International Business Review Vol. 5, No. 4, pp.

277-394, 1996
© Copyright © 1996 Elsevier Scicnce Ltd
Pergamon 0969-5931(96)00019-4 Printed in Great Britain. AN rights reserved
0969-5931/96 $15.00 + 0.00

Dunning’s Eclectic Theory andthe vers

Smaller Firm: the Impact of
Ownership and Locational
Advantages on the Choice of
Entry-modes in the Computer
Soîftware Industry
Keith D. Brouthers,* Lance Eliot Brouthersi and
Steve Werner
*East London Business School, University of East London,
Longbridge Road, Dagenham, Essex RMS& 2AS, UK
+University of Texas at San Antonio, College of Business, Division of
Management and Marketing, San Antonio, TX 78249, USA
YDepartment of Management, University of Houston, Houston,
TX 77204, USA

Abstract — This paper set out to investigate the entry-mode selection activities of small- and
medium-sized service firms. Based on Dunning's eclectic theory (1988, Journal of
International Business Studies, Vol. 19, No. 1, pp. 1-31; 1993, Multinational Enterprises and
the Global Economy, Addison-Wesley) and previous entry-mode research, the entry-mode
selection activities of US computer software firms were examined. The findings tend to
indicate that ownership and locational advantages influence the entry-mode choice of small-
and medium-sized firms in a manner similar to that of larger firms. Additionally, this study
confirms the applicability of the eclectic theory of foreign direct investment to a second sector
of the services industry. Copyright © 1996 Elsevier Science Ltd

Key Words — Entry-mode, Software, Eclectic Theory, FDI.

Keith D. Brouthers (DBA — US International University, San Diego) is a reader in strategic

management at the East London Business School, University of East London. His research has
been published in several journals including: Management International Review and Long
Range Planning. Lance Eliot Brouthers (PhDs — University of Florida and Florida State
University) teaches courses in international business and strategy at the University of Texas at
San Antonio. His research has been published in several journals including: The Journal of
International Business Studies, Long Range Planning, International Business Review and
Columbia Journal of World Business. Steve Werner (PhD University of Florida) is an assistant
professor in the Department of Management at the University of Houston. He has published in:
The Academy of Management Journal, The Journal of International Business Studies, Journal
of international Management, and Columbia Journal of World Business.
AI authors contributed equally to this paper and are listed in alphabetical order. AI
correspondence should be sent to Dr Keith Brouthers.

377
378

International Introduction
Business Past research in the area of entry-mode selection has largely been theoretical
Review (Gannon, 1993; Minor et al., 1991; Okoroafo, 1991; Contractor, 1990; Hill er
5,4 al, 1990; James, 1990; Douglas and Craig, 1989; Hennart, 1989; Contractor
and Lorange, 1988; Dunning, 1988; Douglas and Wind, 1987; Root, 1987;
Anderson and Gatignon, 1986; Boddewyn et al., 1986; Calvert, 1981;
Williamson, 1981; Carman and Langeard, 1980; Bower, 1968).
The empirical research that does exist has primarily focused on the
manufacturing sector (Kwon and Konopa, 1993; Kim and Hwang, 1992; Chu
and Anderson, 1992; Clegg, 1990; Gomes-Casseres, 1989; Gatignon and
Anderson, 1988; Anderson and Coughlan, 1987; Contractor, 1984; Goodnow
and Hansz, 1972; Stopford and Wells, 1972) or contained a mixture of
industries (Kogut and Singh, 1988; Harrigan, 1985; Buckley and Mathew,
1980). More recently this line of inquiry has been extended to the services
sector (Erramilli and Rao, 1993; Agarwal and Ramaswami, 1992; Erramilli,
1991; Erramilli and Rao, 1990; Terpstra and Yu, 1988; Weinstein, 1977,
1974).
However, to date little entry-mode research has focused on the international
activities of small- and medium-sized firms. À review of past entry-mode
research shows that the studies concentrated almost exclusively on large
multinational firms, ignoring the activities of smaller firms. Yet small- and
medium-sized firms are significant players in the international marketplace
(Simon, 1992; Barrett, 1992). While their economic impact is not as great as
the larger firms, small- and medium-sized firms are the fastest growing
segment in international trade (Holstein and Kelly, 1992; Barrett, 1992).
This study represents an attempt to extend what is known about the
relationship between the OLI (Ownership, Location, Internalization) model
(Dunning 1993, 1988) and entry-mode selection, and differs from previous
research in three respects. First, rather than replicate previous studies of large
multinational firms, we select an industry that is almost exclusively populated
by small- and medium-sized firms: the computer software industry.! Second,
we attempt to add to the two previous empirical research studies (Agarwal
and Ramaswami, 1992; Terpstra and Yu, 1988) that have applied Dunning’s
theory to the services sector. Third, we explore a high-technology area of the
services sector that has experienced rapid growth in the past two decades but
has received little attention from researchers to date: the computer software
industry (Gartner and Thomas, 1993).
The paper proceeds in the following order. First, we review Dunning’s
eclectic theory of international production as it applies to entry-mode
selection and discuss each of the three categories (ownership advantages,
location advantages and internalization advantages). Second, we review

For this study small- and medium-sized firms are defined as firms with annual sales between
one million and one billion US dollars. There appear to be only a handful of software firms
with sales in excess of $1 billion while the majority of software firms have sales of only a few
million dollars.
 379

previous eclectic theory based entry-mode selection research. Third, we Dunning’s

discuss the entry-mode options used in previous research studies and Eclectic Theory
hypothesize a relationship between the two general entry-mode selection
categories and the choice of entry mode. Fourth, we describe the methodology
used in the study and describe sample characteristics and procedures. Finally,
we discuss the data analysis and study results and implications of the findings.

Dunning’s Eclectic Theory

Dunning’s eclectic, or OLI, theory as applied to entry-mode selection states
that firms will choose the most appropriate form of entry into a new
international market by considering their ownership advantages, the location
advantages of the country under consideration, and the internalization
advantages of the particular situation.

Ownership Advantages
Ovwnership (O}) advantages are firm-specific competitive advantages
(Porter, 1980) that the firm may possess. These ownership advantages are
created through a firm’s international experience, size, their ability to
differentiate their product or service, the adaptability of the product or
service, the service intensity and the technology intensity of their offerings
(Dunning, 1993). Examples of ownership advantages might include unique
products or services which cannot easily be duplicated by competitors, or
the possession of financial and experiential resources which provide a
method for entry into otherwise closed markets. Ownership advantages
need to be both unique and sustainable in order to provide the firm with a
competitive advantage in entry-mode selection (Porter, 1980).

Locational Advantages
Location (L) advantages are country-specific factors related to the market
under consideration — market potential and market risk (Root, 1987) — and
are available to all firms in that particular market (Dunning, 1988).
However, some firms are better able to utilize these location advantages
then other firms, thus enhancing their competitive advantage either within
the new market, for example through better coordination of within-country
activities, or internationally, for example providing lower cost labor which
would result in a cost advantage in all markets where the firm’s products are
sold (Dunning, 1988). Measures of location advantages include sales
demand and potential demand, differences or similarity in culture,
economic, legal, political and trade policies, similarity of market
infrastructures and the availability of lower production costs (Dunning,
1993).

Internalization Advantages
Finally, the internalization (1) advantages are concerned with the costs of
choosing a hierarchical mode of operation over an external mode (Dunning,
1993, 1988). The internalizing of international operations comes at a cost.
380

International These costs must be compared with the costs of finding and maintaining an
Business external relationship to perform the same functions in the international
Review market. Williamson (1981) refers to these costs as transaction costs. While it
5.4 is strongly believed that these transaction costs must be included in
consideration of entry-modes (Contractor, 1990; Hennart, 1989; Gatignon and
Anderson, 1988), they unfortunately cannot be accurately calculated before
the international operation has been established (Dunning, 1993); Buckley,
1988). Because of this inability to calculate internalization advantage, we
have excluded this factor from the present study.?
Dunning (1993) has recently suggested that the motivation for foreign
market expansion may influence the entry-mode selection process, despite
perceptions of the OLI advantages. Motivations can include market-seeking,
resource-seeking, technology-seeking, cost-reduction seeking, and client-
following activities. Some preliminary evidence on the influence of
motivational factors can be found in a few previous entry-mode studies (Kim
and Hwang, 1992; Erramilli and Rao, 1990). Dunning’s motivations for
engaging in FDI (Foreign Direct Investment) were not included in this study
because, based on our understanding of the dynamics of the industry, most US
software firms appear to have the same motive for foreign entry, market-
seeking.
Resource-seeking and technology-seeking activities tended not to motivate
foreign investment in the past because US software producers were the most
technologically advanced in the worid and the US market contained the
largest, best-trained resources in this industry. However, as the software
industry continues to develop outside the US, technology-seeking activities
may begin to motivate foreign investment. For example, US-based Symantec
recently merged with Canadian based Delrina in order to add Delrina’s
technology to Symantec’s products (Software Magazine 15, 1995, p. 14).
Second, the cost-reduction seeking motivation tends to be of only minor
concern since the main industry cost is software development and software
development requires highly skilled personnel, most of which exist only in
the US. Finally, client-following activities are usually not required in the
software industry because software development is highly mobile, can easily
cross national borders, and packaged software can be exported to almost any
location in the world within a few days. Thus, US software firm expansion
appears to be driven primarily by the motivation of seeking new markets for
existing products.

2Erramilli and Rao (1993) and Gatignon and Anderson (1988) have attempted to measure
transaction costs ex ante through the use of management perceptions. However, as pointed out
in the transaction cost literature, actual transaction costs cannot be properly judged ex ante but
are affected by the actions of the parties involved after the international operation has been
established (Dunning, 1993). For example, while cooperative ventures are formed with the
expectation that all parties will contribute the agreed-upon resources, after formation
cooperative venture partners may experience shirking or management conflicts. These tactics
may adversely affect the venture’s operation and create additional transaction costs not
anticipated prior to venture formation (Gomes-Casseres, 1989).
 381

Previous Research Dunning’s

Researchers of entry-mode selection have tested parts of the eclectic theory Eclectic Theory
in a number of industrial settings. Terpstra and Yu (1988) used measures of
ownership and locational advantages for a study of the largest US advertising
agencies. They included five variables in their study: market size, geographic
proximity, firm size, firm international experience and oligopolistic reaction.
Market size, measured by GDP of the host country, was found to have a
significant positive impact on foreign direct investment in the host country.
Firm size and experience, measured respectively through worldwide billings
and the ratio of foreign billings to worldwide billings, were both found to be
significantly positively related to FDI activity. Finally, oligopolistic reaction,
measured by the number of competitor US advertising agencies with offices
in the host country, was found to be significantly positively related to foreign
investment.
Clegg (1990) makes the case for licensing as a preferred mode of entry
based on ownership (firm-specific) advantages and locational (country-level)
advantages. Using aggregate data for the manufacturing sectors of five
industrialized countries, Clegg empirically examines these two parts of the
eclectic theory.* Cleggp’s findings were mixed but results for the ownership
advantage variables were fairly weak. Locational advantage variables
appeared to have better support but the findings in this area were not clear,
and the results appeared to vary by country.
Agarwal and Ramiswami (1992) included measures of ownership.
locational and internalization advantage in their study of the US equipment
leasing industry.* Findings indicated that large, experienced firms used more
integrated entry modes, whereas high differentiation firms used independent
modes. Firms entering high potential markets preferred integrated modes.
Markets with high investment risk saw little investment as did high
contractual risk markets.

Entry-Mode Options
Previous entry-mode research literature has suggested that the numerous entry-
mode structures can be classified into three distinct groups: independent,
cooperative, and integrated* (Kim and Hwang, 1992; Hill et al, 1990;

3Ownership advantage variables included technology intensity, research and development

intensity, capital intensity and level of firm knowledge (measured by management intensity of
industry). Locational advantage was measured by inward and outward licensing activity, as a
percentage of industry production, for nine industrial segments in each of the five countries.
“Ownership advantages were measured using firm size, multinational expérience and ability to
develop differentiated products. Location advantages were measured using market potential
and investment risk. Internalization advantage was measured using contractual risk.
SConsistent with Hill ef al. (1990), the authors do not include studies of exporting (such as
Cavusgil and Naor, 1987 or Bilkey, 1978). The reason for excluding exporting is that many
services are not exportable, e.g. hotel rooms, airline seats, restaurants, amusement parks
(Carman and Langeard, 1980).
382

Intemational Contractor, 1990; Root, 1987; Anderson and Gatignon, 1986). Some literature
Business suggests that firms may change entry modes over a period of time, however
Review for the purposes of this study only initial entry modes are examined.
5.4
Independent Mode
In the independent entry-mode option, the domestic firm relies on a separate
company that it does not own or control for its “manufacturing”, sales, and/or
services (Vernon and Wells, 1976). Examples of independent entry-modes are
licensing, franchising, agency/distribution, and contracting. Under the
independent entry-mode, the firm takes no equity stake in the international
venture. This option appears to be the most appealing since the initial
investment (resource commitment) by the domestic firm is limited to the cost
of the products, training, and possibly a marketing subsidy. The drawbacks
include both (1) the domestic firm’s lack of control over the methods used to
distribute and market its services and (2) the extent of effort used by the
independent company on behalf of the domestic firm and its products/services
(Agarwal and Ramaswami, 1992; Kim and Hwang, 1992; Boddewyn et al.
1986).

Cooperative Mode
In the cooperative entry-mode option, also referred to as the joint venture
or strategic alliance option in some of the literature, the domestic firm and
one or more other independent firms join to provide “manufacturing”,
sales, and/or services in the target market. Sometimes the independent
firm is a resident of the target market, but other times the cooperative
venture partner may be a third party that possesses an attribute other than
target market location, such as financial or technical support (Hamilton,
1990).
The advantages of cooperative entry-modes are that they may allow for
some control by the domestic firm, for the possibility that the domestic firm
will attain 100% ownership at some later date, and for possible reduction of
financial cost (resource commitment) — and thus financial risk — for the
domestic firm (Contractor and Lorange, 1988). Additionally, new researchf
(Dunning, 1995) has suggested that cooperative entry modes may provide
increased ownership and locational advantages to firms. This research also
suggests that internalization costs may be lower with cooperative modes than
with either independent or integrated modes. However, these benefits are only
available to firms that are able to assimilate cooperative modes within their
organizational structure, which may be difficult to do.
The cooperative entry-mode option is more expensive, and therefore more
financially risky, than the independent entry mode. Moreover, the sharing of
costs and control imply that income is also shared between firms, thus

The authors would like to thank the anonymous reviewer for bringing this new line of
research to our attention.
 383

reducing domestic firm income below what it would receive in a wholly- Dunning’s
owned operation’ (Agarwal and Ramaswami, 1992; Kim and Hwang, 1992; Eclectic Theory
Contractor and Lorange, 1988).

Integrated Mode
The final entry-mode option identified by researchers is the integrated
mode. Under this entry method, the domestic firm establishes its own
“manufacturing”, sales, and/or service organization in the target market.
Integrated entry-modes can be achieved in one of two methods, acquisition
of an existing entity or greenfield start-up. Integrated entry-modes have a
number of advantages: they give the domestic firm the ability to control all
aspects of the target market venture and to have full ownership of all income
generated from the venture. Drawbacks include high cost requirements
(resource commitment) that may be beyond the financial reach of the
domestic firm. Additionally, managerial resources may not be sufficient to
handle the extra workload of a greenfield operation. The time required to set
up this type of entry-mode may also be prohibitive: if the domestic firm is
already under pressure to move into international markets, the time to
establish a wholly-owned operation may make this option unacceptable.
Even acquisition of existing operations may take too much time since
potential candidates need to be identified, evaluated, approached, and
negotiated with. The final drawback of the integrated mode is that any
specialized market knowledge of the target market is not readily available
within the entity, as it would be for a target-based firm (Agarwal and
Ramaswami, 1992; Kim and Hwang, 1992; Contractor and Lorange, 1988).
This lack of market-specific knowledge also exists in acquisitions where the
internal transfer of market-specific knowledge may be hindered by cultural,
procedural or ideological barriers.
Ownership advantages are a measure of the risk inherent in the products,
services and processes possessed by the firm while locational advantages are
the measure of risk inherent (or perceived) in the marketplace. Ownership
advantages affect more directly the perception of the need to control the
international operation, while locational advantages more directly affects
managers’ commitment of funds. Thus for firms with high ownership
advantages, management will be more likely to choose high control integrated
entry-modes. In addition for markets with high locational advantages, firms
are more willing to commit funds and are likely to choose more integrated
entry-modes than in markets where locational advantages are low.

Hypotheses
Similar to Agarwal and Ramaswami (1992) we suggest that a firm will select
its entry mode by considering two general categories of variables: (i)

*While use of the cooperative mode may provide lower income to a firm in absolute terms, the
resources, technology and knowledge provided by the partner firm may provide a better return
on equity than could be achieved with a wholly owned mode.
384

International ownership advantages and (ii) locational advantages. Firms must also
Business consider the three basic entry-mode types: integrated, cooperative, and
Review independent. Using these concepts, two hypotheses have been derived.
54
Hypothesis 1: Entry-mode selection will be more integrated (less
independent) for firms reporting greater ownership
advantages.
Hypothesis 2: Entry-mode selection will be more integrated (less
independent) for firms reporting greater locational advantages
in the target market.

Measures
Ownership Advantages
Ovwnership advantages were measured with a composite index of four
variables: global maturation, product differentiation, adaptability of product,
and service and technology intensity.
Firm experience and size can be considered a measure of the global
maturity of a firm. Firms that are larger and have more experience will be
more mature globally and will be better able to utilize their ownership
advantages and will thus choose high control modes of entry (Dunning, 1993;
Agarwal and Ramaswami, 1902; Terpstra and Yu, 1988: Contractor, 1984).
Firm size, as measured by worldwide sales, and experience, as measured by
the percentage of foreign sales, were used to create a composite measure:
global maturation.
A firm that sells a product or service that can be differentiated or has high-
technology content runs the risk of losing their competitive advantage if they
share the knowledge with other firms. These firms will therefore utilize high
ownership and control modes of entry (Agarwal and Ramaswami, 1992; Kim
and Hwang, 1992; Gatignon and Anderson, 1988; Contractor, 1984). Need for
product differentiation was measured by averaging the responses to the two
semantic differentials: (i} rate competitive intensity from (1) many
competitors to (5) few competitors; and (ii) rate uniqueness of service from
(1) similar to (5) unique.
While consumer tastes may be drawing closer together, there are still many
differences in the ways people use different products and services (Samiee
and Roth, 1992). The ability of a firm to adapt their offering to the demands
of the host country consumer will provide a sustainable ownership advantage
that a firm will try to protect through the use of high control entry-modes
(Dunning, 1993). The need to have an adaptable product was measured by the
semantic differential: rate consumer tastes from (1) similar to the US to (5)
nothing like the US.
Finally, the service and technology intensity of the firm’s offerings may
provide an ownership advantage that is unique to the firm. This advantage
may be more easily protected from dissemination to competitor firms by
maintaining control over the international operations (Erramilli and Rao,
 385

1993). Service and technologicai intensity was measured by the semantic Dunning’s
differential: how much education is needed to sell your services, from (1) high Eclectic Theory
school to (5) advanced degree.
The standardized values for each of the four component variables were
averaged together to create the composite index. Mixing descriptive data with
surveyed data necessitated standardizing the variables when creating the
composite.

Locational Advantage
Locational advantages were measured with a composite index of four
variables: market demand, production costs, cultural differences, and market
infrastructure.
The attractiveness of a market is a driving force in much international
expansion (Dunning, 1993; Terpstra and Yu, 1988; Root, 1987, Weinstein,
1977). Markets with high current and high potential future demand provide a
firm with long-term investment potential. This market attractiveness will lead
firms to favor high investment modes of entry where they can reap the largest
rewards for the longest period of time (Dunning, 1993; Agarwal and
Ramaswami, 1992; Kim and Hwang, 1992; Terpstra and Yu, 1988; Contractor,
1984). Market demand was measured by averaging the responses to three
semantic differentials: (i) rate the competitive intensity from (1) few
competitors to (5) many competitors; (ii) rate current demand from (1) high to
(5) low; and (ïii) rate future demand from (1) high to (5) low.
The ability to provide a firm with lower production costs is one of the
more widely held reasons for FDI among multinationals. Vernon (1966) has
suggested that as products move through their product life cycle, firms tend
to shift investment from industrialized countries to developing countries,
taking advantage of lower cost production and introducing technically
older or more stable products in these less demanding markets. Thus for
products where technology is changing rapidly, these low production cost
advantages are not possible and firms will be less willing to invest in the
market. For technologies which are more stable, firms will be more willing
to invest resources to gain the low production cost advantages. The
potential for production cost advantages was measured by the response to
the semantic differential: rate the speed of technological change from (1)
slow to (5) fast.
Market risk factors also impact a firm’s entry-mode choice (Root, 1987).
Markets with unstable economic, legal and political systems create high risk
environments in which investment is discouraged (Agarwal and Ramaswami,
1992: Kim and Hwang, 1992; Terpstra and Yu, 1988; Contractor, 1984).
Markets with restrictive trade policies or vast cultural differences also
discourage investment (Agarwal and Ramaswami, 1992; Kim and Hwang,
1992; Kogut and Singh, 1988; Terpstra and Yu, 1988). Cultural differences
were measured by averaging the responses to the five semantic differentials:
rate the similarity from (1) similar to (5) different from the US of (i) the legal
386

International structure, (ii) the political structure, (iii) the social structure, (iv) culture, and
Business (v) the economic system.
Review Dunning (1993) points out the importance of market infrastructure as a
5,4 determinant of entry-mode choice. Market infrastructure affects a firm’s
ability to provide its services in its usual manner (Douglas and Wind, 1987).
When marketing infrastructure is different from that to which the firm 1s
accustomed, management will be less willing to commit resources because
the outcome is less certain and a “learning curve” effect may have to take
place. Market infrastructure was measured by the semantic differential: rate
the market infrastructure as (1) similar to the US to (5) different from the US.
The values of each of the component variables were averaged together to
create the composite index.

Entry-mode Selection
Entry-mode selection was limited to the three main categories: Integrated
(ownership of 95% or more), Joint Venture/Strategic Alliance,f and
Independent (ownership of less than 5%).

Data Collection
Data for this study were collected through a mail survey of US computer
software firms engaged in international operations. We used a sample of
computer software firms engaged in international operations drawn from
at least one of the following sources: The American Export Register
(1991); Business Week (“The Business Week 1000” sections 18B—
Computers and Peripherals and 18C—Computer Software and Services
[1991]): or Software Magazine (“Top 50 Independent Software Vendors”
[19911).
À random sample of 125 US-based computer software firms listed as
doing business outside the US were selected for the mail survey. À
questionnaire was developed and pre-tested initially in personal interviews
and later, with four computer software firms, through the mail. Prior to
mailing the final questionnaire, each of the 125 firms was contacted by
phone and each agreed to participate in the survey. The questionnaire,
accompanied by a standard cover letter and directions for completion, was
mailed to the Vice President/Director of International Software Marketing at
each company.
The researchers divided the world into eight segments, excluding the US,
and each software company was asked to complete a one-page general
questionnaire and a two-page questionnaire for each of the areas of the world
where they did business.

The terms “Joint Venture/Strategic Alliance” were used on the questionnaire instead of
“Cooperative Entry Modes” to increase respondents’ understanding. The change in
trminology was based on feedback during the try-out of the preliminary questionnaire.
 387

Results Dunning’s
Twenty-seven companies of the original 125 returned questionnaires to the Eclectic Theory
researchers, providing information on 106 market entries. Two companies
wrote back that they no longer were active in the international marketplace,
while 25 other firms completed on average 4.2 questionnaires. Of the
approximate 106 questionnaires completed, 72 contained complete
information on the ownership advantage variables and 98 had complete
information on the location advantage variables.
The overall response rate of 20% is comparable to other surveys involving
international marketing executives and service firms” (Agarwal and
Ramaswami, 1992; Nayyar, 1992; Gartner and Thomas, 1993) and slightly
higher than expected for anonymously addressed surveys (Kanuk and
Berenson, 1975).
The software firms that responded to the survey instrument indicated that,
on average, they did business in 4.8 of the eight segments of the world.
Respondents indicated that they used independent (Licensing, agents,
franchising) entry modes about 58% of the time, integrated (wholly owned

Entry-mode type
Entry- Entry- Entry-
mode 1 mode 2 mode 3 Total
G=13) (n=20) (n=39) (n=72)
Variable

1. Global maturation
Mean 0-50 —0-09 —0:15 0-00
SD 0-63 0-92 0-59 0-75

2. Product differentiation
Mean 3-27 3-20 2-88 3-05
SD 0-67 0-52 0-57 0-59

3. Adaptability of product
Mean 3.85 3-00 3-10 3-19
SD 0-80 0-73 1-05 0-96

4. Service/technical intensity Table 1.

Mean 3-23 3-15 2-41 2-74 Means and Standard
SD 0.60 1:23 0-75 0-97 Deviations by Entry-
5. Ownership advantage Mode of Composite
Mean 2.05 0-38 —0-87 0-00 Ownership
SD 1:81 1:96 2-00 2-23 Advantage Measure
and Sub-factors
Note: Entry-mode 1, Integrated: entry-mode 2, Cooperative; entry-mode 3, Independent.

’Although 125 firms, contacted by telephone, initially agreed to complete the questionnaire, the
response rate turned out to be a disappointing 20%. Follow-up calls revealed several reasons why
firms changed their minds. The two most common reasons were that: (1) the survey was
perceived as being too long, too detailed, and asked for information that was not readily
available to the respondent; and (2) the survey was perceived by the respondent as asking for
proprietary information which the firm decided not to reveal despite assurances of anonymity.
388
International — defined as stock ownership of 95% or more) entry modes 17% of the time,
Business and cooperative entry modes about 25% of the time.
Review
54 Ownership Advantage
Table 1 reports the means of the composite index ownership advantages and
the variables used to create the index by entry-mode type. Firms of larger size
and more experience preferred integrated entry-modes while the smaller, less
experienced firms (less global maturation) preferred independent modes.
Product differentiation and service and technology intensity both show
similar findings: firms with high values (indicating a uniqueness in service
offerings and high service and technology intensity) preferred integrated
modes and firms with low values (indicating similarity in services and a low
service and technology intensity) preferred independent entry-modes. Lastly,
product adaptability showed a slight U-shaped effect, with higher-valued
firms (those perceiving low need for adaptability) preferring either integrated
or independent entry modes while the lowest value firms (those perceiving
high need for adaptability selected cooperative entry-modes.
The overall measure of ownership advantages showed that firms perceiving a
high level of ownership advantages prefer integrated entry-modes, while those
firms perceiving a low level of ownership advantage prefer independent modes.

Locational Advantages
Table 2 reports the means of the composite index locational advantages and
the variables used to create the index by entry-mode type. It is noticeable that
firms with low values for cultural differences, market infrastructure and

Entry-mode type
Entry- Entry- Entry-
mode 1 mode 2 mode 3 Total
n=17) (n = 24) (n=57) (n=98)
Variable

1. Production costs
Mean 4-00 3-50 3-95 3-84
SD 0-79 0-88 0:83 0-85

2, Cultural differences
Mean 2-79 3-05 3-32 3:16
SD 0-73 0-60 0-55 0-62

3. Market infrastructure
Mean 2-00 3-04 3:26 301
SD 0-94 1-06 1-09 115

4, Market demand
Table 2. Mean 2-55 2-99 3-05 2-94
Means and Standard SD 0:42 0-65 0-79 073
Deviations by Entry- 5. Locational advantage
mode of Composite Mean 2:83 3-14 3:40 3:24
Locational SD 0-32 0-49 0-47 0-50
Advantage Measure
and Sub-factors Note: Entry-mode 1, Integrated; entry-mode 2, Cooperative; entry-mode 3, Independent.
 389

market demand (indicating cultural, economic and political similarity, Dunning’s

infrastructure similarity, and strong market demand) prefer integrated entry- Eclectic Theory
modes. The firms that had high values for these variables prefer independent
modes. The production cost variable shows a U-shaped effect: firms with high
values (perceiving low production cost advantages) preferred either
independent or integrated modes of entry, while firms perceiving high
production cost advantages preferred cooperative entry-modes.
The overall measure of locational advantages shows that firms perceiving
high levels of locational advantage preferred integrated entry-modes while
firms with the lowest perception of locational advantage preferred
independent entry-modes.

Hypothesis Testing
Analysis of variance was used to test the hypotheses. Duncan’s multiple range
test was used to determine if mean differences between the three types of
entry-modes were significant. Duncan’s multiple range test was used because
it has been shown to be sensitive in detecting true differences between means
while not unduly de-emphasizing protection against type I errors (Carmer and
Swanson, 1973). The Duncan procedure controls for family-wise error rates
(a = 0-05) while comparing between-group mean differences simultaneously.
Table 3 reports the results of the analysis of variance and Duncan'’s multiple
range test. The analysis of variance shows that ownership advantages and
locational advantages are significantly (P < 0-0001) related to the entry-mode
strategy. Duncan'’s test shows that firms preferring the integrated entry-mode
had significantly higher levels of ownership advantage than firms preferring
cooperative entry-modes (P < 0-05) or firms preferring independent entry
(P < 0-01). As hypothesized, firms preferring cooperative entry-modes had
significantly greater ownership advantages than firms using independent

Duncan procedure
Entry- Entry-
mode mode 2
Analysis of Variance

1. Ownership advantages
F=1139 P <0-0001
Means: Entry-mode 1: 2-05
Entry-mode 2: 0-38 *
Entry-mode 3: —0-87 ** *

2. Locational advantages
F=10:65 P <0-0001
Means: Entry-mode 1: 2:83 Table 3.
Entry-mode 2: 3-14 *
Analysis of Variance
Entry-mode 3: 3:40 ## *
and Simultaneous
Note: *,P < 0-05; **,P < 0:01. Testing of Variables by
Note: Entry-mode 1, Integrated; entry-mode 2, Cooperative; entry-mode 3, Independent. Entry-Mode Type
390

International entry. Duncan’s test also shows that firms using the integrated entry-mode
Business perceived significantly higher locational advantage than firms preferring
Review cooperative entry-modes (P < 0-05) or firms preferring independent entry
5,4 (P < 0-01). As hypothesized, firms preferring cooperative entry-modes
perceived significantly more locational advantage than firms using
independent entry. Thus, both hypotheses were supported.

Discussion and Conclusions

This paper set out to investigate the entry-mode selection activities of small-
and medium-sized service firms. Based on Dunning’s eclectic theory (1988,
1993) and previous entry-mode research we developed and tested two
hypotheses: (1) entry-mode selection will be more integrated (less
independent) for firms reporting greater ownership advantages and (2) entry-
mode selection will be more integrated (less independent) for firms reporting
greater locational advantages in the target market.
The empirical results provide support for both hypotheses. We found that,
with respect to the computer software industry (1) as a firm’s ownership
advantages increase so does its use of more integrated entry-modes and (2) as
a firm’s perception of locational advantages increases so does its use of more
integrated entry-modes. Based on our findings we suggest that ownership
advantages and locational advantages appear to affect entry-mode choice as
theorized by Dunning (1988, 1993) and others (Agarwal and Ramaswami,
1992; Terpstra and Yu, 1988).
Second, based on theory and previous empirical support one would expect
a linear relationship between the locational/ownership advantages and each
variable. That is, for each variable as the locational/ownership advantages
increased the type of entry-mode selected was theorized to move from
independent to integrated.
A review of the means in Table 1 fully supports the proposition of a
linear relationship for ownership advantages in all but one case. The
variable “adaptability of the product” showed a slight U-shaped
relationship. The linear relationship also appears to be supported in all but
one case for locational advantages (Table 2). “Production cost” advantages
display a U-shaped relationship. Managers that perceived high production
cost advantages were expected to select more integrated entry-modes.
However, what was found was that integrated and independent entry-modes
were selected by firms perceiving high production cost advantages, while
firms perceiving the lowest level of production advantage selected
cooperative entry-modes instead of independent modes. Both the
adaptability of the product and product cost anomalies may have occurred
because of the small sample size rather than because computer software
firms’ actual mode preferences.

Limitations of the Study

Although our findings tended to support Dunning’s eclectic theory for small-
and medium-sized high-technology service firms, much more research is
 391

required. First, Dunning’s theory needs to be tested in other service industries Dunning’s
to determine its applicability across all services. Studies that reflect other Eclectic Theory
segments of the service sector may not find some of the U-shaped
relationships observed in the present study. Second, the response rate in this
study was a disappointing 20%. As was previously stated, the length of the
questionnaire contributed to this disappointing response rate. Future efforts
may wish to keep questionnaires as short as possible to increase response
rates. Additionally, researchers may wish to pilot test the questionnaire to
discover if any of the questions ask for information for which the respondent
(1) does not have ready access and/or (2) requests information the firm
considers proprietary and hence will not reveal. Third, further studies of the
computer software industry are warranted. This emerging global industry is
large and growing rapidly, yet there have been almost no studies to date.

Conclusion
Although entry-mode strategy has been getting more and more attention
from researchers, a lot of work still needs to be done. First, the services
sector must be explored to determine how the intangibility and
perishability of services affect entry-mode choice. Second, most entry-
mode studies in both services and manufacturing look only at US-based
firms. Extending research sites to include European and Asian firms will do
much to increase the generalizability of current theories. Third, more
research needs to be done to determine the optimal sequencing of entry-
modes. Over time, firms sometimes change from one entry-mode to another
while remaining in the same location; licenses are acquired, joint ventures
get dissolved. How do early types of entry-mode effect later ones? How
and why do firms move from one entry-mode to another in the same
country? Lastly, future research may wish to attempt to determine which
entry-mode/circumstances combinations result in the best performance for
the firm. After all, maximal firm performance is the ultimate goal of
international entry. For this reason, understanding entry-modes is essential.
Because entry-modes are very difficult to change once established, the
choice of entry-mode can mean the difference between firm success and
prosperity or firm failure.

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Received January 1995

Revised October 1995 and January 1996