The Impact of E-Commerce

The Impact of E-Commerce on Entry-Mode Strategies of Service Firms: A Conceptual
Framework and Research Propositions

Author(s): Ikechi Ekeledo and K. Sivakumar
Source: Journal of International Marketing, Vol. 12, No. 4 (2004), pp. 46-70
Published by: American Marketing Association
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The Impact of E-Commerce on
Entry-Mode Strategies of Service Firms:
A Conceptual Framework and Research
Propositions
ABSTRACT This article focuses on the role of e-commerce on the entry
mode choice of service firms. On the basis of recent calls for the
reconceptualization of marketing theories and concepts with
services as a key component, the authors focus on the interface
of e-commerce, services marketing, and foreign market entry
mode choice. The authors offer an integrative conceptual
framework that explicates the role of e-commerce on the entry
mode choice of service firms, and they propose that several
internal and external factors moderate this relationship. The
authors derive several research propositions and offer manage
rial implications and directions for further research in the
timely and exciting domain of services marketing.
Recently, Vargo and Lusch (2004) noted that marketing is in

Ikechi Ekeledo and the process of a paradigm shift in which service (as opposed
K. Sivakumar to tangible goods) will be the fundamental component of eco
nomic exchange. The implication of this new, increasingly
dominant logic is that extant concepts and models in the
marketing domain must be reexamined to reflect this shift
toward service. According to Rust (2004), an invited scholar
who commented on Vargo and Lusch's article, this paradigm
shift is occurring as a result of the digital revolution. It has
been suggested that the digital revolution has had a greater
impact on service delivery than on manufacturing processes
and has greatly affected how services are marketed
(Schuknecht and Perez-Esteve 1999; Whinston and Choi
2001). In light of the increasing number of service firms that
are becoming involved in international marketing, an exami
nation of the ways that the digital revolution has affected
entry-mode strategies of service firms is necessary.
Despite the widespread acceptance that information technol

ogy is transforming and internationalizing service industries,
not much has been written about the impact of e-commerce
on the international market-entry strategies of service firms.
More than 14 years have passed since Vandermerwe and
Chadwick (1989) observed that technology was transforming
Submitted February 2004
Accepted July 2004
and internationalizing service industries. The main focus of
their research, which preceded the advent of the Internet as
? Journal of International Marketing
Vol. 12, No. 4, 2004, pp. 46-70 an important tool for e-commerce, was the development of a
ISSN 1069-031X classification scheme for international services based on the
46
degree of consumer-producer interaction and the relative
involvement of goods. Other scholars (Fisk 1999; Gr?nroos
1999; Kelly 1989; Lovelock 1999; Wymbs 2000; Zinkhan
2002) have also written about the impact of technology on
services marketing, but none has explored the strategic
implications of e-commerce for foreign market entry-mode
strategies. To date, published studies on the classification of
international services have focused on explaining why entry
mode concepts and practices developed for the manufactur
ing sector may not fully apply to service firms (e.g., Ekeledo
and Sivakumar 1998; Erramilli and Rao 1993). In addition,
many of the studies involved individual service industries,
such as banking, equipment leasing, and advertising (e.g.,
Agarwal and Ramas was wami 1992; Nigh, Cho, and Krishnan
1986; Sabi 1988; Terspstra and Yu 1988); little research
involving broad categories of service industries has been
conducted. Cross-industry studies in the service sector are
needed because they may suggest ways that marketing con
cepts and strategies can be extended across service indus
tries (Lovelock 1996; Lovelock and Wirtz 2004).
Choosing of an appropriate entry mode is critical to the suc

cess and longevity of a foreign market operation (Root 1994;
Terpstra and Sarathy 2000). Because each entry mode is asso
ciated with a certain level of control, resource commitment,
and investment risk (Calvet 1984; Caves 1982), the initial
mode of operation employed in a foreign market has both
strategic and operational implications for the firm. In recent
years, e-commerce technologies have dramatically changed
the nature of services and service delivery systems. As a
result, applications of traditional entry-mode strategies for
service businesses are no longer adequate. As Vandermerwe
and Chadwick (1989, p. 90) predicted, service firms now
"find themselves changing internationalization mode, or
operating in more than one mode" because of advances in
information technology. Therefore, managers in the service
sector, a major component of international business today
(Czinkota and Ronkainen 2004), undoubtedly want to know
which international market entry-mode selection concepts
and practices are still valid. Managers also want to become
aware of the new entry strategies that e-commerce has made
possible. Our research responds to these issues by proposing
a conceptual model that recognizes the impact of e
commerce on entry-mode strategies of service firms. The
model highlights additional factors that managers should
consider when selecting entry mode, and it demonstrates the
implications of digital commerce for service firms that plan
to participate in international marketing. Thus, our research
responds to Vargo and Lusch's (2004) call for researchers to
modify extant marketing models to reflect the increasing
impact of service and e-commerce in economic exchange.
E-Commerce and Entry-Mode Strategies
In the next section, we briefly review the resource-based
view (RBV), which is the conceptual premise of our research.
Next, we present our conceptual framework and research
propositions. We conclude with a discussion of managerial
implications of our research findings and suggest directions
for further research.
The RBV posits that the firm's own resources (its assets and
The RBV as a Conceptual competencies) are the appropriate starting point for the
Premise firm's strategy formulation (Jolly 2000). The RBV views the
firm as a unique bundle of resources in which the firm's com
petitive advantage is rooted (Barney 1991; Capron and Hul
land 1999; Fahy 1996; Peteraf 1993; Teece, Pisano, and
Shuen 1997). The RBV takes the position that a firm's per
formance in the marketplace is a function of the firm's
resources, given external opportunities and constraints, and
not the result of industry structure, as the traditional indus
trial organization paradigm posits. According to the RBV, a
firm adopts strategies that deliver the best return on its
resources without exposing the firm's competitive advantage
to expropriation. The RBV also recognizes that resources are
both heterogeneous across firms and imperfectly mobile
(Hunt and Morgan 1995). Thus, the RBV takes an inside-out
approach to strategy formulation and advocates the use of
imitation barriers as protective mechanisms (Jolly 2000). The
RBV explains not only the differences in entry-mode strate
gies observed among firms in an industry but also why firms
adopt strategies that their resources can support. Because the
RBV is believed to provide a complete explanation of entry
strategies in the international marketplace, researchers are
beginning to examine international marketing strategies from
this perspective (see, e.g., Ekeledo and Sivakumar 2004;
Erramilli, Agarwal, and Dev 2002).
Figure 1 offers a framework for understanding the impact of

Conceptual Framework e-commerce on the entry-mode strategies of service firms.
and Research The framework posits that the level of digitization of the
Propositions service act influences the location of the service platform for
the foreign market and the choice of level of control. The
level of control that a firm desires determines entry mode,
because each entry mode is associated with a certain level of
control. E-commerce technologies influence entry-mode
strategies by determining the level of digitization for the
service act. The framework also depicts the firm's internal
factors, such as the firm's unique resources (assets and com
petencies) and strategic considerations, and external factors,
such as economic environment, as critical moderators of the
link between levels of digitization associated with the serv
ice act and entry-mode strategies. Both internal and external
factors weaken or strengthen the impact of digitization on
entry-mode criteria. Thus, the appropriate entry mode for a
service firm is a function of the interplay among the internal
48 Ikechi Ekeledo and K. Sivakumar
Figure 1.
The Impact of E-Commerce
Technologies on Entry-Mode
Choice of Service Firms
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E-Commerce and Entry-Mode Strategies 49
factors of the firm, external environmental factors, and e
commerce technologies.
The nature of a service is a key determinant of foreign market

E-Commerce and Level of entry-mode strategies for the firm that markets the service
Service Digitization (Ekeledo and Sivakumar 1998). The immediate impact of e
commerce factors is to determine the level of digitization
(full or partial) that is possible for the service. In turn, the
level of digitization influences two important decisions in
entry-mode selection: (1) where to locate the service
production platform for the target foreign market and (2)
what level of control to exercise over the foreign affiliate, a
decision often influenced by the location of the service
production platform. The level of digitization that a service
act permits also affects the manner in which the service is
produced and delivered. Because digitization has created
more international services and has widened the range of
internationalization modes available to service firms, tradi
tional views of the internationalization of services must be
augmented.
Internationally traded services can be divided into two

groups, on the basis of their degree of digitization: full-digital
services and partial-digital services. This taxonomy some
what resembles that used by Krishnamurthy (2003) to group
firms; a firm that is completely online and has no physical
component has a digitizability of one, whereas a firm that
has no online presence has a digitizability of zero. To the best
of our knowledge, no internationally traded service has a
digitizability of zero, because some marketing activities for
service businesses can and do take place online. For exam
ple, any international service firm can establish a Web site to
advertise its service offerings. Therefore, we limit categories
of international services to digital and partial-digital serv
ices. Conceptually, we assign a digitizability of one to digital
services and a digitizability of less than one, but more than
zero, to partial-digital services.
Digital services share three fundamental characteristics of

digital products, as Choi, Stahl, and Whinston (1997) note:
indestructible, transmutable, and reproducible. A digital
service is considered indestructible if it retains its form and
quality no matter how often it is used. For example, the qual
ity of application software never degrades; there is no wear
and tear. Transmutability refers to a digital service that is
easy to modify; it can be changed easily and quickly, thus
making it highly customizable. Finally, reproducibility refers
to a digital service that can be reproduced, stored, and trans
ferred among users without difficulty. Reproducibility is
responsible for the very small incremental costs of reproduc
ing digital services after production of the first unit. For
example, the cost to reproduce each marginal unit of a music
50 Ikechi Ekele do and K. Sivakumar
CD is trivial compared with the cost to assemble musical
instruments, musicians, and content specialists to produce
the master copy. Online distribution of the CD further
reduces the cost of reproduction, because buyers can down
load their own copies. For example, CD Now, an interna
tional online distributor of sound recordings, offers interna
tional customers recordings that are cheaper than those
offered by local offline retail outlets (Quelch and Klein
1996). The characteristics of a digital service make it
amenable to pure e-commerce, thereby influencing entry
mode strategies. In pure e-commerce, the three components
of a market (product, agents or players, and process) are dig
ital (Turban et al. 2002). The three components can be com
pletely physical, completely digital, or a combination of
both, depending on the nature of the product. For a digital
service, these components can all be digital; that is, not only
the production of the service but also its delivery, payment,
and consumption can occur online.
Figure 2 presents a matrix for grouping international services

based on both the full and partial levels of digitization and
the service classification scheme that Lovelock and Wirtz
(2004) use. Lovelock and Wirtz's four service processes can
be compressed into the two categories of service digitization.
The digital service category includes services directed at
people's minds (mental stimulus processing) and those
directed at intangible assets (information processing). The
partial-digital service category includes services directed at
people's bodies (people processing) and those directed at
physical possessions (possession processing).
It is important to point out the difference between the classi

fication of internationally traded services into separable and
Level of Service Digitization

Full Partial Figure 2.
Service Processes and Their
Mental stimulus Levels of Digitization
People processing
processing
(e.g., lodging,
People (e.g., advertising,
restaurants, passenger
education,
transportation,
entertainment,
surgery)
psychotherapy)
Direct Recipient
of the Service
Information Possession processing
processing
(e.g., repair and
(e.g., data processing, maintenance, retail
Possession data transmission, distribution, freight
insurance, software transportation,
programming) refueling)
nonseparable services and our categorization of services into
digital services and partial-digital services. Some nonsepara
ble services can be digitized, and some separable services
cannot be digitized. For example, physician services are con
sidered nonseparable services because they require close
physical proximity between the service provider and the
recipient of the service. E-commerce technologies have made
it possible to divide physician services into services that are
digitizable and those that are not. For example, surgery is not
digitizable, but telepsychiatry and telepathology are. Equip
ment leasing service is an example of a separable service that
is not fully digitizable; it belongs to the partial-digitization
category. Therefore, classification of internationally traded
services into separable and nonseparable services is different
from the classification of services into digital and partial
digital services. Thus, we use service processes to explain
both the digital and the partial-digital service category
because service processes allow the categories to be mutually
exclusive, an important criterion for evaluating classification
schemata (Hunt 1991).
Digital Services and Entry-Mode Strategies. Digital services,

The Impact of Level of which include both mental stimulus and information pro
Digitization on Entry-Mode cessing services, involve intangible actions. They can be cre
Strategies ated and distributed electronically (Siegel 2004; Turban et al.
2002), recorded on tape or CD, or captured in some other
storage device. Both the core of a digital service (the basic
output that consumers seek) and its supplementary compo
nent can be digitized. Core services are the front-office offer
ings, whereas supplementary services are mostly back-office
tasks. Supplementary services may be activities indispensa
ble for the execution of the core service or services used to
enhance the quality of the service act (Kotabe and Murray
2003). For example, a person who buys a statistical software
package also buys the ability to organize and analyze data,
which is the core service. The supplementary services for the
product include packaging (storage device), features, price,
quality, warranty, and after-sales service. Because both the
core service and the supplementary services can be con
verted into binary digits, a digital service can be created, pur
chased, paid for, delivered, and consumed online. Alterna
tively, a digital service can be recorded on tape or CD or
embedded in some other storage device and exported to for
eign markets. Examples of digital services include computer
software, data entry and processing, entertainment, publish
ing, remote education, Internet services, health care, finan
cial services, travel services, and auctions. Note that though
all digital services are separable services (services that allow
production and consumption to be decoupled), not all sepa
rable services fall within the digital service category. As we
noted previously, equipment leasing is a separable service
that is not digitizable. An equipment leasing company based
in the United States can lease equipment to a customer in
Mexico without having a physical presence in that country.
Another separable service that is not digitizable is electricity
supply. A supplier of electricity located in Canada can
export electric current across the border to U.S. consumers.
Again, electric current crosses national borders but not the
service platform (the power station).
Traditionally, entry-mode selection involves determining the

location of production facilities and deciding on the level of
control to exercise over the foreign affiliate (Douglas and
Craig 1995). Because of the ease with which a digital service
can traverse national borders through electronic networks,
the location of production facilities in the foreign market is
not a critical issue for digital service firms. Firms can offer
digital services from a distance; therefore, a digital service
firm can locate its production platform for a target foreign
market outside that market and use exporting to reach the
market. The level of control selected is often a function of the
interplay between the nature of the service and the firm's
internal factors, such as firm-specific resources or strategic
considerations.
The RBV posits that a firm favors a strategy that protects the
proprietary content of its marketing mix against dissemina
tion (Barney 1991; Wernerfelt 1984). Each entry mode is
associated with a certain level of control, or involvement and
protection of proprietary know-how (Anderson and Gatignon
1986; Ekeledo and Sivakumar 2004). For service firms,
exporting and full ownership are full control modes that
offer the highest level of control, whereas joint venture, man
agement contract, and licensing are shared control modes
(Ekeledo and Sivakumar 1998; Erramilli and Rao 1990; Love
lock 1996). Exporting and full ownership also provide the
highest level of protection for a firm's proprietary resources
(Ekeledo and Sivakumar 2004).
In addition to these distinctive elements, the three funda

mental characteristics of digital services (indestructibility,
transmutability, and reproducibility) also affect the entry
mode strategies of digital service firms. Because digital serv
ices perform in the same way in second-hand markets as they
do in new markets (indestructibility), to continue generating
revenue from the service, producers of digital services must
find ways to discourage the sale of second-hand services
(Choi, Stahl, and Whinston 1997). Producers of digital serv
ices also need a mode of operation that discourages counter
feits of their products because of the ease with which digital
services can be copied (reproducibility). As such, the mode
of operation selected should facilitate product customiza
tion, which discourages counterfeits. For computer software,
exporting, combined with user licensing, helps discourage
E-Commerce and Entry-Mode Strategies
the sale of second-hand software by unauthorized people
and encourage repeat purchases. Some software products are
now programmed to self-destruct after the paid-for usage
expires, thus requiring the licensee to continue renewing the
usage license.
In terms of RBV's prescriptions for protecting the proprietary

know-how of a service firm, exporting and licensing appear
to be incompatible entry modes. Exporting can protect a
service firm's know-how, whereas licensing is considered a
weak protector of proprietary know-how. Indeed, dissemina
tion of proprietary know-how is a serious drawback of
licensing as a mode of entry in foreign markets (Keegan 2002;
Root 1994), but licensing directed at the product's user is
another issue; it is not the same as licensing another business
entity to produce and distribute the product. The purchaser
does not buy the software itself but buys a license that speci
fies how, when, and where the buyer may legally use the
software, thereby reducing unauthorized reproduction and
distribution. As we noted previously, this arrangement also
enables the company to continue to sell the same software to
the same buyer through periodic updates, albeit at a lower
price than a first-time buyer would pay. Similarly, exporting
enables a company to sell its service in countries that do not
offer sufficient demand to justify local production. The com
pany can centrally produce for several markets and obtain
economies of scale. For organizational users of a digital prod
uct, such as an application software package, the software
company can grant the user a renewable license to use the
product for a specified period. Thus, the combination of
exporting and consumer licensing is a useful addition to tra
ditional entry-mode strategies and deserves to be exploited
whenever possible. Examples of international services that
export their products through electronic networks include
accounting services, design and engineering services, data
entry and data processing services, and remote education
(Czinkota and Ronkainen 2004). Software parks in countries
such as China, India, Ireland, Malaysia, Pakistan, Romania,
and Thailand demonstrate efforts to promote export trade in
digital services (Whinston and Choi 2001). Two examples of
software companies that combine exporting and licensing to
sell their services abroad are SPSS and McAfee (VirusScan).
Digital services, such as sound recordings and movies, do
not require updating and thus must focus on exporting.
P^ Digital service firms are likely to favor exporting or

the combination of exporting and consumer licens
ing over any other entry mode.
Partial-Digital Services and Entry-Mode Strategies. As Figure

2 shows, partial-digital services, which include people
processing services and possession-processing services,
Ikechi Ekeledo and K. Sivakumar
involve tangible actions in the form of physical interaction
with the direct recipient of the service. Consequently, the
delivery of the core service cannot be digitized, and the serv
ice provider must establish a service platform in the local
market. The degree to which a partial-digital service firm can
take advantage of digitization is limited to its service func
tions that can be digitized. Outsourcing of some service pro
duction functions, as we discuss subsequently, may be an
important motive for entering a foreign market.
When selecting an appropriate entry mode, the service firm's

objective should be to balance the opportunity for growth
and profitability that the new market offers with the risks of
doing business in a new foreign environment (Palmer and
Cole 1995). Such a risk is the exposure of proprietary know
how to expropriation by competitors. After the firm assesses
business risks in the new market, it must decide whether to
enter the foreign market using full ownership, joint venture,
franchising, or management contract. Empirical research,
which uses the RBV as a theoretical foundation, suggests that
full ownership is the preferred entry mode for service firms
that want to protect their proprietary know-how (Ekeledo
and Sivakumar 2004). A company-owned subsidiary, as we
noted previously, provides the best protection for the propri
etary elements of a service firm's marketing mix. However,
when the capital requirement to establish multiple service
outlets is high, as in the case of fast-food restaurants, a
partial-digital service firm may be forced to combine full
ownership with franchising as modes of entry. This arrange
ment enables the franchiser to share the costs of developing
the foreign market with franchisees, while allowing the fran
chiser to ensure that outlets owned by franchisees deliver
high-quality service.
P2: Partial-digital service firms are likely to favor full

ownership or the combination of full ownership and
franchising over any other entry mode.
Cultural Differences. Cultural differences between the host

country and a firm's domestic market may pose serious barri The Impact of External
ers to foreign market entry. This is particularly true of inter Factors on the Link Between
national services, because the services marketed reflect a Digitization and Entry Mode
society's nature and values. For example, to protect local cul
tures from foreign influence, European Union countries want
40% of their television programs to be produced locally
(Gillespie, Jeannet, and Hennessey 2004). To strengthen this
type of restriction further, an amendment in the new Euro
pean Union draft constitution allows a member country to
block trade deals that involve a cultural product, such as
movies or music, with a non-European country (Fuller 2003).
This type of restriction influences entry-mode decisions by
weakening the link between service digitizability and choice
of entry mode. A firm that otherwise would have adopted
exporting might settle for licensing or another collaborative
mode to comply with laws in a foreign country. Dahringer
(1991) notes that the close relationship between a society's
culture and the services offered in that society is responsible
for the higher number of trade barriers that international
services marketers face in foreign markets. Cultural differ
ences affect not only traditional international commerce but
also the design of electronic marketing tools, such as Web
sites, that target customers in different foreign cultural envi
ronments. As a result, a Web site may need to be localized to
make it more sensitive to the cultural nuances of a target for
eign market (Siegel 2004).
Language is another element of a host-country culture that

might have an impact on the use of exporting to reach a for
eign market, because it is the key to understanding a society's
culture. Because language embodies a society's culture,
countries such as France are sensitive about incursions into
their language by other languages and even seek legal means
to discourage the incursion. To overcome language barriers
in e-commerce, a firm may need to work with a local busi
ness organization. For example, Lotus sought the assistance
of a local software company when it introduced its Lotus 1-2
3 software into the Japanese market (Terpstra and Sarathy
2000). Research also has found that a visitor will spend more
time on a Web site if it is written in the visitor's native lan
guage and adapted to the visitor's culture (Siegel 2004). In
addition, language translation problems may complicate the
use of a Web site hosted in the firm's domestic market. With
out conversion software, it may not be possible to access Web
sites that are written in Arabic, Chinese, Japanese, or Korean
(double-byte-language countries) with an English-based
browser because Latin-based alphabets use single bytes. As a
result, conducting business in another country may require a
local presence or collaboration with a local partner, even
when product digitizability makes exporting from the home
base the most appropriate mode of entry.
Because of the sensitivity of many services to national cul

ture, it is a challenge to market culturally sensitive digital
services across national borders. For example, some movies
or television shows developed in one culture may require
substantial changes to make them acceptable in another cul
ture. Viewers in one country may tolerate violence on tele
vision but may find nudity to be offensive, while viewers in
another country may not object to nudity on television but
may detest violence. Thus, similarities in national culture
between a firm's home market and that of the target host
country influence the choice of market entry, especially dur
ing a firm's initial efforts to expand into foreign markets
(Jeannet and Hennessey 2001; Keegan and Green 1997).
P3: As the cultural differences between a firm's home
country and the host country increase, the propen
sity of digital service firms toward exporting weak
ens, and the propensity toward joint venture
becomes stronger.
Government Regulations. Some governments are more intru

sive than others in the regulation of e-commerce activities.
Intrusive government actions, such as prohibiting private
ownership of satellite dishes, limiting access to services on
the Internet, regulating international banking, or restricting
importation of entertainment services, interfere with the full
realization of the benefits of e-commerce technologies. Such
government actions make markets unattractive for foreign
investment.
Political pressure from citizens of a particular country can

also lead to regulations that discourage the importation of
digital services. For example, citizens complained to the
welfare directors of the state of New Jersey about a contractor
that was using a foreign call center to manage calls from state
welfare recipients. As a result, a bill was proposed in the
state legislature that would require workers hired for state
contracts to be U.S. citizens or residents, except in the case of
specialty jobs that lacked qualified U.S. applicants (Wald
man 2003). The issue of outsourced service jobs in foreign
countries has begun to concern workers not only in the
United States but also in Britain and Australia [The Econo
mist 2003). Politicians in these countries are now under
pressure to discourage domestic companies from outsourc
ing digital services. This type of political pressure is likely to
lead to regulations that impede importation of digital
services.
P4: Concerns about government regulation of e

commerce in a host country weaken the use of
exporting by digital service firms in favor of full
ownership.
Tariff and Nontariff Barriers. Direct trade barriers, which

include tariffs, favor local production, whereas indirect trade
barriers (nontariff barriers) encourage local partnerships
(Douglas and Craig 1995). Tariffand nontariff barriers are the
result of government policies and regulations. A tariff (a tax
on imported products) bars trade by increasing the cost of the
product to the importer. Tariff barriers, which affect digital
services recorded on cassette tapes, CDs, DVDs, and other
storage devices, contribute to price escalation and discourage
the use of exporting as an entry mode. Thus, tariff barriers
encourage local production, but the mode of operation
adopted by a service firm may depend on the capital inten
sity of the service industry (Erramilli and D'Souza 1995).
Because of lower capital requirement, most digital services
favor full ownership. Partial-digital services are not con
cerned with tariffs because they cannot use exporting.
Nontariff barriers can also weaken the impact of digitization

on entry-mode strategy. Nontariff barriers that face the serv
ice sector could be the "buy local" policies of host govern
ments, licensing requirements, or a government monopoly of
the service industry (Dahringer 1991). Buy local policies
encourage local production, which could take the form of a
full-ownership or shared control mode, such as joint ven
tures, franchising, management contract, or some other form
of collaboration. Regulations that require local training and/
or licensing for services pose a barrier to foreign-trained serv
ice providers. For example, to be a certified public account
ant in the United States, a person must have an education in
local accounting and a passing score on a professional
accounting examination. This type of requirement discour
ages cross-border trade in accounting services. Local govern
ment monopolies of some services also favor local produc
tion. Consequently, to participate in a service that is a
government monopoly in a foreign market, the foreign firm
must partner with the government. Because capital intensity
for most partial-digital services (e.g., hospitals, hotels,
restaurants) is high, partial-digital service firms that enter a
foreign market to serve local customers are more likely to
favor a collaborative arrangement, such as joint venture and
franchising.
P5: Tariff barriers weaken the propensity of digital serv

ice firms toward exporting.
P6: Compared with digital service firms, a greater num

ber of partial-digital service firms favor joint venture
and franchising when nontariff barriers are high.
Internet Infrastructure of the Host Country. A well-developed

e-commerce infrastructure and a large, skilled workforce that
is capable of using information technology encourage e
commerce, whereas a poorly developed e-commerce infra
structure hinders e-commerce. For example, credit card
firms are reluctant to enter a country with poor telephone
and mail services. Countries with a more fully developed e
commerce infrastructure provide a broader range of entry
modes for both digital services and partial-digital services
than do countries in which e-commerce infrastructure is
nonexistent or poor.
Countries can be divided into three broad groups on the basis

of e-commerce readiness through the use of a classification
scheme that is somewhat similar to the one proposed by
Siegel (2004): least-electronic-commerce-ready countries,
electronic-commerce-ready countries, and electronic
commerce-leading countries. Most people in least
electronic-commerce-ready countries have little awareness
of e-commerce. Such countries do not have adequate infor
mation technology infrastructure or a sufficient number of
educated and affluent people who can participate in
e-commerce; in addition, their telephone and mail services
are poor. A potential demand for e-commerce-based services
does not make foreign direct investment (full ownership or
joint venture) in digital services worthwhile in these coun
tries. The minimal e-commerce trade that does occur in these
countries is conducted through public Internet connections
in schools, libraries, and caf?s. As a result, a digital service
firm interested in reaching the mass market in a least
electronic-commerce-ready country must rely on exporting
the service using storage devices such as audiotapes, video
tapes, or CDs. The net effect of least-electronic-commerce
readiness for digital services is to strengthen exporting as a
mode of operation, albeit exporting the service in tapes,
disks, or some other storage device. Poor e-commerces infra
structure do not have a significant impact on the entry-mode
strategies of partial-digital services.
P7: Poor Internet infrastructure in a foreign market

encourages traditional exporting of digital services
using storage devices, such as cassettes, disks, or
CDs.
As we show in Figure 1, internal factors or firm-specific

characteristics may weaken or strengthen the impact of level The Impact of Internal Factors
of digitization on entry-mode choice. Internal factors include on the Link Between
firm-specific resources and strategic considerations. Firm Digitization and Entry Mode
specific resources include proprietary know-how and firm
size, whereas strategic issues include entry objectives
(Ekeledo and Sivakumar 2004).
Proprietary Know-How. As the RBV posits, protection of

copyright, trademark, or some other proprietary asset influ
ences choice of entry mode. Counterfeiting?infringements
on copyrights and trademarks of service producers?contin
ues to be a serious problem for digital service firms. Unau
thorized reproduction and distribution of books, computer
software, motion pictures, music, and video games result in a
huge loss of revenue for firms in these lines of business. The
worldwide cost of pirated software is estimated at US$11.4
billion annually (Jeannet and Hennessey 2001). With respect
to unauthorized distribution of music, Napster was per
suaded to change the way its music-swapping software could
be used only after a court ruled that it must observe copy
right laws. In the case of computer software, the revenue loss
from pirated new business software applications is estimated
at US$11 billion, with illegal copies of software from
Microsoft or Norton Utilities outselling legal copies [Balti
more Sun 1999).
Although copyright and trademark laws protect intellectual

property, such laws vary across countries, as does their
enforcement. With infringements of intellectual properties
on the rise, companies must adopt entry-mode strategies that
reduce the damaging effects of counterfeits. To contain or
deter intellectual property infringement in a foreign market
with lax enforcement of intellectual property laws, a digital
service firm may need to establish a physical presence in the
foreign market.
It has also been observed that key technologies in services

tend not to be protected by patents or copyrights and must
rely on secrecy (Grosse 1996; Teece 1988). This observation
is particularly true of partial-digital services, which depend
on trade secrets. Therefore, to protect a trade secret, a partial
digital service should use full ownership. However, many
partial-digital service firms require multiple sites to cover
the national market. Because of the enormous costs of mak
ing the service available in multiple sites, a partial-digital
service firm can lower the cost of operation by simultane
ously using full ownership and franchising. Franchising
gives the franchiser substantial control over units operating
under the franchiser's name (Cross and Walker 1987).
P8: To protect intellectual property against infringe

ment, digital service firms favor full ownership,
whereas partial-digital service firms favor simulta
neous use of full ownership and franchising more
than any other entry mode.
Firm Size. The size of a firm often indicates its competitive

advantage in financial, physical, human, technological, rep
utational, and organizational resources. Size places a con
straint on what a firm can do (Grant 1991). It reflects the
firm's ability to absorb the costs of international expansion
that involves full ownership of foreign affiliates (Agarwal
and Ramaswami 1992; Madhok 1997). Small firms often lack
financial resources to absorb the costs and risks of interna
tional expansion, and therefore they are forced to rely on
shared-ownership modes in foreign markets (Zacharakis
1997). Large firms tend to favor full ownership because their
financial resources enable them to absorb the costs and risks
of foreign expansion (Root 1994). Empirical research has
found a positive relationship between large firm size and full
ownership and small firm size and exporting (Porter 1990;
Terpstra and Yu 1988).
As we noted previously, firm size is likely to have a greater

impact on partial-digital services than on digital services.
Firm size is more likely to affect choice of entry mode by
partial-digital service firms because the capital requirement
of most partial-digital services is lower than that of most dig
ital services. For example, fast-food restaurants favor full
ownership combined with franchising because of the high
cost of multiple service platforms required to cover a foreign
market adequately. In contrast, digital service firms are more
likely to concentrate production in a single or limited num
ber of locations and then export their service to foreign mar
kets. As a result, firm size is not a significant issue for this
category of service. Because of the low capital intensity asso
ciated with most services (Terpstra and Yu 1988), the impact
of firm size is likely to be noticeable among small digital
service firms and partial-digital service firms.
P9: Firm size affects the entry-mode strategies of partial

digital services more than those of digital services.
Compared with small digital service firms, a greater
number of small partial-digital service firms favor
joint venture and licensing.
Entry Objectives. Management's goals and objectives differ

throughout a firm's investment history. A firm may enter a
foreign market for the sake of capability enhancement or
competitive positioning (Kogut 1988; Madhok 1997). The
firm may also use a shared-ownership mode of operation to
enhance its knowledge of a target foreign market when it
lacks such knowledge for a successful entry into the market
and cannot develop such knowledge quickly (Huber 1991). A
firm that has valuable production skills but lacks marketing
skills for a target foreign market may seek a partner with the
appropriate marketing skills.
Both digital and partial-digital service firms might engage in

a shared-ownership mode for capability enhancement and
competitive positioning, but the low capital intensity associ
ated with most digital services favors acquisition (a full
ownership mode) over collaborative modes when the motive
is to enhance. For example, a software developer may
acquire another software company in a foreign market's soft
ware park for capability enhancement and competitive posi
tioning. Locating in a software park enables the company to
take advantage of the concentration of highly skilled labor.
P10: Digital service firms are likely to favor acquisition

(a full-ownership mode), and partial-digital service
firms are likely to favor joint venture, when the
motive for entering a foreign market is capability
enhancement or competitive positioning.
Outsourcing. Traditional motives for entering foreign mar

kets are to serve either new foreign consumers or a foreign
subsidiary of a domestic client (Erramilli and Rao 1990). E
commerce technologies have added outsourcing as a third
motive. Technological advances in data processing and
telecommunications have expanded the domain of outsourc
ing opportunities for service firms. Previously hierarchically
performed, supplementary service functions have become
popular outsourcing candidates (Applegate 1995; Wymbs
2000). An information-based supplementary service can be
delivered from a remote location. For example, an airline can
locate its accounting activities offshore. Similarly, an insur
ance company can locate its claims processing activities in a
foreign country. Other supplementary services that can be
outsourced include call centers, software programming,
billing, and bill collection. Outsourcing enables a firm to
focus on its core competencies and leverage its resources for
increased competitiveness (General Electric 1999). Thus,
service firms use internal sourcing for core service activities
but may use external sourcing for a supplementary service
that is not considered a source of competitive advantage.
A service firm can enter a foreign market for either internal

or external sourcing. Internal sourcing involves procuring
services in the firm's organization, whereas external sourcing
involves contracting with an independent supplier to pro
vide the service. The RBV approach suggests which produc
tion functions should be contracted out and which should be
performed internally. According to RBV, a firm can protect
its proprietary know-how by maintaining full control over
production functions that drive its performance in the mar
ketplace (Ekeledo and Sivakumar 2004). Because a firm's
competitive advantage may reside in its core service or its
supplementary service, the proprietary nature of the core
service or supplementary service determines the type of
sourcing (internal versus external) used (Kotabe, Murray, and
Javalgi 1998).
Outsourcing enables partial-digital services to take advan

tage of full digitization when the service function involved is
information based. The entry mode that a partial-digital serv
ice uses for a digitizable supplementary service depends on
the proprietary nature of the supplementary service. If the
supplementary service gives the firm a competitive edge, the
firm is likely to use internal sourcing, which involves full
ownership of the foreign supplementary service affiliate; oth
erwise, the firm will favor licensing. However, partial-digital
service firms are likely to use external sourcing for a greater
number of their back-office activities. Recent studies have
found that a focus on internal sourcing of supplementary
services tends to dilute a firm's core service competencies
(Kotabe and Murray 2003). In contrast, a digital service firm
is likely to use internal sourcing for supplementary services
because its back-office service activities tend to be indispen
sable to the service bundle. For example, software develop
ment, product design, and application support tend to be
essential back-office tasks for the associated core services.
Pn: Digital service firms are likely to favor full owner

ship, whereas partial-digital service firms are likely
to favor licensing or another collaborative entry
mode, when the motive for entering a foreign mar
ket is to outsource supplementary services.
This study offers support for the observation that some

extant concepts and models for marketing must be modified Discussion
to reflect the increasing importance of services in economic
exchange and of the role of the digital revolution in the para
digm shift that is occurring in marketing today (Rust 2004;
Vargo and Lusch 2004). We have contributed to the knowl
edge of this new, increasingly dominant logic by presenting a
conceptual framework that is rooted in the RBV to under
stand the impact of e-commerce technologies on entry-mode
decisions. Our framework suggests that marketers need to
take a more comprehensive view of entry-mode strategies by
including the impact of the level of service digitization. The
revolutionary changes and improvements that advances in
computer and communication technologies have made pos
sible for the marketing of international services necessitate a
reconsideration of the guidelines for designing entry-mode
strategies in order for service firms to determine which ideas
are still valid and which should be updated. By making an
effort in that direction, this article emphasizes the impor
tance of e-commerce technologies in the international mar
keting of services and identifies ways that firms can adjust or
expand existing concepts of entry-mode choice to reflect the
benefits of information technologies in today's marketplace.
Most, if not all, international services can now benefit from
information technologies. If the core service cannot be con
verted into binary digits and distributed electronically, at
least some back-office production and distribution tasks can
benefit from digitization. For example, marketing tasks such
as advertising, order taking, billing and bill collection,
prospecting for customers, and some customer services can
take place online.
Our conceptual framework complements existing models of

entry-mode strategies for service firms by recognizing
changes due to e-commerce. We show that international
services can be divided into two broad groups on the basis of
the level of digitization that the service allows. We also show
that a service with a generic benefit that is digitizable can
combine two seemingly contradictory modes of operation
and, in doing so, can further strengthen the firm's ability to
protect proprietary elements of its marketing mix. For exam
ple, licensing is not meant to be a strong means for protecting
a firm's know-how, but we show that licensing directed to
the digital service user can effectively discourage product
counterfeiting. We used real-world examples to illustrate our
conceptual argument, because empirical support for the
issues we raise are currently lacking. To encourage confirma
tion of our positions, we make several refutable propositions
that could prove helpful to empirical researchers.
In addition, this study provides an opportunity to employ

the RBV as a conceptual premise for a research study that
involves marketing strategy. This research demonstrates the
value of this theoretical perspective. A firm's internal factors,
such as firm-specific resources, are powerful predictors of
the firm's strategies and behavior in the marketplace. The
more that a resource offers a firm a competitive advantage in
the marketplace, the more desirable is a strategy that protects
the resource from expropriation by competitors. Thus, this
study enhances the application of the RBV by illustrating
how it could be employed to explain entry-mode strategies of
service firms.
Why is foreign market entry-mode strategy still an important

issue in an age in which the Internet has blurred national
market boundaries? Perhaps a global market entry-mode
strategy should be discussed instead. A global marketing
strategy for a product, in this case a service, refers to a single
strategy that encompasses many countries rather than a sepa
rate strategy for each foreign market (Jeannet and Hennessey
2001). The single strategy for a global market applies to all
countries in which the product is sold, while allowing for
some flexibility for local market differences. As Jeannet and
Hennessey (2001) point out, it is not easy to design one
global strategy that works well across countries. The chal
lenge of developing such a strategy is magnified when the
product is culture sensitive, as is the case with many serv
ices. Furthermore, national laws that guide the production
and distribution of services must be harmonized to lessen
the difficulty in the design of global strategies that work well
across countries. Currently, the harmonization of national
laws that pertain to the marketing of services is far from a
reality, despite increasing regional economic integration
among countries. Therefore, we must continue to think in
terms of separate entry strategies for individual national mar
kets, despite the opportunities that e-commerce has created
for global marketing.
We believe that managers will find our model to be useful in

Managerial Implications more thoughtfully developed entry strategies for interna
tional services. Our classification scheme suggests that mar
keters should recognize the impact of the level of digitization
on entry strategies. Marketers should not only consider
entering the entire service act in a foreign market but also
examine the strategic benefits of entering only certain service
operations. E-commerce technologies now allow certain
service processes to be administered from a distance. For
example, centralization of information hubs may result in
significant gains from scale economies. By recognizing con
straints imposed by external factors and firm-specific factors,
managers should take advantage of the additional interna
tionalization modes that e-commerce technologies have
made possible.
Our research supports Lovelock's (1999) proposition that

globalization has different implications for different types of
services and is affected by the process involved in creating
and delivering the service. We contend that, all things being
equal, exporting is appropriate for internationalizing a digi
tal service. It is an effective way for a digital service firm to
protect its proprietary know-how; it also enables the firm to
take advantage of scale economies by centralizing some of its
production tasks. Digital reproduction of a service allows for
significant reductions in cost, because the seller can sell
unlimited and inexpensive copies of the product online.
Even when the service is exported in a storage device, the
cost of reproduction is trivial compared with the cost of pro
ducing the first unit.
Partial-digital services also benefit from the digital revolu

tion. In addition to going abroad to serve local customers,
partial-digital service firms can now outsource digitizable
back-office tasks in foreign markets. Partial-digital service
firms, even home-country local ones, can engage in interna
tional trade by importing outsourced tasks from abroad. As
can digital service firms, partial-digital service firms can cen
tralize digitizable production tasks, such as accounting and
billing. Partial-digital service firms that enter foreign coun
tries in search of customers should decide whether to locate
all production activities in the foreign market or centralize
information-based tasks. For example, raw data can be coded
and organized in a central location, a call center can serve
more than one service platform, and so forth.
We began this article with the position that e-commerce tech

nologies have created innovative ways to market services Research Implications
abroad, and we set out to support this position with informa
tion gathered from our research. In addition to the need to
validate our model empirically, further research in some
other aspects of the model is necessary. As with any concep
tual snapshot, important details often remain for further
investigation. An example is that Internet infrastructure and
access vary from country to country and even within coun
tries. For example, Internet access is possible in coastal
India, nontropical south central and coastal Brazil, northern
Mexico and Mexico City, parts of Thailand, and parts of
China (Siegel 2004). This uneven distribution of Internet
access in individual countries requires further research to
determine the true market potential of certain countries.
Another area of investigation is the impact of cultural differ
ences on the electronic marketing of services. How does cul
tural difference affect a consumer service and a producer
service in the same country? We know that industrial goods
tend to encourage standardized marketing strategy in global
markets. Is the same observation true of industrial services?
Our research focused on two broad service groups: digital

services and partial-digital services. Further research should
examine a more fine-grained analysis of individual digital
service industries to ascertain how practices in such indus
tries compare with the suggestions in this article. Examples
of industries to examine include software, movie, music,
television, newspaper, health care, and spectator sports, all
of which can be digitized.
As prior researchers have noted, the technology-mediated

Conclusion marketing of services is likely to redefine conceptual frame
works for designing entry-mode strategies for service firms.
This research suggests that technology is an important factor
to consider in selecting entry mode. As a result of technol
ogy, distance is no longer a barrier to the international mar
keting of services; some service firms can become global
from the beginning. Because of the ease with which online
transactions can traverse national borders, service firms do
not need to undergo all the traditional steps of entry-mode
selection, such as determining market potential and examin
ing entry barriers, before venturing abroad. Researchers rec
ommend the incorporation of technological factors into the
entry-mode conceptual framework to account for the impor
tant role of technology in the marketing of services in today's
e-commerce environment. This article is an effort to examine
ways that technology has redefined entry-mode concepts.
The net result of this research is to group services into those
that can and cannot be created and distributed electronically
but that can still use e-commerce technologies to increase the
efficiency of service production and delivery. We also identi
fied traditional concepts of entry-mode selection that must
be extended to reflect today's e-commerce reality.
Agarwal, Sanjeev and Sridhar N. Ramaswami (1992), "Choice of

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The Impact of E-Commerce

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How does the article conceptualize the role of e-commerce on entry mode choices of service firms?

How does the article conceptualize the role of e-commerce on entry mode choices of service firms?

What internal and external factors are proposed to moderate the relationship between e-commerce and entry mode choices?

What internal and external factors are proposed to moderate the relationship between e-commerce and entry mode choices?

The Impact of E-Commerce on Entry-Mode Strategies of Service Firms: A Conceptual

Framework and Research Propositions

American Marketing Association is collaborating with JSTOR to digitize, preserve and

Recently, Vargo and Lusch (2004) noted that marketing is in

Despite the widespread acceptance that information technol

Choosing of an appropriate entry mode is critical to the suc

E-Commerce and Entry-Mode Strategies

Figure 1 offers a framework for understanding the impact of

48 Ikechi Ekeledo and K. Sivakumar

E-Commerce and Entry-Mode Strategies 49

The nature of a service is a key determinant of foreign market

Internationally traded services can be divided into two

Digital services share three fundamental characteristics of

50 Ikechi Ekele do and K. Sivakumar

Figure 2 presents a matrix for grouping international services

It is important to point out the difference between the classi

Level of Service Digitization

E-Commerce and Entry-Mode Strategies 51

Digital Services and Entry-Mode Strategies. Digital services,

52 Ikechi Ekeledo and K. Sivakumar

Traditionally, entry-mode selection involves determining the

In addition to these distinctive elements, the three funda

E-Commerce and Entry-Mode Strategies

In terms of RBV's prescriptions for protecting the proprietary

P^ Digital service firms are likely to favor exporting or

Partial-Digital Services and Entry-Mode Strategies. As Figure

Ikechi Ekeledo and K. Sivakumar

When selecting an appropriate entry mode, the service firm's

P2: Partial-digital service firms are likely to favor full

Cultural Differences. Cultural differences between the host

E-Commerce and Entry-Mode Strategies 55

Language is another element of a host-country culture that

Because of the sensitivity of many services to national cul

Ikechi Ekeledo and K. Sivakumar

Government Regulations. Some governments are more intru

Political pressure from citizens of a particular country can

P4: Concerns about government regulation of e

Tariff and Nontariff Barriers. Direct trade barriers, which

E-Commerce and Entry-Mode Strategies 57

Nontariff barriers can also weaken the impact of digitization

P5: Tariff barriers weaken the propensity of digital serv

P6: Compared with digital service firms, a greater num

Internet Infrastructure of the Host Country. A well-developed

Countries can be divided into three broad groups on the basis

Ikechi Ekeledo and K. Sivakumar

P7: Poor Internet infrastructure in a foreign market

As we show in Figure 1, internal factors or firm-specific

Proprietary Know-How. As the RBV posits, protection of

E-Commerce and Entry-Mode Strategies 59

Although copyright and trademark laws protect intellectual

It has also been observed that key technologies in services

P8: To protect intellectual property against infringe

Firm Size. The size of a firm often indicates its competitive

As we noted previously, firm size is likely to have a greater

Ikechi Ekeledo and K. Sivakumar