The Impacts of Country-of-Origin on Brand Equity

Dr. Chien-Huang Lin and Danny T. Kao ABSTRACT

In the era of global marketing, corporations have to keep an eye on the marketing environment to survive in the long run. Branding strategies, as the key role in the marketing mix, are increasingly viewed as a powerful tool to obtain sustainable competitive advantages, to fully utilize available resources and to avoid bleeding price competitions (Aaker and Keller, 1990). Brand equity is widely acknowledged as an index of measuring the effectiveness of branding strategies. However, while facing numerous unfamiliar brands, consumers may fall into the dilemma. Therefore, the country-oforigin (COO) becomes a critical external cue for consumers to depend on. Unfortunately, the country of brand-of-origin is not exactly identical to that of the brand-of-manufacture due to the international OEM businesses. It is interesting to observe that how this phenomenon will impact on the brand equity. The concept of brand equity was addressed by advertising agents several decades ago (Barwise, 1993). Brand equity is currently not an account in the financial statements in practical field, however, it is significantly influential on revenues. For example, Philip Morris, the manufacturer of Marlboro, had acquired Kraft Foods and Miller Beer. AOL and Times Warner is another story of merger. In the process of M &A, the assessment of brand value is absolutely indispensable, thus the importance of brand equity is even conspicuous. For the time being, almost every industry is suffered from enduring economic depression and tries to reduce operational costs, as well as to raise up the profits simultaneously. Brand equity is thus receiving more attentions. While brand equity is beneficial for consumers to screen out messages in chaos, to reinforce the confidence of purchase decisions, and to create greater satisfaction, it will also conducive for sellers to increase marketing effectiveness and efficiency, to establish brand loyalty, to improve the profitability, and to distinguish from competitors (Huang, 2001).

Effects of Values and Culture on International Consumer Satisfaction (Main Title: 16pt:Bold)
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Dr. Turan Senguder, Nova Southeastern University, Ft. Lauderdale, FL

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ABSTRACT (Title: 10pt:

Centered: Captial: Bold)

(one space) (Text: 10pt: Roman Times font: Justified: Indentation: 0.5 inches) Empirical evidence drawn from Hofstede's international study (1980, 1983) shows that values differ significantly among nations. This research explores important differences in the types of values held by individuals in Turkey and the United States and how these values influence consumer satisfaction. This research mainly examines whether the consumers living in Turkey place more importance on status, social image, personal abilities, family and interpersonal relationships, than the consumers living in the United Sates. Hofstede's (1980) definition of national culture as the "collective mental programming that conditions peoples' values and

perceptions" was adopted in this research. (one space) INTRODUCTION (Title: 10pt: Centered: Capital: Bold) (one space) Consumer satisfaction is important to the marketer because it is a determinant of repeat sales and consumer loyalty. Satisfaction is also important to the individual consumer because it reflects a positive outcome from the fulfillment of unmet needs (Spreng et al., 1996; Oliver and DeSarbo, 1988; and Day and Landon 1977). This research will help marketers seeking to sell their products in other countries and striving to maintain a high level of customer satisfaction compared to the competition. This goal cannot be obtained without a clear understanding of factors contributing to the generation of high satisfaction and the process by which customer satisfaction evolves following a product consumption experience. Customer satisfaction is an important determinant of post-purchase attitude and product choice. The growing amount of international business has increased the need to understand customer satisfaction from a cross-national perspective. (one space) Culture (Sub-Title: 10pt: Aligned Left: Title Case: Bold) Culture can be defined as a system of values in order to study culture as a determinant of consumer behavior (Hofstede, 1980b, 1983). Members of a particular culture transform their experiences with their physical and social surroundings to an abstract level of belief about what is desirable and what is not. Such encoded beliefs, called values, act as a general guide for day-to-day behaviors, including those pertaining to buying and consumption. Cultural values differ among nations along Hofstedes four dimensions of national character (Hofstede, 1980, 1983). (one space) Behavior (Sub-Title: 10pt: Aligned Left: Title Case: Bold) The growing amount of international business has increased the need to understand consumer behavior from a cross-national perspective. Because competition has been increasing in international markets, management focuses on protecting its customer base from switching to competitors (Lowenstein, 1995) by making consumers more satisfied than they are with competing products (Hofstede, 1980b). A number of satisfaction models have been accepted by researchers and practitioners, but these models explain this phenomenon at the individual level, independent of the cultural environment of the consumers Hofstede, 1980b). Rsearchers need to understand social values, cultural beliefs, and norms to use these models. According to existing research, valued benefits have impact on satisfaction responses following consumption (Westbrook and Reilly, 1983). Therefore, satisfaction is the function of the congruency between perceived performance and valued benefits derived from consumer personal values, and the formation of consumer values is influenced by central cultural values. LIMITATION OF THE STUDY AND FUTURE STUDIES (Title: 10pt: Centered: Capital: Bold) In this research, satisfaction is measured by using the desktop computer as a stimulus product. However, many other stimulus products can be used in the future. Different products might create different results. Also, there might be more dimensions of national character, beside those Hofstedes dimensions. Future research on cross-national satisfaction will be improved if other cultural values can be identified. The validity of the research findings is

somewhat limited by the conceptual framework and design and the exclusion of some variables (Kahle, 1980). The identification of these limitations should provide direction for future research

Submitted in part fulfilment of the requirements for the degree of Master of Business Administration

The country-of-origin affect on perception of services entry mode decisions as a determinant of usability by Nils Peters School of Management University of Surrey 21 th April 2011 Word Count: 21,822 Nils Peters -1Abstract 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 selfadministered 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 -2least 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. -3I. Table of Content I. Table of Content ______________________________________________ 3 II. List of Tables _________________________________________________ 5 III. List of Figures ________________________________________________ 6 IV. Abbreviations & Glossary ______________________________________ 7 1. Introduction ________________________________________________ 8 1.1 Services and their Economic Importance ______________________ 8 1.2 The Challenging Internationalisation of Services ________________ 10 1.3 Country-of-Origin and its Effects on the Internationalisation of Services 12 1.4 Purpose of this Work _____________________________________ 13 1.5 Research Questions _____________________________________ 14 1.6 Objective ______________________________________________ 15 1.7 Structure of this Work ____________________________________ 15 2. Internationalisation of Services _______________________________ 16 2.1 Characteristics of Services ________________________________ 16 2.2 Motives for Internationalisation _____________________________ 19 2.3 Entry Modes ____________________________________________ 20 2.4 Factors Influencing the Selection of Entry Modes _______________ 22 2.5 Approaches to Systematise Services and their Potential for Internationalisation ____________________________________________ 24 3. COO Effect ________________________________________________ 30 3.1 Critical Analysis of the COO Literature with regard to Products ____ 31 3.2

Mode of Action of COO Effects _____________________________ 33 3.3 Critical Analysis of the COO Literature with regard to Services ____ 37 3.4 COO as Multi-Facet Construct ______________________________ 38 4. Methodology ______________________________________________ 45 4.1 Problem and Research Questions ___________________________ 45 4.2 Theoretical Framework: Hypothesis, Variables and Manipulations __ 46 4.3 Research Design ________________________________________ 48 4.4 Sampling Process _______________________________________ 49 -44.5 Research Instrument _____________________________________ 51 4.6 The Pilot Study__________________________________________ 54 4.7 Selection of Services _____________________________________ 57 4.8 Method of Analysis ______________________________________ 57 4.9 Gaining Confidence on the Results __________________________ 59 5. Results of the Main Study ___________________________________ 61 5.1 Demographic Information _________________________________ 61 5.2 Preliminary Work: Calculating the ESQ Value __________________ 62 5.3 Manipulating the CPI Information ___________________________ 63 5.4 CTI Information in Service Offers with Incongruent CPI Information _ 67 5.5 CTI Information to Outbalance Negative Effects based on Incongruent CPI Information _______________________________________________ 70 5.6 Summarizing the Results __________________________________ 73 6. Conclusions and Limitations _________________________________ 74 6.1 Background ____________________________________________ 74 6.2 Conclusions ____________________________________________ 74 6.3 Limitations _____________________________________________ 80

6.4 Further Research ________________________________________ 82 V. References _________________________________________________ 83 VI. Appendices ________________________________________________ 105 1. Appendix - COO Mode of action ____________________________ 105 2. Appendix Data of Questionnaire ___________________________ 109 3. Appendix Results on Cronbach's Alpha (SPSS) ______________ 111 -5II. List of Tables Table 2-1: Characteristics of Entry Modes of the Service Sector (author of this work, based on Ekeledo and Sivakumar, 1998) ... 21 Table 3-1: Mainly used COO-facets (author of this work, based on Chao, 2001, Chen, 2004 and Li et al., 2000) ... 39 Table 4-1: Items and dimensions of the Likert scale (the author of this work) ... 53 Table 4-2: Scoring of the items (the author of this work) ... 53 Table 4-3: Cronbrach's alpha measurement of reliability (the author of this work, based on data from SPSS) ... 55 Table 4-4: Frequency table (extract from SPSS) ... 56 Table 5-1: Overview of scenarios (author of this work) ... 63 Table 5-2: Comparison of means for scenario 1 and 2 (extract from SPSS) ... 64 Table 5-3: Wilcoxon signed rank test - effects of CPI on ESQ (extract from SPSS) ... 65 Table 5-4: Comparison of the means for scenario 1 and 4 (extract from SPSS) .. 68 Table 5-5: Wilcoxon signed rank test - effects of CTI on ESQ (incongruent CPI) (extract from SPSS) ... 69 Table 5-6: Comparison of means for scenario 3 and 4 (extract from SPSS) ... 70 Table 5-7: Wilcoxon signed rank test - effects of CTI on ESQ (congruent and incongruent CPI) (extract from SPSS) ... 71 Table 5-8: Comparison of ranks with and without the supplement of CTI information (author of this work) ... 73 -6III. 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) ... 9 Figure 1-2: Trade in services vs. merchandising trade as percentage of GDP (author of this work, based on World Bank, 2010) ... 11 Figure 2-1: Model of foreign market entry modes (author of this work, based on Sivakumar and Ekledo, 1998) ... 23 Figure 2-2: The Sampson/Snape Box (author of this work, based on Bruhn and Stauss, 2005) ... 25 Figure 2-3: Patterson's and Cicic's Service Classification Scheme (author of this work, based on Patterson and Cicic, 1995) ... 27

Figure 3-1: Example for the use of COO information at Audi UK (Audi, 2010) ... 31 Figure 3-2: Structural relationships of "halo" with regard to COO (author of this work, based on Han, 1989) ... 35 Figure 3-3: Structural relationships of "Summary construct" with regard to COO (author of this work, based on Han, 1989) ... 36 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) ... 42 Figure 3-5: Dimensions of SERVQUAL to measure ESQ (the author of this work based on Arambewala and Hall, 2006 ... 44 Figure 4-1: Variables in the main study (1) (the author of this work) ... 47 Figure 4-2: Variables in the main study (2) (the author of this work) ... 47 Figure 4-3: Information on the independent variable as provided in the questionnaire (the author of this work) ... 54 Figure 5-1: Demographic data (author of this work, based on SPSS) ... 61 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)) ... 79 Figure Appendix-1: Theoretical framework of COO effects (author of this work, based on Obermiller and Spangenberg, 1989, p. 456) ... 106 -7IV. Abbreviations & Glossary BRIC Brazil, Russia, India and China COA Country of assembly (sometimes: country of association) COB Country of origin of the brand COD Country of design COM Country of manufacturing COO Country of origin COSD Country of service delivery CPI Country of person image CTI Country of training image e.g. for example (Latin: exempli gratia) FDI Foreign Direct Investments GATS General

Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product ICT Information and Communication Technology UK United Kingdom USA United States of America WTO World Trade Organisation Introduction -81. 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). 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) Introduction -9Figure 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 3 Brasil, Russia, India and China (BRIC). Term for these economically strong growing countries (Oxford Dictionaries, 2010) Introduction - 10 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 %). 4 Information and communications technology (ICT) (Oxford Dictionary, 2010) Introduction - 11 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 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) Introduction - 12 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-oforigin (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 Introduction - 13 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 Introduction - 14 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? Introduction - 15 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). InternationalisationofServices - 16 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, Grnroos 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 6 Primary sector = raw materials (agriculture); secondary sector = manufacturing (Bhagwati and Irwin, 1996) InternationalisationofServices - 17 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. Grnroos (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 wordof-mouth or experience to evaluate service offers (Javalgi and Martin, 2007). This is particularly challenging for service internationalisation, where cultural or InternationalisationofServices - 18 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. InternationalisationofServices - 19 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 metadrivers 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. InternationalisationofServices - 20 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 InternationalisationofServices - 21 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.

Table 2-1: Characteristics of Entry Modes of the Service Sector (author of this work, based on Ekeledo and Sivakumar, 1998) InternationalisationofServices - 22 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. 7 For a model including a time component, compare e.g. Malhotra, Agarwal and Ulgado (2003)