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International Risk Perceptions and Mode of Entry:
A Case Study of Malaysian Multinational Firms
*Zafar U. Ahmed, Ph.D.,
Sacred Heart University, Fairfield, Connecticut, USA
e-mail: [email protected]
Osman Mohamad, Ph.D.,
University of Science, Penang, Malaysia
James P. Johnson, Ph.D.,
Old Dominion University, Norfolk, VA, USA
Brian Tan, MBA.,
University of Science, Penang, Malaysia
*Please send correspondence to the first author.
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International Risk Perceptions and Mode of Entry:
A Case Study of Malaysian Multinational Firms
Abstract
Risk perceptions are believed to influence a firm’s choice of entry mode into
foreign markets. However, studies of the risks faced by international businesses have
typically focused on a specific category of risk, such as political or financial risk,
overlooking possible interrelationships among the many types of risk that are present in
the international environment. This study applies an integrated international risk
framework to investigate the relationship between risk perceptions and the choice of
foreign market entry mode. Data from 69 Malaysian public companies yielded a high
degree of correlation among 11international risk variables, broadly grouped into two
categories: external risks and internal risks. A significant relationship was found between
the level of perceived risk and choice of entry mode, such that low risk perceptions were
associated with high-control modes of entry and high-risk perceptions were associated
with low-control modes of entry.
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International Risk Perceptions and Mode of Entry:
A Case Study of Malaysian Multinational Firms
With increasing levels of globalization and international competition, managers
are facing ever more complex strategic decisions. Often, foremost among these are
decisions relating to the choice of entry mode in foreign markets. However, although
international expansion holds out a promise of fruitful new markets, there are many and
varied risks facing firms in these strange new lands (Brouthers, 1993). Risk is defined as
(1) the uncertainty associated with exposure to a loss caused by some unpredictable
event, and (2) variability in the possible outcomes of an event based on chance. The
degree of risk depends on how accurately the results of a change event can be predicted;
the more accurate the prediction, the lower the degree of risk (Jackson & Musselman,
1987).
The international business/strategic management literature lacks a generally
accepted definition of international risk (Miller, 1992). Since risk usually refers to
unanticipated or negative variations in revenues, cost, profit, and market share,
international risk generally can be defined as the danger firms face of limitations,
restrictions, or even losses when engaging in international business. Miller (1992)
suggests a three-fold integration of international risk variables: [1] general environment
uncertainty, [2] industry risk, and [3] firm specific risk.
General environmental uncertainty refers to variables that apply across all
industries within a country, such as political risk, government policy uncertainties,
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economic uncertainties and social uncertainties. Industry risk include the risks associated
with differences in industry or product specific variables, such as uncertainties associated
with production inputs, special material and labor supply availability, product and market
uncertainties, and competitive rivalry. These uncertainties may be caused or exacerbated
by shifts in supply or changes in demand within a specific country. Finally, firm-specific
risk includes operating uncertainties related to labor and employee issues, liability
uncertainties associated with the harmful effects of products on users, credit uncertainties
arising from inability to collect accounts receivables, and so forth. These uncertainties
reduce the predictability of corporate performance, and thus increase international risk. In
the international environment, therefore, risk is multidimensional (Miller, 1992). This
more comprehensive conceptualization of international risk is related to the strategic
choice of entry mode. Miller (1992) argued that focusing on discrete international risks,
such as exchange rate risk or political risk, in isolation from the other international risks
can lead to a suboptimal entry mode. Extending Miller’s integrated international risk
framework, Brouthers (1993) examined the relationship between international risk and
entry mode strategy and found that the choice of entry mode varied according to
perceptions of international risk.
This study examines the influence of international risk on the foreign market entry
mode decision made by firms based in an emerging market: Malaysia. To examine the
risk/entry-strategy relationship, we adopt Miller’s (1992) integrated international risk
perspective, identify key components of the international risks involved in strategic
decision making, and then explore how management might minimize the impact of these
risks on the firm through the entry mode selected. We empirically test an integrated
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model of international risk and the influence of risk perceptions on strategic choice; this
extends the integrated international risk framework developed by Miller (1992) and
previous work by Brouthers (1993), who related international risk perceptions to entry
mode strategies. This study is expected to contribute to a better understanding of the
relationships between international risk and entry mode strategy from the viewpoint of
firms based in emerging economies.
Literature Review and Hypotheses
The international business literature has tended to focus on particular types of
risk, specifically political risk, ownership risk, or transfer risk (Akhter and Lusch, 1988;
Ting, 1988), to the exclusion of other interrelated risks (Miller, 1992) and is a significant
shortcoming in the literature. Examining only one international risk variable, such as
political risk or financial risk, may lead to incorrect entry mode decisions because other
related risks are ignored (Brouthers, 1993). Nevertheless, empirical studies have found a
significant relationship between one or more risk variable and entry mode strategy (Kim
& Hwang, 1992). In these studies, risk has been defined as dissemination risk (Kim and
Hwang, 1992; Anderson and Gatignon, 1986; Agarwal and Ramaswami, 1992) or as
country specific risk (Anderson and Gatignon, 1986; Erramilli and Rao, 1990; Kogut and
Singh, 1988).
Dissemination risk is the risk of exposing a firm’s proprietary know-how, skills or
technology to actual or potential competitors. Dissemination risk has been
operationalized as research and development expenditures (Kim and Hwang, 1992),
marketing and advertising spending (Anderson and Gatignon, 1986), the costs of
monitoring contract compliance (Agarwal and Ramaswami, 1992), and brand and
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reputation strength (Kim and Hwang, 1992). In most cases, higher investments in these
variables indicate increased dissemination risk. However, these findings do not address
the issue of how to handle multiple types of risk in entry mode decisions. Country
specific risk is defined as the environmental unpredictability in a given country
(Anderson and Gatignon, 1986), and it has been operationalized as environmental
volatility (Erramilli and Rao, 1990), socio-cultural distance (Kogut and Singh, 1988),
clusters of countries (Anderson and Gatignon, 1986), risk of expropriation, and instability
of political, social and economic conditions (Agarwal and Ramaswami, 1992). Most
previous entry mode research has addressed separately these elements of international
risk, but few studies have examined international risk as a whole.
Influence of International Risk on Entry Mode Strategy
International risk can be managed through the choice of appropriate entry mode
strategies. The international business literature classifies entry mode strategies into three
broad groups: (1) Non-equity/exporting mode, (2) Joint-venture mode, and (3)] Whollyowned subsidiary mode (Brouthers, 1993; Kim and Hwang, 1992; Hill et al., 1990). Each
entry mode is consistent with a different level of control (Calvet, 1984; Root, 1987) and
resource commitment (Vernon, 1979). Control here means authority over operational and
strategic decision making, while resource commitment refers to dedicated assets that
cannot be redeployed to alternative uses without loss of value (Kim and Hwang, 1992).
Hill et al. (1990) suggest that while a wholly owned subsidiary could be characterized by
a relatively high level of control and resource commitment, the opposite is true of indirect
exporting. For joint ventures, although the levels of control and resource commitment can
vary with the nature of ownership split, the extent of control and resource commitment
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generally lies between that of wholly owned subsidiaries and the non-equity/exporting
modes. Brouthers (1993) developed an integrated risk-strategy framework to describe the
relationship between perceived international risk and the choice of entry mode.
According to this framework, a firm adjusts its entry mode based on management’s
perception of total international risk. For markets where total perceived risk is low, firms
will use strategies that involve a high level of resource commitment. However, in markets
that have high total perceived risk, management must adjust its entry mode strategy to
minimize the effect of risk on the firm’s performance, and so will likely use a low
resource commitment strategy.
Control of Risks
Multinational firms often seek to minimize risks associated with international
expansion by controlling the operations of the international business unit, in the belief
that this will permit them to manage and reduce risks (Cyert and March, 1992). However,
when the perception of risk gets too high, management no longer believes that it has
control over the risk; at this point, the strategy must change and the firm seeks to relieve
itself of some portion of control by sharing responsibility for control and shifting the risk
management to another firm, either a joint-venture partner or licensee, which may be
better qualified to perform the tasks. These control risks are not usually black and white
issues; when the risk/control trade-off becomes blurred, a strategy of reduced control may
be appropriate. Control risk variables are concerned with three issues: (1) management’s
desire for control, based on its prior experience; (2) cultural differences; and (3) the
industry structure. Firms select their entry mode based on their perception of control risks
in the market (Brouthers, 1993).
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Management Experience
Previous research has identified international management experience as a
measure of a firm’s ability to exercise control and manage an international operation, thus
influencing entry mode choice (Anderson & Gatignon, 1986; Vernon, 1985). Although
Miller (1992) does not include management experience in his framework of integrated
international risk management, the literature indicates that management experience has a
direct impact on risk perceptions, so it is included as part of the theoretical framework of
this study.
H1: Firms choose different entry modes for foreign markets according to their perception
of their management experience in the foreign country.
Cultural Differences
Culture affects the attitudes and beliefs of potential customers and may also
impact their response to certain products and services. Cultural differences refer to the
extent of similarities or differences between the cultures of customers in the home market
and those in the foreign target market (Kogut and Singh, 1988). With small differences in
culture, similar strategies can be adopted; as cultural differences increase, management’s
desire for centralized control decreases (Anderson and Gatignon, 1986; Erramilli and
Rao, 1990; Kogut and Singh, 1988). In highly different cultures, management is likely to
perceive increased levels of control risk because of its lack of market knowledge and will
select entry mode strategies that minimize management control.
H2: Firms choose different entry modes for foreign markets according to their perception
of cultural differences between the home country and the foreign country.
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Industry Structure
Industry structure affects perceived risk and entry mode selection since it can
provide barriers to new entrants, reducing the rivalry between firms already in the
industry (Porter, 1980). In a highly concentrated industry, firms tend to favor high
control modes of international expansion, thus maintaining barriers to entering the market
(Vernon, 1985). Miller (1992) addresses industry structure as industry uncertainties in
his framework of integrated risk management.
H3: Firms choose different entry modes for foreign markets according to their perception
of the industry structure in the foreign country.
Market Complexity Risks
Market complexity risks refer to market specific variables that affect a firm’s
ability to enter a market, distribute its products or services, and increase or maintain
market share. Market complexity risks affect management’s decision about committing
resources to a particular market. When the foreign market is similar to the home market,
firms are more willing to invest resources, while in markets that differ significantly from
the home market, firms will be more hesitant to invest and will seek ways to reduce their
investment. As with control risks, market complexity risks are based on management’s
perception of similarities and differences between home market and foreign target
markets. Brouthers (1993) identified the following market complexity risk variables: (1)
political risk, (2) transfer risk, (3) operating risk, (4) ownership risk, (5) marketing
infrastructure, (6) customers’ tastes, (7) competitive rivalry, (8) market demand and
market potential.
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Political Risk
Political risk can be viewed as governmental or societal actions and policies
originating either within or outside the host country, and negatively affecting either a
select group or a majority of foreign business operations and investments (Akhter and
Lusch, 1988). Political instability that results from a war, revolution, coup d’état, or
political turmoil can also be political risk. Miller (1992) termed this risk political
uncertainties in his framework of integrated risk management.
H4a: Firms choose different entry modes for foreign markets according to their
perception of political risk in the foreign country.
Transfer Risk
Transfer risk arises from a government’s ability to restrict the free flow of goods,
services and funds into and out of a particular country. In some developing countries,
government policies (i.e. exchange controls, taxation, currency devaluation/revaluation)
restrict foreign companies’ access to financial markets and the flow of funds out of the
country (Root, 1993). Restrictions can also be imposed through import and export
barriers, and price controls. Transfer risk was not addressed directly by Miller (1992), but
his framework subsumes interest rates, inflation, and foreign exchange risks under
macroeconomic uncertainties.
H4b: Firms choose different entry modes for foreign markets according to their perception
of transfer risk in the foreign country.
Operating Risk
Operating risk refers to interference with the on-going operations of a firm, such
as potential restrictions in logistics, marketing, finance, or other business functions
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imposed by a government or by political pressure from vested interest groups, or due to
market conditions (Akhter and Lusch, 1988). It includes the inability of the firm to
enforce contracts, bureaucratic delays, the quality of local management, and the
availability of skilled labor and raw materials (Haner, 1980). Miller’s (1992) operating
risks includes three sub-categories of uncertainties: (1) labor uncertainty, (2) firm specific
input supply uncertainty, and (3) production uncertainty.
H4c: Firms choose different entry modes for foreign markets according to their perception
of operating risk in the foreign country.
Ownership Risk
Ownership risk arises from the uncertainty of government actions over the control
of the firm and its assets, through measures such as expropriation, confiscation,
domestication and nationalization (Akhter and Lusch, 1988). In general, firms involved in
international business have to take into consideration ownership risk and the possible
resulting loss of assets (Jeannet and Henessey, 1995). Miller’s (1992) framework of
integrated risk management addressed nationalization as a type of ownership risk.
H4d: Firms choose different entry modes for foreign markets according to their perception
of ownership risk in the foreign country.
Marketing Infrastructure
Marketing infrastructure refers to the methods available within a market to sell,
distribute, advertise and promote a firm’s products or services. Marketing infrastructure
decisions can have adverse effects on international expansion, such as when firms use
incorrect marketing channels or networks based on home market experience without
adjusting for differences in the targeted foreign market, resulting in unfavorable
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outcomes (Ricks, 1983). If management perceives that the marketing infrastructure is
similar to that of the home market, it will likely choose an entry mode strategy that
contains elements similar to the successful home market strategy. In markets with vast
differences, management would perceive higher levels of market complexity risks and
thus would likely use strategies to minimize the impact of these risks on the overall
performance of the firm. Miller (1992) did not address marketing infrastructure in his
integrated model, but it is specifically included here:
H4e: Firms choose different entry modes for foreign markets according to their perception
of the marketing infrastructure in the foreign country.
Customer Taste
Customer taste focuses on similarities/differences between customer preferences
in the home market and the target market. A company can only react to, and not control,
customers’ tastes, purchasing patterns, preferences for substitute products, etc. (Evans &
Berman, 1994). Management must evaluate its willingness to invest in an environment
where its products or services may be used differently than in the home country (Agarwal
and Ramaswami, 1992). Firms must discern what the customers and prospects need,
want, and will buy, then create a satisfying mix of goods and services from which buyers
can select (Meloan, 1995). If customer tastes are similar to those of the home market,
firms will prefer high resource commitment entry modes; if customer tastes are perceived
as being significantly different, firms will favor low resource commitment entry modes
(Brouthers, 1993). Miller (1992) addresses customer tastes in the industry uncertainties
category (product market uncertainty) of his integrated model.
H4f: Firms choose different entry modes for foreign markets according to their perception
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of customers’ tastes in the foreign country.
Competitive Rivalry
The competitive environment affects a firm’s marketing efforts and its success in
attracting a large target market. A firm needs to analyze the structure of the industry in
which it operates and examine its competitors on the basis of competitive characteristics
such as marketing strategies, domestic/foreign firms, company size, competitive
strategies, and channel competition (Evans & Berman, 1994). If competitive rivalry is
high, entering a market would be more difficult and management would perceive higher
market complexity risk. The entry strategy must be adjusted and selected to reflect the
level of competitive rivalry in the target market (Brouthers, 1993). Competitive rivalry is
part of the integrated model developed by Miller (1992) under the category of industry
uncertainties (competitive uncertainty).
H4g: Firms choose different entry modes for foreign markets according to their perception
of competitive rivalry in the foreign country.
Market Demand
Firms must conduct customer research to determine market demand and to
develop and introduce offerings desired by the customers. Market demand examines both
current market and future market demand (Evans & Berman, 1994). In countries with a
high demand for the firm’s products and services, provided that the market size is
sufficient to support the entry of an additional firm, perceived market demand risk of
entry is low, since a market already exists for the product. In countries with low current
demand but high predictions for future demand, risk perception is also believed to be
moderately low, again because of the potentially large market for the product or service
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in the future (Meloan, 1995). Miller (1992) includes market demand in his integrated
model under industry uncertainties (product market uncertainty).
H4h: Firms choose different entry modes for foreign markets according to their perception
of market demand and potential market growth in the foreign country.
Entry Mode Strategy
There is wide variety in classifying international business arrangements
(Brouthers, 1993; Czinkota et al., 1994; Erramilli and Rao, 1990; Kim & Hwang, 1992;
Naumann and Lincoln, 1991; Young et al., 1989), but they can be broadly classified into
three distinct groups of international entry modes:
Group 1 - Non-equity / indirect exporting mode

indirect exports

direct exports

licensing and franchising

establishment of an export subsidiary
Group 2 - Joint-venture mode

establishment of a minority joint-venture

establishment of a 50%:50% joint-venture

establishment of a majority joint-venture
Group 3 - Wholly-owned subsidiary mode

acquisition of a wholly owned subsidiary abroad

establishment of a wholly owned subsidiary abroad from scratch.
Entry mode decisions are believed to be based on perceptions of the international
risk of entering a new market. Each entry mode provides management with a trade-off.
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First, management can retain full control of its operations through high commitment of
resources (wholly-owned subsidiary), resulting in exposure to total risk. Second,
management can share control and resources with another firm (joint-venture
arrangement) and avoid some of the risk. Finally, management can shift control and risk
to another firm and avoid most of the risks in that target market by opting for exporting
(Naumann and Lincoln, 1991). Figure 1 indicates the influence of international risk on
entry mode strategy. It illustrates the components of international risk that combine to
form total perceived international risk, which has a direct impact on the choice of entry
mode.
-------------------------------------------------Insert Figure 1 About Here
-------------------------------------------------Method
This study examines the influence of international risk on the choice of entry
mode selected by Malaysian public companies, defined as any company listed on the
Kuala Lumpur Stocks Exchange as of 1 June 1997. A questionnaire was sent by mail to
the Manager-In-Charge of International Business in each of the 642 listed companies.
Risk Measurement
Perceived risk was measured by assessing similarities or differences between
what the management is used to dealing with, and the situation in the target country. As
the differences between countries increase on the items being measured, the perception of
risk increases. The differences between the home country and the target country were
measured for each risk variable discussed below. In addition, market complexity
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variables (i.e. political risk, transfer risk, operating risk, ownership risk, marketing
infrastructure, customers’ taste, competitive rivalry and market demand) were also
assessed as the level of predictability of an outcome in the target country. A higher level
of predictability implies a low level of uncertainty (lower risk), while a lower level of
predictability implies a high level of uncertainty (higher risk). Perceptions of risk were
measured in the context of the foreign market that the company most recently entered.
Risk Variables
The international risk variables were measured using eleven groups of questions,
each group measuring one international risk variable. A total of forty perceptions of
international risk were grouped under the following variables (see Figure 1): (1)
management experience, (2) cultural differences, (3) industry structure, (4) political risk,
(5) transfer risk, (6) operating risk, (7) ownership risk, (8) marketing infrastructure, (9)
customer taste, (10) competitive rivalry, and (11) market demand and potential market
growth. These were the independent variables in this study. Evaluations were on a 5point Likert-type scale (1= very low perceived international risk, 5 = very high perceived
risk). Cronbach alpha coefficients for the independent variables ranged between 0.64 and
0.93, suggesting that the measures were reliable.
Strategic Choice of Entry Mode
Entry mode was grouped into three groups: Group 1 - Non-equity / exporting
mode; Group 2 - Joint-venture mode; Group 3 - Wholly owned subsidiary mode. This
classification is consistent with previous research into entry mode strategy options
(Young et al., 1989; Kim & Hwang, 1992; Czinkota et al., 1994; Naumann and Lincoln,
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1991; Brouthers, 1993; Erramilli and Rao, 1990). The entry mode used in the country that
the company most recently entered is the focus of this study.
Analysis and Results
A total of 69 usable questionnaires were returned -- a response rate of 10.75%,
which is consistent with the response rate of previous studies using Malaysian companies
(Leong 1996; Ching 1997). The poor response rate can be attributed to attitudes widely
held in developing countries such as Malaysia, which include a lack of interest among
public listed companies in responding to survey questionnaires, and/or a disinclination to
disclose confidential information.
More than half of the firms (57%) manufactured industrial or consumer products,
with the next largest group (22%) engaged in services or trading. Other industries
represented were Construction, Finance, Properties, and Plantations. Thirty-two firms
selected the non-equity/export mode for their most recent foreign market entry; 25 firms
selected the joint-venture entry mode, and 12 firms selected the wholly-owned subsidiary
entry mode. Each industry was represented in at least two out of the three categories of
entry mode. However, no respondents from the industrial products sector selected the
wholly-owned subsidiary mode, no respondents from the construction sector selected the
joint-venture mode, and none from the properties and plantation sector selected the nonequity/export mode. While these observations do not appear to reveal a significant bias
between industry sector and choice of entry mode, no definitive conclusions can be
drawn here since the number of respondents from some industries, such as construction,
finance, properties and plantations, is relatively small.
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---------------------------------------Insert Table 1 About Here
---------------------------------------Table 1 presents the means, standard deviations and correlations of the risk
variables. The mean values of the international risk variables show that, generally,
respondents have a high perception of international risk based on the foreign market last
entered. Positive correlations among all the independent variables are evident in Table 1
and are statistically significant (p<.05) for 48 of the 55 pairs of variables. This
multicollinearity supports our initial assumption that the international risk variables are
interrelated.
International Risk and Entry Mode Strategy
To assess the influence of international risk on entry mode strategy, 3 analytical
techniques were used: multivariate discriminant analysis, factor analysis, and hierarchical
discriminant analysis. Table 2 presents the results of the multivariate discriminant
analysis, which indicated that the three groups differed in terms of international risk
perceptions. The discriminant function was significant (p<.001) level for Function 1,
which accounted for 91.38 percent of the variance. Even after the discriminant power was
removed by the first function, some discriminant power still remained, since Function 2
was significant at the <.10 level and accounted for 8.62 percent of the variance.
---------------------------------------Insert Table 2 About Here
----------------------------------------
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Business analysts may consider a significance level of p>.05 as acceptable, based
on the cost versus the value of the information (Hair , Anderson & Tatham, 1987).
However, the level of significance is not an accurate indication of a function’s ability to
discriminate between groups. The eigenvalues (1.2028 and 0.1135) and canonical
correlations (0.7389 and 0.3193) denote the relative ability of the functions to separate
the groups. Furthermore, to determine the predictive ability of the discriminant functions,
classification matrices must be constructed and the validity of the functions then tested.
To do this, a random holdout sample of 18 respondents was selected and excluded from
the analysis, leaving an analysis sample of 51 respondents. The predictive accuracy of the
discriminant function was measured by the hit ratio (percentage correctly classified),
which was obtained from the classification matrix of the holdout sample. The hit ratio
was 67%, which was significantly higher than that of the Maximum Chance Criterion test
(46% ) and the Proportional Chance Criterion test (38%), indicating that the predictive
accuracy of the discriminant function was acceptable.
Next, the stepwise method was used to identify the three variables that
contributed most to discriminating among the groups (Table 3): industry structure,
customer taste, and marketing infrastructure. Industry structure discriminated
significantly between Group 1 and Group 3, while customer taste and marketing
infrastructure discriminated significantly between Group 2 and Group 3. A one-way
ANOVA confirmed that there were significant differences between all three entry modes
in relation to these three independent variables. These three international risk variables
appeared to have the greatest influence over the choice of entry mode for the foreign
market most recently entered. However, the variables excluded from the stepwise
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analysis might still significantly influence the dependent variable, since such exclusion
could result from either multicollinearity or a lack of statistical significance.
To assess whether there was support for the hypotheses, the data were then
subjected to factor analysis. After varimax rotation, two factors emerged with
eigenvalues greater than 1.0, accounting for all eleven independent variables and
explaining 67% of total variance (Table 4). Six variables loaded on Factor 1, which
accounted for 52.2% of the total variance: cultural differences, marketing infrastructure,
operating risk, ownership risk, political risk, and transfer risk. Factor 1 can be interpreted
as reflecting external risk and is labeled Country and Supporting Industry Specific Risk.
The remaining variables -- competitive rivalry, market demand, customer tastes,
management experience, and industry structure – loaded on Factor 2, which accounted
for 15 percent of the total variance and can be interpreted as reflecting internal risk; it is
labeled Product, Company and Industry Specific Risk. This factor grouping, along with
the multivariate discriminant analysis and the multicollinearity among the independent
variables, suggests strongly that all eleven risk variables influence the choice of entry
mode, supporting the hypotheses.
---------------------------------------Insert Tables 3 and 4 about Here
---------------------------------------Discriminant Analysis Using Factors as Independent Variables
Simultaneous multivariate discriminant analysis was then applied, using the two
factors as independent variables and the three groups of entry mode as the dependent
variables. The results indicated that the three groups differed in terms of international risk
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perceptions. (Because of space restrictions, the tables for this and the subsequent tests are
not shown here but details may be obtained from the authors.) The discriminant function
was significant (p <. 001) for Function 1 but non-significant (p <. 05) for Function 2. As
before, the predictive ability of the discriminant functions was then assessed. The hit
ratio of the holdout sample of the analysis using Factors 1and 2 was 83 percent, even
higher than the hit ratio of 67 percent of the earlier multivariate discriminant analysis,
indicating that these two international risk factors satisfactorily discriminated among the
choice of entry modes.
Finally, a one-way ANOVA confirmed that the two factors differed significantly
(p <. 05) across the three groups of entry modes, with the highest mean values in Group 1
(Non-equity/exporting) and the lowest in Group 3 (wholly-owned subsidiary). When
perceived international risk is high, an entry mode with lower resource commitment and
lower control is selected; when perceived international risk is low, an entry mode with
higher resource commitment and higher control is selected. Thus, a negative relationship
exists between risk perception and level of international involvement.
Conclusions and Managerial Implications
The results of the analysis supported the hypotheses of this study and indicated
that, for Malaysian public firms, international risk perceptions influence the choice of
entry mode. Further, the data showed that there are significant differences in how the
firms across the three entry mode groups perceive international risk. The eleven
correlated variables of international risk can be grouped into two factors: (1) Country and
Supporting Industry Specific Risk, and (2) Product, Company and Industry Specific Risk.
A negative relationship was found between the level of perceived international risk on the
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one hand and the level of resource commitment and control of the foreign business unit
on the other: perceptions of greater international risk are associated with lower levels of
resource commitment and a preference for control of the foreign business unit, and vice
versa. Therefore, if perceived international risk is high, firms will most likely choose the
non-equity/export entry mode. If firms perceive moderate international risk, then the
most likely mode of entry will be joint-venture. When perceived international risk is low,
the most likely entry mode will be a wholly-owned subsidiary.
The findings of this study are consistent with prior research in the area of
international risk and entry mode strategy. Brouthers (1993 found a significant
relationship between perceived international risk and strategic choice; as perceived risk
increases, the level of resource commitment and control of the strategic choice is
reduced. Hill et al. (1990) also found that the choice of entry mode is influenced by
control, resource commitment, and dissemination risk. Kim and Hwang (1992) found
overall differences in the profiles of the three distinct entry modes, and concluded that
entry mode choice is influenced by global strategic variables (international risk). These
consistent and comparable findings of prior studies in this area support the findings of
this study.
Limitations and Recommendations for Further Research
First, the low response rate (10%) and relatively small sample size limited the
range of tests employed in this study. Having only 69 samples in this study imposed
severe limitations on the choice of statistical analyses and on the interpretation of results.
Researchers should allocate more time to follow up the return of the questionnaires in
order to achieve a higher response rate. Second, because this study relied on the memory
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of the respondents, some responses may have been inaccurate or biased. The last foreign
market entry might have occurred some time ago, so the respondents might not have been
able to remember and identify their perceptions of international risk at that time.
However, in emerging economies, it is difficult to obtain an accurate database of
companies that have just entered a new foreign market. Future research could possibly
utilize the press releases of listed companies announcing their latest international
involvement. Questionnaires could be adapted to relate specifically to the announcement
and be sent to the respondents soon after the press release. In this way, the information
required need not rely on the memory of the respondents. A third limitation is the
possibility that business volume in the foreign market might impact the choice of entry
mode. If the business volume is small relative to the size of the company, the entry mode
selected could be low in resource commitment and control; if the volume of business is
large relative to the size of the company, the entry mode selected might be high in
resource commitment and control. Although market demand, a proxy for business
volume, is an independent variable in this study, the exclusion of business volume as a
possible moderating variable is a limitation of this study. Future research should
specifically include business volume in the framework and assess its suitability for
inclusion as a moderating variable.
Notwithstanding these limitations, this study makes a valuable and unique
contribution to international business research. It helps international executives to refocus
on the types of international risk and their influence on entry mode strategy, providing
managers with a better appreciation of international risk variables in influencing the entry
mode decision.
24
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28
TOTAL PERCEIVED INTERNATIONAL RISK












ENTRY MODE STRATEGY
Management Experience
Cultural Differences
Industry Structure
Market Complexity
Political Risk
Transfer Risk
Operating Risk
Ownership Risk
Marketing Infrastructure
Customer Taste
Competitive Rivalry
Market Demand

Non-Equity/ Exporting

Joint-Venture

Wholly-Owned Subsidiary
Figure 1
International Risk and Entry Mode Strategy
29
Table 1. Zero-Order Correlation Matrix
Mean
s.d.
1. Competitive
Rivalry
2. Cultural
Difference
3. Market
Demand
4. Marketing
Infrastructure
5. Operating
Risk
6. Ownership
Risk
7. Political Risk
2.9
0.81
1.00
2.8
1.14
0.38***
1.00
2.7
0.78
0.55***
0.26**
1.00
2.5
0.88
0.52***
0.43***
0.47***
1.00
2.7
0.87
0.57***
0.50***
0.38***
0.77***
1.00
2.6
1.07
0.57***
0.45***
0.36***
0.63***
0.65***
1.00
2.5
0.96
0.51***
0.58***
0.23*
0.63***
0.76***
0.80***
1.00
8. Customer
Taste
9. Management
Experience
10. Industry
Structure
11. Transfer Risk
2.7
0.72
0.76***
0.34**
0.58***
0.54***
0.59***
0.54***
0.46***
1.00
2.1
0.88
0.32**
0.35***
0.52***
0.45***
0.24***
0.26**
0.22
0.33**
1.00
3.1
1.23
0.61***
0.05
0.359***
0.190
0.249**
0.181
0.166
0.396***
0.266*
1.00
2.6
0.82
0.38***
0.64***
0.340***
0.692***
0.805***
0.678***
0.766***
0.451***
0.229*
0.1084
Variable
*** p<0.01
** p<0.05
*
p<0.10
N=69
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Correlation Coefficient of r > 0.7 signifies strong correlation, and r < 0.3 signifies weak correlation.
(10)
(11)
1.00
30
Table 2. Stepwise Multivariate Discriminant Analysis
Function
Eigen-value Cumm
Canonical Corr Wilk’s Lambda
Percent
1
2
1.20
0.11
91%
100%
0.74
0.32
0.41
0.90
Table 3. Summary of Stepwise Multivariate Discriminant Analysis
Step
Action Entered / Removed Wilk’s
Sig
Entered
Lambda
1
2
3
Industry Structure
Customer Taste
Marketing
Infrastructure
0.76
0.52
0.41
0.00
0.00
0.00
Chi-square
42.17
5.05
Minimum
D Squared
0.31
0.88
0.89
Sig
0.151
0.079
0.172
df
Sig
6
2
0.000
0.080
Between
Groups
1&3
2&3
2&3
31
Table 4. Factor Statistics
Factor
Factor
No.
1
Country and
Supporting
Industry Specific
Risk
2
Product, Company
and Industry
Specific Risk
Variables
Communality
Cultural differences
0.51
Marketing infrastructure
Operating risk
Ownership risk
Political risk
Transfer risk
0.70
0.79
0.70
0.82
0.83
Competitive rivalry
0.76
Market demand
Customer taste
Management experience
Industry structure
0.62
0.68
0.36
0.60
Eigenvalue
Percent of
variance
5.74
52%
1.63
15%