The Influence of International Risk on Entry Mode Strategy in the Computer Software Industry

Introduction As the business world becomes more global and the level of international competition continues to increase, managers will find themselves facing increasingly complex strategic decisions. Perhaps first and foremost among these decisions are the decisions relating to methods of expanding the firms' international operations. However, as one considers the prospects of international expansion one can not help but be aware of the many and varied risks facing firms in these "strange new lands. " Ghoshal (1987) has postulated that managing risks is one of three strategic objectives for managers of multinational firms. Yasai-Ardekani (1986) has suggested that industry environmental characteristics such as risk, influence management perception which, in turn, leads to an influence on the structure of the organization. Carman and Langeard (1980) have stated that service firms face far greater risks in international expansion than do product firms: (1) the inseparability of production and consumption for services eliminates certain entry mode choices, (2) the lack of visibility of services (intangibility) increases the time needed to diffuse service innovation, and (3) service providers may be perceived by host governments as contributing little to the national economy while draining resources, precipitating regulations that favor domestic service providers over foreign providers. Existing research has shown a relationship between risk and international diversification, i.e. how firms can reduce overall financial risk by diversifying into international markets (see Rugman 1979 for a discussion). Risk has also been shown as a motivation for international expansion, e.g. entry into competitor markets as a bargaining tool through the "exchange of threats" (Casson 1987, Graham 1985, Vernon 1985, Vernon 1974). In addition entry mode research has included "risk" as$a key element in many of their studies of entry mode determinants (Root 1987, Anderson and Gatignon 1986, Hennart 1988, Contractor 1990, Buckley and Mathew 1980). Vernon (1985) and Miller (1992) have suggested that the perception of a more comprehensive "international" risk and the strategic choice of entry mode may be related. They suggest that looking at individual international risks, such as exchange rate or political risks, in isolation of the other international risks results in an incorrect analysis of the internalization question and can lead to an incorrect entry mode choice. This study is part of a more expansive research project designed to measure perceived risks in different parts of the world and relate these risk perceptions to the strategic choices made by managers. To focus in on the risk-strategy relationship, we first identify key components of the international risks involved in strategic decisions making and then we explore ways in which management can minimize the impact of these risks on the firm through the strategies, i.e. entry mode selected. Once a theoretical base is formed, we present the results of a pilot study to test the risk-entry mode relationships, using a small sample of international high-tech service firms. Whet is International Risk? Both Miller (1992) and Vernon (1985) refer to international risk, however only Miller provides details of a three part integration of international risk variables. The three parts consist of (1) general environmental, (2) industry, and (3) firm-specific risks. General environmental uncertainty refers to those variables that are consistent across all industries within a given country. Included in this factor are such variables as political risk, government policy uncertainty, economic uncertainty, social uncertainty, and natural uncertainty (uncertainty caused by nature itself, such as floows or typhoons). Miller's second grouping, industry uncertainty, contains the risks associated with differences in industry/product-specific variables. Among these variables are the input market uncertainties associated with production inputs, such as material/labor supply availability, quality, and quantity. …