Managerial risk perceptions of international entry‐mode strategies : The interaction effect of control and capability

Purpose – The primary purpose of this paper is to investigate how opportunity for control and firm capability interact to moderate the amount of risk that managers associate with various international entry‐mode strategies. A secondary goal is to investigate how managers perceive the need to retain control over three core functional areas (marketing, production, and R&D) when making entry‐mode decisions. Design/methodology/approach – A field experiment design was implemented in a sample of US business owner/executives. Using an online data collection method, the study asked a sample of small‐business owners and managers to assess the amount of risk they associated with three modes of entering the Japanese market: non‐ownership (export), equal partnership (50/50 joint‐venture), and sole‐ownership. They were also asked how much control they needed to retain over R&D, production, and marketing for the venture to be successful. Findings – Ownership‐provided control interacts with capability to influence managerial risk perceptions. Managers in lower‐capability firms see the least risk in the non‐ownership entry mode while those in higher‐capability firms see the least risk in the equal‐partnership entry mode. Managers believe that for a new venture in a foreign market to be successful, control should be retained over the R&D function, regardless of entry mode. Research limitations/implications – The findings appear to reconcile some of the conflicting predictions of the transaction cost and resource‐based theoretical perspectives, because it appears that international managers consider both control (internationalization theory) and capability (resource‐based theory) when judging the perceived risk of an entry strategy. Practical implications – For firms that are incapable of managing in an international context, a low‐control no‐ownership entry mode is perceived as the least risky approach; for firms that have some capability for international management, then a partial‐ownership mode such as a 50/50 joint‐venture is perceived as having lower risk than no‐ownership. In non‐ownership and joint‐venture type entry modes, managers are more apt to outsource the marketing function to an agent/partner, but not R&D. In contrast, managers believe that marketing needs to be maintained in‐house when utilizing a sole‐ownership entry mode. Originality/value – By illustrating the role of perceived risk in foreign‐market entry‐mode decisions and demonstrating how capabilities interact with ownership‐provided control to moderate these perceptions, the paper's findings suggest that managers' risk perceptions may mediate the effects of firm‐specific factors, and thus contributes significantly to both theory and practice.