The country-of-origin affect on perception of services

Table of Content

II. List of Tables

III. List of Figures

IV. Abbreviations & Glossary

1. Introduction
1.1 Services and their Economic Importance
1.2 The Challenging Internationalisation of Services
1.3 Country-of-Origin and its Effects on the Internationalisation of Services
1.4 Purpose of this Work
1.5 Research Questions
1.6 Objective
1.7 Structure of this Work

2. Internationalisation of Services
2.1 Characteristics of Services
2.2 Motives for Internationalisation
2.3 Entry Modes
2.4 Factors Influencing the Selection of Entry Modes
2.5 Approaches to Systematise Services and their Potential for Internationalisation

3. COO Effect
3.1 Critical Analysis of the COO Literature with regard to Products
3.2 Mode of Action of COO Effects
3.3 Critical Analysis of the COO Literature with regard to Services
3.4 COO as Multi-Facet Construct

4. Methodology
4.1 Problem and Research Questions
4.2 Theoretical Framework: Hypothesis, Variables and Manipulations
4.3 Research Design
4.4 Sampling Process
4.5 Research Instrument
4.6 The Pilot Study
4.7 Selection of Services
4.8 Method of Analysis
4.9 Gaining Confidence on the Results

5. Results of the Main Study
5.1 Demographic Information
5.2 Preliminary Work: Calculating the ESQ Value
5.3 Manipulating the CPI Information
5.4 CTI Information in Service Offers with Incongruent CPI Information
5.5 CTI Information to Outbalance Negative Effects based on Incongruent CPI Information
5.6 Summarizing the Results

6. Conclusions and Limitations
6.1 Background
6.2 Conclusions
6.3 Limitations
6.4 Further Research

V. References

VI. Appendices
1. Appendix - COO – Mode of action
2. Appendix – Data of Questionnaire
3. Appendix – Results on Cronbach’s Alpha (SPSS)

Abstract

Today, the service sector contributes to a major part of the GDP of the most developed countries, while the share of services of the total export of these countries is comparable low. This constitutes certain challenges for the internationalisation of services. With regard to the use of “country-of-origin effects” (COO), the special service characteristics create challenges for service companies, e.g. by the inseparability of service provision and consumption. When decisions on the market entry options are made and local staff is favoured to expatriate staff, incongruence in the COO facets occurs which is difficult to hide. Based on the research on products, this might reduce COO’s positive effects on service consumers’ quality expectations (ESQ). In this context, the question arises whether information on training in the company’s home country (CTI) can reduce the aforementioned negative effect.

In order to examine the existence of these relationships, an online provided self-administered experiment was created. Using a non-probability sample of 100 Germans, respondents were asked to rate two different service examples with regard to the ESQ. In each example, the country of the person providing the service (CPI) was manipulated to be congruent as well as incongruent to the company’s origin. In addition, the CTI was added to incongruent service examples. The construct was evidenced by an accomplished pilot study to be reliable and valid. The data of the non-probability sample were analysed by comparing the mean values of respondents’ ratings on ESQ, and further, by conducting a Wilcoxon Signed Ranked Test.

The results showed the expectedly higher ESQ for offers containing congruent CPI information. In case of incongruent CPI, the supplemented CTI was capable to increase the ESQ ratings. In one out of two examples, the CTI fully compensated the negative effect by CPI’s incongruence.

Provided that the results of the study are empirically supported by further research, service companies need to consider the influences of their decisions on entry mode on the usability of COO effects in future. This particularly applies to service companies entering new markets, where COO effects can contribute to trust and consumers’ willingness to accept new offers. The provision of services at least temporarily by expatriate staff significantly contributes to the full usage of COO effects. If this is not possible, e.g. for reasons of cost, advertising on trainings accomplished in the company’s home country positively compensates the reduced COO effects. Researchers should consider including these findings in their models to conceptualise service company’s entry mode decisions, as proposed in this work.

II. List of Tables

Table 2-1: Characteristics of Entry Modes of the Service Sector (author of this work, based on Ekeledo and Sivakumar, 1998)

Table 3-1: Mainly used COO-facets (author of this work, based on Chao, 2001, Chen, 2004 and Li et al., 2000)

Table 4-1: Items and dimensions of the Likert scale (the author of this work)

Table 4-2: Scoring of the items (the author of this work)

Table 4-3: Cronbrach's alpha measurement of reliability (the author of this work, based on data from SPSS)

Table 4-4: Frequency table (extract from SPSS)

Table 5-1: Overview of scenarios (author of this work)

Table 5-2: Comparison of means for scenario 1 and 2 (extract from SPSS)

Table 5-3: Wilcoxon signed rank test - effects of CPI on ESQ (extract from SPSS)

Table 5-4: Comparison of the means for scenario 1 and 4 (extract from SPSS)

Table 5-5: Wilcoxon signed rank test - effects of CTI on ESQ (incongruent CPI) (extract from SPSS)

Table 5-6: Comparison of means for scenario 3 and 4 (extract from SPSS)

Table 5-7: Wilcoxon signed rank test - effects of CTI on ESQ (congruent and incongruent CPI) (extract from SPSS)

Table 5-8: Comparison of ranks with and without the supplement of CTI information (author of this work)

III. List of Figures

Figure 1-1: Estimated world outward FDI flows by sector and industry, 1990-1992 and 2006-2008 (author of this work, based on UNCTAD, 2010)

Figure 1-2: Trade in services vs. merchandising trade as percentage of GDP (author of this work, based on World Bank, 2010)

Figure 2-1: Model of foreign market entry modes (author of this work, based on Sivakumar and Ekledo, 1998)

Figure 2-2: The Sampson/Snape Box (author of this work, based on Bruhn and Stauss, 2005)

Figure 2-3: Patterson’s and Cicic’s Service Classification Scheme (author of this work, based on Patterson and Cicic, 1995)

Figure 3-1: Example for the use of COO information at Audi UK (Audi, 2010)

Figure 3-2: Structural relationships of "halo" with regard to COO (author of this work, based on Han, 1989)

Figure 3-3: Structural relationships of "Summary construct" with regard to COO (author of this work, based on Han, 1989)

Figure 3-4: Framework to conceptualise the factors influencing perceived service quality with regard to COO effects (author of this work, based on Stanton and Veale, 2010)

Figure 3-5: Dimensions of SERVQUAL to measure ESQ (the author of this work based on Arambewala and Hall, 2006.

Figure 4-1: Variables in the main study (1) (the author of this work)

Figure 4-2: Variables in the main study (2) (the author of this work)

Figure 4-3: Information on the independent variable as provided in the questionnaire (the author of this work)

Figure 5-1: Demographic data (author of this work, based on SPSS)

Figure 6-1: Enhancement of Ekledo’s and Sivakumar's model of foreign market entry modes (author of this work, based on Sivakumar and Ekledo (1998))

Figure Appendix-1: Theoretical framework of COO effects (author of this work, based on Obermiller and Spangenberg, 1989, p. 456)

IV. Abbreviations & Glossary

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1. Introduction

1.1 Services and their Economic Importance

In the era of globalisation, not only products are increasingly traded around the world, rather services turn out to become an essential element of international trade. Javalgi and White (2002) expect the twenty-first century to be described as “the century of the proliferation of international services” (p. 577). According to Marchetti and Roy (2009) “gone are the days when services used to be considered as non-tradables”, ( p.xix). This is evidenced by the fact that in 2009, services to a value of $ 3.4 trillion were traded worldwide (WTO, 2010a) and as the international trade statistics does not cover all services defined by the GATS^[1], the actual trade is expected to be even higher^[2].

However, it is not only the dimension which makes it worth drawing attention to, it is rather the pace of growth. The export of commercial services more than doubled from 2000 ($ 1.5 trillion) to 2009 ($ 3.4 trillion) (WTO, 2010a), while the merchandise trade only grew by 3 % annually from 2000 - 2009 (both export and import) (WTO, 2010a). Furthermore, in 2006 to 2008, more than 60 % of worldwide annual foreign direct investments (FDI) were invested in services, while this accounted only for 50 % in 1990 to 1992 (see following figure ) (UNCTAD, 2010).

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Figure 1-1: Estimated world outward FDI flows by sector and industry, 1990-1992 and 2006-2008 (author of this work, based on UNCTAD, 2010)

Especially in the developed countries, the service sector plays an increasingly pivotal role, both in terms of the total national output and in terms of employment. In Germany, for example, services accounted for 61 % of the gross value (Destatis, 2010a) in 2009 and for 72.4 % of total employment in 2007 compared to 45.1 % in 1970 (Destatis, 2010b). In some BRIC^[3] countries, the service sector accounts for more than 50 % of the gross domestic product (GDP) (e.g. Brazil = 68.5% or Russia = 60.5 % (2009)). In contrast, developing countries such as China with a service sector accounting for 42.6 % of GDP offer high potential for service exporting countries (CIA, 2010).

This development is based on a wide range of reasons. Besides the opening of formerly closed markets such as Russia (Winstead and Patterson, 1998), a global convergence of tastes and preferences increases the opportunity for international marketed products and services. Therewith, one major requirement according to the “drivers of globalisation” framework by George Yip (Yip, 1992) showing the internationalisation potential of industries (Johnson et al., 2008) is fulfilled. A further condition is the role of governments, which is often apparent by protectionist entry barriers. According to Javalgi and White (2002), a major step in this regard was the agreement settled at the Uruguay Round of GATT, reducing barriers of service trade such as local ownership requirements or labour restrictions (entry barriers) as well as discriminatory taxation or local investment requirements (operational barriers). Additionally, progress in the area of intellectual property rights or patents have increased service providers’ confidence in offering their services internationally. In terms of cost, as a further globalisation driver according to Yip, the development regarding the ICT^[4] enabled service providers to export services in cost effective ways, especially via the internet. Finally, in terms of competitive reasons, service companies are required to consider international approaches as their clients move abroad and exported products require the provision of services in the target country (Vandermerwe and Chadwick, 1989). Furthermore, Asian markets are growing substantially and in order to understand customers’ tastes and demands, services are increasingly requested to be provided locally (e.g. product design).

1.2 The Challenging Internationalisation of Services

In general, the service sector is an already important and fast growing segment in international business. Moreover, the developing countries will offer additional potential for international service expansion and services might determine the future strategic directions for the creation of sustaining competitive advantages (Javalgi and White, 2002).

Against this background, it is remarkable that even if the service sector contributes to a major part of most developed countries’ GDP, the service share of total export is comparably low. According to the World Bank (2010), the service trade as a sum of services exported divided by the GDP amounted to a total of 12.3 % in 2008 (1990: 7.6 %), while merchandising accounted for 53.0 % (1990: 32.2 %).

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Figure 1-2: Trade in services vs. merchandising trade as percentage of GDP (author of this work, based on World Bank, 2010)

This mismatch is especially obvious in Germany, where in 2009, 72.0 % of trade (related to GDP) was effected with merchandising and only 15.1 % with services, even if services accounted for 61 % of the total gross value (2009) (Destatis, 2010a) (see figure 1.2).

While this mismatch shows the enormous potential to internationalise services on the one hand, it demonstrates the obvious challenges of service companies when internationalising. This seems to be mainly caused by the special service characteristics of intangibility, perishability, heterogeneity and inseparability (Parasuraman et al., 1985a). Ahlert et al. (2007a) emphasised that due to the inseparability of production and consumption of a service in geographically and timely matters (“uno-actu-principle”^[5] ), the export as an entry mode is only possible by using external and transportable medium such as a compact disc (e.g. for software). Thereby, a separation of service provision and consumption, and thus the export, becomes possible. As the use of tangible media is only possible by means of some kinds of services, it seems obvious that the criteria for selecting an entry mode may differ at least to some extent from those of tangible products. Especially factors influencing the crucial customer-provider relationship such as language or cultural aspects are considered more critical at services then at products (Capar and Kotabe ,2003). Furthermore, the intangibility of services results in challenges for consumers to compare offers in advance, as a simple inspection whether the service is of high or low quality is not possible (Bharadway et al. 1993).

As these characteristics contribute to challenges at the internationalisation of services and increase consumers’ purchasing risks (Mitchell and Greatorex, 1993), service companies are forced to support a positive consumer perception of their services. In the context of new entry modes and the related limited availability of intrinsic cues which directly indicate the quality of a service, for example descriptions of what the service includes, extrinsic cues such as the country-of-origin (COO) play a pivotal role as indicator of service quality. This is because extrinsic information as COO or brand are easily available and the related supplement of tangible aspects inferred from the cue can contribute to a positive quality perception of the service (Bharadway et al., 1993). Thereby, search cost can be reduced and offers become more salient and affordable (Landes and Posner 1987).

1.3 Country-of-Origin and its Effects on the Internationalisation of Services

Used in brands (e.g. British Airways) or claims, the country-of-origin is widely accepted to have a certain effect on the evaluation of products in terms of consumers’ perceptions of quality (e.g. White and Cundiff, 1978) and purchase decision (e.g. Johannson et al., 1985). By transferring country related images to products or services, the use of COO effects seems especially useful when other quality cues are missing and/or the brand is not well known. Han (1989) evidenced in this regard that consumers utilise the COO more when they are less familiar or less involved with a product.

The effect is extensively examined in the literature regarding (tangible) products and generally considered existent, even if researchers are still of different opinions under which circumstances the COO effect applies (Dinnie, 2003). Different factors supporting or reducing COO effects are found and especially regarding the increasing multi-national production, the questions is raised whether the COO effect still exists when the production is split over various countries. Thus, the COO is no longer considered as single-facet approach and becomes a multi-facet approach with facets such as country-of-brand (COB) or country-of-manufacturing (COM) (Chao, 1993). Products which differ in two or more COO facets (incongruence) are called hybrid products (Josiassen and Harzig, 2008)

The question whether COO effects still apply with incongruence in COO facets seems particularly interesting for the field of services which has not been researched very intensely (Javalgi et al., 2001). This is because differences in the country of the company and the country of the person providing the service are due to the service characteristic of inseparability are difficult to hide. Especially regarding the entry mode decision, negative influences on the COO effect caused by incongruence of origins should be considered, as this could harm the crucial customer-provider relationship as well as the apparently valuable effects of COO on quality perceptions. Hence, even if recent literature has provided some evidence that the COO effect generally contributes to the perception of quality – also in the field of services, and in some cases directly influences the purchase decision (e.g. Khare and Popovich, 2010), more knowledge is needed with regard to incongruence in COO facets.

1.4 Purpose of this Work

Summarising, service companies are faced with the special characteristics of services determining the entry mode decisions. If these characteristics require a local presence of the service provider, the company is automatically confronted with the decision of providing the service by local or expatriate personnel. If the service company prefers the provision by local staff, for instance for cost reasons, this could have severe impact on the usability of COO effects as described in the previous chapter. The resulting incongruence between companies’ favourable origin and the origin of the person providing a service has already been discussed in literature on tangible products. Some works indicate that even with incongruent COO information, offers can benefit from COO with regard to the perceived product quality (e.g. Schweiger, Otter and Strebinger, 1997; Nebenzahl and Jaffe, 1993; Papadopoulos and Heslop, 1993). However, it can be doubted whether these findings are fully transferable to services. This is because incongruence in the aforementioned COO facets is more difficult to hide and the provider-consumer relationship can be considered more critical with services than in the manufacturing process of products (Chao, 1998).

However, as the use of COO effects is considered particularly valuable when entering a new market, it appears worth examining the effects of incongruence in COO facets with regard to services in the light of entry mode decisions. This is as both subjects seem to be strongly linked and it needs to be researched whether the usability of COO effects should be considered as factor determining entry mode decisions in the future.

1.5 Research Questions

Based thereon, the present work will answer the question of whether COO still affects consumers’ perceptions of services in case of incongruence in single COO facets. Further, as some internationalisation strategies might accept aforementioned incongruence, it will be examined which measures are capable of outbalancing negative effects caused by incongruence in COO facets.

Consequently, the research questions are defined as follows:

- Is the country-of-origin still affecting consumers’ quality perceptions of services if the COO information given in an offer are different to each other?
- Which additional information can be provided with an offer, capable of outbalancing negative effects by incongruence in aforementioned COO facets?

1.6 Objective

By examining the aforementioned research questions, managers will be provided with knowledge about following subjects:

- The influences of their entry mode decisions on the usability of COO effects
- The circumstances under which the effects on the usability of COO effects need to be considered with the entry mode decisions
- The measures capable of outbalancing negative effects on the usability of COO effects caused by entry mode decisions With regard to existing literature this research will contribute in the following respect:
- The influence of incongruence in COO facets on COO-construct’s strength in influencing consumers’ perceptions of services
- The transferability of results on hybrid products to the COO literature with regard to services
- The criteria determining a reasonable entry mode, by considering COO effects as factor influencing the internationalisation success of services.

1.7 Structure of this Work

First, the literature of the internationalisation of services will be reviewed with a special focus on the motivation to internationalise, the different kinds of services and appropriate entry modes as well as the factors influencing entry mode decisions (Chapter 2). Second, the literature on COO will be studied, emphasising the general findings, the mode of action and particularly the latest results regarding products and services with different countries-of-origin (hybrid products and services) (Chapter 3). Based upon the present literature, the hypothesis will be formulated and an appropriate methodology will be defined to gain the necessary primary data (Chapter 4). After conducting the research study, the results will be presented (Chapter 5) and finally, conclusions for both practitioners and scientists will be drawn (Chapter 6).

2. Internationalisation of Services

The present work will add knowledge to the field of international service marketing by connecting the literature on the internationalisation of services and related entry modes with the knowledge on country-of-origin (COO) effects on customers’ perception of service offers. Before the COO literature will be reviewed, this chapter will give a brief overview of relevant theory of the internationalisation of services, in particular of the definition and characteristics of services and motives for their internationalisation. Furthermore, entry modes and the criteria for their selection, as well as major approaches to group services and allocate sufficient entry modes are investigated.

2.1 Characteristics of Services

The service industry, often described as the tertiary sector^[6] (e.g. by Fisher and Clark, c.f. Bhagwati and Irwin, 1996), accounted for 69% of the world’s gross domestic product (GDP) in 2007 (World Bank, 2010). This percentage includes services like transportation, hotels, education, health or financial services. Since the importance of services has increased considerably (1980, services accounted only for 56% of world’s GDP; World Bank 2010) the number of publications with regard to marketing of services increased as well (e.g. Zeithaml et al., 1985; Bharadwaj et al., 1993). Even if many researchers state that principles which apply to manufacturing companies are also applicable to service companies (e.g. Boddewyn et al., 1986), a majority of researchers emphasises the differences between services and manufacturing companies and demand more research on service related theory (Johanson and Vahlne, 1990 or Knight, 1999). In recent years, researchers focus more strongly on the international trade of services (e.g. Emarilli, 1990, Grönroos 1999, Lovelock, 1999, Roberts, 1999, Aharoni and Nachum, 2000, Patterson and Styles, 2005a, Javalgi and Martin, 2007), as many authors expect that gaining competitiveness in services instead of manufacturing will be the dominating topic of the twenty-first century (e.g. Javalgi and Martin, 2007). However, according to main literature reviews on this subject (Knight, 1999, Bryson, 2001, Netland and Alfnes, 2007), the existing literature does not reflect the importance of the subject, neither with regard to its extent nor in its theoretical foundation to develop generalisable theories. Knight criticises that the literature he examined (1980-1999) was mainly explorative, was missing strong theoretical foundations and was described narrowed in its topics, industries and locations (US and Nordic countries). Both Knight (1999) and Bryson (2001) emphasise that greater effort is needed to create a foundation for the development of appropriate theories and they point out that a classification of services with clear definitions and taxonomies is needed (Netland and Alfnes, 2007). Even if many approaches have been made in this regard (e.g. Thakor and Kumar, 2000), a service classification has generally not been accepted so far (Netland and Alfnes, 2007).

Before this work presents several approaches in this chapter, a commonly used definition and the characteristics of services, which are often cited and widely undisputed, are presented. This will contribute to a common understanding of the term services, as is used in this work.

Grönroos (1990, p. 27) defines services as follows:

“[…] an activity or series of a more or less intangible nature that normally, but not necessarily, take place in interactions between the customer and service employees and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems.”

This definition is in accordance with the findings of Parasuraman, Zeithaml and Berry (1985a) who realised that intangibility, inseparability, perishability and heterogeneity are cited consistently to define services. These characteristics are part of the aforementioned definition, and will be described in detail on the following pages.

Since services cannot be felt, tasted, seen or touched, intangibility is described by Bateson (1977) as “the critical goods-services distinction from which all other differences emerge” (Zeithaml et al., 1985, p.33). Intangibility leads to several challenges in marketing of services, especially caused by the missing opportunities of comparing, presenting or testing services in advance. Service providers are thus faced with challenges in differentiating their offers (Patterson and Cicic, 1995), and consumers often have to rely on intangible cues like word-of-mouth or experience to evaluate service offers (Javalgi and Martin, 2007). This is particularly challenging for service internationalisation, where cultural or language differences increase consumers’ perceived risk of selecting a service provider.

In addition, services are inseparable, as the requirement of simultaneous provision and consumption is a typical characteristic of services. Even if inseparability does not apply to all services (e.g. software produced in advance and sold via a CD ROM), most service providers are forced to maintain trustful relationships and to integrate consumers in the service-provisioning process (e.g. medical services) (Winstead and Patterson, 1998). As a result, local presence in international markets is a common requirement of services, and corresponding costs have to be considered when pursuing an international approach (Lovelock and Wirtz, 2007). Interpersonal skills are particularly important in international settings to overcome the cultural or language barriers (Javalgi and Martin, 2007) and gain understanding of the local culture (Lovelock, 1996).

Another characteristic of services is perishability which expresses that services cannot be stored and produced in advance, resulting in an increased risk of unused capacities or unmet demand (Zeithaml et al., 1985). Especially the latter contributes to the challenges in service internationalisation, as due to cultural differences or language barriers, variations in supply and demand are even harder to manage (Javalgi and Martin, 2007).

Finally, services are heterogeneous with regard to the output quality. This quality can vary by the time or location when a service is delivered, and in particular depending on the person providing the service (Winstead and Patterson, 1998). Hence, the communication of a defined level of quality is difficult, especially in labour-intensive services or those with significant consumer contact (Javalgi and Martin, 2007).

Aforementioned characteristics show that the personal relationship between service provider and consumer is a crucial success factor in the service business.

2.2 Motives for Internationalisation

Motives and objectives of internationalisation can be manifold in general, and often more than one is responsible for the selection of an approach (Cicic et al., 1999). Most cited motives for the increasing internationalisation of services are meta-drivers like mutual agreements as the GATS (reducing trade barriers), which is often described as the starting point of the internationalisation trend (Javalgi et al., 2003 or Clark et al., 1996). Furthermore, developments in ICT are mentioned in this regard, as they enable the electronically based service export (e.g. Bryson, 2001), and the globalisation and subsequent global networks are made responsible for a higher emphasis on services (Netland and Alfnes, 2007).

According to Bagchi-Sen and Kuechler (2000), those motives can be distinguished in proactive (strategic-driven) and reactive (demand-driven) stimuli, whereby proactive stimuli attempt a strategic change while reactive stimuli let companies react on circumstances requiring the “going international”. Examples for proactive stimuli are economies of scale, technological advantages and unique products or market size. Reactive stimuli can be overcapacity, saturated or declining domestic markets and clients asking to be served outside the domestic market (Czinkota and Ronkainen, 2007). The latter, described as “client following” by Vandermerwe and Chadwick (1989, p.79), is the major driver for internationalisation according to Bryson (2001). Other demand driven factors are the demand for one-stop-service combinations (Bagchi-Sen and Kuechler, 2000) and the focus on core-activities of many manufacturers, resulting in increasing demand for (outsourcing) services (Roberts, 1999).

The aforementioned motives show that the trend of service internationalisation will be of sustainable nature. In accordance therewith, the subject of market entry modes will be important in the future as well. As this is also important for this work’s focus, the following chapter will briefly present major entry modes for the internationalisation of services.

2.3 Entry Modes

Even if there is an on-going discussion in literature whether entry modes differ between services and manufacturers, there is strong indication that entry modes of manufacturers cannot be generally transferred to services (Erramilli, 1990, Erramili and Rao, 1993). Before this topic is discussed in this chapter, basic entry modes are presented.

Entry modes can be classified in various ways. Major classifications are based on the degree of resources required abroad, the level of control, or the uncertainty a company is exposed to (Blomstermo et al., 2006). For instance, for export strategies, resources are mainly used in the home country, whereas at foreign direct investments (FDI) resources are primarily used in the target country. Furthermore, export as the classical form of internationalisation is less risky compared to FDI, as specific knowledge of the domestic market already exist (e.g. in terms of legislation), and the mobility of producer or service provider is not required (Stauss, 1995).

Besides the classification of export, certain forms of cooperation modes exist, and according to Weiss (1996), they are possible with or without direct investments. Cooperation without direct investments comprises franchising or licencing contracts. Cooperation with direct investments are joint ventures or mergers and acquisitions, and mostly the achievement of control is intended with these strategies. Accordingly, entry modes can be distinguished in high control modes (e.g. wholly or majority owned subsidiary) and low control modes (e.g. licensing or other contractual relationships). High control modes are more resource-intensive and generally used when powerful relationships or deep market understanding are aimed (Hastings and Perry, 2000), or in case of high brand values and accordingly high demand on quality (Klein and Leffler, 1981). If risks are perceived high due to missing market knowledge and uncertainty regarding demand results in reduced willingsness to commit on resources, low control modes are used (Blomstermo et al., 2006).

The process of internationalisation - especially with regard to the selection of entry modes depending on the different stages of internationalisation - is described in various ways (e.g. U-model of Johanson and Vahlne, 1977; behavioural internationalisation process models by Aharoni, 1966) but not considered particular important for this work. However, it is considered important for this work that many service companies have to enter a market all at once, depending on the level of inseparability required by the service (Netland and Alfnes, 2007). For this reason, they cannot select export which is traditionally regarded as the first step of internationalisation (Ekeledo and Sivakumar, 1998). As a consequence, those companies have to internationalise in one step, and accordingly have to deal with higher risks concerning the use of resources and time to gain market knowledge. Summarising the aforementioned facts, the following table shows the main entry modes and evaluations of the levels of control and requirements for resources.

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Table 2-1: Characteristics of Entry Modes of the Service Sector (author of this work, based on Ekeledo and Sivakumar, 1998)

2.4 Factors Influencing the Selection of Entry Modes

The decision which entry mode to select at the internationalisation of services is most critical. It significantly determines the performance of foreign operations (c.f. Li, 1995), the control the company will have to achieve strategic goals (e.g. follow clients or get access to skills), the determination of risks and returns, and finally the relationship with the client (Javalgi and Martin, 2007). As the factors influencing the entry mode decision are of special importance, they are presented in this chapter.

Much of the knowledge with regard to factors influencing the entry mode selection is based on the manufacturing theory. Even if some scholars are of the opinion that the knowledge is also applicable to services (e.g. Agarwal and Ramaswani, 1992), a growing group of scholars suggest that this theory is not generalisable and peculiar service characteristics have to be considered (c.f. Errammili, 1990; Errammili and Rao, 1993). As this discussion would exceed the extent of this work, only some widely accepted factors influencing entry mode decisions in services (and even products) are presented. Therefore, the contingency approach of Ekeledo and Sivakumar (1998)^[7] is used as a basis because of its comprehensiveness and systematic structure.

This approach sets on the eclectic models of Dunning (1979) as well as Hill, Hwang and Kim (1990), and adds the product classification as key determinant of entry mode decisions to the external and organisational environment. Within the group of external factors, the host country market factors (e.g. market potential and structure) are considered as particularly important (Aharoni, 1966). If markets are small, competitive or characterised by weak infrastructure, service companies tend to adopt modes with less involvement like franchising or management contracts (Ekeledo and Sivakumar, 1998). The entire modell is displayed in the following figure.

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Figure 2-1: Model of foreign market entry modes (author of this work, based on Sivakumar and Ekledo, 1998)

Even if this model considers many factors determining an entry mode decision, neither this, nor other approaches found in relevant literature, have considered COO effects as factor influencing the entry mode decision so far. However, it appears worth considering COO effects in the future research on this subject as they might be able to determine the internationalisation success. Therefore, this work will contribute appropriate knowledge to this subject.

2.5 Approaches to Systematise Services and their Potential for Internationalisation

Even if services seem to be more various and specialised in different industries than products, the need for a generalisable classification of services is high as basis for generic international service marketing strategies (c.f. Clark et al., 1996). Even if many approaches have been made, most of them are focused on certain industries or are considered “not mutually exclusive and exhaustive for all services” (Samiee, 1999, p. 325). The classifications of Lovelock and Yip (1996)^[8] and Clark et al. (1996)^[9] are examples. Some widely accepted models are briefly discussed with the intention to select a classification scheme for this work’s research study on COO effects.

2.5.1 The Approaches of Bhagwati and Sampson/Snape

In his works concerning the question of whether or not to include services in the Uruguay Round of trade negotiations, Bhagwati (1987) contemplated two categories of services, those which need the physical proximity of the service provider (“temporary-factor-relocation-requiring-service”^[10] ) and the ones which do not require such proximity (“long-distance services”) (Bhagwati, 1987, p.553). Based thereon, the mobility of the service provider and client as well as the appropriate cost for movement were identified as determinants on the entry mode decision of the first group. For the second group, not requiring proximity, intermediaries and telecommunication technology were found to be crucial, enabling a timely and geographically decoupling of the provisioning and consumption of the service and, thus, increase these services’ potential for international trade.

In analogy of Bhagwati’s approach, also Samson and Snape focused on the mobility of service provider und service user (Sampson and Snape, 1985). Therein, Samson and Snape distinguished four kinds of services, depending on the question where the service is provided. In later works other researchers (c.f. Stauss, 1995, p. 455) created a matrix based on Samson’s and Snape’s classification (“Sampson/Snape-Box”), enabling the allocation of services to groups, determined by providers’ and users’ mobility or immobility (see following figure). For example, the “Across-the-border-trade” field contained those services where user and provider are rather immobile. In this case, an internationalisation can only be realised with services which do not, have the uno-actu-principle as prerequisite, e.g. software, where intermediaries enable the transport. Compared thereto, the field of “third country trade” is characterised by mobility on both sides and, thus, the service provision can be done in a third country. In this case, the service provider has to invest (e.g. FDI) and the user has at least travel cost to reach the place of service provision. An example could be a trade fair of an American company in Asia with customers from Germany.

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Figure 2-2: The Sampson/Snape Box (author of this work, based on Bruhn and Stauss, 2005)

The models of Bhagwati or Sampson and Snape link the mobility of the service provider and the mobility of the service user and allow to draw conclusions from this mobility on the potential for internationalisation of each service. Hence, the service characteristic of inseparability, requiring the mobility, is the major determinant of the entry mode decision in this approach.

Also Vandermerwe and Chadwick (1989) created a model evaluating inseparability as a degree of required interaction between service provider and client, as main determinant for selecting entry modes.

2.5.2 The Approach of Vandermerwe and Chadwick

Vandermerwe and Chadwick created a six-field matrix to allocate services depending on intangibility and the degree of interaction (e.g. high at medical services). Three clusters were created. The first contains services characterised by a combination of low intangibility and low provider-customer interaction (e.g. books), which are easily to trade based on their tangible component and, thus, a local presence to exercise control is not required. The second cluster consists of services characterised by average intangibility and need for interaction (e.g. airlines or fast-food restaurants), as well as by a certain level of customisation. These services require involvement of the consumer and investments to enable the service provision and control at the target country. Within the third cluster, services with high interaction and intangibility are allocated, at which the service-quality is strongly connected with the education and skills of the service provider. Therefore, an internationalisation strategy has to enable a sufficient degree of control over the service-provisioning process. This is why foreign direct investments or merger and acquisitions are the most suitable modes (Zimmermann, 1999; Vandermerwe and Chadwick, 1989).

Vandermerwe and Chadwick emphasised that simultaneous forms of internationalisation can be useful and that developments in communication technology create increasing potential for services in cluster two or three of being exported, e.g. the medical diagnostic via internet. The communication technology is capable of abrogating borders and distances, particularly via online platforms (Vandermerwe and Chadwick, 1989).

2.5.3 The Approach of Patterson and Cicic

Patterson and Cicic (1995) further developed the classification scheme of Vandermerwe and Chadwick by allocating possible entry modes for each service (Ahlert et al., 2006). Thereby, even Vadermerwe and Chadwick distinguished services by their level of tangibility and degree of interaction necessary to provide a service (“face-to-face contact”). The following figure shows the four resulting cells to which service providing companies can be allocated to.

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Figure 2-3: Patterson’s and Cicic’s Service Classification Scheme (author of this work, based on Patterson and Cicic, 1995)

The four service types and corresponding modes of internationalisation are (Patterson et al., 2005b):

- Location-free professional services (Cell 1): Personnel needs to travel to a foreign country to provide the service and return home afterwards. A permanent presence is not required.
- Location-bound customized projects (Cell 2): Services are of high customisation. Hence, the personal interaction between client and service provider is intense and comparably long. This is why a permanent presence in the foreign country is preferable.
- Standardised service packages (Cell 3): As these services are embedded in tangible items such as software on CD-ROM, the face-to-face contact is comparably low and the traditional export can be realised.
- Value-added customised projects (Cell 4): These services require high interaction with the customer and add value to a physical good through customisation. Presence is not required but often preferred.

2.5.4 The Approach of Erramilli

As the aforementioned approaches show, inseparability is the main factor determining the entry mode decision and differentiating service companies’ entry mode decisions from those of traditional manufacturers. Based on this finding, Erramilli (1990) added a classification scheme, distinguishing services in hard services (low inseparability, and in terms of entry modes comparable to manufacturing products) and soft services (requiring simultaneous provision and consumption, limiting their entry mode options). Based on its convenience, this scheme is preferred by many scholars (Ekeledo and Sivakumar, 1998) and will also be the leading scheme of the present work. With regard to the examination whether COO effects are influenced by the entry mode, only soft services will be selected. This is because hard services are considered comparable to traditional products and, hence, according COO, literature seems to be transferable. However, as this work intends to contribute to more knowledge on COO effects on services, the focus will be on soft services. In addition, Patterson’s and Cicic’s scheme is used to identify the soft services characterised by a high degree on face-to-face contact. These are used in research of the present work, as according to Patterson et al. (2005b) the personnel at these services is the very critical performance driver and, thus, the requirements on the service personnel are particularly high (e.g. education). Hence, especially at those services the question of using local versus foreign personnel in the target country is challenging, as with the decision on entry mode the usability of COO effects might be determined.

The selected services can further be distinguished into those with a low and a high degree of intangibility. Using both types in a study enables researchers to examine whether consumers of rather intangible services, being more reluctant to extrinsic cues (Samiee, 1994), are more sensitive to changes in the given COO information than consumers of rather tangible services (Patterson et al., 2005a).

Chapter two shows that the entry mode decisions of services are influenced by internal and external factors but also heavily rely on the kind of service. Since hard services are not limited by personnel or geographical restrictions, and the services can be transported via a supporting medium, they are generally comparable to products with regard to their entry modes. In contrast, soft service companies need to consider the particularities of their services. Especially the crucial provider-customer relationship (face-to-face contact) and the requirements resulting from cultural or language barriers as well as the perceived risk of customers when choosing a service have to be considered. Hence, the service providers need to challenge the question of whether sending expatriates or choose to set up a permanent business in the target country (Blomstermo et al. 2006).

3. COO Effect

„It is often said that brand names like ´McDonald’s´ are worth millions. If so, how many billions is Germany’s image worth?“ (Papadopoulos and Heslop, 1993, p. xix).

The aforementioned citation expresses the key thought of the country-of-origin research objective: Is there any effect coming from the image of a country on consumers’ evaluation of a product originating from this country?

Many authors have evidenced that the consumers’ perception of the quality of a product is influenced by its country-of-origin (COO) (e.g. Bilkey and Nes, 1982, Maheswaran, 1994, Papadopoulos and Heslop, 1993). Since the initial work of Schooler (1965) was released, more than 1,000 studies have been published including at least 400 issues in academic journals (Roth and Diamantopolous, 2009), making it to one of the most researched topics in international marketing literature (Amine et al., 2005, Peterson and Jolibert, 1995). Extensively examined in the literature with regard to products, the COO effect can be described as the transfer of a country image (CI) on a product or brand. The country image - as “the mental associations and beliefs triggered by a country” - is connected by marketers with brands to add positive associations (Kotler and Keller, 2009) and stereotypical information of a country image (Maheswaran, 1994), e.g. “it’s French, it must be stylish” (Kotler and Keller, 2009, p. 659). Even if the COO is not directly relevant for evaluating an offer, consumers stereotype the beliefs in quality or attractiveness (Agrawal and Kamakura, 1999 or Verlegh and Steenkamp, 2005) and consequently show stronger purchase intentions for products from countries with perceived positive image (Knight and Catalone, 2000, Chao, 1989). This is particularly distinctive when there is a strong product-country congruence, such as Italian fashion, French perfume or German machinery (Papadopoulos and Heslop, 1993). Conversely, Germany as COO of fashion would cause negative perception compared to France (Stanton and Veale, 2009).

The CI itself results from variables such as history and tradition or representative products and political backgrounds (Nagashima, 1970), and leads to “country-personalities”. For example, Germany is seen as robust, Japan as cutting edge and England as solid and reliable (Baker and Ballington, 2002).

The reference of COO is communicated by a brand (e.g. British Airways), visualised by the Swiss cross, for instance, (e.g. Victorinox) or communicated in the phrase “Made in…” (Berentzen et al., 2008).

Furthermore, as the following figure shows, the COO can be communicated by a brand’s claim as done by Audi in its UK claim in German language: “Vorsprung durch Technik” (“advance by engineering”) (Audi, 2010) emphasising Audi’s German heritage which is well known for superior engineering performance.

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Figure 3-1: Example for the use of COO information at Audi UK (Audi, 2010)

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^[1] General Agreement on Trade in Services = extension of the multilateral trading system to service sector entered into force in January 2005 (WTO, 2010b)

^[2] For example services as preliminary works of merchandises are not considered as services (compare: Gupta, 1996, Stauss, 1995)

^[3] Brasil, Russia, India and China (BRIC). Term for these economically strong growing countries (Oxford Dictionaries, 2010)

^[4] Information and communications technology (ICT) (Oxford Dictionary, 2010)

^[5] In German literature often used term to describe the requirement of simultaneous provision and consumption of a service (e.g. Burr and Stephan, 2006 or Haller, 2001)

^[6] Primary sector = raw materials (agriculture); secondary sector = manufacturing (Bhagwati and Irwin, 1996)

^[7] For a model including a time component, compare e.g. Malhotra, Agarwal and Ulgado (2003)

^[8] Services classified into: people-processing, possession-processing, information-based services

^[9] Services classified into: contact-based, vehicle-based, asset-based and object based services

^[10] temporary-factor-relocation-requiring-service are further divided into those services with mobile service provider but immobile user, for example a taxi, services with mobile user but immobile provider like haircuts and finally services where both are mobile and decide on the place of their contact (Bhagwati, 1987)