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Lecture: 5

Internationalization of

Service Firms (Part 2)

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Why service firms are becoming

more international?

yThe Uruguay Round of the WTO in 1986

begun to reduce previous national

restrictions on international services.

yT

ech

nological improvementsh

ave alsoencouraged trends towards

internationalization.

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Exports of Goods and Services, 1980-

2004

0

100

200

300

400

500

600

1980 82 84 86 88 90 92 94 96 98

2000

2002

2004

(1980=100)

0

1500

3000

4500

6000

7500

9000

10500

12000

Billion$

Goods Services Goods growth Services growth GDP growth

Source: WTO

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Specific Features of Trade in Services

Sou : WTO/ ATS

yServices represent 20% of total world

trade and account for the 2/3 of GDP.

y Intangible nature:Many services require

physical proximity of provider and consumer:

services perceived as less easily tradable than

goods.

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Count y ACount

y A Count y BCount y BMode1: CrossMode1: Cross--bordersupplybordersupply

Mode 2: Consumpt on AbroadMode 2: Consumpt on Abroad

Mode 3: Commercial presenceMode 3: Commercial presence

Source:WTO/OMC

Consumerfrom AService

SupplierT eServiceCrosses t eborder

Consumer

from A

Consumer

from A

Service

SupplierConsumeris

abroad

Service

supply

Consumerfrom A

Commercial

presence

Service

Supply

Establishesa

commercial presence

Juridical

person

The modesof international Service Supply1/2

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The 4 Modes of International Service Supply (2/2)

Mode 4: resenceof natural personsMode 4: resenceof natural persons

Country ACountry A CountryCountry

Source: basedon WTO material

Consumer

from A

Service

supply

Natural person

Consumer

from A

Commercial

presence

Juridical

person

Service

supply

Employeesent by firm from B

Self-employed oes to A

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Modes of International Service Supply

Mode1: CrossMode1: Cross--borderborder

supplysupply

Commercial servicesCommercial services

Mode 2: ConsumptionMode 2: Consumption

abroadabroad

traveltravel

Mode 3: CommercialMode 3: Commercial

presencepresence

Construction servicesConstruction services

Mode 4: resenceofMode 4: resenceof

natural personsnatural persons

Seasonal work,Seasonal work,

consultingconsulting

Mode of Service Supply Typical Service Category

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Larger firms are more likely to operate

internationally

yThis may be because larger firms have more

resources to commit to international

expansion and are better able to cope withthe risks lined with it. Large firms tend to

operate in mature domestic markets and

may want to grow outward.

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Market characteristics (MC) are linked

to international expansion

MC are linked to managements attitude

towards operating internationally.MC

includeh

ost government regulations andrestraints on market entry; prohibition or

limitation of foreign ownership; local

content requirement; financial and fiscal

controls.

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Management attitude is vital

y Attitudes of the service firms management affecthow international the firm will be.As attitudes

towards exporting become more positive,managers may become less concerned with thecomplexities of international expansion. Serviceindustry is one low capital investment

requirements.Thus, management attitudes tendto have the strongest influence on expansiondecisions.

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Hard vs. soft services

yHard services require limited or no local

presence by the exporter and consumption can,

to a major extent, be separated from

production. Conversely, soft services

production and consumption are to a major

extent simultaneous processes, requiring major

local presence by service firm

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Forms of internationalization

yClient-following mode

yMarket-seeking mode

yElectronic marketing mode

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Client-following (CF) mode

yThe client-following strategy implies thata firm is part of an international networkof exchange Client-following firmsoperate in a network in which theirexchange partners operate internationally.CF common among banks,

accounting/auditing and constructionfirms.

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CF characteristics

1. In the early stage CF commit greater resources abroad thanmarket-seekers

2. In comparison to market-seekers, CF are willing and able

to rapidly commit relatively large resources in countries atgreat psychic distances

3. CF are more willing than market-seekers to commitresources in equity ventures abroad.

Client-followers rely less on outsiders to enterforeign markets.

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Marketing-seeking (MS) mode 1/2

yIn the initial stage,MS firms operate in

domestic exchange networks that provide

little assistance to go abroad. For aM

S,success abroad is contingent upon the

ability of the firm to find partners to

cooperate with, to detect needs, and toestablish relations with firms abroad.

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Marketing-seeking (MS) mode 2/2

yMS lack experiential knowledge of foreign

markets and are exposed to more potential

problems than CF.They must also establish

credibility with the buyers.This requires the

adapting of services, distribution systems and

supply channel, routines and processes to meet

the needs of the client.All this is resource and

time consuming.

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Electronic marketing mode 1/2

yElectronic marketing as an

internationalizing strategy means

that the service firm extends its

accessibility through the use of

advanced electronic technology.

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Electronic/Internet marketing mode 2/2

yThe Internet provides firms with a way of

communicating its offerings and putting

them up for sale, and a way of collecting

data about the buying habits and patterns

of its consumers and using network

partners to arrange delivery and payment(e.g.Amazon. com,TV shop)

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Characteristics of firms entering foreign markets

Entry modeEntry mode FormForm Integration/Integration/

controlcontrol

CommitmentCommitment

1. Wholly1. Wholly--

ownedowned

subsidiarysubsidiary

subsidiarysubsidiary highhigh highhigh

2. Partly2. Partly--ownedownedsubsidiarysubsidiary

Minority/majorityMinority/majorityownership, affiliate, etcownership, affiliate, etc

High/moderHigh/moderateate

High/moderateHigh/moderate

.Contract,.Contract,

alliancealliance

relationshiprelationship moderatemoderate lowlow

4. Market4. Market exportsexports lowlow lowlow

Source: adapted from MajkgrdandSharma (1998)

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Recommended Readings1. Hitt,M.A, et al,The Internationalization of Professional Service Firms: Effects of

Human Capital and Social Capital, Academy of Management, 2003.

2. Ekeledo, I, Siakumar, K, International market entry mode strategies of

manufacturing firms an service firms, International Marketing Review,Vol. 21, No.

1, 2004.

3. Karadeniz, E.E., Gcer, K, Internationalization of small firms:A case study of

Turkish small and medium-sized enterprises, European Business Review,Vol. 19,No. 5, 2007.

4. Kim, D,The Internationalization of US Internet portals: does it fit the process

model of internationalization?, Marketing Intelligence and Planning, 21/1, 2003, pp.

23-36.

5. Bjrkman, I., Inward international activities in service firms illustrated bythree case studies from the tourism industry, International Journal of Service

Industry Management,Vol. 8, No. 5, pp. 362-376.