market entry and expansion Keith D. Brouthers INTRODUCTION Although business expansion into global markets has grown rapidly in the past few decades, research in the area has lagged. Foreign market entry and expansion entails a number of impor- tant marketing strategy decisions including (i) selection of specific target countries, (ii) structuring of foreign subsidiary units, and (iii) management of foreign operations. In this article, we focus on the decision about structuring of international subsidiary units, often referred to as entry-mode choice. Research in this area has tended to focus almost exclusively on firm- and country-specific characteristics, showing little interest in the effects of marketing strategy, and managerial decision-making behavior (see INTERNATIONAL MARKETING CHANNELS). Brouthers and Hennart (2007) provide a detailed review of the entry-mode literature and suggest that scholars have tended to concentrate on rational models of strategic choice, ignoring behavioral aspects. Further, Canabal and White (2008) in their review note that most interna- tional entry-mode research has been published in international business and management jour- nals with only a few contributions in marketing research outlets. This may explain why critically important issues involving marketing strategy have been virtually ignored by researchers so far. International entry-mode choice, like other marketing strategy decisions, is influenced by a multitude of factors. These can be classified into three distinct groups (Figure 1): firm/country characteristics, top management team effects, and marketing strategy fit. The main theoretical perspectives that have been applied to the entry-mode decision – transaction cost analysis, resource-based view (RBV), and institutional theory – focus on firm and country character- istics. These theories do an excellent job of explaining how differences in country char- acteristics, such as institutional environments (Brouthers, 2002), and firm characteristics, like resource advantages (Brouthers, Brouthers, and Werner, 2008a), lead to specific entry-mode choices. What these theories and related Country - firm effects TMT effects Marketing strategy effects Figure 1 Dimensions of entry-mode choice. research studies do not do is to help explain how marketing strategy issues as well as managerial decision-making processes and influences play a part in the entry-mode decision. In this article, we provide a short overview of the existing entry-mode research and elaborate on areas where future marketing research can make an important contribution. Before we begin the review, we define some of the key terms and concepts that lie behind this research area. KEY TERMS AND CONCEPTS Entry modes – also referred to as channel choice, channel selection, modes of entry, or entry struct- ures– vary along a continuum of risk and control (Brouthers and Hennart, 2007). At the high end are wholly owned subsidiary units .

1. market entry and expansion
Keith D. Brouthers
INTRODUCTION
Although business expansion into global markets
has grown rapidly in the past few decades,
research in the area has lagged. Foreign market
entry and expansion entails a number of impor-
tant marketing strategy decisions including
(i) selection of specific target countries, (ii)
structuring of foreign subsidiary units, and (iii)
management of foreign operations. In this article,
we focus on the decision about structuring of
international subsidiary units, often referred to
as entry-mode choice. Research in this area has
tended to focus almost exclusively on firm- and
country-specific characteristics, showing little
interest in the effects of marketing strategy,
and managerial decision-making behavior (see
INTERNATIONAL MARKETING CHANNELS).
Brouthers and Hennart (2007) provide a detailed
review of the entry-mode literature and suggest
that scholars have tended to concentrate on
rational models of strategic choice, ignoring
behavioral aspects. Further, Canabal and White
(2008) in their review note that most interna-
tional entry-mode research has been published
in international business and management jour-
nals with only a few contributions in marketing
research outlets. This may explain why critically

2. important issues involving marketing strategy
have been virtually ignored by researchers so far.
International entry-mode choice, like other
marketing strategy decisions, is influenced by a
multitude of factors. These can be classified into
three distinct groups (Figure 1): firm/country
characteristics, top management team effects,
and marketing strategy fit. The main theoretical
perspectives that have been applied to the
entry-mode decision – transaction cost analysis,
resource-based view (RBV), and institutional
theory – focus on firm and country character-
istics. These theories do an excellent job of
explaining how differences in country char-
acteristics, such as institutional environments
(Brouthers, 2002), and firm characteristics, like
resource advantages (Brouthers, Brouthers, and
Werner, 2008a), lead to specific entry-mode
choices. What these theories and related
Country -
firm effects
TMT
effects
Marketing
strategy
effects
Figure 1 Dimensions of entry-mode choice.
research studies do not do is to help explain how
marketing strategy issues as well as managerial
decision-making processes and influences play

3. a part in the entry-mode decision.
In this article, we provide a short overview of
the existing entry-mode research and elaborate
on areas where future marketing research can
make an important contribution. Before we begin
the review, we define some of the key terms and
concepts that lie behind this research area.
KEY TERMS AND CONCEPTS
Entry modes – also referred to as channel choice,
channel selection, modes of entry, or entry struct-
ures– vary along a continuum of risk and control
(Brouthers and Hennart, 2007). At the high end
are wholly owned subsidiary units where a firm
owns 95% or more of the equity of the entity, and
has made a large financial commitment, which
exposes the firm to high risks, but also provides
the firm with total control over the foreign
operation. At the other extreme, are nonequity
license agreements, where firms sell the right
to use their product/process to a foreign-based
firm, and exporting modes (see STRATEGIC
EXPORT MARKETING–ACHIEVING SUCCESS
IN A HARSH ENVIRONMENT). At this end
of the spectrum, the firm has made only a
small financial commitment and is therefore
exposed to very low risk, but it also has little
control over the foreign operation. Between
these extremes are multiple variations including
equity joint ventures (including majority,
equal, and minority ownership), nonequity
cooperative agreements (also commonly called
Wiley International Encyclopedia of Marketing, edited by

4. Jagdish N. Sheth and Naresh K. Malhotra.
Copyright © 2010 John Wiley & Sons Ltd
2 market entry and expansion
strategic alliances), and franchising agreements
(a complex form of licensing) (see INTER-
NATIONAL FRANCHISING). As Canabal and
White (2008) note, most studies exploring the
entry-mode decision look at the choice between
two or more of these mode types.
While exporting is an important entry mode,
the marketing literature has tended to examine
exporting channel selection as a decision sepa-
rate from entry-mode choice. Scholars like Bello
and Lohtia (1995) and others (see STRATEGIC
EXPORT MARKETING–ACHIEVING SUCCESS
IN A HARSH ENVIRONMENT) tend to use the
same theoretical approaches in export channel
choice as entry-mode scholars use in entry-mode
choice. This tends to create some confusion
among researchers because the exporting
literature tends to be the only market entry and
expansion literature where researchers separate
the mode choice for the sales function of a firm
from the mode choice of the production function
of the firm. In fact, most entry-mode studies
do not specify whether they are examining the
entry for production, sales, or both functions
of the firm. Hence, although the terminology
is different (entry mode versus channel choice)
the types of modes examined and the theories
used in these two streams of research tend to

5. coincide.
EXISTING RESEARCH
Firm and country characteristics. Most of
the literature in entry-mode choice has been
published since 1990. The growth in entry-mode
(channel choice) scholarship since 1990 has
provided researchers and managers with a better
understanding of how firms choose between
various entry-mode types. This research tends
to use theories that focus attention on firm- or
country-specific characteristics. For example,
in Canabal and White’s (2008) review they note
that of the 10 most widely used independent
variables, 6 are firm-specific (including inter-
national experience and firm size), and 4 are
country-specific (including cultural distance
and host-country risk).
Three main theoretical perspectives drive the
study of entry-mode choice: transaction cost
economics (TCE), institutional theory, and the
RBV (Brouthers and Hennart, 2007). TCE is
the most widely applied theoretical perspective
and captures both firm- and country-specific
influences. TCE suggests that managers have
limited cognitive abilities and hence are
concerned with safeguarding their investments
against issues arising from incomplete contracts
and opportunism. This concern is amplified
when the investment involves specific assets (a
firm-specific attribute) as well as internal uncer-
tainties (a firm-specific attribute) and external
uncertainties (a country-specific attribute).

6. These three characteristics of the transaction
then influence the mode-choice decision.
Two recent meta-analyses of TCE entry-
mode studies have found that asset specificity,
internal uncertainties (also referred to as behav-
ioral uncertainties), and external uncertainties
(sometime referred to as host-country risk) all
have a significant impact on entry-mode choice;
providing strong support for the transaction cost
perspective (Geyskens, Steenkamp, and Kumar,
2006; Zhao, Luo, and Suh, 2004). Further, these
studies tend to show that foreign subsidiary
performance is better when the mode used
is predicted by transaction cost theory. This
suggests that TCE can provide a good foundation
for managers to develop a tool for determining
the structure of new foreign subsidiary units that
will result in greater success.
Furthermore, although TCE entry-mode
choice models have been extensively tested on
both service-based and product-based firms,
normally, studies examine only product- or
service-based firms, or include a dummy
variable to ‘‘control’’ for this industry type.
But these studies offer little insight into how
decision-making and mode choice may differ
between service providers that expand abroad
and firms expanding to sell tangible products.
There has been some progress in this area using
TCE, but much more work is needed.
Probably, the most influential research study
comparing service and manufacturing firm mode
choice is the one by Erramilli and Rao (1993).

7. They suggest that because services and manufac-
tured products differ, transaction cost decision
models of entry-mode choice need to be modified
to take these differences into account. They go on
to provide a theoretical extension to transaction
market entry and expansion 3
cost theory and test the revised theory empir-
ically. Yet recently, Brouthers and Brouthers
(2003) looked at the same issue and suggested
that no adjustment to transaction cost theory
was needed. They maintain that service- and
product-based firms simply are influenced to
a greater (lesser) extent by the basic transac-
tion cost factors. They extend this work by
suggesting the real difference between service-
and product-based firms is associated with how
risk and trust propensity influence mode choice
and transaction-cost- based decisions.
In addition to transaction cost research, other
studies have used an institutional theory perspec-
tive focusing on country-specific factors that may
influence the mode-choice decision (Brouthers
and Hennart, 2007). Institutional theory suggests
that each country is composed of a unique
combination of normative, cognitive, and regu-
lative factors that impact the way business is
carried out and how managers, employees, and
customers behave. One stream of research in
this area suggests that the institutional environ-
ment produces an isomorphic effect where firms
simply replicate existing entry-mode structures

8. to conform to industry or country standards.
A second stream in this area suggests that the
individual dimensions of the institutional envi-
ronment (or the distance between home country
and target country dimensions) have differing
effects on mode choice; either creating opportu-
nities for entry or restricting access to resources,
customers, or distribution channels.
Originally conceptualized as national cultural
distance and country risk, entry-mode studies
tend to provide growing guidance on how the
institutional environment impacts mode choice.
The only meta-analysis in this area explores
national cultural distance research (Tihanyi,
Griffith, and Russell, 2005). This study finds
that cultural distance does not tend to have a
direct effect on mode choice but that it only
has an impact on entry-mode choice for firms
coming from high risk propensity countries (like
the USA and the UK). This suggests that the
cultural component of the institutional envi-
ronment may have different effects for firms
from different home countries entering different
host countries. Other aspects of the institutional
environment such as host-country risk and legal
restrictions have also been examined, but as
yet no meta-analysis exists (see Brouthers and
Hennart, 2007 for a summary of these studies).
In general, research using institutional theory
has provided managers with an understanding
of how home- and host-country institutional
factors influence the choice of entry mode and
the success of foreign subsidiary units.

9. The third most widely used theoretical
perspective, the RBV, focuses on firm-specific
factors and generally suggests that firms are a
collection of resources and capabilities (knowl-
edge and processes) that can be combined in
different ways to create a competitive advantage.
This advantage can be used to help the firm
enter foreign markets and overcome the liability
of foreignness. Compared to both transaction
cost and institutional-theory-based research,
far fewer studies have examined entry-mode
choice using the RBV because of the difficulty
in defining and measuring resources, many
of which, like tacit knowledge, are intangible
(Brouthers and Hennart, 2007).
One of the more frequently explored resources
that has been examined is experience. Scholars
like Anderson and Coughlan (1987) and Delios
and Henisz (2000) have noted that different
types of experience may provide different bene-
fits to the firm that can have an important
impact on entry-mode choice (either in combi-
nation with transaction cost factors as noted
by Anderson and Coughlan (1987) or moder-
ated by the institutional environment as noted
by Delios and Henisz (2000)). Some studies
taking an RBV perspective tend to look at
how foreign entry, and hence mode choice,
can be used to exploit existing resources in
new foreign markets while other research exam-
ines how the mode choices of firms can be
used to help them scout for new resources
to enhance the firm’s existing stock. Research
using this perspective has highlighted the impor-
tance of linking the type of resource advantage

10. and motive for foreign expansion (exploitation
of existing resource-based advantages or explo-
ration for new resource-based advantages) with
an appropriate subsidiary structure (Brouthers
and Hennart, 2007).
In addition to studies using a single theoret-
ical perspective, scholars often develop studies
that combine multiple theories. For example,
Brouthers, Brouthers, and Werner (2008a)
4 market entry and expansion
combine the RBV and institutional theory to
examine their joint impact on mode choice.
They find that resource-based advantages do
not always have the same value in foreign
markets as in the home market. Therefore,
firms may need to vary their mode choice to get
the most value out of existing resource-based
advantages when entering foreign markets.
Brouthers (2002) among others (Brouthers and
Hennart (2007)) explore the mutual effects
of TCE and institutional theory. They find
that institutional theory helps extend TCE
by clarifying additional external uncertainties
that firms may face when entering new foreign
markets. As Brouthers (2002) indicates, by
considering both transaction cost characteristics
as well as institutional factors, firms may make
more informed mode-choice decisions that
result in better performing foreign subsidiary
units. Many other studies have combined
aspects of two or more theoretical perspectives

11. to examine the international entry-mode choices
of firms. The one thing these studies all have
in common is that they concentrate on theories
that focus on firm- and country-specific aspects
of the mode-choice decision (see Brouthers and
Hennart (2007) for more details).
In sum, despite the growth in studies exami-
ning mode (channel) choice, most have used
theoretical perspectives that focus on country-
and firm-specific aspects of the decision.
Although very helpful to managers, this rese-
arch is limited because it means that we still have
little understanding of how issues like marketing
strategy or managerial biases influence the
mode-choice decision.
POTENTIAL FOR FUTURE RESEARCH
There are now almost 200 studies providing
theoretical and/or empirical examination of
the issue of firm expansion and mode choice.
Recently researchers have been questioning
the need for further research in this area.
Yet despite the growth in research there is
still much to be learned. We now discuss two
areas of research that have the potential to
make a significant contribution to improving
international performance through a better
understanding of the method of entry-mode
choice.
Marketing strategy. Marketing strategy deals
with a wide range of decisions that can influ-
ence the performance of the firm (see GLOBAL
MARKETING STRATEGY; GLOBAL MAR-

12. KETING STRATEGY: PERSPECTIVES AND
APPROACHES). Yet, when examining inter-
national expansion, researchers tend to ignore
the marketing strategy implications of mode
choice. Some research does address strategy
issues. For example, Bradley and Gannon
(2000) look at how market concentration versus
diversification strategies impact mode choice
while Sanchez-Peinado, Pla-Barber, and Hebert
(2007) examine the impact of global versus
multidomestic strategy, follow-the-leader stra-
tegies, and market-seeking strategies on mode
choice. In these and related papers, researchers
have found mixed support; strategies appear to
provide an important impact on mode choice
but the way that impact is felt is not entirely
clear (Brouthers and Hennart, 2007).
Other marketing strategy issues have not
found their way into entry-mode research despite
their importance to the firm. For example,
variations in product/service mix may have an
influence on mode choice (see MARKETING
MIX; MANAGING THE GLOBAL PRODUCT
PORTFOLIO). Specific entry-mode types may
enhance (detract from) the marketing effort
in new foreign markets simply because of the
product/service mix being offered. Normally
firms do not use the same product/service
mix in each foreign market as they use at
home. These differences may call for different
skills and knowledge, which may impact the
mode-choice decision because different modes
of entry provide firms with varying degrees of
access to skills and knowledge.

13. Further, the marketing strategy of using
standardized or adapted products/services in
foreign markets may also influence mode choice
(see STANDARDIZATION/ADAPTATION OF
INTERNATIONAL MARKETING STRATEGY).
Standardization, for example, may require few
country-specific adjustments to the production
process but extensive knowledge and skills
in marketing the product/service to the
final customer, hence influencing the mode
choice for the production operation differently
from the sales function. Likewise, adaptation
of products/services may require extensive
market entry and expansion 5
country-specific production knowledge but
might build on existing marketing skills. These
differences may have a significant influence on
mode choice and the effectiveness of the foreign
operation.
Market orientation is now recognized as
critically important in domestic markets, yet
there is little understanding about the best way
to extend this orientation to foreign markets
(see MARKET ORIENTATION). A firm whose
competitive advantage relies on its market
orientation may need to think carefully about
how to be successful in foreign markets. For
example, is it more effective to use wholly
owned subsidiaries and keep control of foreign
operations when market orientation is important
or does sharing ownership through joint

14. ventures or license agreements help firms more
effectively service foreign customers?
Branding strategy is also not considered in
the mode-choice decision, yet brands are often
one of the most powerful marketing tools a firm
may possess (see BRAND STRATEGY; GLOBAL
BRANDING: THREE KEYS FOR GLOBAL
BRAND SUCCESS). Brands and brand strategy
may significantly impact mode choice because
brands may be better protected through some
modes than through others. In addition, some
mode types may make it easier for firms to
obtain additional brands or expand brands to
related products/services. Hence brand strategy
may be another important determinant of the
mode-choice decision.
As we have briefly outlined above, marketing
strategy issues form an important and integral
part of a firms success, yet there is little under-
standing about the impact of marketing strategies
on foreign market entry-mode decisions or how
mode structure influences a firm’s ability to
effectively implement their chosen strategy.
Top management team. As we know from
decision-making research the characteristics of
the decision maker or decision-making team play
a critically important part in determining what
choices are made (Wubben and Wangenheim,
2008). However, in the entry-mode literature
managerial influences are seldom included.
There are a few recent papers that have started
to look at the decision-making process using
real-options theory (Brouthers, Brouthers,

15. and Werner, 2008b) and others that have
examined manager characteristics (Brouthers
and Hennart, 2007). But much more work needs
to be done in this area.
For example, network theory has recently
been used to help explain why managers make
certain decisions (Rindfleisch and Moorman,
2001). Networks are the groups of individuals,
both personal and professional, with whom the
manager interacts, exchanges information, and
shares resources. Researchers need to examine
network connections, inside and outside the firm,
to gain an understanding of how network rela-
tionships may influence the mode-choice deci-
sion. For example, do some networks discourage
the use of specific entry-mode types or do some
networks enhance the opportunity to use other
mode types?
Organizational culture may also have a signifi-
cant influence on the foreign market entry-mode
choice decision. Firms may have cultural-based
beliefs and values that eliminate certain mode
choices from consideration or that influence the
type of information that managers consider rele-
vant to the mode-choice decision. Organizational
cultural values can have an important impact
on the decision-making process and outcome
(Deshpande and Webster, 1989), yet entry-mode
scholars have tended to ignore the impact of
organizational culture in studies of entry-mode
choice.
Furthermore, because foreign market expan-

16. sion decisions are made at different levels of the
firm, depending often on firm size, it is impor-
tant that we obtain market entry decision data
from the correct respondents. Studies looking at
the impact of top managers in very large organi-
zations, for example, may not be examining the
right level of analysis. It is often the case in larger
firms that SBU managers or product managers
make these important expansion decisions. At
present both marketing executives and middle
managers have been conspicuously absent from
entry-mode research. Obtaining data from these
sources may be difficult but the value added
could greatly increase our knowledge of how
these decisions are really made.
As researchers in other areas have noted,
managerial biases can have an important impact
on the decisions they make. Those interested
in foreign market expansion can help us gain
6 market entry and expansion
a better understanding of entry-mode choice
by exploring the impact of factors that create
biases in managerial decisions hence prohibiting
managers from making the best entry structure
decisions.
CONCLUSIONS
Although foreign market entry-mode scholar-
ship has seen strong growth in recent years, there
are still many unanswered questions. Even some

17. of the most widely explored issues need further
work as answers are still elusive as to the best
way to make the entry-mode decision. Marketing
practitioners and researchers can make an impor-
tant contribution to our knowledge of market
entry and expansion by focusing on how impor-
tant marketing strategy issues and managerial
biases influence these decisions.
In this article, we reviewed past research and
highlighted several areas where new research is
needed and where current research has failed
us. By focusing on newer issues like market
orientation, brand strategy, and product mix,
researchers can help bring greater realism to our
decision-making models. In addition, by gath-
ering information from the appropriate level of
manager in the firm and considering how issues
like network relationships and organizational
culture influence managerial decisions, future
research can improve decision-making models
that will help firms make better decisions in the
future.
Finally, there are still enormous challenges
ahead for researchers to gain a greater under-
standing of how market entry and expansion
decisions are made. This expanded research can
help facilitate better managerial practices and
improve international performance for firms.
Marketing scholars can have a substantial impact
on this research by examining marketing issues
and the influence of marketing managers in
taking effective mode-choice decisions.
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Title
ABC/123 Version X
1
Research Analysis
PSYCH/650 Version 2
1
University of Phoenix MaterialResearch Analysis
Terms
Definitions
Peer-reviewed study
Peer review refers to a study that has been accepted by a
standard journal using blind review by peers in the field. This
means that every study should have a fair access to publication

21. based upon quality of the study.
Type of study
Types of studies can include experimental, case study,
longitudinal, cross-sectional, survey, and so forth.
Measurement or assessment tools
A measurement tool is a means that the researchers used to
measure or assess the variables under study. Did the study
develop assessment tools? Did the study use objective
measurement tools? Can the measurement tools be found and
used by another researcher? Are the instruments valid and
reliable?
Number of participants
This refers to how many participants were in the study.
How they were selected
Selection process can include the means of recruitment of
participants; what was the sampling method or strategy?
Describe the population. This could be clients or college
students. Indicate sample size.
Number of groups
Was there a control group? The control group does not receive
the treatment. Do these participants have the same
characteristics and diagnosis as the experimental group
participants?
How they were assigned
Were they matched or randomly assigned to one the conditions,
or groups, in the study?

22. What type of intervention was delivered
Define the type of therapeutic treatment or intervention that
occurred.
How the intervention was delivered
Were there therapists? Were the therapists trained to deliver the
treatment? Was the study a drug study? Was it double-blind?
Were there repeated measures
In this area, we are looking at whether the study found the
subjects 6 months or 1 year after the conclusion of the study.
Was there a difference between the experimental and control
participants at the follow up? We are looking at whether the
treatment effect lasts over time.
Copyright © XXXX by University of Phoenix. All rights
reserved.
Copyright © 2015 by University of Phoenix. All rights reserved.
international franchising
Barry Quinn
THE FRANCHISE METHOD
Franchising has become a major driving force in
the globalization of service businesses. Changes
in the global trading environment such as the
lifting of restrictive legislation and a greater
homogeneity in buyer behavior have resulted
in the further spread of franchising activity
from the developed economies toward emerging

23. markets in Asia, South America, and Europe.
While traditionally associated with the fast food
restaurant sector, franchising has been increas-
ingly employed by companies in a range of
sectors, including retailing, hotels, car hire, and
industrial services. The term franchising has been
used to describe a wide variety of business activ-
ities, but the contemporary franchise system
commonly in use is known as business format fran-
chising. There are clear advantages to adopting
franchising as an international expansion vehicle
and these are linked to the relatively low financial
resources, lower risk, and the local knowledge
offered by the franchisee.
INTERNATIONAL EXPANSION
The United States has traditionally been the
world’s single largest franchise market.
However, franchising is now used widely by
US and non-US companies as a strategy for
growth in both developed economies and
emerging markets. Market saturation has
been cited as a key factor for franchisors in
the United States, Canada, Western Europe,
and Japan (Hoffman and Preble, 2004), and
international expansion has generally occurred
in markets geographically and culturally close
(see MARKETING ASPECTS OF PSYCHIC DIST-
ANCE; MARKETING ASPECTS OF CULTURAL
DISTANCE) to the home market. For instance,
Canada has been the preferred first destination
for US franchisors (see, for instance, Walker and
Etzel, 1973; Hackett, 1976; Walker and Cross,
1989). Evidence has been found to support the
notion that franchising organizations only make

24. international moves after reaching a significant
level in their domestic operations (Walker, 1989;
Aydin and Kacker, 1990; Welch, 1990). An
initial domestic presence is viewed as crucial
for successful international expansion in that it
aids the learning process that will be useful for
later international expansion and that it creates
a widespread network that, by itself, becomes a
very tangible statement to potential franchisees,
both local and foreign. However, an exception
to this ‘‘rule’’ can be seen in the case of retailing
companies (see INTERNATIONAL RETAILING).
As service sector companies have developed
franchise operations in their respective domestic
markets, some retail companies only employ
franchising as a strategy in international
markets. In other words, franchising is adopted
as an alternative strategy to the core operating
presence developed within the domestic market
(Quinn and Alexander, 2002).
EMERGING MARKET OPPORTUNITIES
The fundamentally expansionist nature of fran-
chising would suggest that foreign markets will
be perceived as providing favorable opportu-
nities for growth, regardless of the level of
development of the domestic market (see, for
instance, Hackett, 1976; Hopkins, 1996). It is
increasingly the case that franchisors are looking
for opportunities in emerging markets (Welsh
et al., 2006) and franchising is being seen as
one way for nations to grow their economies.
This is the case in Asian markets such as
China and Singapore (Choo et al., 2007; Wang

25. et al., 2008). Such markets offer clear oppor-
tunities to franchisors, including high growth
and demand for western products and services,
urban populations, rising middle classes, and
attractive legislative environments. Franchising
is of great benefit to transitional economies,
particularly the former communist economies
of Eastern Europe where entrepreneurship and
business development skills have been lacking
(Welsh and Swerdlow, 1991; Anttonen et al.,
2005).
FORMS OF ACTIVITY
Master/area franchising, joint venture fran-
chising, direct investment, and direct franchising
are the major forms of franchising a firm can
choose from when it decides to enter a foreign
Wiley International Encyclopedia of Marketing, edited by
Jagdish N. Sheth and Naresh K. Malhotra.
Copyright © 2010 John Wiley & Sons Ltd
2 international franchising
market by the franchising route. In master/area
franchising agreements, such as those favored by
the Body Shop and the convenience store retailer
7-Eleven, the franchisor grants the master fran-
chisee the right to subfranchise the franchisor’s
concept to others within an exclusive territory,
creating a tripartite franchise relationship. For
the franchisor, such arrangements mean that
most of the work involved in expanding the

26. operation in the foreign market is carried out
by the foreign franchisee, thereby reducing the
demands on the franchisor. However, control
of the quality of the network’s operations is
crucial and difficult to maintain (Quinn and
Doherty, 2000). The international franchisor
will seek to maintain quality and standards
through provision of adequate support, in terms
of personnel and resources. There is the danger
that franchisors may, in practice, underestimate
the social, economic, and cultural differences
of another country, particularly given the stan-
dardization ethos of franchising. This scenario
becomes more likely as franchisors seek to avail of
the growing opportunities in emerging markets
that are generally culturally and geographically
distant from the domestic market. Conflict
can arise because of the considerable cultural
distance (also see MARKETING ASPECTS OF
CULTURAL DISTANCE) between the two
parties, which increases their tendency to see
the same situation in quite different ways. Thus,
the strength of the relationship between the
franchise partners is of paramount importance.
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1991.
global sourcing strategy: an evolution
Masaaki Kotabe and Janet Y. Murray
As global competition has accelerated the
speed of technological obsolescence for
most products, companies can no longer
survive simply by adopting a polycentric,

29. country-by-country approach to international
business. If companies with a new product
do follow a country-by-country approach to
enter foreign markets over time, a globally
oriented competitor will likely overcome their
initial competitive advantages by blanketing
the world markets with similar products in a
shorter time frame. Increasingly, how to source
globally has become a critical strategic decision
that is influenced by the capabilities needed to
compete.
Without established sourcing plans, distri-
bution, and service networks, it is extremely
difficult to simultaneously exploit both emerging
technology and potential markets worldwide.
The increased pace of new product intro-
duction and reduction in innovational lead
time calls for more proactive management
of locational and corporate resources on a
global basis. In this article, we emphasize the
choices companies make to perform activities
either inside the firm or have those activities
performed by others, anywhere in the world –
which we call global sourcing strategy. Global
sourcing strategy, therefore, refers to the
management of (i) logistics (see DESIGNING
A GLOBAL SUPPLY CHAIN: OPPORTUNI-
TIES AND CHALLENGES) identifying which
production units will serve which particular
markets and how components will be supplied
for production and (ii) the interfaces among
R&D (see GLOBAL PRODUCT R&D), manufac-
turing/operations, and marketing (see GLOBAL
MARKETING STRATEGY; MARKETING
STRATEGY IMPLEMENTATION) on a global

30. basis. Global sourcing strategy requires a
close coordination among R&D, manufac-
turing/operations, and marketing activities
across national boundaries (Kotabe, 1992).
GLOBAL SOURCING PHENOMENON
In a hypercompetitive and uncertain global
business environment (see SOCIETY, CULTURE,
AND GLOBAL CONSUMER CULTURE) coupled
with a more even distribution of supply
capabilities worldwide, an increasing number
of large and small firms either produce in
lower-cost locations or outsource goods and
services from lower-cost producers. To create
a sustainable competitive advantage over their
rivals, firms realize that it is imperative to
continuously create and acquire capabilities. In
addition to securing lower costs from global
suppliers, firms increasingly outsource to
gain access to suppliers’ capabilities. Thus,
the core driver of the latest form of global
outsourcing (i.e., both onshore and offshore) is
the heightened organizational and technological
capacity of firms in decoupling and coordinating
a network of remotely located external suppliers
performing an intricate set of activities. Hence,
how to source globally has become a critical
strategic decision that is influenced by the
capabilities needed to compete and help sustain
a firm’s competitive advantage.
Although firms have embraced global
sourcing of goods and services, they have expe-
rienced mixed results. Gottfredson, Puryear,

31. and Phillips (2005) found that about 50%
of firms in their sample reported that their
outsourcing programs fell short of expectations.
Only 10% were highly satisfied with the cost
savings, and 6% were highly satisfied with their
offshore outsourcing overall. Other researchers
(Leiblein, Reuer, and Dalsace, 2002) have even
suggested that outsourcing may not be related to
performance. Owing to the inconclusive perfor-
mance outcomes, practitioners have started to
question whether universally prescribing global
outsourcing is the right way to go.
One plausible argument is that based on a
‘‘balance’’ perspective, there is an optimal degree
of outsourcing. The outsourcing–performance
relationship takes on an inverted-U shape,
implying that as firms deviate further from
their optimal degree of outsourcing, by either
outsourcing (or insourcing) and offshoring (or
onshoring) too much, their performance will
suffer disproportionately. So, the key question
for sourcing firms is how much global sourcing
they should engage in, to achieve desirable
performance.
Another plausible argument for the incon-
clusive sourcing performance findings is that
Wiley International Encyclopedia of Marketing, edited by
Jagdish N. Sheth and Naresh K. Malhotra.
Copyright © 2010 John Wiley & Sons Ltd
2 global sourcing strategy: an evolution

32. Table 1 Different sourcing strategies.
Ownership Aspect Locational Aspect
Domestic Sourcing Foreign Sourcing
Insourcing (intrafirm sourcing) Onshore insourcing Offshore
insourcing
Outsourcing (contractual sourcing) Onshore outsourcing
Offshore outsourcing
desirable sourcing performance necessitates the
sourcing strategy to achieve a strategic ‘‘fit’’ with
the environment. Indeed, researchers have theo-
rized that the appropriateness of a particular
strategy is based on its ‘‘coalignment’’ or ‘‘fit’’
with environmental contingencies (Drazin and
Van de Ven, 1985). Using contingency theory
to examine the environment–strategy coalign-
ment effect on performance, we believe that the
environment and strategy interact in a dynamic
process, and that a match between them would
exert a positive impact on performance. Thus,
firms that can adapt their global sourcing strategy
effectively to both internal and external factors
are likely to achieve better performance.
We focus on global sourcing as it adds many
more complexities that do not apply to domestic
sourcing strategy. In developing viable global
sourcing strategies, firms must consider not only
manufacturing and delivery costs, the costs of
various resources, and exchange rate fluctua-
tions, but also the availability of infrastruc-
ture (including transportation, communications,

33. and energy), industrial and cultural environ-
ments, the ease of working with foreign host
governments, and other factors. Furthermore,
the complex nature of global sourcing strategy
spawns many barriers to its successful execution.
In particular, logistics, inventory management,
distance, nationalism, and a lack of working
knowledge about foreign business practices, are
some of the major operational problems encoun-
tered by both United States and foreign multi-
national firms engaging in global sourcing.
Intuitive arguments, like ‘‘focusing on core
competency’’ and ‘‘strategic sourcing,’’ are often
made to legitimize the trends toward more global
outsourcing. We first discuss the recent trends in
global sourcing strategy. Then, we highlight the
advantages and disadvantages of global sourcing,
by providing a list of intuitive arguments for
each. We then attempt to explain global sourcing
levels and how these relate to performance
based on the two complementary perspectives
of ‘‘balance’’ and ‘‘fit.’’ By synthesizing these
two perspectives, we introduce existing theories
of sourcing in this article.
Trends in global sourcing. The primary objec-
tive of global sourcing strategy is for the firm to
exploit both its own and its suppliers’ compet-
itive advantages and the comparative locational
advantages of various countries in global compe-
tition. From a contractual point of view, the
global sourcing of intermediate products such as
components and services by firms takes place
in two ways: (i) from the parents or their

34. foreign subsidiaries on an ‘‘intrafirm’’ basis (i.e.,
insourcing) and (ii) from independent suppliers
on a ‘‘contractual’’ basis (i.e., outsourcing). Simi-
larly, from a locational point of view, multi-
national firms can procure goods and services
either (i) domestically (i.e., onshoring) or (ii)
from abroad (i.e., offshoring) (see OFFSHORING
AND MARKETING). This leads to a matrix of
possible choices presented in Table 1.
In the last two decades, we have witnessed
three waves of global sourcing. The first wave,
starting in the mid-1980s, was primarily focused
on global sourcing of manufacturing activities.
Therefore, research was conducted primarily
on manufacturing firms. Large manufacturing
firms increasingly set up their operations
globally and began to use suppliers from many
countries to exploit best-in-world sources
(Quinn and Hilmer, 1994). Consequently,
supply chains (see SUPPLY CHAIN MANAGE-
MENT STRATEGY) became more global and
complex, with manufacturing firms sourcing
from suppliers in many countries for raw
materials, intermediate, and final products.
A second wave began to occur in the early
1990s, when firms started eliminating their infor-
mation technology (IT) departments that had
global sourcing strategy: an evolution 3
Table 2 Recent waves in global sourcing.

35. Time Period First Wave (since
1980s)
Second Wave (since Early
1990s)
Third Wave (since Early
2000s)
Type of activity Manufacturing Information technology
Business processes
Destinations China, Central and
Eastern Europe,
Mexico, and others
India, Ireland, and others India, Pakistan, South
Africa, and others
Type of firms Manufacturing Manufacturing, banks,
and others
Financial services, and
services, more generally
Primary motives Reduction in labor
costs
Obtaining enough skilled
programmers and cost
reduction
Reduction in labor costs
and round-the-clock
service provision

36. grown substantially. As IT itself had become
commoditized and many firms had little interest
in developing new information systems in-house,
this IT outsourcing wave spawned the growth of
specialist providers, such as EDS and Accenture.
Global sourcing mostly involved labor-intensive
and standardized programming activities, which
could be easily sourced from low-cost locations
like India. The rise of commercial applications
for a wide range of firm activities, epitomized
in enterprise resource planning systems, also
implied that a marketplace had developed where
independent suppliers could make competitive
offerings.
A third wave, characterized as the offshoring
movement, began in the early 2000s. We
have witnessed the rise of business process
outsourcing that extends beyond IT services to
a range of other services related to accounting,
human resource management, finance, sales,
and after-sales services such as call centers. It is
this third wave of business process outsourcing
that has generated so much publicity. Many
are concerned that foreign business processes
suppliers may be moving up the knowledge
chain more rapidly than expected by sourcing
firms. Such knowledge transfer could, in the
long run, undermine sourcing firms’ ability
to differentiate themselves from their foreign
suppliers. Indeed, such hollowing-out concerns
have previously been raised about outsourcing
of manufacturing activities (Bettis, Bradley, and
Hamel, 1992; Kotabe, 1998). We summarize
our argument on these recent waves of global
sourcing in Table 2.

37. GLOBAL SOURCING STRATEGY AND
PERFORMANCE
It is widely suggested that global sourcing
helps improve performance, particularly cost
effectiveness (Trent and Monczka, 2003). Firms
located in developed countries often find that
labor costs are excessive, compared to the
value that is added to their products. At the
other extreme, some global sourcing may be
driven by knowledge concerns. Some inputs,
such as liquid-crystal displays and technical
expertise, may be available only in certain other
countries, thus making global sourcing not a
choice but an imperative. As for the sourcing
of many raw materials, domestic sourcing is
not an option since many raw materials are
unavailable domestically. Certain intermediate
products tend to be sourced from locations near
the source of raw materials. Another argument
in favor of global sourcing is that it enables a
firm to produce closer to its customer markets,
thereby increasing access to its customers
and obtaining critical market knowledge for
product development (see GLOBAL PRODUCT
DEVELOPMENT). For instance, Japanese
manufacturing firms have, over time, replicated
supply chains in North America and Europe
to operate closer to these markets. Production
and sourcing experience in these regions has
also enabled them to improve their product
offerings. Another reason to opt for global
sourcing is that demand from various regions
can be pooled, thus achieving maximum scale
and bargaining power through single sourcing

38. from a foreign supplier.
4 global sourcing strategy: an evolution
Table 3 Arguments for and against outsourcing.
The Case for Outsourcing The Case Against Outsourcing
Strategic focus/reduction of assets Interfaces/economies of
scope
Through outsourcing activities a firm can
reduce its level of asset investment in
manufacturing and related areas. Therefore,
stock markets usually react favorably to
outsourcing since more or less similar
absolute profit levels can be obtained with
lower fixed investments. Furthermore,
outsourcing can help the management of a
firm redirect its attention to its core
competencies, instead of having to possess
and update a wide range of competencies.
Firms may benefit from internalizing
production through scope economies.
Manufacturing firms, in their outsourcing
decisions, ought to reflect on the interfaces
among R&D, manufacturing, and
marketing. If there are important interfaces
between activities, decoupling them into
separate activities performed by different
suppliers will generate less than optimal
results.

39. Strategic flexibility Hollowing out
Outsourcing may increase the firm’s strategic
flexibility. By using outside sources, it is
much easier to switch from one supplier to
another. If an external shock occurs, firms
are able to react quickly by simply increasing
or decreasing the volumes obtained from an
external supplier. If the same item were
produced in-house, the firm would not only
incur high restructuring costs but also a
much longer response time to external
events.
Firms that outsource activities excessively are
hollowing out their competitive base. Once
activities have been outsourced, it tends to
become difficult to differentiate a firm’s
products on the basis of these activities.
Furthermore, a firm could lose bargaining
power vis-à-vis its suppliers because its
suppliers’ capabilities may increase relative
to those of the firm.
Avoiding bureaucratic costs Opportunistic behavior
Rising production costs are associated with
internal production, due to a lack of a price
mechanism and economic incentives inside a
firm. As a consequence, firm efficiency will
suffer.
External suppliers may behave
opportunistically as their incentive
structure varies widely from that of the
outsourcing firm. Opportunistic behavior

40. allows a supplier to extract more rents
from the relationship than it would
normally do, for example, by supplying a
lower than agreed-on product quality or
withholding information on changes in
production costs.
Relational rent Rising transaction and coordination costs
In recent years, many researchers have argued
that certain relationships with external
suppliers can help create a competitive
advantage. By outsourcing items on the basis
of idiosyncratic and valuable relationships
with suppliers, firms may be able to
innovate, learn, and reduce transaction costs.
Excessive outsourcing may lead to high
coordination costs. Firms are limited in
their capacity to work with outside
suppliers as partners and therefore, have to
prioritize outside partners. If they
simultaneously invested time and attention
to all outside suppliers, this would induce
very high coordination costs.
(continued overleaf)
global sourcing strategy: an evolution 5
Table 3 (Continued).
The Case for Outsourcing The Case Against Outsourcing

41. Limited learning and innovation
A form of learning that is deemed especially
important for attaining tacit knowledge is
learning by doing. The supplier may
acquire tacit knowledge by performing the
activity; consequently, the outsourcing
firm cannot appropriate all benefits.
Appropriation of innovation and rents is
always a problem in buyer–supplier
relationships because both parties will try
to obtain as many private benefits as
possible. Furthermore, it may become
more difficult to innovate, owing to the
different incentives available and the
subsequent lack of interfaces between
firms.
On the other hand, there are disadvan-
tages associated with global sourcing. One
major problem is ‘‘cultural differences’’
between buyers and their foreign suppliers
(see BASE OF THE PYRAMID MARKETS:
CULTURE INSIGHTS AND MARKETING
IMPLICATIONS). Indeed, differences such as
institutional and language problems may affect a
relationship negatively. This raises another layer
of issues related to the long-term sustainability
of firms’ core competencies, particularly when
firms begin to increase reliance on independent
suppliers through outsourcing (for a more
extensive discussion of outsourcing and core
competencies, see Mol, 2007). There are two
opposing views of the long-term implications
of outsourcing. One school of thought argues

42. that many successful companies have developed
a dynamic organizational network through
increasing cross-border joint ventures, subcon-
tracting and licensing activities (Miles and
Snow, 1986). This flexible network system, also
known as supply-chain alliances, allows each
participant to pursue its particular competence.
Each network participant is complementing
rather than competing against the other
participants for the common goals. The other
school of thought argues that while a firm may
gain short-term advantages, there could also
be negative long-term consequences. As the
firm becomes more reliant on its independent
suppliers, it may not be able to keep abreast
of constantly evolving design and engineering
technologies without engaging in those develop-
mental activities (Kotabe, 1998). Consequently,
the firm encounters the inherent difficulty in
sustaining its long-term competitive advantages.
In other words, over time a firm’s technical
expertise and capability surplus vis-à-vis its
foreign suppliers may diminish to the point that
its value added is limited, and it may become
more like a trading company. Thus, based on
the arguments for and against outsourcing, we
need to synthesize our thinking on outsourcing
and performance. A summary of these opposing
arguments is presented in Table 3.
A ‘‘balance’’ perspective. A ‘‘balance’’
perspective offers insights on the sourcing
strategy–performance relationship. The under-
lying argument of a ‘‘balance’’ perspective is
that firms that outsource all of their activities

43. run into a multitude of problems, such as a
lack of innovation and bargaining power, and
an inability to be distinct in the eyes of the
customer. However, firms that only insource
fail to use the powerful incentives supplied
by markets, thus becoming bureaucratic and
inefficient. Therefore, outsourcing some but not
6 global sourcing strategy: an evolution
all activities provides the best solution overall,
and there is an optimal degree of outsourcing.
We believe a similar line of reasoning can
apply to the degree of internationalization of
sourcing (i.e., onshoring and offshoring) and
how that affects performance. More specifi-
cally, there are advantages and disadvantages
associated with global sourcing, as we high-
lighted above. As a firm does more offshoring
(particularly, offshore outsourcing), the disad-
vantages become larger to the point where they
severely impede performance. If firms do not
use offshoring at all, they cannot enjoy any of
the advantages of offshoring, such as having a
wider supply base from which to choose. This
line of reasoning is consistent with research in
international business; it is, for instance, indi-
rectly suggested by Dunning’s (1993) treatment
of international sourcing, and neoinstitutional
economics traditions, particularly the transac-
tion costs framework (Williamson, 1985).
Williamson (1985) distinguishes between

44. production and transaction costs. Production
costs refer to the costs of producing a good or
a service, and transaction costs represent all
the costs incurred as the product moves from
one supply-chain partner to the next. When
firms use offshore outsourcing by procuring
from foreign suppliers, it may help reduce their
production costs. In some instances, a local
supplier’s production costs may be lower than
those of foreign suppliers, but this is often
the exception and not the rule. Transaction
costs, on the other hand, tend to be higher for
such offshoring, as there are many types of
institutional, cultural, and language barriers that
must be overcome.
The cost of searching for supply sources
abroad, whether internal or external sources,
is somewhat higher than that for local supply
sources. The cost of evaluating those foreign
supply sources is much higher, as the evaluation
costs are strongly related to the familiarity that
decision makers have with the other party. Since
firms are likely to be less familiar with foreign
supply sources and decision makers may not be
able to draw on their networks in helping them
evaluate these sources, this induces substantial
evaluation costs. Rangan (2000) uses this argu-
ment to explain why buying firms are much
more likely to choose a domestic rather than a
foreign supplier, even when the physical distance
between the buyer and each of these suppliers is
the same.
We argue that offshoring is a balancing

45. act between production and transaction costs.
Firms need to find the proper balance between
domestic and foreign supply sources (using
onshoring and offshoring) if they wish to locate
on the top of the curve and obtain the highest
possible performance. They can achieve this
by using foreign sources for part, but not all
of their sourcing. Sourcing everything from
abroad produces poor performance results
because the disadvantages of offshoring, like
the hollowing-out argument, become too large.
Focusing all efforts on onshoring, however, is a
serious form of myopia with equally disastrous
effects on firm performance, primarily because
the firm is not capitalizing on important
opportunities to improve competitiveness. A
graphic illustration of our argument is presented
in Figure 1.
The balance perspective is therefore summa-
rized as follows: Some activities are best
outsourced globally while others ought to be
integrated (from a performance perspective).
A firm can enjoy optimal performance when it
correctly outsources and integrates all activities.
Similarly, the firm also needs to balance between
onshoring and offshoring activities. This
produces a pattern of an inverted U-shaped
(negatively curvilinear) relationship between
outsourcing and performance, with the top of
the curve presenting the performance optimum.
A ‘‘fit’’ perspective. Despite the heightened
publicity of global sourcing, many firms have
been highly dissatisfied with their sourcing
performance. The problem may be due to the

46. fact that many researchers and practitioners have
adopted a deterministic view in evaluating the
global sourcing strategy–performance relation-
ship, without exercising caution that such a view
tends to overgeneralize the sourcing benefits.
Researchers often adopt the contingency
approach in representing a ‘‘fit’’ perspective
of the environment–strategy–performance rela-
tionship. Extant research has confirmed that
some environmental factors indeed exerted
moderating effects on the sourcing strategy–
performance relationship. In the manufacturing
global sourcing strategy: an evolution 7
Insourcing/Onshoring Outsourcing/Offshoring
F
ir
m
p
e
rf
o
rm
a
n
ce

47. Figure 1 A curvilinear relationship between the degree of global
outsourcing and firm performance.
context, Murray, Kotabe, and Wildt (1995)
concluded that the financial performance advan-
tage of global insourcing over global outsourcing
of nonstandardized (i.e., major) components
strengthened with increased product innova-
tions, process innovations, and asset specificity.
Using foreign firms manufacturing in China
as subjects of their study, Murray, Kotabe,
and Zhou (2005) found that global outsourcing
of major components (in the form strategic
alliance-based sourcing) did not affect market
performance. Instead, product innovativeness
and technological uncertainty moderated
such a relationship. Specifically, at low levels
of product innovativeness/technological uncer-
tainty, the use of strategic alliance-based
sourcing of major components by the sourcing
firm is positively related to market perfor-
mance. However, at higher levels of product
innovativeness/technological uncertainty, the
sourcing–performance relationships become
negative.
In refuting the popular arguments that
insourcing or outsourcing will lead to superior
performance, they found that sourcing strategy
per se did not significantly affect performance.
Instead, the sourcing strategy–performance
relationship was driven by factors underlying
sourcing strategy choice. They further cautioned
against the universalistic normative implications
for firms deciding on whether to insource

48. or outsource their value-chain activities
and stressed the value of contingency-based
theoretical approaches.
As discussed earlier, global sourcing of
services did not take place until the second
wave of global sourcing; therefore, extant
literature on global sourcing of services (see
SERVICES MARKETING STRATEGY; SERVICE
INNOVATION MANAGEMENT) is limited when
compared to that in manufactured goods.
Murray and Kotabe 1999 found that similar
to components and finished-goods sourcing,
supplementary services were sourced globally,
either by insourcing or outsourcing. The higher
the asset specificity and the lower the transaction
frequency of the supplementary services, the
higher the global insourcing used. Finally,
insourcing and offshoring of supplementary
services were negatively related to the market
performance of a service.
The fit perspective is therefore summarized
as follows: There is a range of contingency
factors (i.e., capital intensity, degree of service
inseparability, market uncertainty, and transac-
tion frequency) at the transaction-, firm-, and
context-levels. These factors determine how
much global outsourcing (both onshore and
offshore) ought to take place from a perfor-
mance perspective. To an extent, the contin-
gency factors also explain how much global
outsourcing actually takes place in practice. Fit
is achieved when the actual global outsourcing
level is in accordance with the level predicted

49. 8 global sourcing strategy: an evolution
on the basis of the contingency factors. If a firm
matches a global outsourcing decision to the rele-
vant contingency factors, the resulting strategic
fit helps achieve superior performance.
A ‘‘balanced-fit’’ perspective. The previous
discussion raises two related questions. First,
are these contradictory or rather complementary
perspectives; if they are complementary, how
do they complement each other? Second, how
can we, taking into account these perspectives,
explain the large increases in offshore and global
outsourcing? We now seek to answer these two
questions on the basis of the extant literature,
specifically by drawing upon possible conceptual
angles on global outsourcing.
To describe how the balance and fit perspec-
tives complement each other, and to explain
why over the past two decades or so we have
witnessed the degree of global sourcing shifting
toward more offshoring, we need to draw more
directly upon key academic perspectives on
global sourcing. We summarize 11 such perspec-
tives in Table 4.
It is not in the scope of this article to describe
each perspective in detail or to show how
different perspectives are useful in predicting
global outsourcing (for a more detailed descrip-
tion, see Mol, 2007). However, it is important

50. to note that these perspectives operate at three
different levels: the transaction, the firm, and
the industry and institutional contexts. Taken
together, they represent almost all the contin-
gency factors that the academic literature has
produced to date. Which of these perspectives
matters most is to an extent determined by
the empirical context in which outsourcing is
investigated. Some of the perspectives have been
more prominent than others in recent academic
studies of outsourcing. Transaction-cost
economics and the resource-based view come
to mind as examples, which may reflect their
actual importance in practice.
This takes us back to the two questions. The
first question can be answered by stating that
exactly where the optimal point of outsourcing
(balance) lies is determined by the scores on the
contingency factors (fit). In terms of the second
question, the optimal point in terms of how much
a firm should engage in offshoring will shift over
time. Over the past two decades or so, we have
witnessed that the degree of global sourcing has
shifted to the right in Figure 1, that is, toward
more outsourcing and offshoring. This implies
that changes in both the level of the contingency
factors as well as their constitution (i.e., which
variables matter and to what extent) have caused
the increase in outsourcing and offshoring levels.
Taken together, the implication is that the
balance in global outsourcing has shifted toward
higher levels of outsourcing because of …

51. export performance
Luis Filipe Lages and Carlos M. P. Sousa
INTRODUCTION
The area of export performance is attracting
both academic and managerial attention at
an increasing pace. For more than three
decades (1964–1998), work in the field
was mostly concerned with understanding
export-performance determinants. With the
publication of a special issue on export per-
formance measurement in the Journal of
International Marketing in 1998, research in this
topic received a new boost. Since then, several
works have been presented to justify the exis-
tence of divergent findings in this field (Lages
and Lages, 2004; Lages, Lages, and Lages,
2005; Diamantopoulos and Kakkos, 2007).
Simultaneously, new works appeared arguing
that export managers are not only proactive but
also reactive to past results. As a consequence,
research should also start considering export
performance as an independent variable (Lages
et al., 2008b).
Today, after almost half a century of research
in this theme, there is very little consensus on
the key antecedents and outcomes of export
performance as well as how export performance
should be defined and measured (Sousa, 2004;
Sousa, Martinez-Lopez, and Coelho, 2008).
Not surprisingly, the current literature on

52. export performance is fragmented, diverse,
and inconsistent, hindering advancement
in the field. It is fragmented because of
numerous studies in the literature that are
characterized for adopting a variety of analytical
techniques and methodological approaches.
It can be classified as diverse because of
the different determinants and measures of
export performance (see STRATEGIC EXPORT
MARKETING–ACHIEVING SUCCESS IN A
HARSH ENVIRONMENT). Finally, it is consid-
ered inconsistent because of the different
and often contradicting findings that exist in
the export-performance literature. Despite
the critical importance of this theme both
from public policy making and managerial
perspectives, in our view, no consensus will exist
in the literature until an established measure of
export performance is used. The purpose of this
article is to provide an overview of the literature
on export performance and a list of potential
directions for future research.
SUBJECTIVE OR OBJECTIVE MEASURES?
Over the last five decades, a wide diversity of
measures has been used in the exporting liter-
ature to assess performance (Diamantopoulos
and Kakkos, 2007). A first choice to be made
is between subjective and objective measures
(see MARKETING METRICS). Supporters of
subjective assessment argue that, although
objective assessments in measuring actual
export performance may be regarded as being
‘‘more trustworthy,’’ these measures raise

53. different measurement problems. Obtaining
accurate objective data on export performance
is very hard because export managers are rarely
willing to respond effectively to absolute values
(Lages, Lages, and Lages, 2005). They will also
argue that managers often disagree about which
operational measures to use when setting targets
because performance assessment is idiosyncratic
to the type of firm and its environment, and
some measures (e.g., profitability, sales, and
ROI) raise comparability problems due to
different accounting practices within strategic
business units (SBUs) and across firms (Styles,
1998). Another major obstacle is that financial
reports hardly ever make a distinction between
the performance of domestic and export markets
operations and even more seldom provide data
on each export venture. As a consequence,
objective metrics are rarely used because it is
often impossible to establish a common defini-
tion of success/failure or fixed reference points
across firms. On the other hand, by measuring
perceived performance, researchers are able to
capture the degree to which performance has
matched the aspiration levels of the firm from
one year to the next. The imaginary line sepa-
rating success from failure will be determined by
the level of expected performance and will serve
as a useful starting point for future decision
making. In sum, one may assume that an indi-
vidual export venture will be successful when
targets are met or exceeded and unsuccessful
when it is below this line (Lages et al., 2008b).
Organizational learning theory posits that
Wiley International Encyclopedia of Marketing, edited by

54. Jagdish N. Sheth and Naresh K. Malhotra.
Copyright © 2010 John Wiley & Sons Ltd
2 export performance
performance achievement and satisfaction are
crucial in triggering action, because managers
are assumed to have a set performance goals
to which performance outcomes are compared.
Subjective measures of performance capture
the degree to which performance matched these
goals and aspiration levels of the firm, and
seem to be directly amenable to comparison
across firms. Managerial perceptions of the
achievement of these exporting goals and
satisfaction with the exporting activity may
play a key role in the definition of firms’ export
activities (Lages et al., 2008b). Future research
should consider both objective and subjective
dimensions of export performance (Katsikeas,
Leonidou, and Morgan, 2000; Sousa, 2004).
AGGREGATED OR DESEGREGATED
MEASURES?
Past research suggests that no single measure is
adequate to assess export performance. The use
of multiple measures and ways to measure export
performance is necessary to fully realize the
strengths of each indicator and to minimize the
impact of their shortcomings (Sousa, 2004). No
approach is perfect, and through a combination
of several approaches one may increase the
likelihood of having solid findings. Hence, for

55. testing the robustness of export-performance
findings, future research is strongly encouraged
to use a combination of different approaches:
total item aggregation, intermediary aggrega-
tion, and total desegregation approaches. While
in the most aggregated approach, findings result
in a loss of specific information, because the
distinction among the independent items is
lost, in the most disaggregated approach, it
becomes harder to have an overall picture of
export performance. As a consequence, the most
common approach to assess export performance
is an intermediary aggregation of various
items into single performance measures (i.e.,
commonly denominated as factors or constructs)
(Lages, Lages, and Lages, 2005). Although this
combination of different measures into factors
allows better contextualizing the complex
performance construct (Katsikeas, Leonidou,
and Morgan, 2000), this approach does not
precisely capture the different dimensions
of the performance phenomenon (Doyle and
Stern, 2006). In addition, some measures
may correlate differently with other measures
and different measures may have different
weights depending on the context. For example,
in the case of Western companies, rankings
for specific performance variables have been
created and profits became one of the most
important performance measures. However,
when managers focus on seeking outstanding
profits, this may lead to poor results in other
export performance metrics such as market
share (Doyle and Stern, 2006). Likewise, when
managers focus too much on sales volume, this

56. might create problems on sales revenue, and, as
a consequence, create image problems. As such,
for future research, we strongly advocate the
use of aggregation approaches in combination
with single-performance items. This way, by
using the most disaggregated approach, it will
also be possible to treat each one of the items
included in the model individually (Doyle and
Stern, 2006).
STATIC OR DYNAMIC APPROACHES?
Although management research has been
gradually moving from a static analysis to a
more dynamic approach, research involving
export performance predominantly follows
a static approach. The literature on export
performance rarely looks to change in terms of
export performance and rarely implements a
longitudinal research. This makes it difficult to
implement dynamic models and limits effica-
cious measurement of performance (Katsikeas,
Leonidou, and Morgan, 2000). Future longi-
tudinal research allows a better analysis of
the relationship between export performance
and its determinants. Future research is
strongly encouraged to build on organizational
learning theory and strategic dynamics to better
understand how export performance change
occurs in foreign markets. Notwithstanding the
significant amount of research conducted in
exporting, a review of the literature indicates
several shortcomings in this field.
SHORT- OR LONG-TERM ASSESSMENT?

57. Although the majority of the literature assumes
that managers undertake a proactive and
export performance 3
long-term perspective of export performance, a
number of studies have suggested that western
firms are often reactive and short-term oriented
(Madsen, 1998; Lages and Lages, 2004). Most
studies do not specify the time period and
assume that export performance is a long-term
issue (Diamantopoulos and Kakkos, 2007).
Among the rare exceptions that do so, while
some prefer to use a more dynamic approach by
trying to capture performance over a 12-month
period (Morgan, Kaleka, and Katsikeas, 2004;
Lages and Lages, 2004), others follow a more
static approach by assessing export performance
levels in a specific year (Lages, Lages, and
Lages, 2005). To organize the literature in terms
of export performance measurement, future
research should make this aspect clear. Indeed,
short-term analysis is a critical issue from a
managerial perspective as many top managers
wish to see short-term performance effects and
do not give enough time to observe the effects
of strategy in the long term. However, being
overly focused on short-term goals may be
risky for the long-term development of a firm’s
capabilities (Madsen, 1998). The importance of
performance dimensions may also vary across
stakeholder groups (e.g., investors, employees,
and customers) and depend on whether the
focus is on the short term or the long term

58. (Sousa, 2004). A manager who focuses on
the long term to increase the market share
in a foreign market may not perceive export
performance to be low when export sales or
export profits are weak.
A DEPENDENT OR AN INDEPENDENT
VARIABLE?
Interestingly, and despite the fact that the
overwhelming majority of studies analyze
performance as a dependent variable, it is
uncertain which measures should be analyzed
as causally dependent. Researchers tend to put
export performance as a dependent variable
even when the data collected on strategy
and performance variables relate to the same
period of time. However, managerial practice
is expected to be dynamic. Past performance is
highly likely to influence organizational change
as managers tend to respond to performance
feedback. However, to our knowledge, no study
has analyzed the impact of past performance
on strategic change in international markets.
Performance as an independent variable has
been highly unexplored in an international
marketing context (Lages and Montgomery,
2004; Lages et al., 2008b are two exceptions).
As the underlying aspects of export-marketing
strategy are driven by managerial action, greater
understanding of managerial learning from
past export performance can provide marketing
academics and practitioners with strategic
insights into enhancing export performance (see
CONCEPT OF CAUSALITY AND CONDITIONS

59. FOR CAUSALITY).
THEORETICAL OR MANAGERIAL
APPROACHES?
In the late 1990s, some attempts were made to
develop comprehensive and psychometrically
sound measures of export performance (Styles,
1998; Zou, Taylor, and Osland, 1998). Despite
these attempts, a major concern remained that
export-performance assessment tends to be
misaligned with the managerial world (Madsen,
1998; Lages and Lages, 2004). Several reasons
justify the need for a sound managerial evalu-
ation of export performance. If one considers
that exporting actions have an impact on the
overall failures/successes of firms, it becomes
necessary to have tools that allow managers to
monitor export performance. Proper measures
will provide decision makers with a reference
to support the definition of future short- and
long-term actions, such as the allocation of
human and financial resources to specific export
ventures. Export performance evaluation is
equally important at the public-policy level.
The benefits provided by the exporting activity
encourage public policy makers to implement
export assistance programs to enhance firms’
global marketing strategies. As a consequence,
a proper assessment of export-marketing
strategy (Lages, Abrantes, and Lages, 2008a)
and export performance will have an impact
on any country’s economic health (Lages and
Montgomery, 2005).
During the last four years, some export

60. measurement tools have been developed with
greater managerial- and public-policy flavor.
One of these tools is the STEP scale (Lages and
4 export performance
Lages, 2004), which addresses the short-time
horizon frequently used by managers and
public-policy makers to assess performance.
Two other managerial tools – the APEV scale
and the PERFEX scorecard (Lages, Lages,
and Lages, 2005) – were specifically designed
to be included in annual reports and to assess
export performance both at the corporate
and exporting venture levels. The APEV
scale was inspired by the EXPERF measure
(Zou, Taylor, and Osland, 1998). All these
three scales (EXPERF, STEP, and APEV)
are of a reflective nature and were developed
using CONFIRMATORY FACTOR ANALYSIS.
More recently, Diamantopoulos and Kakkos
(2007) suggest that this field should also use
formative indicators. As such, the authors
propose the AEP index as a composite measure
of managerial-subjective evaluations of export
performance. This index enables the assessment
and comparison of multiple export objectives,
both within and between firms, by allowing the
setting of the weights of the different indicators
to be zero. From a managerial perspective, the
major advantage of using performance metrics
of a formative nature is that, in contrast to
reflective aggregated measures, it becomes
possible to identify which particular indicators

61. the managers have in mind when assessing
export performance.
DETERMINANTS OF EXPORT PERFORMANCE
Two broad theoretical approaches, the resource-
based paradigm and the contingency paradigm,
provide the basis for classifying the determinants
of export performance into internal and external
factors. Specifically, internal determinants
are justified by resource-based theory, while
external determinants are supported by contin-
gency theory. Resource-based theory focuses
on how sustained competitive advantage is
generated by the unique bundle of resources at
the core of the firm. The contingency paradigm
suggests that environmental factors influence
the firm’s strategies and export performance
(see STANDARDIZATION/ADAPTATION OF
INTERNATIONAL MARKETING STRATEGY).
The effects of various firm characteristics on
export performance are dependent on the
specific context of the firm. An extensive list
of studies has already identified key determi-
nants of success in terms of the internal and
external factors influencing successful export
performance (Sousa, Martinez-Lopez, and
Coelho, 2008). However, there is a lack of
agreement on the domains and measurement of
the determinants of export performance. This
obstructs development of the theory on export
performance, and makes it very difficult to
compare the findings from different studies and
literature. As a result, attempts should be made
to develop clear conceptual domains and sound

62. schemes to measure the variables. Nonetheless,
after more than four decades of research on
the analysis of the relationships among internal
and external forces, export-marketing strategy
and export performance, researchers now agree
that export performance must be analyzed
as a function of the fit between the firm’s
environment and the selected export-marketing
strategy.
Despite the argument that control variables
deserve as much attention and respect as do inde-
pendent and dependent variables, most export
performance studies fail to include them (Sousa,
Martinez-Lopez, and Coelho, 2008). This disre-
gard for the role of control variables is an issue
of concern, and researchers are encouraged to
account for these effects in future studies. In
addition to the analysis of possible direct rela-
tionships (as undertaken by most investigators),
future research is also encouraged to analyze
the moderating effects of external forces and
the indirect impact of environmental forces on
export performance through their influence on
strategy. The export-performance literature has
reached a level of sophistication that researchers
should be interested in detecting not only the
main effects of independent variables but also
their indirect and moderating effects.
UNIT OF ANALYSIS
There is no consensus in the literature regarding
the level of performance assessment. Most export
studies have looked at export performance at
the firm level (Sousa, Martinez-Lopez, and

63. Coelho, 2008). One possible explanation for this
predilection by researchers could be the fact
that respondents are more willing to disclose
information at this broad level. The underlying
export performance 5
theoretical justification for firm-level studies is
the theory on internalization (Rugman, 1980).
This theory states that, in imperfect markets,
firms should internalize the firm-specific advan-
tages, both tangible and intangible, to extract
maximum economic rent. Consequently, the
study of export performance at the firm level
has the benefit of capturing firm-specific advan-
tages, which are derived not only from the
development of a particular product but also
from the total learning process of the firm.
This allows examine the influence of potential
determinants (e.g., overall firm strategy, organi-
zational culture, organizational structure, R&D,
etc.) that are not directly related to a specific
venture. Other units that are commonly used
are at the product level, strategic business-unit
level, and product–market export venture level.
Proponents of these three levels argue that it is
unrealistic to expect that the same strategies can
lead to the same results in all export products,
SBUs, and product–market ventures. Naturally,
the use of different levels of analysis will lead to
different (and sometimes conflicting) insights on
the topic.
FRAMES OF REFERENCE AND DIRECTIONS

64. FOR FUTURE RESEARCH
Researchers use different frames of reference.
In most cases, performance measurement tends
to be self-driven. More recently, some works
have explored performance assessment versus
competitors (Morgan, Kaleka, and Katsikeas,
2004). Future research should consider the use
of customer-, stakeholder-, and network-driven
perspectives. In addition, employees within
the same firm will hold different viewpoints of
the same reality. As a consequence, the use of
multiple informants within each firm will bring
added value to assess this complex phenomenon
(Sousa, 2004). With rare exceptions (Styles,
1998; Zou, Taylor, and Osland, 1998; Lages and
Lages, 2004), most studies have used a single
country or region as a frame of reference. The
performance measures used in these studies
often reflect the unique emphasis that different
countries place on exporting (Zou, Taylor, and
Osland, 1998). As a result, attempts should
be made to validate scales across countries.
However, considerable difficulties are likely to
be encountered in establishing equivalence and
comparability of research in different studies.
Researchers have to develop cross-cultural
conceptualization and measurement that reflect
true cultural differences among markets along
the underlying construct under study. This
can play an important part in advancing
export-marketing theory by stimulating cross-
cultural export-marketing studies that investi-
gate specific similarities and differences among
and between countries (Styles, 1998).

65. The United States is the most researched
country in export-performance studies and
despite a rise in the number of studies
conducted outside the United States, there
are still countries from certain parts of Asia,
South and Central America, the Caribbean, and
Africa that have received little or no attention
from researchers (Sousa, Martinez-Lopez,
and Coelho, 2008). Further research should
consider the inclusion of such countries to
investigate whether our current knowledge can
be generalized to these countries, especially
those from the developing world. Firms from
developing countries are particularly interesting
to study in future research because of their
growing presence in an integrated global
economy. In addition, most export performance
studies involve samples drawn form manufac-
turing industries with relatively few studies
investigating export performance of service
firms. While there are some determinants and
measures of export performance that apply to
both manufacturing goods and services, it is
likely that additional variables must be taken
into account that relate to the specific charac-
teristics of services firms when operating in the
international arena (Sousa, Martinez-Lopez,
and Coelho, 2008). Considering that services
account today for around 20–30% of world
trade, there is an increasing need for researchers
to test whether traditional theories of GLOBAL
MARKETING STRATEGY: PERSPECTIVES
AND APPROACHES apply to the international
marketing of services.

66. Taken together, the existing shortcomings
in the export-performance literature create
new research opportunities as they leave inter-
national marketing academics and practitioners
without a clear understanding of the effects of
6 export performance
export performance as well as of the factors
influencing it.
ACKNOWLEDGMENT
This work was funded by ‘‘Fundação para a
Ciência e a Tecnologia’’ and NOVA FORUM.
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