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1 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. 2 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. 3 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, 4 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 5 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 6 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 7 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). 8 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. 9 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. 10 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 11 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 12 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 13 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 14 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. 15 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 16 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, 17 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. 18 ---------------------------------------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 ---------------------------------------- 19 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 20 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 21 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 22 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 23 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. 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Young S., Hamill, J., Wheeler, C., and Davies, J.R.: International Market Entry and Development: Strategy and Management, Prentice Hall, Englewood Cliffs, NJ. 1989. 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%