Turning the Spotlight on Service Multinationals New Theoretical Insights and Empirical Evidence

Turning the Spotlight on Service Multinationals:New Theoretical Insights and Empirical Evidence ☆Sumit K.Kundu a ,Somnath Lahiri b,⁎aDepartment of Management and International Business,College of Business Administration,Florida International University,448Mango Business Building,11200SW 8Street,Miami,FL 33199,USA bManagement and Quantitative Methods Department,College of Business,Illinois State University,Normal,IL 61790-5580,USAa r t i c l e i n f o ab s t r ac tArticle history:Received 27April 2015Received in revised form 6May 2015Accepted 7May 2015Available online 10July 2015This article is the opening piece of the Special Issue on Service Multinationals.©2015Elsevier Inc.All rights reserved.Keywords:Service multinationals Spotlight Insights Theory1.IntroductionAnyone harboring some interest in world economy recognizes the importance of service sector.Although manufacturing remains the backbone of trade and commerce,the importance of services has continued to grow over time.It is fair to say that the emergence of the service sector in the world economy is a hallmark of the second half of the twentieth century.Academicians,practitioners and policy makers witnessed escalating importance of the service sector in the past five decades.Interestingly,contribution of the service sector in the economic development has been a notable attribute of both developed and developing countries.To analyze contribution of services we focused on five developed countries and five developing countries and culled data since 1970s from the World Bank.Based on Kundu (1994),we used 3measures viz.,employment in services as percentage of total employ-ment,service exports to total exports,and services as a percentage of gross domestic product (GDP).Tables 1and 2highlight our findings.We observe in Table 1that employment in services has increased over the decades with the USA leading the way and closely followed by the UK.The average value ranges from 56.07%(Japan,1980s)to 81.20%(USA,2010–'14).In services internationalization as measured by service exports as a percentage of total exports,the UK leads the way followed by the USA.The average value ranges from 16.46%(Germany,2000–'10)to 40.27%(UK,2010–'14).The contribution of the service sector to gross domestic product has in-creased in the past decades.Here the USA leads the way averaging more than 75%since the 1990s.For Germany the average is less than 70%all along.Journal of International Management 21(2015)215–219☆Research assistance of Sayed Afjei (PhD,Florida International University)is gratefully acknowledged.⁎Corresponding author.E-mail addresses:kundus@fi (S.K.Kundu),slahiri@ (S.Lahiri)./10.1016/j.intman.2015.05.0021075-4253/©2015Elsevier Inc.All rightsreserved.Contents lists available at ScienceDirectJournalof International Management216S.K.Kundu,hiri/Journal of International Management21(2015)215–219Table1Contribution of services in select developed countries.Source:.Country Variable1970s1980s1990s2000–'102010–'14Developed countries USA Services employment(%)–68.3272.7077.3081.20Services export(%)–––31.3534.89Services(%of GDP)––75.1277.0777.99 UK Services employment(%)–63.4869.1275.7378.93Services export(%)–––37.7240.27Services(%of GDP)––69.2475.6778.77 Germany Services employment(%)––60.2666.8270.10Services export(%)–––16.4617.01Services(%of GDP)––65.8969.5268.72 France Services employment(%)–60.5767.3871.8274.63Services export(%)–––23.6934.52Services(%of GDP)62.1867.6072.3776.3278.41 Japan Services employment(%)–56.0760.1065.9969.70Services export(%)–––16.8417.99Services(%of GDP)54.7259.1863.8970.2572.39 Canada Services employment(%)–68.9973.6975.27–Services export(%)–––16.4920.19Services(%of GDP)–––69.3670.79 Note:Each cell contains average of all available yearly data.Table2suggests that for developing countries employment in services has increased over the decades with Brazil and South Africa leading the way.The average value ranges from15.88%(China,1980s)to62.70%(Brazil,2010–'14).In services internationalization, India leads the way(43.84%in2010–'14)followed by Turkey(30.05%in2010–'14).The numbers for Brazil,Russia and South Africa are relatively lower but exhibit similarity amongst themselves.In contribution of services to GDP,South Africa and Brazil are ahead of the other countries.The average value ranges from23.17%(China,1970s)to68.55%(South Africa,2010–'14).Based on the above,one can conclude that services have become an important economic activity in both developed and developing countries.But contribution of services in general has been more in the developed countries than in the developing countries.2.Service multinationalsGrowing importance of services resulted in the formation of a new breed of multinational companies,service multinationals (SMNCs),that produce and deliver value-creating services across national borders.Between1990–1992and2010–2012,global in-ward FDIflow in services grew almost905%(from97.04to975.55billion U.S.dollars)compared to491%in manufacturing(52.25 to308.70billion U.S.dollars)during the same time-period(UNCTAD,2014).Success stories of SMNCs in diverse industries such as banking,hotels,airlines,and information technology from different parts of the world have caught the attention of the IB community. Surprisingly SMNC scholarship has not kept pace with the unprecedented growth of services and SMNCs over the years.More than a Table2Contribution of services in select developing countries.Source:.Country Variable1970s1980s1990s2000–'102010–'14Developing countries Brazil Services employment(%)–49.5254.5858.9062.70Services export(%)–––16.2423.48Services(%of GDP)47.9845.0160.4965.9067.90 Russia Services employment(%)––50.6660.08–Services export(%)–––14.2918.62Services(%of GDP)–32.9749.6558.9059.66 India Services employment(%)––23.7024.6027.35Services export(%)–––39.4243.84Services(%of GDP)39.1642.7746.5452.9555.71 China Services employment(%)–15.8823.2230.7035.15Services export(%)–––11.3910.88Services(%of GDP)23.1726.2734.1141.1144.34 S.Africa Services employment(%)–––63.8962.30Services export(%)–––17.3019.78Services(%of GDP)52.3350.7760.9165.1668.55 Turkey Services employment(%)–47.2334.2645.2349.97Services export(%)–––26.9330.05Services(%of GDP)41.0149.7451.7961.1763.67 Note:Each cell contains average of all available yearly data.decade ago,Capar and Kotabe (2003,p.346)lamented that “the service sector has been explored to a limited extent so far,although service firms have contributed to the majority of the job growth in the industrialized nations.”The state of SMNC research was summed up by Kundu and Merchant (2008,p.376)who,as guest editors of a special issue on SMNCs,observed that the “the challenge lies ahead in the development of theories of service multinational enterprise to explain the intricacies of service firms.”Two articles in that Special Issue (Kundu and Merchant,2008;Merchant and Gaur,2008)provide extensive coverage of pre-2007research on service and SMNCs.3.Post-2007researchIn order to assess the state of post-2007services research we examined related publications in five leading international business/management journals:Journal of International Management ,Journal of International Business Studies ,Management International Review ,Journal of World Business ,and International Business Review for the time-period 2008–2014and the first four months of 2015.During this period a total of 17971research articles were published in these journals of which only 79articles (i.e.,4.4%)were dedicated to services/SMNCs.This means that on average about 11articles on services/SMNCs appeared per year in all the five journals taken to-gether.Given the importance of services in the global economy the number of related publications is certainly not encouraging.Table 3highlights our findings.We can make several important observations from Table 3.First,scholars have focused on a variety of service industries such as software,telecommunication,advertising,insurance,engineering,information technology,and hotels.Historically most studies on in-ternationalization of service firms were based on banking and financial services industry.Focusing on diverse industries is very much needed as the service sector is extremely heterogeneous and encompasses a wide range of industries broadly classi fied as capital in-tensive service industry and knowledge intensive service industry (Contractor et al.,2003).Service providers can also be classi fied as hard service providers and soft service providers (Erramilli,1990;Erramilli and Rao,1993).A wide variety of research themes have been pursued by the authors in the surveyed publications.These include offshoring and outsourcing,mergers and acquisitions,knowledge transfer,innovation,sustainability,and multinationality and performance.The propensity to move away from examining the determinants of services internationalization is clearly evident.The research themes re flect a very important trend in contemporary IB:proliferation of SMNCs from diverse industries locating their value chain activities (including R&D)in developing countries such as India,China,Mexico,and the Philippines to leverage cost advantage as well tap growth opportunities.This also re flects market-seeking motivation of SMNCs as opposed to primarily client-following motivation.Table 3suggests that scholars have relied on time-tested theoretical paradigms —Uppsala Model,Resource Based View,Transaction Cost Economics,Eclectic Paradigm,Institutional Theory,and Network Theory.Table 3further suggests that of the 79surveyed studies,41were quantitative,21qualitative,6mixed and 11conceptual.4.Special issueIn order to turn the spotlight on SMNCs we submitted a proposal to the Editor,Journal of International Management,to organize a Special Issue.Our desire was to gain new theoretical insights and empirical evidence on SMNCs.The Editor appreciated the merit in our proposal and allowed us to go ahead with the Special Issue.The Call for Papers was announced with February 28,2014as the sub-mission deadline.We received a total of 20papers.After three rounds of revision we shortlisted 3papers for publication.Two of these three papers are conceptual and one is quantitative.The paper by Charles Stevens and his colleagues focus on SMNC's foreign entry strategy.The authors argue that successful strategy needs to take into account the attributes and preferences of not only the foreign entrant but also its local partner.The authors integrate the tenets of TCE with Signaling theory and develop a conceptual model.A key theme in their model is reputation .The authors suggest that the foreign entering firm and its partner signal and receive reputation information,and through this they understand each other's intentions.The authors offer testable propositions.The paper by Chris Meyer and his co-authors focuses on SMNC internationalization.They argue that SMNCs encounter uncertainty that results from customer interaction in foreign locations,and to handle such uncer-tainty firms may choose to deploy resources in the form of codi fied processes and procedures,or productive knowledge embedded in the organizational actors.The authors suggest that SMNCs decide on their mode of internationalization based on their uncertainty-encountering strategies.The authors offer propositions and develop a model of service firm internationalization.The empirical work of Chang Hoon Oh and colleagues focuses on retail sector.They examine the relationship between regional diversi fication,product diversi fication and firm performance.Their multi-country,multi-year study involving large European retailers provides evi-dence of curvilinear relationship between regional diversi fication and performance,and negative moderating effect of product diversi fication.The papers in this Special Issue increase our knowledge of services and SMNCs and offer fresh insights.The paper by Stevens et al.addresses an important tension relating to SMNC foreign entry:greater hierarchy and control owing to higher transaction costs versus lesser hierarchy owing to the need to remain flexible,learn and adapt.Their integrative model seeks to address this tension by sug-gesting that both foreign entrant and its local partner matter in deciding appropriate foreign entry strategy.Although TCE has been extensively used in prior entry mode literature,the authors'use of signaling theory and integrating it with TCE is somewhat new in the SMNC literature.The second conceptual paper by Meyer et al.enhances our understanding of internationalization strategies1Non-research publications not considered in this number include book reviews,acknowledgments,errata/corrigenda,bibliographic service,thank you to reviewers,letters from editor and obituaries.217S.K.Kundu,hiri /Journal of International Management 21(2015)215–219of SMNCs by bringing together customer interaction,uncertainty resulting from such interactions,and firm's use of knowledge re-sources.SMNCs investing overseas need to overcome various uncertainties including those induced by their customers.SMNCs also need to devise appropriate control mechanisms and production processes to prevent disruption of services in the face of uncertainties.This paper brings together all these aspects and suggests various internationalization strategies that SMNCs may adopt.Although firm-level performance implications of geographic diversi fication and product diversi fication have been adequately studied in the IB literature,few studies have investigated them in the domain of SMNCs.The paper by Oh et al.exactly does that.A notable feature of their research is the separation of geographic diversi fication into intra-and inter-regional diversi fication.Their uti-lization of three stage internationalization paradigm and regional MNE theory in the retail sector adds to the SMNC literature.An in-teresting finding in this paper is that product diversi fication matters only for inter-regional diversi fication.5.Future researchThese three papers outline useful directions of future research.Stevens et al.,for example,suggest that future studies should ex-amine how reputation of the foreign entrant or that of its partner may in fluence important aspects of international strategies such as speed,pattern and overall effectiveness.They also suggest how interplay between different types of reputation (behavioral intent oriented,service quality oriented)affects different aspects of entry strategy should be examined.In addition,the authors suggest that future studies should empirically test their offered propositions.Empirical testing of propositions is also recommended by Meyer et al.They further desire that future studies should extend their work by using existing scales for customer interaction uncertainty and ser-vice knowledge resources.Finally,they hope to see in the future use of extrinsic factors e.g.,cultural distance in expanding their work.In order to build on their empirical work,Oh and colleagues suggest that future scholars need to examine the effects of important aspects such as learning bene fits,consumer differences and coordination costs in supply chain management,competitive pressures,industry sector and various firm-speci fic characteristics on the performance implications of diversi fication.In addition,they recom-mend that future scholarship needs to perform comparative studies across heterogeneous attributes such as SMNC strategic motiva-tions,industry sectors and regions,and various dimensions of geographic diversi fication.Table 3Articles published on services 2007–2014.JournalNumber of papers published Industries studied Research themes Theoretical lensResearch design aInternationalBusiness Review25-Insurance -Banking-Health services -Financial services-Information technology -Advertising -Hotel-Venture capital -Offshoring -Outsourcing-Internationalization-Mergers and acquisitions -Role of culture-In fluence of knowledge -Innovation -Sustainability -Transaction cost Economics -Institutional theory -Uppsala model -Eclectic paradigm -Networks-Absorptive capacity -Hofstede's framework Quantitative (11)Qualitative (7)Mixed (4)Conceptual (3)Journal ofWorld Business17-Higher education -Legal-Telecommunication -Software consulting-Human resource services -Business process Offshoring services-Offshoring -Outsourcing-Internationalization location-Mergers and acquisitions -Knowledge sharing and performance -Entry mode -Sustainability -Resource based view-Transaction cost economics -Eclectic paradigm -Institutional theory -Dynamic capabilitiesQuantitative (7)Qualitative (10)Journal of International Management14-Banking -Engineering -Insurance -Software-Telecommunication -Offshoring -Outsourcing-Internationalization-Knowledge service clusters -Resource based view-Transaction cost economics -Institutional theory -Eclectic paradigmQuantitative (8)Qualitative (2)Mixed (1)Conceptual (3)Journal of International Business Studies13-Professional Business services -Advertising -Trading -Insurance-Offshoring -Outsourcing-Internationalization -Service consumption -Acquisition-Client perceived value -Global sourcing -Resource based view-Transaction cost economics -Institutional theory -Hofstede's framework -Theory of innovationQuantitative (11)Qualitative (1)Mixed (1)ManagementInternational Review10-Information Technology -Banks-Telecommunication-Offshoring -Outsourcing-Internationalization -Knowledge Transfer -Multinationality and performance-Transaction cost economics -Institutional theory -Human capital theory -Co-evolution theory -Network view-Internationalization theoryQuantitative (4)Qualitative (1)Conceptual (5)aNote:Numbers in parenthesis represent the number of published articles in that category.218S.K.Kundu,hiri /Journal of International Management 21(2015)215–219These three papers have turned the spotlight on SMNCs but more and better scholarship will help brighten the spotlight to a great-er degree.We feel what Li and Guisinger (1992,p.691)noted long ago that “results of our study suggest that service FDI can be ex-plained by a rich variety of theories,”is very relevant even today.We need to produce robust theoretical and empirical papers of SMNCs that tap the essential characteristics of services (intangibility,inseparability of production,delivery and consumption,hetero-geneity,and perishability)and provide fine-grained analysis of SMNC dynamics including FDI.There have been signi ficant contribu-tions to understand services and SMNCs (Boddewyn et al.,1986;Brouthers and Brouthers,2003;Dunning,1989;Erramilli and Rao,1993;Murray and Kotabe,1999;von Norden flycht,2010).But more such insightful and impactful papers are needed to extend the frontiers of knowledge.We urge scholars to conduct theoretical and empirical research on how SMNCs plan,organize and manage critical firm-speci fic assets (managerial,technological,financial),multinationality,diversi fication and inter firm relationship strategies,and other organi-zational and managerial issues across diverse industries and settings.We also request scholars to embark on comparative studies based on differences in firm-speci fic attributes,industry settings and geographic locations (e.g.,developed and developing countries)(Kundu,and Contractor,1999;Lahiri et al.,2014).In addition we urge researchers to study the in fluence of various cross-national dis-tances (Berry et al.,2010)on important relationships relating to SMNCs.A missing element in much of the services/SMNC literature is examination of the role that top managers/leaders play for their firm's growth and competitiveness.We,therefore,encourage scholars to consider bringing in individuals in their conceptual or empirical works (Contractor et al.,2015)and examine how managerial char-acteristics and interactions at the individual level impact various firm-level outcomes.We sincerely thank the following reviewers who contributed to this Special Issue.Ahmet Kirca,Alain Verbeke,Alvaro Cuervo-Cazurra,Andrew Inkpen,Angela Da Rocha,Anna Lamin,Anupama Phene,Arun Kumaraswamy,Avimanyu Datta,Bjorn Ambos,Chinmay Pattnaik,Claudio Ramos Conti,David Brock,Dirk Morschett,Douglas Dow,Elizabeth Rose,Esteban 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