Foreign expansion in service industries - Separability and human capital intensity

Abstract

We investigate the effect of operating in service industries, in which separability and human capital intensity factors influence the choice of foreign entry mode and expatriate staffing decisions. To look into this issue, we compared 14,863 instances of Japanese foreign direct investment (FDI) into manufacturing and three service industries (wholesale trade, retail trade, and financial services). Our theoretical and empirical analyses support the assertion that in situations where required capabilities must be developed through (1) close contacts with end customers and (2) high levels of professional skills, specialized know-how, and customization, wholly owned subsidiaries and expatriate staff are preferred. From our results, we draw implications for the FDI literature and offer a novel perspective on the factors influencing the internationalization of service firms. © 2002 Elsevier Science Inc. All rights reserved.