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Multinational Corporation Internationalization in the Service Sector: a Study of Japanese Trading Companies

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Multinational Corporation Internationalization in the Service Sector: a Study of Japanese Trading Companies Journal of International Business Studies (2007) 38, 1149–1169 & 2007 Academy of International Business All rights reserved 0047-2506 $30.00 www.jibs.net Multinational corporation internationalization in the service sector: a study of Japanese trading companies 1 Anthony Goerzen and Abstract Shige Makino2 This paper extends Chang’s (1995) sequential investment theory to include multinational corporations (MNCs) in service industries, given this sector’s 1University of Victoria, Victoria, British Columbia, large and growing impact on the global economy. To facilitate an examination Canada; 2Department of Management, of service MNC internationalization patterns, we develop a new typology of The Chinese University of Hong Kong, service investment (i.e., core-global, related-local, unrelated-global, and unre- Shatin, NT, Hong Kong lated-local) based on business relatedness and location-specificity. We test this typology on a sample of large Japanese trading companies; our results suggest Correspondence: that the initial investments of service MNCs are closely related to their core A Goerzen, University of Victoria, Business businesses and are less location-specific, but that subsequent investments are and Economics Building (BEC) Room: 216, less related to firms’ core services and are more location-specific – a pattern similar Victoria, British Columbia, Canada. to the traditional view on manufacturing MNCs. We extend our analysis to Tel: þ 1 250 721 6414; Fax: þ 1 250 721 6067; examine several case studies to provide a richer context for these findings. In E-mail: [email protected] addition, we examine the performance implications of internationalization. Our findings suggest that firms that internationalize through early investments that are closely related to their core activities outperform those in unrelated businesses over time, but that this performance gap between related and unrelated foreign investments diminishes in more advanced stages of internationalization. Journal of International Business Studies (2007) 38, 1149–1169. doi:10.1057/palgrave.jibs.8400310 Keywords: multinational corporation; internationalization; service sector; Japanese trading company; sogo shosha Introduction Chang’s (1995) work is an important contribution that extends Johansson and Vahlne’s (1977, 1990) sequential investment theory by combining it with resource-based theories in the study of foreign direct investment (FDI). By focusing on the sequence in which firms add lines of business, Chang (1995) examines the foreign entries of Japanese electronics manufacturers in the US between 1976 and 1989. He discovered that Japanese manufac- turers first internationalized their core businesses and those in which they had a strong competitive advantage over local firms; learning from these early entries enabled them to launch further entries into non-core businesses and into areas of weaker competitive advantage. Thus, in contrast to Western firms that often make big investments in a short period (Rosenzweig, Received: 31 October 2005 Revised: 15 May 2007 1993, 1994), Japanese companies appear to favour an ‘evolu- Accepted: 8 June 2007 tionary’ approach (Kagono et al., 1985) by making frequent small Online publication date: 30 August 2007 investments made over a long period. Multinational corporation internationalization in the service sector Anthony Goerzen and Shige Makino 1150 In Chang’s (1995) theoretical framework, firms Previous literature on service vs sequentially approach foreign entry with learning manufacturing MNCs gained from prior entry experience. As observed by A current debate among international business many scholars, however, the majority of research scholars concerns the extent to which MNCs on multinational corporation (MNC) foreign entry engaged in the delivery of services are different has focused on extractive or manufacturing firms from those involved in manufacturing. Several (e.g., Boddewyn et al., 1986; Enderwick, 1989, 1992; scholars have suggested that the international Habib and Victor, 1991; Li and Guisinger, 1992; expansion strategies of service MNCs may differ Campbell and Verbeke, 1994; Li, 1994; Aharoni, from those of manufacturing MNCs, because of the 1996), despite the fact that the service sector has unique characteristics of service industries (e.g., become increasingly important in world trade. In Habib and Victor, 1991; Li, 1994; Aharoni, 1996; fact, one of the most important international Aung and Heeler, 2001; Capar and Kotabe, 2003). business trends is the growing proportion of trade These unique characteristics have been discussed in services: in the 1990s, for example, over 50% of by many authors (e.g., Boddewyn et al., 1986; global FDI was in the service sector (Wirjanto, Enderwick, 1989, 1992; Hirsch, 1993; Campbell 1997). Further, according to the World Bank, ‘the and Verbeke, 1994), and therefore only a very brief internationalization of services is at the very core of review is necessary here. According to scholars of economic globalization. Service industries provide the service industry, there are several key dimen- links between geographically dispersed economic sions of services, as summarized in Table 1. Of the activities and thus play a fundamental role in the key attributes indicated in Table 1, the most growing interdependence of markets and produc- prominent differences involve the intangible nature tion activities across nations’ (Braga, 1996: 1). Yet of services and the simultaneous production and ‘little is known about the pattern and determinants consumption processes due to the impossibility of of international expansion strategies in service inventory in services (Habib and Victor, 1991; industries’ (Li, 1994: 218). As suggested by Capar Gummesson, 1997). and Kotabe (2003) as well as Hitt et al. (2006), to Notwithstanding these differences, however, sev- improve our understanding of this key sector of the eral studies have found that there are many global economy, research is needed that focuses important parallels between the delivery of services specifically on MNCs engaged in the delivery of and the production of manufactured goods. For services. example, Li and Guisinger’s (1992) analysis of the Although previous research has examined service international behavior of 168 large service MNCs MNCs from various perspectives, including their in nine service industries between 1976–1980 characteristics (Cho, 1987; Balabanis, 2000), and 1980–1986 in Japan, Western Europe, and the motives for foreign expansion (Li and Guisinger, US suggested that service MNCs follow their 1992) and correlates of performance (Katrishen and competitors (both domestic and international) in Scordis, 1998), very little research has directly examined the patterns of service MNC internatio- nalization (for an exception see Hurry et al. (1992), who focus on Japanese high-tech venture capital Table 1 Key service attributes firms). To address this gap, therefore, this paper will Characteristic Description unfold as follows. First, we will review prior theore- tical work on service vs manufacturing firms. Then, Intangibility Skills-based competence; proprietary following Chang’s (1995) approach, we will develop a assets are difficult to transfer to third party Inseparability Production and consumption occur conceptual framework on service MNC internationa- simultaneously; close consumer lization patterns by combining Johansson and interaction Vahlne’s (1977, 1990) sequential investment theory Heterogeneity Consumer participates in tailored with Kogut and Zander’s (1992, 1993) theory of production; quality is difficult to control knowledge transfer. Subsequently, we present a Perishability Supply/demand asymmetry leads to sequential order of five major Japanese trading firms, capacity underutilization; service cannot using the empirical method developed in previous be placed in inventory to meet future research (Davidson, 1980a, b), followed by a discus- demand sion and conclusion with limitations, managerial Regulation Services have long been highly controlled and regulated by governments implications, and suggestions for future research. Journal of International Business Studies Multinational corporation internationalization in the service sector Anthony Goerzen and Shige Makino 1151 going abroad as a defensive strategy – a result example, the critical importance of maintaining that is consistent with findings of the inter- quality to protect the brand makes third-party national behavior of manufacturing firms involvement less desirable. (Mitchell et al., 1992; Martin et al., 1998; Chan Whereas the typical sequence of foreign expan- et al., 2006; Chan and Makino, 2007). sion in manufacturing starts with ad hoc exports, Thus service MNCs may use internalization to progressing to exports via an intermediary, then a overcome imperfections in the markets for their sales subsidiary, and finally FDI, service MNCs must services, in much the same way that manufac- often skip over the first several stages, since the turing MNCs create internal markets to overcome nature of service output often does not lend itself to imperfect world good and factor markets (Rugman, gradualism in overseas operations. Service MNCs 1981: 89; also Gray and Gray, 1981; Pecchioli, are therefore unable to gain overseas market 1983; Wells, 1983; Yannopolous, 1983). Although experience without establishing a local presence. current theories of FDI and the MNC may This need is compounded by the requirement to have broad applicability to the service
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