Service Firms’ International Entry-Mode Choice: A Modified Transaction-Cost Analysis Approach

Abstract

Some peculiar characteristics of service firms, such as low capital intensity and the inseparability of production and consumption, have necessitated the modification of the traditional transaction-cost framework used to study entry-mode choice. By relaxing some unduly restrictive assumptions of the conventional transaction-cost analysis (TCA) model, the paper argues that firms prefer to start with full-control modes. It postulates that substantial variation in entry-mode choice occurs when firms that are characterized by low asset specificity relinquish control in response to the rising costs of integration or the diminishing ability to integrate. Several hypotheses on the propensity of service firms to employ shared-control entry modes are developed and tested. The results not only provide insights into entry-mode choice by service firms but also indicate how the transaction-cost framework can be broadened to develop a more comprehensive model for understanding entry-mode choice.