difficult to define”. In the same vein, Graf (2005: 42) mentions that “there has been a
debate on service definitions over decades amongst academics”.
Originally, the category of services was a residual that embraced everything that was
not included in the primary and secondary sectors of economies.
This has encouraged attempts to redefine services through identification of their unique
characteristics and features in order to delimit services from primary and secondary
economic activities.
These definition attempts are mainly driven by the increasing significance of services
globally which in effect lead to growing discontent towards defining services with a
negative connotation as residual.
To underpin this endeavour, it should be recapitulated from Part One of this paper that
the tertiary sector nowadays accounts for the most significant of the three high-level
sectors in developed countries in terms of contribution to gross domestic product as
well as in share of labour force (Illeris 2007: 19-25).
In 1960, the American Management Association defined services as “activities,
benefits, or satisfactions which are offered for sale, or are provided in connection with
the sale of goods. (Cook et al. 1999: 319).
27

Quinn et al. (1990: 60) present a more analytical definition that suggests services to
stand for “economic activities whose output is not a physical product or construction,
[but a product that] is generally consumed at the time it is produced, and provides
added value in forms that are essentially intangible.”
Other authors define services as “processes involving customer contact” (Chase 1978:
137-142). Berry (1980: 25) defines services as “a deed, a performance, an effort” in
contrast to goods, which he defines as “an object, a device, a thing”.
Mersha (1991: 391) summarises services as “a bundle of tangible goods and intangible
benefits provided in a particular environment” and Nie and Kellogg (1999: 339)
conclude that “products are possessed and services are rendered, participated in, and
experienced.”
Hill delivers a definition of services that aims to recognise the activities that services
create. He states “a service may be defined as a change in the condition of a person or
a good belonging to some economic unit, which is brought about as the result of the
activity of some other economic unit, with the prior agreement of the former person or
economic unit” (Illeris 2007: 22-23).
However, scholars like Gadrey point out that Hill’s definition of services is restricted to
the relation of the service producer and the service user leaving out services with little
or no relation between the producer its user. Furthermore, Gadrey states that Hill’s
definition of services only relates to the process of a service, neglecting the output of a
service (Illeris 2007: 23-24).
In reaction to his criticism, Gadrey goes on to suggest an alternative definition of
services. He claims that it is applicable to speak of a service “when an organisation A
which own or controls a technical or human capacity sells to an economic agent B the
right to use that capacity for a certain time period in order to produce useful effects on
an agent C or on goods that he owns or for which he is responsible” (Illeris 2007:
23-24).
By means of clarity, Graf (2005: 42) argues that service definition attempts can be
classified into three groups on the basis of the definition’s methodology.
He states that there are so called ‘enumerative approaches’ towards defining services
that aim to define services by presenting examples and illustratrations of services in a
descriptive manner.
Furthermore, he argues that there are ‘negative definitions’ of services that declare
economic activities as services which cannot be clearly identified as primary or
secondary economic activity (Graf 2005: 42-44).
28

Thirdly, he makes the point that there are approaches to define service that choose to
describe services on the basis of their unique characteristics, referred to as
‘constitutive features’ (Graf 2005: 45-50).
Nevertheless, the overall recognition that may be drawn from the above presented
definitions and Graf’s definition subsumption are firstly that services and goods seem to
differ in their nature, secondly that services rely more heavily on customer perceptions,
contact and expectations than goods and thirdly that service outputs are more difficult
to quantify than goods (Nankervis 2005: 8).
However, there is virtually no exclusively satisfactory definition of services that
incorporates all service features without contradicting on other aspects and that
withstands the pace of economic change that dictates constant refinement of the
service definition to accommodate for the ongoing evolution of services (Illeris 2007:
24-25, & Nankervis 2005: 8).
.
With regard to the difficulty of defining services all-embracingly accurately, Bryson &
Daniels suggest not to become too distracted by the search of a clearcut definition of
services and instead accept the fact that there is no holistically, perfectly satisfying
definition of services and acknowledge that there are borderline cases (Illeris 2007:
24-25).
6.2 Constitutive Features of Services and their Implications on Marketing
Services are undoubtably a complicated phenomenon. Unlike manufactured goods,
services cannot be characterised by their amenability to measurement and
quantification (Búrca, Fletcher, & Linden 2004: 290-291, Búrca et al. 2004: 290-292).
Regardless of the fact that there may be no single applicable and satisfying definition
that accounts for all services, there are specific characteristics that marketing theorists
such as Búrca et al. (2004: 291); Bateson & Hoffmann (2006: 28); Boone & Kurtz
(2004: 319) and Bradley (2005: 179) amongst many other academics generally
propose in an attempt to distinguish services from goods by their unique
characteristics:
- intangibility
- inseparability
- heterogeneity
- perishability
29

6.2.1 Intangibility
Intangibility is throughout literature the most cited difference between goods and
services. It refers to the distinction that services, unlike goods, do not always consist of
physical attributes which can be judged by consumers by sight, taste, smell or touch
prior to purchase. Desmet et al. (1998: 6) add that besides their physical intangibility
services can also be “difficult for the mind to grasp” which makes them conclude that
services can also be “mentally intangible”.
Goods such as clothing or furniture can be readily touched or held, whereas services
such as legal advice or a restaurant’s ambience cannot be touched or held neither
before nor after purchase and consumption. As a result, customers essentially buy the
service provider’s promise on the service’s quality and outcome. This brings about the
challenge for service marketing to display and communicate services to potential
customers without the customer being able to objectively judge the service before
purchase. Bateson & Hoffmann (2006: 30) refer to this challenge as the task of
“explaining your product’s merits to consumers”. Also, service providers are exposed to
subjective or deviating opinions of their services’ outcomes which can potentially harm
a service provider’s reputation.Furthermore, as a consequence of intangibility, services
often lack of an entity that can be stored, transported and owned. This can mean that a
service firm cannot build up or store stocks of their services “against periods of high
demand” (Bateson, & Hoffmann 2006: 29). In effect, service providers are somewhat
limited in the number of services they can deliver according to their resources in the
time during business hours. Bateson & Hoffmann (2006: 29) present evidence that “the
inability [of services] to maintain inventories translates into constant supply and
demand problems” and further they argue that the inability to build up inventories
“presents so many challenges to marketers that it has earned its own name -
perishability”. Moreover, services are not patentable due to their intangibility. As
Bateson & Hoffmann (2006: 29) summarise this entails the danger that “new or existing
services may be easily copied”, which leads to the valid assumption that a service
firm’s knowledge and expertise may be hard to keep exclusive. In addition, the
intangibility of services confronts service providers with the challenge of pricing a
service. Bateson & Hoffmann (2006: 30) reveal that a product’s price is typically “based
on cost-plus pricing”, but for most services “there is no cost of goods sold” that can be
clearly determined. Instead, labour costs make up for the majority of incurring costs for
many services (Bateson, & Hoffmann 2006: 30).
In effect, Bateson & Hoffmann (2006: 28) argue that “intangibility is the primary
[constitutive feature of services] from which the other three [generally proposed]
characteristics emerge” being inseparability, heterogeneity and perishability (Boone &
Kurtz 2004: 318-320; Bradley 2005: 178-180; Buckley et al. 1999: 149-150; Desmet et
al. 1998: 4-11; & Illeris 2007: 22-28).
30

6.2.2 Inseparability
The inseparability of production and consumption of services refers to the fact that
many services are at least to some extent supplied and consumed simultaneously,
which leads to the understanding that the process of delivering a service is tied to the
interconnection or even interaction of the service provider and its customer.
The inseparable nature of services oftentimes brings about that the service provider as
well as the customer must be physically present in the same location so that a service
can be delivered.
In contrast to goods that can be produced, sold and consumed in different locations
with or without time intervals between their production and sale; services on the other
hand are often sold before they are produced and consumed at the same time.
This implies not only that the production and consumption of goods and services runs
differently, but also that the process of production and consumption oftentimes cannot
be isolated for services. Bateson & Hoffmann (2006: 32) indicate that this tendency
combined with services’ intangibility results in that service providers become a “tangible
cue” associated with the service. Therefore, the customer’s service assessment is
partly based upon and traceable to the service provider’s “use of language, clothing,
personal hygiene and interpersonal communication skills” besides the service quality
itself (Bateson & Hoffmann 2006: 32). Further they state that the “interaction between
service provider and customer defines a critical incident [...] which represents the
greatest opportunity for both gains and losses in regard to customer satisfaction and
retention”.
Moreover, the inseparability of services holds that a customer is directly involved in the
delivery of a service including its production and consumption, whereby the level of
contact and interaction between service provider and customer can vary greatly
depending on the type of service.
Nevertheless, by interacting with the service provider, the customer “provides inputs
into the service production process” and therefore “plays a key role in the successful
competition of the service encounter”. As a result, the customer can be seen as a
production resource in interaction with the firm’s personnel. It follows that one may
speak of co-production in services between provider and customer (Bateson, &
Hoffmann 2006: 34-36; & Illeris 2007: 22-28).
In the same manner, “the presence of other customers during the service encounter is
[a] defining characteristic of inseparability” of service as Bateson & Hoffmann (2006:
34-36) state. This characteristic is linked to the fact that the production and
consumption of a service oftentimes run parallel and that the service process thereby
becomes a “shared experience” for numerous customers.
31

The implications therefrom boil down to service providers being confronted with the
challenge of “managing different [customers] with different needs within a single service
environment”.
In addition, a challenge that service providers are faced with is to mass produced their
service successfully. That said, it should be recapitulated that “an individual service
provider can produce only a limited supply”. As soon as a service provider is working at
the top of his capacity there is a sudden stop to the number of customers a service
provider can cater to.
However, there is another problem attached to the pursuit of mass production in the
context of services that is linked to the customer’s involvement in the production and
consumption of a service. This is that a customer is required to travel to the service
provider’s location or vice versa depending on what kind of environment and/or
equipment is necessary to deliver a service (Boone & Kurtz 2004: 318-320; Bradley
2005: 178-180; Buckley et al. 1999: 149-150; Desmet et al. 1998: 4-11; & Illeris 2007:
22-28).
6.2.3 Heterogeneity
In many cases the provision of services is embodied in the firm’s personnel, which
makes services prone to volatility in product outcomes and quality and thereby exposes
services to deviations in the consistency from one service transaction to the next.
Academics refer to this as the heterogeneity of services.
The marketing challenges that are revealed from services being constitutively
heterogeneous translate into that services are hard to standardise and that quality
controls are more difficult to conduct and evaluate than in manufacturing services.
This is triggered by the fact that the delivery of a service involves both the inputs of the
service provider and the customer. This cooperation influences the service’s quality,
since human’s performances and behaviours are never alike nor are they retrievable in
a standardised form. Bateson & Hoffmann (2006: 32) even go as far as to say that
“heterogeneity, almost by definition, makes it impossible for a service operation to
achieve 100 percent perfect quality on an ongoing basis”.
Nevertheless, the service quality and its consistency depends heavily on the
professional and social qualifications of the personnel (Boone & Kurtz 2004: 318-320;
Bradley 2005: 178-180; Buckley et al. 1999: 149-150; Desmet et al. 1998: 4-11; & Illeris
2007: 22-28).
32

6.2.4 Perishability
Marketers also consider services to be perishable, which refers to the tendency that
services cannot be stored, inventoried or reserved. Unlike goods that can be stored
and sold at a later date, services that are not sold when they become available cease
to exist. This can be illustrated by thinking of unoccupied airline seats that are not sold.
These not realised sales cannot be inventoried or added to the aircraft during busy
holiday times when extra capacity is needed (Desmet et al. 1998: 4-11; & Illeris 2007:
22-28).
Bateson & Hoffmann (2006: 44) point out that the inability of service firms to build up
inventories “creates profound difficulties for marketing”. Services’ perishability that
brings about the non-existence of inventories makes quality controls for service firms a
lot more difficult than for manufacturing companies which can use sampling techniques
to ensure minimum variability of their outputs.
A manufacturing company that detects goods that does not meet the set quality level
can either alter or scrap the good; service firms do not have this possibility since the
production and consumption often run simultaneous, which rules out the option of
retroactive intervention.
Another challenge to service marketers is that the non-existence of inventories makes
matching supply and demand a major obstacle (Bateson, & Hoffmann 2006: 45-46).
Therefore, Bateson, & Hoffmann (2006: 45-46) point out that “the only way that supply
matches demand is by accident” and that service firms can only refer to
“guesstimation” of demand.
It should be noted that service firms like McDonald’s Inc.15 have managed to inventory
parts of their service. McDonald’s Inc. are able to inventory their hamburgers for a
limited period of time before they are either sold or disposed.
However, a McDonald’s outlet cannot inventory the entire service experience and for
instance save spare capacity on a weekday evening to make use of it during busier
weekend evenings (Bateson, & Hoffmann 2006: 41-44).
33
15 Mc Donald’s Inc. operates more than 32 000 quick-service restaurants in 117 countries worldwide
(McDonald’s Inc. 2011).

6.2.5 Summary
In addition, some academic also point out the issue of ownership in services to
distinguish goods from services. The above given illustration involving seats in an
airline also serves to describe the matter of ownership in services. With many services
the customer solely acquires the right to use, to access or to hire the service.
Oftentimes, a customer does not own anything after a flight in an airline or a meal in
restaurant. As a result, the purchase of a service can result in the ownership of nothing
tangible as opposed to the purchase of a good (Buckley et al. 1999: 149-150).
To summarise it can be pointed out that scholars agree that services by tendency are
of rather intangible nature. Also, academics widely agree that services’ production and
consumption often run simultaneously which means that services by tendency are
rather inseparable.
Besides, there is a consent among scholars that services can often not be stored or
inventoried due to services’ tendencies to cease in existence, which refers to the
perishability that many services hold. Finally, there is also an agreement that services
tend to be heterogeneous in output and quality, while goods are said to be of more
homogeneous nature (Boone, & Kurtz 2004: 318-320, Bradley 2005: 178-180, Buckley
et al. 1999: 149-150, Desmet et al. 1998: 4-11, & Illeris 2007: 22-28).
These differences between good and services, namely intangibility, inseparability,
heterogeneity, perishability are referred to as service constitutive characteristics. For
the sake of accuracy, it is however necessary to clarify that few services in fact display
all these features, although most exhibit more than one.
However, it would be impossible to identify a list of characteristics applicable to all
services with regard to the diverse nature of the service industry (Illeris 2007:27-28).
The overall point that this chapter is aiming to make is that intangibility, inseparability,
perishability and heterogeneity as service constitutive features have implications on a
firm’s marketing approach that are of vital importance to consider, since these
implications can be limiting and yield a number of challenges (Bateson & Hoffmann
2006: 29).
34

7. Borderline between Goods and Services
“While goods are produced, services are performed” (Desmet et al. 1998: 5).
Having characterised distinctive attributes of services such as intangibility,
inseparability, heterogeneity and perishability it could be concluded that services are
different from goods. In support of such a preliminary presumption, Bateson & Hoffman
(2006: 5) provide an equally-preliminary and simplistic definition of goods and services
by stating that “goods are objects, devices or things” and “services are deeds, efforts,
or performances”.
However, it is not quite as simple as that and only few services display all the outlined
features of intangibility, inseparability, heterogeneity and perishability. In actual fact, the
definition of services is even further complicated by the fact that there are few pure
services and few pure goods (Desmet et al. 1998: 6).
In that regard, Bateson & Hoffman (2006:5) argue that it would be very difficult to find a
pure good or a pure service. According to them a pure good would imply that the
benefits received by the consumer contain no elements supplied by services and vice
versa a pure service would contain no element of goods.
For the purpose of illustrating this matter Desmet et al. (1998: 6) refer to the service
characteristic of intangibility by stating that “not all services show the same degree of
intangibility” and further they state that at the same time “few services are 100 per cent
intangible, just as few goods are 100 per cent tangible” (Desmet et al. 1998: 6).
Desmet et al.’s (1998: 6) chain of argumentation indicates that the borderline between
goods and services is crossed by inputs required to produce a good and inputs
necessary to deliver a service.
Many goods ,as Desmet et al., further contribute embody services in their production
and/or distribution; just as many services involve physical goods in their existence. In
fact the amount of service inputs nowadays to produce goods typically represents
70-80 percent of total costs (Bateson & Hoffman 2006:5, & Desmet et al. 1998: 6).
Also, Buckley et al. (1999: 150) point out that “the distinction between goods and
services cannot be viewed as a simple black and white categorisation” and
Nankervis (2005:8) similarly refers to the affiliation of goods and services by arguing
that “we may be moving into an era where goods and services are becoming merged”.
35

7.1 Goods-Service Continuum by Shostack
The recognition and acceptance amongst economist that many services do not function
without the support of goods and vice versa has led several scholars like Mersha
(1991), Cook et al. (1998) and Chase (1978) to talk of a ‘goods-services continuum’.
This idea is traceable to Shostack (1977) who further conceptualised thoughts
originated by Rathmell (1966) into a ‘goods-services continuum’.
Rather than attempting to define service and delimiting them from goods; the ‘goods-
services continuum’ model suggests to perceive good and service along a continuum
that positions goods and services based on their level of intangibility in their existence.
Thereby the continuum maps out and illustrates the combination of tangible and
intangible attributes that make up a product (Beech, & Chadwick 2007: 162; &
Nankervis 2005: 6).
Figure 7 : Goods-Service Continuum (Shostack)
Source: Own illustration following Nankervis 2005: 7
As can be read from the continuum, the area above the horizontal line refers to
intangible components of a product and its production, while the area below the
horizontal line refers to tangible components of a product and its production. The
higher up a product is positioned, the higher the product’s and its production’s
composure of intangible components is and vice versa this methodology applies for the
lower a product is positioned.
This approach can be illustrated by thinking of a meal in a restaurant, which comprises
of both tangible products in terms of food, furnishing and fitting as well as intangible
products such as the experience, the staffing service and the atmosphere, which
Shostack weights as a “balanced entity between goods and services”.
36

To be noted also is that Shostack sets ‘salt’ and ‘teaching’ as extreme endpoints of the
continuum with no or very little complementary components (Nankervis 2005: 7).
The ‘goods-service continuum’ by Shostack is reprinted and referred to in many
publication and found favour with many academics such as Kumar who underlines the
continuum’s applicability by stating that “the continuum highlights the fact that most
services are in reality a combination of products and services having both tangible and
intangible aspects” (Kumar 2010: 28).
Intangibility is the parameter that lays out the basis of the ‘goods-services continuum’
by Shostack. Beech & Chadwick (2007:19) state that it is valid to do so, since “the
nature of services is in essence defined by the level of tangibility within its existence”.
Likewise Bateson & Hoffmann (2006: 28) express their approval by arguing that
“intangibility [is] the mother of all unique differences” between goods and services.
Shostack constructed the ‘goods-service continuum’ to highlight that the marketing
approaches applicable to services and goods differ more the greater their position on
the continuum is apart. This Shostack summarises by supposing that a product with a
greater degree of intangible elements will differ more from the marketing approach of a
‘pure good’ than a ‘product’ with less intangible elements.
In relation to the dealings of chapter 9, Buckley & Ghauri (1999:150) argue that “it
would not be false to to assume that the greater the degree of intangible elements the
more likelihood there is of foreign expansion strategies to differ from those traditionally
associated with product manufacturing.”
37

7.2 Goods-Service Continuum by Graf
In support of the view that most products being either goods or service do not function
or exist without a degree of the other, the German scholar Graf (2005:67) developed a
similar continuum that “attempts to overcome the dichotomy of goods and services”.
However, in contrast to the ‘goods-services continuum’ by Shostack, Graf (2005: 67)
does not limited his continuum to intangibility as a parameter, but instead Graf
broadens his continuum by the service constitutive features inseparability, perishability
and heterogeneity as additional parameters (Graf 2005:67).
Figure 8 : Goods-Service Continuum (Graf)
Source: Own illustration following Graf 2005: 67
Graf (2005:67) developed his version of the continuum to visualise and conceptualise
good and service as endpoints of a continuous transition that includes all service-
constitutive features in order to clarify that goods and services are not be seen as
fundamentally oppositional categories.
Graf’s (2005:66) continuum approach “to overcome the dichotomy of goods and
services” displays ‘pure’ services as products for which the degree of intangibility,
inseparability, perishability and heterogeneity is fully pronounced.
In contrast, ‘pure’ goods are pictured as products for which the degree of intangibility,
inseparability, perishability and heterogeneity is weakly or not pronounced.
Graf (2005:67) summarises the continuum’s applicability by stating that “any economic
activity can be positioned on such a continuum in accordance to its degree of pure
good and pure service components”.
38

7.3 Summary
The point that this chapter is aiming to make is to expand the previous chapter’s result
that intangibility, inseparability, perishability and heterogeneity yield a number of
challenges for the service’s marketing approach by the understanding that the impact
of these challenges depends on the degree of service constitutive features that a
service holds and that the degree of service constitutive features can be very different
from service to service. (Bateson, & Hoffmann 2006: 29).
39

8. Foreign Market Entry Modes
A firm’s expansion beyond its domestic market into a foreign or unattended markets for
the purpose of offering and selling its goods or services can be undertaken and
realised by means of a number of different and from another differing foreign market
entry modes (Hübner 1996: 208).
According to Root (1982: 5-7) foreign market entry modes can be defined as
“institutional arrangements that [enable] the entry of a company’s products, technology,
human skills, management, or other resources into a foreign country [or unattended
market]”.
Nickels et al. (2008: 5) summarise the existing types of foreign market entry mode by
stating that “the key strategies [to enter foreign markets] include licensing, exporting,
franchising, management agreements, creating international joint ventures or strategic
alliances [...] and engaging in foreign direct investments”.
Further, Root (1982: 5-7) clarifies that an entry mode consideration simply does not
apply for a company that is “already located in the country that contains its market” and
therefore the choice of an entry mode represents a unique challenge and
contemplation within a firm’s internationalisation.
Also, Root (1982: 5-7) mentions that firms can “arrange entry into a foreign country in
only two ways from an economist’s perspective” in the sense that on one hand there is
the possibility of exporting a company’s “products to the target country from [its
domestic] production base” into the foreign target market and on the other hand, as
Root (1982: 6-7) indicates, there is the alternative possibility of transferring the firm’s
“resources in technology, capital, human skills, and enterprise to a foreign country” in
order to either sell its products directly to foreign customers or by means of cooperation
or venture with a resident partner and that partner’s resources.
40

8.1 Classification of Entry Modes
Gooderham & Nordhaug (2003: 15) explore how foreign market entry modes differ from
another as to how they can be classified by revealing that marketers such as Kumar &
Subramanian (1997: 53-72), Contractor & Kundu (1998: 325-358) as well as Erramilli et
al. (2002: 223-242) agree that foreign entry modes, or entry strategies as they are
alternatively referred to, can be classified or subdivided into equity and non-equity entry
modes.
Non-Equity Modes: Equity Modes:
- exporting - joint ventures
- licensing - foreign direct investments
- franchising
- management agreements
In an article in the Journal of International Business Studies, Pan & Tse (2000:
537-539) present the Hierarchical Model of Entry Modes that visualises entry modes
hierarchically in conformity with the subdivision of foreign market entry modes into
equity and non-equity entry modes.
Figure 9 : Hierarchical Model of Entry Modes
Source: Own illustration following Pan & Tse 2000: 538
41

Figure 9 showing the Hierarchical Model of Entry Modes displays the existing entry
modes that companies can potentially engage in in their pursuit of internationalisation.
Further, Figure 9 classifies foreign market entry modes into Non-Equity Modes and
Equity Modes on the first level of hierarchy. The second level of hierarchy identifies
Exporting and Contractual Agreements as Non-Equity Modes as well as it identifies
Joint Ventures (JVs) and Foreign Direct Investments (FDIs) as Equity Modes.
Exporting itself is then split into Direct Exporting and Indirect Exporting, likewise
Contractual Agreements are split into Licensing, Franchising and Management
Agreements. Accordingly Figure 9 subdivides Joint Ventures (JVs) into Minority Joint
Ventures, 50 % share Joint Ventures and Majority Joint Ventures as well as splitting
Foreign Direct Investments into Greenfield and Acquisition (Pan & Tse 2000: 537-539).
8.2 Description of Entry Modes
“Entry Modes are the formats of foreign market entry” (Peng 2009: 286).
The following sections will individually outline both non-equity modes as well as equity
modes and describe their distinctive features and characteristics.
8.2.1 Non-Equity Modes
Foreign market entry modes classified as non-equity modes including exporting,
licensing, franchising and management agreements are characterised by the fact that
that they “tend to reflect relatively smaller commitments to overseas markets” as Peng
(2009: 286) summarises. The commitments associated with non-equity modes include
relatively low resource commitments, control as well as low risk and profit potential
(Nickels, et al. 2008:66).
8.2.1.1 Exporting
Onkvisit & Shaw (2009: 296-297) state that “exporting is a strategy in which a company
[...] exports a product from its home market”, while further pointing out that oftentimes
“the exported product is fundamentally the same as the one marketed in the home
market”. In addition, Root (1982: 7) clarifies that for exporting “a company’s final or
intermediary product [is produced] outside the target market country and subsequently
transferred to it”.
Gooderham & Nordhaug (2003: 15) add that exporting represents a “relatively low-risk
strategy as it involves little investment and exit is [rather] unproblematic”.
42

With regard to the risk exposure that a company engages in by exporting, Onkvisit &
Shaw (2009: 296-297) further contribute that “risks are minimal because the company
simply exports its excess production capacity when it receives orders from abroad”.
Also, Onkvisit & Shaw (2009: 296-297) indicate that exporting is the most common
entry mode for small firms and those that start internationalising their operations.
However, problems can arise when “the country’s home-country currency is strong” as
Onkvisit & Shaw (2009: 296-297) reveal. In addition, Gooderham & Nordhaug (2003:
15) add in this context that import tariffs, quotas as well as freight costs can also stem
exporting.
Among exporting a differentiation can be made by subdividing exporting activities into
indirect and direct exporting. As Búrca et al. (2004: 236-237) point out indirect
exporting “refers to the use of agencies to get the product into the foreign market”
which essentially realise the products’ transport and sale. In contrast, they argue that in
direct exporting a firm “either sells direct to the end user” by organising the entire
transport themselves or alternatively “arranges for firms in the target market to act as
agents and/or distributor for its products”.
8.2.1.2 Licensing
Onkvisit & Shaw (2009: 297-301) define licensing as “an agreement that permits a
foreign company to use industrial property (i.e. patents, trademarks, and copyrights),
technical know how [...] architectural and engineering designs, or any combination of
these in a foreign market”. In other words, the licensor grants a licensee with the right
to produce “a product for sale” for a specified period in a specified territory in return for
a fee, called a royalty, or other compensation.
Licensing, as Gooderham & Nordhaug (2003: 15) add, is “a particularly useful option in
countries where regulations limit market entry or where tariffs and quotas make export
a non-viable strategy”.
8.2.1.3 Franchising
Gooderham & Nordhaug (2003: 16) state that franchising is an entry mode very similar
to licensing. However, they argue that franchising is somewhat more “comprehensive”
than licensing in the sense that franchising agreements cater more to service heavy
activities. They explain this by indicating that “for [a franchise] fee [...] the franchisee
receives a complete package comprising of the franchisor’s trademark, products and
services, and a complete set of operating principles” which as they further contribute
creates “the illusion do a worldwide company”.
In the same vein, Root (1982: 8) emphasises that franchising stands out from licensing
by its “motivation, service and duration”. Further, Root (1982: 8) reveals that not only
43

does a franchise agreement grant the franchisee with the “right to use the company’s
name, trademark, and technology” but in contrast to licensing the franchisor also gives
assistance [...] “in organisation, marketing and general management”.
Nickels et al. (2008: 67) add that similar to the conditions of licensing, a franchisor is
given the right to sell a product or service in a specified geographic area.
8.2.1.4 Management Agreement
O’Connell (1999: 200) defines management agreements by the following explanation
laid out in the Encyclopedic Dictionary of International Management:
“Many organisations do not have the desire or the experience to manage their
operations in every country. When this occurs the organisation may arrange with
another company to manage and operate its foreign subsidiary, Management
[agreements] are normally compensated by means of a fee for services or a
percentage of profits”.
Onkvisit & Shaw (2009: 301) add that management agreements represent “a sound
strategy” to enter politically risk foreign markets. Also they contribute that “government
pressure and restrictions” may even force a company to “relinquish control” and urge
the owners and/or investors to hire such a management company to coordinate
operations.
8.3 Description of Equity Modes
According to Peng (2009: 286) foreign market entry modes classified as equity modes
including joint ventures and foreign direct investments are “indicative of relatively
larger, harder to reverse commitments”. Similarly, commitment refers to the level of
resources, control as well as risk and profit potential (Nickels, et al. 2008:66).
8.3.1 Joint Venture
To Onkvisit & Shaw (2009: 301) a joint venture is “simply a partnership at corporate
level”. In support of this view, O’Connell (1999: 203) specifies a joint venture as “an
agreement between two [or more companies] to coproduce and distribute a [good or
service]” that is usually arranged between foreign and host country companies who
share ownership, control, profits and losses.
44

In addition, Búrca et al. (2004: 238-239) reveal that a joint venture is a common form of
market entry into countries that have foreign investment laws requiring “some local
equity in any investment in their country”.
Theoretically, any split of equity participation in joints ventures amongst partners is
possible and dependant on the agreement between involved joint venture parties.
In the case of a joint venture partner contributing less than the other party or parties
this is referred to as a minority joint venture, whereas the other partner or the other
partners are considered to hold a majority venture (Nippa 2004: 111).
8.3.2 Foreign Direct Investments
As to Johansson (2009: 132) a foreign direct investment is a “wholly owned subsidiary”
in a foreign market that is set up or acquired, owned, operated and controlled entirely
by the domestic parent company.
Among foreign direct investments a distinction is made between two variation of foreign
wholly owned subsidiaries. These are greenfield investments and the acquisition of an
existing foreign company (Tian 2007: 89).
According to Tian (2007: 89) a greenfield investment “refers to starting a new
enterprise from scratch while [an] acquisition refers to purchasing an established
enterprise [abroad]”.
Further, O’Connell (1999: 204) points out that a foreign direct investment requires
“large capital investments and commitment of time and effort”. Also, he refers to the
distinction between greenfield investments and acquisition of an existing foreign
company by adding that a greenfield investments usually becomes subject to a
company’s pursuit of establishing a foreign wholly owned subsidiary when there is no
“suitable company” to acquire.
45

9. Foreign Market Entry Mode Selection
“One of the most critical issues in international market entry strategy is the selection of
an appropriate entry Mode” (Painado, & Barber 2007: 159).
In his publication Internationalisierung von Dienstleistungsangeboten [The
Internationalisation of Services] Hübner (1996: 208) emphasises the importance of a
firm to well-consider and asses its choice of foreign entry mode by indicating that “the
selected entry mode and its maintenance greatly impact on a company’s success or
failure abroad”. Further, Hübner contributes that “retroactive adjustments [of entry
mode] can cause substantial and irreversible damage to the firm’s reputation as well as
its business success abroad”.
In this context, O’Connell (1999: 202) states that the selection of a foreign market entry
mode depends on a number of factors that consist inter alia of the amount of
commitment a firm is willing to invest including time as well as capital, the degree of
risk a firm is willing to expose itself to, the amount of control a company wishes to
maintain over its operations and the profit potential a firm is willing to achieve.
Nickels et al. (2008:66) conceptualised a continuum that takes up O’Connell’s (1999:
202) consideration in that it positions foreign market entry modes according to their
associated amount of commitment required, control, risk and profit potential.
Figure 10 : Foreign Entry Mode Continuum
Source: Own illustration following Nickels, et al. 2008:66
As can be read from the illustration by Nickels et al. (2008:66) licensing by tendency
represents the foreign market entry mode that requires the least commitment by the
firm that chooses it to internationalise operations, while also yielding the least risk,
control and profit potential.
46

Internationalisation of Service Firms - Identifying Unique Characteristics' Impact on Entry Mode

Internationalisation of Service Firms - Identifying Unique Characteristics' Impact on Entry Mode

Recommended

Recommended

More Related Content

Similar to Internationalisation of Service Firms - Identifying Unique Characteristics' Impact on Entry Mode

Similar to Internationalisation of Service Firms - Identifying Unique Characteristics' Impact on Entry Mode (20)

Internationalisation of Service Firms - Identifying Unique Characteristics' Impact on Entry Mode