The long-term development of professional services firms' entry and operation modes : a regional approach

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The Long-Term Development of Professional Services

Firms’ Entry and Operation Modes: A Regional Approach

Master’s Thesis in International Management (6314M0251Y) MSc. in Business Administration – International Management

Faculty of Economics and Business Universiteit van Amsterdam

Supervisor: Dr. Johan Lindeque Second Reader: Dr. Francesca Ciulli Student: Laura S. Kaufmann Student ID: 11410450

Date of Submission: 23rd_{June 2017}

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ABSTRACT

This study sets out to research the evolvement of MNEs’ entry and operation modes in different geographical regions over time through a longitudinal study. The conceptual foundation of the study is composed of a modern conceptualization of regions put forward by Ghemawat and Altman (2016) and the influence of inter- and intra-regional LOF on MNEs’ regionalization, which are approached from an MNE and a location perspective. Furthermore, asset specificity is integrated in the analysis of the data, while through the purposive sampling of the Big Four, which are all active in the professional services industry, industry specificity is assumed. Following Benito et al.’s (2009) call for qualitative research of MNEs’ operation mode configurations, this study adopts a qualitative, multiple-case study design. Data of the Big Four are collected through using several sources, which include corporate websites and documents, Bloomberg and the databases LexisNexis and Orbis. The findings suggest that, even though the study attempted to advance from the traditional regional classification of the extended triad by Rugman and Verbeke (2004), most of the PSFs’ activities are located within the extended triad regions. Regarding the PSFs’ entry modes, the most notable finding is that the PSFs expanded intra-regionally with more confidence regarding the level of risk-taking, commitment, and ownership in North America than in East Asia and Pacific. Focusing on the operation modes, the findings reveal that neither the duration of the PSFs’ activities nor their financial performance in the host regions have an influence on the development of the operation modes, thereby contradicting the claims of several IB scholars (Pedersen et al., 2002; Ellis, 2005; Petersen et al., 2006; Swodoba et al., 2011). Most notably, even though there are no theoretical indicators to assume asset specificity to be a decisive factor in the context of PSFs’ regionalization, the findings of this study show that most foreign direct investments took place in the PSFs’ consulting business area and moreover, that such foreign direct investments are very likely to be executed with higher-commitment operation modes.

Keywords: Regionalization, entry mode, operation mode, liability of foreignness, professional services firms (PSF).

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STATEMENT OF ORIGINALITY

This document is written by Student Laura Kaufmann who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion

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ACKNOWLEDGEMENTS

After initially hesitating if a Master’s in Business Administration would be the right choice for me, I am very glad today that I have made that decision to come to Amsterdam a year ago. I have had an incredible journey over the past years and I am excited to finish my Master’s with this thesis. I would like to thank my supervisor Dr. Johan Lindeque for his very constructive and encouraging feedback throughout the past months. With his passion for research he challenged and motivated me to make the most out of this thesis. I would like to thank Jaap for his patience and encouragement during the sometimes-long study hours. And last, I would like to thank my parents and my whole family for the infinite support and encouragement during every step that has led me up to where I am today!

Und zu guter Letzt möchte ich mich bei meinen Eltern und meiner ganzen Familie bedanken. Ohne Eure einzigartige Unterstützung und Vertrauen, wäre ich heute nicht da, wo ich jetzt bin. Ich bin froh, so eine tolle Familie zu haben und danke Euch von ganzem Herzen!

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TABLES AND FIGURES

Table 1: Regional Classification of Countries ... 6

Figure 1: A Hierarchical Model of Choice of Entry Modes... 17

Figure 2: Case Design ... 23

Table 2: The Sample ... 26

Table 3: Overview of Available and Studied Data Sources and FDI ... 28

Table 4: Regional Percentage of Total Global Revenues Generated in 2016 ... 29

Table 5: Regional Orientation ... 30

Table 6: Code Book ... 32

Table 7: Deloitte’s Regionalization ... 36

Table 8: PwC’s Regionalization ... 40

Table 9: EY’s Regionalization ... 45

Table 10: KPMG’s Regionalization ... 49

Table 11: The PSFs’ Intra-Regional Entry Modes ... 51

Table 12: The PSFs’ Operation Mode Development per Region ... 52

Table 13: Operation Mode Motivation ... 52

Table 14: Operation Modes by Service Sector ... 53

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1. INTRODUCTION

Globalization has a strong influence on the world economy and is increasingly influencing international business (IB). The process of globalization refers to the integration of markets around the world through the movement of goods, services, and capital across borders (Garrett, 2000). Unprecedented high levels of market integration have been reached (Ghemawat, 2003), however markets are not yet completely integrated across national borders. Many researchers in the field refer to the process as semi-globalization, thereby emphasizing on the persistent market imperfections, which function as impediments against complete globalization (Arregle, Miller, Hitt, & Beamish, 2013; Garrett, 2000; Ghemawat, 2003, Kim & Aguilera, 2015; Rugman & Verbeke, 2004). At the same time, politically created imperfect competition and market imperfections, such as imperfect product and factor markets and economies of scale lead to decreased costs, thereby impeding firms’ survival, which can stimulate firms to make foreign direct investments (FDI) (Welch, Benito, & Petersen, 2007). Such opportunities and constraints against semi-globalization arise increasingly at the regional level, which is why this intermediary level of analysis is gaining attention and recognition among IB scholars. As the country- and global levels of analysis are not sufficient anymore in order to investigate the current state of semi-globalization, the regional level of analysis functions complementarily (Arregle et al., 2013; Flores, Aguilera, Mahdian, & Vaaler, 2013; Verbeke & Asmussen, 2016). When opting to internationalize, multinational enterprises (MNEs) face costs of doing business abroad (CDBA) (Sethi & Judge, 2009), which are caused by firms’ unfamiliarity with the host country (Zaheer, 1995). When firms choose to expand not only into a foreign country but moreover into a foreign geographic region, such CDBA, which IB scholars also refer to as liability of foreignness (LOF) increase as not only the firm’s home and host country are different from each other but moreover the regions differ decisively (Rugman & Verbeke, 2007). Therefore, this study aims at determining how MNEs attempt to overcome such CDBA when entering and operating in a non-home region by studying the concepts of inter- and intra-regional LOF.

Two perspectives are adopted in order to study how MNEs attempt to overcome their experienced LOF during regionalization. The first perspective focuses on firm-specific advantages (FSAs), which can be exploited and leveraged by the MNE (Rugman & Verbeke, 1992). This perspective concentrates on the MNE’s own impetus in developing competitive advantages. The added value is hence to highlight the effects of MNEs’ own efforts in

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MNEs local contextual dimension and thereby integrates country-specific advantages (CSAs) that firms can exploit, and the institution-based view (IBV), which specifies the influence institutions have on firms (North, 1991; Peng, Sun, Pinkham, & Chen, 2009; Xu & Shenkar, 2002). Integrating the location perspective into the study provides the added value of helping to understand the importance of the MNEs’ context throughout the regionalization process. By including both perspectives in the study, a more holistic approach is taken, investigating internal as well as external forces, drivers, and impediments to an MNE’s internationalization process. As an attempt to keep CDBA at a minimum, firms carefully select an appropriate entry mode into the foreign country. The greatest distinction can be made between non-equity and equity entry modes (Pan & Tse, 2000). Once a firm has successfully established itself in a new market, it is challenged to maintain and manage the evolving organizational arrangements used to conduct IB activities there. At this stage, the earlier conceptualization of the entry modes is no longer applicable as a firm has established its operations within the new country already (Benito, Petersen, & Welch, 2009). Hence, the conceptualization of the foreign operation mode is of interest for this study, which refers to how already established IB activities are conducted within a host country. Interestingly, recent research of operation modes shows that operation mode changes occur frequently in the form of commitment increase and reduction, and moreover, that firms often add new modes incrementally, have mode combinations, and perform changes within those combinations (Benito et al., 2009; Petersen & Welch, 2002).

The interest of IB scholars in the operation mode evolution is growing and to contribute to the IB literature, the following related research gaps are addressed by this study. First, previous studies on firms’ internationalization predominantly regard changes in the operation mode as conscious, individual decisions and thereby neglect to study possible underlying coherences, which could facilitate profound explanations of the operation mode choices (Benito et al., 2009). Furthermore, the concept of operation mode packages is strongly understudied and the importance of role changes of operation modes is thereby also neglected (Benito et al., 2009; Petersen & Welch, 2002). Another aspect is that only few of approximately 100 empirical studies, which were executed between 1994 and 2009 were able to analyze data obtained over a longer period of time due to access difficulties (Benito et al., 2009). Fourth, past studies have mainly focused on the country-level, which is insufficient in grasping today’s strong semi-globalization tendency (Kim & Aguilera, 2015). Lastly, when analyzing firms’ internationalization process, determining the CDBA is crucial. However, previous studies have neglected the interaction and reinforcement of intra- and inter-regional LOF at the regional level

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(Qian, Li, & Rugman, 2013). In order to make a contribution through an attempt to close this gap in the IB literature, the following research question has been developed:

RQ: How do MNEs’ entry and operation modes vary across regions over time?

Benito et al. (2009) highlight the need for a qualitative analysis as they question the ability and validity of quantitative research to capture the context of operation mode decisions and moreover of underlying coherences. Therefore, a qualitative multiple-case study design is chosen for this study. Four cases including the big four professional services firms (PSFs) Deloitte Touche Tohmatsu Limited (Deloitte), PricewaterhouseCoopers (PwC), Ernst & Young (EY), and KPMG are investigated. Within each case, two embedded units of analysis, namely the MNEs’ entry modes and the foreign operation modes are studied. For the purpose of this study, the professional services industry is chosen as it remains understudied today, with the predominant attention on manufacturing industries in the regionalization debate (Kolk & Margineantu, 2009). Furthermore, regionalization is of significant importance within the professional services industry due to PSFs’ characteristic to “follow their clients into new geographies” (Baaij, 2014, p. 97), thereby following their clients’ internationalization journey (Kolk & Margineantu, 2009). Hence, this study aims at determining potential tendencies and patterns within the professional services industry, with regard to PSFs’ entry into foreign regions and the development of the operation mode within regions. Through the purposive sampling of PSFs, industry specificity is acknowledged and eliminated as a dynamic factor, while the focus on professional services as core intangible assets highlights the focus on such specific assets.

Data on the PSFs’ entry and operation modes and the development within the host-region-host-countries are collected using several sources such as corporate websites and documents, Bloomberg, as well as the databases Orbis and LexisNexis. The key findings of this study show that, even though the study attempts to advance from the traditional regional classification of the extended triad by Rugman and Verbeke (2004), most of the PSFs’ activities are located within the extended triad regions. Regarding PSFs’ entry modes, the most notable finding is that PSFs expanded intra-regionally with more confidence regarding their level of risk-taking, commitment, and ownership in North America than in East Asia and Pacific. Focusing on the operation modes, the findings reveal that neither the duration of the PSFs’ activities nor their financial performance in the host regions have an influence on the development of the operation modes, thereby contradicting the claims of several IB scholars (Pedersen et al., 2002; Ellis,

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theoretical indicators to assume asset specificity to be a decisive factor in the context of PSFs’ regionalization, the findings of this study show that most foreign direct investments took place in the PSFs’ consulting business area and moreover, that such foreign direct investments are very likely to be executed with higher-commitment operation modes.

This study continues by reviewing the regionalization literature with detailed attention to the concepts of LOF, firm- and country-specific advantages, the IBV, as well as industry and asset specificity. Consecutively, turning to the internationalization literature, the focus is on the role of entry and foreign operation modes in this debate. This is followed by an elaboration on the method and sample, the presentation and discussion of the findings, and last the conclusions, implications, and limitations of this study, before the study ends with suggestions for future research.

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2. CONCEPTUAL FOUNDATION

In this section, the conceptual foundation for answering the research question is developed. The section begins with discussing the main notions of IB literature on regionalization and LOF. Consecutively, two perspectives on LOF are studied, namely the firm perspective focusing on FSAs, and the location-perspective, looking at CSAs. Subsequently, the extent of industry and asset specificity in the professional services industry are reviewed before the section advances to discuss the firm’s strategic management of LOF with regard to entry and foreign operation modes.

2.1. REGIONALIZATION

Regionalization is a perspective which stems from the process of semi-globalization. Its distinction from the country and global perspective is that it focuses on MNEs’ economic and spatial tendencies (Rugman & Oh, 2010). Thereby, this new intermediary level of analysis has the advantage of integrating supranational concepts in studying MNEs’ strategic practices as, for example, regional aggregation and arbitrage (Arregle et al., 2013; Ghemawat, 2003; Kim & Aguilera, 2015). The main regions identified by IB literature are North America, Europe, and Asia-Pacific, which Rugman and Verbeke (2004; 2007; 2008b) refer to as the ‘extended triad’. Rugman and Verbeke (2004) defined the most relevant regions due to the fact that most MNEs are located and most business innovations originate in them. In general, regions are characterized by a distinction from each other with regard to their economies and geographic location, and a general intra-regional pursuit of cohesion (Rugman & Verbeke, 2007). However, as the extended triad does not cover all world regions, Ghemawat and Altman (2016) further developed the extended triad into the ‘complete triad’ model for the DHL Global Connectedness Index 2016 (GCI), a report that assesses the current phase of globalization. In the report, they defined the seven world regions as (1) North America, (2) Europe, (3) East Asia and Pacific, (4) South and Central America and the Caribbean, (5) Middle East and North Africa, (6) Sub-Saharan Africa, and (7) South and Central Asia, which is compared to the extended triad in table 1 below. For the purpose of this study, the GCI definition is used as it is more comprehensive with regard to the number of included countries, as it combines the traditional concept of the triad with a modern definition of the world regions, and as it is better applicable to the way how PSFs organize themselves globally, which is further elaborated in section 3.3.1. Regional Orientation.

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Extended Triad (Rugman & Verbeke, 2004)

GCI Regional Classification (Ghemawat & Altman, 2016)

North America

Canada, Mexico, United States

North America

Canada, Mexico, United States

South and Central America & the Caribbean

Argentina, Bahamas, Barbados, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, Venezuela

Europe

Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom

Europe

Albania, Austria, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, FYR Macedonia, Malta, Moldova, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Russian Federation, Serbia, Slovak Republic, Slovenia, Spain, Sweden,

Switzerland, Ukraine, United Kingdom

Middle East & North Africa

Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, Yemen

Sub-Saharan Africa

Angola, Benin, Botswana, Burkina Faso, Burundi, Cameroon, Republic of Congo, Cote d’Ivoire, Ethiopia, Gambia, Ghana, Guinea, Kenya, Madagascar, Mali, Mauritius,

Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Togo, Uganda, Zambia, Zimbabwe

Asia-Pacific

Australia, Brunei Darussalam, Cambodia, China, Fiji, Hong Kong SAR (China),

Indonesia, Japan, Republic of Korea, Lao PDR, Macau SAR (China), Malaysia, Mongolia, Myanmar, New Zealand, Philippines, Singapore, Taiwan (China), Thailand, Vietnam

East Asia & Pacific

Australia, Brunei Darussalam, Cambodia, China, Fiji, Hong Kong SAR (China),

Indonesia, Japan, Republic of Korea, Lao PDR, Macau SAR (China), Malaysia, Mongolia, Myanmar, New Zealand, Philippines, Singapore, Taiwan (China), Thailand, Vietnam

South & Central Asia

Armenia, Azerbaijan, Bangladesh, Georgia, India, Kazakhstan, Kyrgyz Republic, Nepal, Pakistan, Sri Lanka, Turkey, Uzbekistan

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The analysis at the regional level has gained increasing recognition among IB scholars as regionalization is perceived as a widespread, stable phenomenon (Choi & Caporaso, 2002; Rugman & Oh, 2010). However, despite increasing relevance and academic interest in regionalization, past studies have mainly focused on the country-level (Kim & Aguilera, 2015). Within the regionalization debate, Rugman and Verbeke (2004) distinguish between four types of MNEs. First, home region-oriented firms have 50 percent or more of their sales within their home region. Second, bi-regional MNEs are active in at least two regions and have between 20 and 50 percent of their sales in each of these regions. Third, host region-oriented MNEs have more than 50 percent of their sales in any region other than their home region, while global MNEs have between 20 and 50 percent of their sales equally distributed within all three regions of the extended triad. The greatest advantage of regionalization for MNEs lies in the application during the early stages of the internationalization strategy (Arregle et al., 2013; Baum, Schwens, & Kabst, 2015; Cantwell, Dunning, & Lundan, 2010; Rugman & Oh, 2010). Through incremental learning during the process, MNEs are able to maintain local responsiveness and thereby to develop and strengthen FSAs as brand awareness, know-how, management skills or technology within their home region (Arregle et al., 2013). Furthermore, MNEs can expand inter-regionally, increasingly exploiting FSAs and learning from experiences in other countries to reduce the CDBA (Rugman & Oh, 2010), which is discussed next.

2.1.1. LIABILITY OF FOREIGNNESS

When expanding beyond their national borders, MNEs are confronted with CDBA, which refer to the additional costs implied by operating in a foreign market (Sethi & Judge, 2009). During such international expansions, MNEs experience a competitive disadvantage towards local firms in the host countries, which is also known as LOF (Zaheer, 1995). While there is an ongoing discussion among IB scholars about whether LOF is the descendent of CDBA, a subset of CDBA, or whether the concepts are equivalent (Sethi & Judge, 2009), this study adopts the last perspective, regarding the concepts as equal. Zaheer (1995) initially distinguished between four sources of such disadvantages. Those are first, spatial distance, which causes travel, transportation or coordination costs, both, across different time zones and geographic distance. Furthermore, unfamiliarity with the local business environment, lack of legitimacy, and home country restrictions on operations in the host country pose as sources (Zaheer, 1995). Later, Zaheer and Mosakowski (1997) determined another source of LOF, namely the lack of

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LOF can be defined at the country and at the regional level, which highlights that the location-specificity of LOF is contingent on the MNE’s FDI (Quin et al., 2013; Rugman & Verbeke, 2004). First, looking at the country level, when MNEs expand beyond their national borders within a region they experience LOF in the host country. Hence, when the MNE’s FDI takes place within a single region, the specific CDBA are referred to as intra-regional LOF, referring to the difference among the home and host countries within the home region (Rugman & Verbeke, 2007). At the regional level, MNEs experience additional CBDA when expanding beyond the home region, or between regions, which is referred to as inter-regional LOF, referring to the difference among home and host region (Kim & Aguilera, 2015; Qian et al., 2013; Rugman & Verbeke, 2007). Inter-regional expansion through FDI across multiple regions is associated with greater costs than intra-regional expansion (Rugman & Verbeke, 2007), especially due to a general intra-regional drive for political, economic, and cultural cohesion (Qian et al., 2013). Evidence of such drive is that nearly all members of the World Trade Organization (WTO) are members of a multilateral regional trade agreement, which have the overall goal to facilitate intra-regional trade (Choi & Caporaso, 2002), such as the EU and NAFTA. Such regional institutions further enhance inter-regional LOF for foreign firms through government bias, which refers to policies benefitting local businesses and negatively affecting firms from a different region (Qian et al., 2013). A concept similar to government bias is discriminatory LOF, which refers to impeding regulations against foreign businesses entering a market at the national level (Sethi & Judge, 2009). For the purpose of this study the distinction between those two concepts is not relevant and subsequently is referred to as discriminatory LOF. In contrast to discriminatory LOF, Sethi and Judge (2009, p. 407) identified incidental LOF, which refers to the “non-discriminatory costs of learning and adaptation to cope with the unfamiliarity and lack of roots in the host country environment”, which can be related to the initial sources of LOF found by Zaheer (1995) and can hence be experienced during intra- as well as inter-regional expansion.

Despite the dominant distinction between intra- and inter-regional LOF in IB literature, Qian et al. (2013) posit that scholars have neglected the interaction between the two concepts when studying a phenomenon at the regional level. Specifically, during inter-regional expansion MNEs are exposed to both types, intra-regional and inter-regional LOF. Qian et al. (2013, p. 638) further argue that the two concepts even reinforce each other as, “when a foreign firm enters one or more countries in a host region, the country-specific foreignness the firm experiences increases the difficulties that the firm faces in managing its business in the host region”. Furthermore, intra-regional LOF does not necessarily decrease with intra-regional

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expansion. Economic, cultural, and regulatory differences among countries within the same region can be substantial and firms can continuously face costs due to spatial distance and the lack of a local business network, regardless of previous expansion (Kolk, Lindeque, & van den Buuse, 2014; Qian et al., 2013).

As previously elaborated, inter- and intra-regional LOF are regarded as an impediment for MNEs to expand beyond their home region (Kim & Aguilera, 2015; Qian et al., 2013; Rugman & Verbeke, 2007). Based on their study of the 500 largest MNEs, Rugman and Verbeke (2004) found that MNEs are predominantly home region-oriented (64 percent) and hence predominantly experience intra-regional LOF. Comparatively fewer firms are bi-regional (5 percent), host region-oriented (2.2 percent), or global (1.8 percent). The last three types of MNEs have in common that they experience intra- as well as inter-regional LOF, however, to different extends. While inter-regional LOF is widely regarded as a main determinant of MNEs’ home region-orientation among IB scholars (Rugman & Verbeke, 2004; 2007; 2008b), some question the strong impact of inter-regional LOF and argue that “it is too small to discourage inter-regional diversification” (Osegowitsch & Sammartino, 2008, in Qian et al., 2013, p. 636).

In order to overcome LOF, MNEs need to gain experience and thereby learn about the characteristics of the host country. This facilitates the MNE to strengthen and further develop links with local businesses and, moreover, to adapt its corporate values and practices to local requirements before expanding to another host region (Arregle et al., 2013; Rugman & Oh, 2010). This emphasizes that LOF is a dynamic concept, which decreases with the MNE’s learning process (Qian et al., 2013; Rugman & Oh, 2010; Sethi & Judge, 2009). The important question that is investigated throughout this study is how MNEs’ entry and operation mode are related to the degree of LOF experienced. Next, two important perspectives influencing the process of overcoming LOF are investigated namely the firm- and the location-perspective, which revolve around the firm’s initiative to leverage firm- and country-specific characteristics.

2.1.2. AN MNE PERSPECTIVE ON LOF

This section serves to investigate FSAs, which firms can leverage and develop for their benefit. FSAs, as the name already implies, stem from the firm’s own initiative to develop competitive advantages. Such advantages can be, for example, a strong brand name, the ability of product differentiation, superior marketing and distribution skills, or access to raw materials (Rugman, Verbeke, & Nguyen, 2011). Rugman and Verbeke (1992) distinguish between location bound

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advantages, which can only be exploited in a particular location and are hence not easily transferrable without considerable efforts of adaptation. On the national level, “[…] specific local customer needs and market conditions, as well as government regulation, provide incentives to firms to develop LB-FSAs” (Rugman & Verbeke, 1992, p. 765). This suggests that LB-FSAs are usually rather connected to downstream processes such as marketing and sales as they stand in strong relation to local characteristics as, for instance, customers’ preferences (Rugman & Verbeke, 1992; 2007), and facilitate the overcoming of discriminatory and incidental LOF. In service industries, the potential to develop a competitive advantage lies, according to Kolk and Margineantu (2009, p. 399), particularly in a strong “reputation of consistent quality on delivery of a specific service.”

The latter, NLB-FSAs, also referred to as transferable FSAs of the MNE, can be leveraged globally to different degrees (Rugman & Verbeke, 1992). NLB-FSAs can contribute to overcoming market imperfections, to creating economies of scale and scope, as well as to exploiting the differences among the home and host country (Rugman & Verbeke, 1992). Thereby, NLB-FSAs can be used to expand beyond regional borders, enhancing the MNE’s regionalization process (Rugman & Oh, 2010, Verbeke, 2013). In the process of overcoming incidental LOF, the ability to leverage such NLB-FSAs builds on the firm’s ability to transfer and moreover coordinate such, mostly intangible, FSAs fully or partially across the border. Through the successful leveraging of NLB-FSAs, PSFs are, in turn, able to create value, which competing local firms are assumed to not be capable of replicating, as they do not possess the same FSAs, and thereby, firms can create a monopolistic advantage in the host country (Pinkse & Kolk, 2012; Rugman et al., 2011). Another option to overcome LOF is the recombination of NLB-FSAs with home- or host-CSAs. Recombining NLB-FSAs with home-CSAs is particularly effective when entering a market in the host country that is effected by institutional failure (Pinkse & Kolk, 2012). An example from the professional services industry is when a PSF aims at entering a host country in which the International Financial Reporting Standards (IFRS) are not adopted, which were introduced in 2001 and facilitated the rapid growth of PSFs over the last decades due to the adoption in over 100 countries (Carmona & Trombetta, 2008). Through, for example, combining the PSF’s FSAs of a strong brand and its ability to lobby the home government, exploiting its home-CSA of an internationally strong government, the government can exert pressure on the host-country government to adopt the IFRS. The next paragraph elaborates on CSAs in more detail.

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2.1.3. A LOCATION PERSPECTIVE ON LOF

Expanding on the previous section, this section serves to investigate CSAs, which firms can leverage and develop for their benefit. CSAs refer to economic, political, institutional, and cultural country characteristics on the basis of which countries positively differentiate themselves from others (Rugman, 2005; Rugman & Oh, 2012). In contrast to FSAs, CSAs are always location-specific and exogenous to the firm as, for example a highly skilled labor force, which is a particularly sought asset by PSFs (Kolk & Margineantu, 2009). According to Rugman and Verbeke (1992), MNEs can exploit both home and host country CSAs in order to create new NLB- and LB-FSAs and thereby a competitive advantage, which they refer to as the dual use of CSAs. However, the combination of FSAs and CSAs becomes complex once CSAs are not freely accessible to foreign firms (Hennart, 2009). This is the case when access is being controlled or protected though, for instance, local monopolies of natural resource ownership. Such situations make it necessary for foreign MNEs to develop relationships with local entities (Hennart, 2009), which can be regarded as the development of LB-FSA in order to overcome discriminatory LOF.

In order for a country to be an attractive and appropriate host country for the MNE, the host country’s CSAs have to be compatible with the MNE’s objectives for engaging in FDI in the particular country. Dunning (1998) identified four different FDI motivations, namely natural resource, market, efficiency, and strategic asset seeking. First, natural resource seeking MNEs have the primary objective to obtain favorable resource endowment, pricing or quality of the natural resource in the host country. Second, market seeking firms pursue the objective of finding a new market with a heretofore unsatisfied demand, which they can attend and expand to. Third, firms seeking efficiency focus strongly on production cost related endowments such as labor, materials, or machinery in order to enhance the efficiency of their value chain, while firms seeking strategic asset focus on the local endowment of intangible assets, which are primarily knowledge-related (Dunning, 1998). Considering the strong importance of strategic assets for PSFs and their tendency to internationalize conform with their clients’ tendencies (Kolk & Margineantu, 2009), the following working proposition can be inferred:

WP1: PSFs’ regionalization is most likely to be driven by market and strategic asset seeking.

MNEs’ potential to leverage LB- and NLB-FSAs as well as home and host CSAs in order to develop competitive advantages can be analyzed drawing on the IBV (Xu & Shenkar, 2002). Adopting the economic definition by North (1991, p. 97), “institutions have been devised by

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constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity.” Institutions are commonly known as the rules of the game, where it is distinguished between formal and informal institutions. Formal institutions include constitutions, laws, and property rights, among others, while informal institutions refer to sanctions, taboos, customs, traditions, and culture (North, 1991). The greater the institutional difference between the home and host country is, the more difficult and costly it is for MNEs to develop new FSAs or to adopt existing FSAs in the host country (Arregle et al., 2013; Qian et al., 2013; Rugman & Oh, 2010; Verbeke, 2013), as there is often a “lack of [external] complementary FSAs required to operate successfully” (Rugman & Verbeke, 2007, p. 204), which furthermore enhances the LOF experienced by the MNE (Pinkse & Kolk, 2012). On the other hand, the more familiar an MNE is with the local institutions of the host country, the lower the transaction costs and hence CDBA will be, which function as an important determinant of an MNE’s economic performance (North, 1991; Peng, 2002). This is particularly important in the professional services industry as “responsiveness to the cultural and especially regulatory environment of local markets is necessary” in order to serve clients appropriately (Kolk & Margineantu, 2009, p. 400).

To summarize, MNEs’ international competitiveness is dependent on their ability to transfer and leverage LB- and NLB-FSAs as well as on their ability to integratively use CSAs of both, the home and host country (Rugman & Verbeke, 1992; 2005; 2007; Verbeke, 2013). As stated by Verbeke (2013, p. 34) “a firm’s success abroad depends on its ability to link its internationally transferable FSAs with location advantages (whether valuable inputs or attractive market conditions) in host countries, which are the reasons why the MNE expanded there in the first place. This linking process often requires developing new, [LB-] FSAs in the host country.” Klier, Schwens, Zapkau, and Dikova (2017, p. 305) recently added to this discussion that firms hence “adapt their strategic decisions to their resource base either by exploiting existing advantages or by seeking to develop new advantages.” The leveraging of NLB-FSAs is more likely to be achieved during intra-regional than during inter-regional expansion (Qian et al., 2013; Rugman & Verbeke, 2007; Verbeke & Asmussen, 2016; Verbeke, 2013), which is in line with the general home-regionalization tendency (Rugman & Verbeke, 2004; Ghemawat & Altman, 2016). However, despite this tendency Rugman and Oh (2010) emphasize the value of inter-regionalization efforts for MNEs in order to maximize firm value and to satisfy shareholders.

The firm and location perspective on LOF experienced by MNEs during intra- and inter-regional expansion are featured by two further conditions related to the industry in which the

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firm is operating and the asset specificity of the MNE’s activities concerned. Both dimensions have been shown to result in differential outcomes for the degree of LOF experienced in intra- and inter-regional expansion.

2.1.4. INDUSTRY SPECIFICITY

An important aspect to consider when investigating MNEs’ regionalization strategy is industry specificity (Kolk et al., 2014). Most generally, a distinction can be made between manufacturing and service industries (Rugman & Collison, 2004), whereof the former has received predominant attention by IB scholars (Kolk & Margineantu, 2009). Nevertheless, a recent study on service industries has found that home-region orientation is even stronger in services industries than in manufacturing industries (Rugman & Verbeke, 2008a). Furthermore, previous studies have also focused on specific sub-industries as, for instance, automotive, retail, or food and beverages (Kolk et al., 2014). Thereby, they have aimed at discovering industrial specificities within the regionalization debate, which highlights the relevance of industry specificity in regionalization research. By focusing on a single industry in this study, the industry is removed as a source of variation and it is furthermore expected that particular regionalization trends can be determined, which then can be ascribed to the professional services industry.

2.1.5. ASSET SPECIFICITY

Asset specificity is another important factor, which influences the regionalization strategy of MNEs. Asset specificity refers to the specific types of assets used and to the location of those assets in the value chain. Hence, this also refers to the position of the FSAs within the value chain, which are developed on the basis of those assets. Rugman and Oh (2012) differentiate between two types of activities to which assets belong, namely upstream and downstream. Upstream activities occur within the early stages of the value chain such as, for example, Research and Development, sourcing, procurement, and manufacturing. FSAs, which are related to upstream activities tend to be non-location bound (Rugman & Verbeke, 2007) and are therefore easier to be redeployed (Arregle et al., 2013). Downstream activities, on the other hand, take place throughout the last stages of the value chain as, for instance, sales and marketing. Those activities are characterized by a strong relation to the local customers as they

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activities tend to be location bound (Rugman & Verbeke, 2007) and are hence more difficult to be redeployed (Arregle et al., 2013). As the professional services are directly received and realized by the clients, they are considered downstream activities as they stand in direct contact with the end consumer (Langfield-Smith, Thorne, Holton, & Hilton 2003; Li, 2005).

2.2. STRATEGIC MANAGEMENT OF INTRA- AND INTER-REGIONAL LOF

The internationalization process of MNEs has been the focus of IB research ever since the Pre-Hymer era in the 1960s. During that time research was conducted at the country-level, focusing on international economics and national competitiveness of MNEs. In the 1970s, the focus shifted to the FDI, which MNEs undertook to internationalize, which were analyzed predominantly at the firm-level. Since the 1980s, MNEs are greatly studied at the subsidiary-level as the MNE was newly defined as a differentiated network (Rugman, et al., 2011). Within the internationalization process of firms, the entry mode represents the initial stage of international expansion. However, the conceptualization of the entry mode is limited as it does not consider the further development of MNEs within the country, once they have entered (Benito et al., 2009). Therefore, the foreign operation mode is investigated subsequently. Building on the entry mode, the added value of the operation mode is that it facilitates the understanding of MNEs’ development and evolvement within a host country (Benito et al., 2009). Combining the literature review on MNEs’ entry and operation modes with the previously revised literature, seven working propositions are developed throughout the remainder of this section first, for PSFs’ entry modes and subsequently regarding their foreign operation modes.

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2.2.1. ENTRY MODE

The entry mode is an MNE’s first choice for the form of operation in a new market. Choosing the right entry mode is crucial for an MNE as it determines the resource commitment, whether an MNE opts for an exploration or exploitation strategy, the level of risk and uncertainty, and the level of transfer of knowledge from the home country (Hill, 2011). Furthermore, the experienced LOF is the most severe at this point in time. Therefore, the thorough assessment of an appropriate entry mode is crucial to keep the LOF at a minimum (Sethi & Judge, 2009). In response to the nomination of Keith David Brouthers (2002), a renowned scholar in the field of entry modes, with the JIBS Decade Award, Shaver (2013) questioned the need for more research on firms’ entry modes. He expressed his opposing standpoint by claiming research to have reached “a clear conceptual understanding of how to differentiate entry modes […], of what determines firm choices amongst various modes […], and some insight into when one mode leads to better performance outcomes” (Shaver, 2013, p.23). Hennart and Slangen (2015) responded to Shaver’s assertion highlighting the need for further research on entry modes and presenting several reasons. One thereof is the need to study the evolution of foreign operations, which result from suboptimal entry mode choices.

Researching entry modes, Pan and Tse (2000) developed a framework, which follows the hierarchical decision-making process of MNEs when internationally expanding (figure 1). Even though the framework is well-recognized among IB scholars, it does not sufficiently represent the situation of firms within the service industry as it was developed based on data from manufacturing industries. Services are strongly distinct from manufactured products as they are intangible and hence cannot be consumed or stored physically. Furthermore, the production and consumption of the services are inseparable as the involvement of the client in service industries is substantial, especially in the professional service industry, (Kolk & Margineantu, 2009). Therefore, the General Agreement on Trade in Services (GATS) framework from the WTO (2013) is combined with the hierarchical model as the two frameworks are reconcilable with each other but are not aimed at a one-on-one comparison. In contrast to the sequential decision-making process outlined by the hierarchical model, the GATS framework distinguishes between four different modes of supply in service sectors, where each mode refers to a different extent of the MNE’s presence in the host country. These modes are cross-border trade, consumption abroad, commercial presence, and presence of natural persons.

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from left to right, the further to the right a mode is placed, the more control and ownership of activities and processes but also the more risk the mode implies. First, looking at the non-equity entry mode contractual agreements on the left-hand side, they can be associated with the fourth GATS mode, presence of natural persons, which includes services where employees from an MNE have to be physically present within the host country (WTO, 2013). Another mode of supply which can be related to non-equity entry modes is cross-border trade where services are produced in the MNE’s home country and then supplied to the customer in the host country via telecommunications or postal networks (WTO, 2013). As cross-border trades are usually project-based as, for instance, consultancy or market research reports (WTO, 2013), they can be regarded as market transactions and are therefore associated with exporting entry modes. The second GATS mode consumption abroad refers to foreign clients physically crossing the border to enter the MNE’s home country in order to consume the service locally such as, for example, students consuming educational services from a university in a host country (WTO, 2013). Those services are usually of a temporary nature and can therefore also be associated with non-equity contractual agreements. The third GATS mode commercial presence refers to the provision of a service “by a locally-established affiliate, subsidiary, or office of a foreign-owned and [foreign]-controlled company,” as, for instance, hotel chains or insurance companies (WTO, 2013, p. 3). Such activities are typically not involved with equity investments and can hence be associated with non-equity entry modes, licensing and alliances. In general, the benefits of non-equity entry modes are that they require little interaction with the foreign market or suppliers, that the incurred costs and risk are relatively low, and that they provide the opportunity to exploit economies of scale (Hill, 2011; Pan & Tse, 2000; Zahra, Ireland, & Hitt, 2000). Those benefits are however of less value to PSFs as PSFs do not have the objective to reach economies of scale but to deliver high quality customized services to their clients for which close cooperation with stakeholders is necessary (Baaij, 2014). On the other hand, disadvantages of non-equity entry modes are that firms have low control over the process, knowledge, and activities involved (Hill, 2011; Pan & Tse, 2000).

When opting for an equity entry mode placed on the right-hand side of figure 1, MNEs’ strategic commitment to their future operations in the host country is higher and requires significant resources (Hill, 2011). MNEs then face another question, which regards the degree of independence and ownership, whether the MNE wants to establish a joint venture (JV) with a local firm and thereby share ownership or whether it wants to enter the host country alone, establishing a wholly owned subsidiary (WOS) via a greenfield investment (Pan & Tse, 2000). In comparison with non-equity entry modes, general benefits of equity entry modes are stronger

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control over upstream and downstream activities as well as the stronger potential to implement and exploit FSAs (Hill, 2011), which is particularly relevant for PSFs in order to develop a strong local reputation and thereby a competitive advantage (Kolk & Margineantu, 2009).

Figure 1: A Hierarchical Model of Choice of Entry Modes (Pan & Tse, 2000)

Looking at JVs in particular, it is the least independent equity entry mode as the venture partners share costs and risks, which is why costs and risks are lower than for WOS. Another benefit of JVs is that an MNE can benefit from the local partner’s knowledge of the host market and thereby leverage such LB-FSAs. Drawbacks, on the other hand, are that MNEs risk to lose control over the JV if it is not executed appropriately. Furthermore, JVs face the risk of cultural clashes among home and host country employees and practices (Hill, 2011). Based on the analysis of the IB literature on LOF and entry modes, thinking first of the general literature and then about the industry specific implications, the following working propositions can be inferred:

WP2a: The simultaneous intra- and inter-regional LOF experienced by PSFs during the first entry in a host region is likely to be associated with a less independent equity entry mode. WP2b: PSFs’ first entry in a host region is likely to take place through a JV with a local partner to leverage local market knowledge and thereby to facilitate the development of LB-FSAs.

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Next, looking at acquisitions, they provide a similar benefit as JVs, namely that firms can benefit from the target’s local host market knowledge. Further benefits of acquisitions are that they can be executed quickly and thereby, firms can establish a physical presence instantly, gaining not only the target’s tangible assets, but also their intangible FSAs such as the local brand recognition and managers’ knowledge of the local market. On the other hand, drawbacks of acquisitions are that firms can overestimate a target’s value or the potential value that can be created through the acquisition and therefore pay too much and, as well as for JVs, that the cultures between the two firms can clash (Hill, 2011). Last, greenfield investments require the greatest commitment of resources as MNEs have to independently build the local venture from the bottom up and solely carry all costs and risks. However, benefits are complete control over the venture and the immediate establishment of the PSF’s brand as well as the implementation of the corporate culture (Hill, 2011). The previously mentioned fourth GATS mode, presence of natural persons, can also be associated with equity entry modes, in addition to non-equity contractual agreements. It is the only mode of supply which has the potential to go beyond the temporary, project-based timeframe through including equity investments, and can hence be associated with JVs and WOS. Mergers and acquisitions (M&As), which can be associated with acquisitions on the very right of the hierarchical model, account for the major entry mode within the service industry (Iammarino & McCann, 2013). In contrast to JVs, when merging, the firms form a new venture which operates as a new, independent legal entity and therefore requires strong, long-term commitment (Berk, DeMarzo, & Hardford, 2012). M&As are found to be chosen by strategic asset seeking firms to acquire complementary LB-FSAs, given that a firm is already familiar with the host region (Klier et al., 2017). This becomes especially relevant for PSFs when expanding within a host region, entering into further host-region-host-countries during which they presumably experience decreasing inter-regional LOF as they are already familiar with the host region. Therefore, again thinking first of the general literature and consecutively about the industry specific implications, the following WPs can be inferred,

WP3a: Entering new host countries within the host region, the intra-host-regional expansion is likely to be associated with higher-commitment equity entry modes.

WP3b: PSFs intra-host-regional expansion is likely to take place via the equity entry modes mergers and acquisitions to acquire complementary LB-FSAs.

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2.2.2. FOREIGN OPERATION MODE

Building on the entry mode, the concept of foreign operation mode includes the evolvement of firms’ “organizational arrangements to conduct international business activities” (Benito et al., 2009 p. 1458). Whereas the terms ‘entry mode’ and ‘operation mode’ were earlier used interchangeably (Benito & Welch, 1994), today the concept extends the traditional study of market entry by focusing on the changes made by firms operating in a foreign market and by highlighting the importance of the context in which such changes take place. This implies that, while the operation mode development is determined through comparing the current operation mode with the initial entry mode into a host country, the same concepts can be used for the analysis, such as alliance or equity JV, among others. This approach emphasizes that organizations’ operation modes are not static but, on the contrary, evolve together with the relationships which firms engage in (Cantwell et al., 2010). Especially through the interaction with local actors within the foreign markets, firms are able to learn and thereby to adapt their perception of risks and benefits of being involved in the foreign markets (Swodoba, Olejnik, & Morschett, 2011). Hence, growing familiarity with local institutions not only reduces LOF (North, 1991; Peng, 2002), but moreover also leads to an increase in firms’ willingness to increase their local commitment (Pedersen, Petersen, & Benito, 2002).

WP4: The longer a PSF operates in a host country within a host region, the more likely the PSF is to transition to a higher commitment equity operation mode.

With an increasing interest of IB scholars in this topic area, different studies have brought forward mixed results. While some scholars found that the initial entry mode may persist (Rosson & Ford, 1982, in Swodoba et al., 2011), others found that mode combinations are build (Petersen & Welch, 2002), or that the initial entry mode is replaced by another operation mode (Pedersen et al., 2002). Regarding the last, two trends that have been identified are operation mode increases and reductions. Operation mode increases refer to the switching to an operation mode with a higher level of control, ownership, or risk, while operation mode reductions refer to the contrary (Swodoba et al., 2011). Several scholars have identified firms’ economic performance as a decisive factor, leading to an increase or reduction accordingly in the operation mode (Ellis, 2005; Petersen, Pedersen, & Benito, 2006; Swodoba et al., 2011).

WP5: The better a PSF’s economic performance in a host-region-host-country is, the more likely it is to increase the operation mode to a higher commitment equity operation mode.

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The conceptualization of the operation mode allows for several modes to be adopted in different combinations within one country, which is termed operation mode package and that has been strongly neglected by IB scholars until now (Benito et al., 2009; Petersen & Welch, 2002). An advantage from applying a mode package instead of choosing one over another or discarding modes, can be an increase in market penetration as firms become more flexible (Benito et al., 2009). Peterson and Welch (2002) identified four different forms of mode packages, namely the unrelated, the segmented, the complementary, and the competing operation mode package. When a firm uses several operation modes within one country but they stand in no relation to each other the firm is applying an unrelated mode package. This can be the case when the firm is, for example, active in different industries or markets within the host country. Second, the segmented package refers to the application of several operation modes within the same industry. Here, the operation modes stand in relation to each other as they are focused on the same activity within the value chain, however they can target different segments from the customer portfolio or different geographic areas within the host country. Third, the complementary mode package refers to modes that are aimed at different activities of the firm’s value chain with the coherent aim to pursue the firm’s objective. An important aspect is that additional coordination among the different modes is needed. Last, the competing mode package refers to the implementation of different operation modes, which are aimed at the same segment while the level of ownership differs among them. Thereby, the firm can, to some extent, increase control on the operation mode with a lower level of ownership as the operation mode with a higher level of ownership serves as a reference point, which is especially pertinent in manufacturing industries (Petersen & Welch, 2002).

An important aspect of mode packages is that different modes can play distinct roles which are either primary or supportive (Petersen & Welch, 2002). Examples of primary roles can be market penetration or revenue generation, which relate back to Dunning’s (2000) market and strategic asset seeking FDI motives. Supporting roles facilitate the pursuit of the primary roles through, for example, transferring technology or developing a positive political profile, which can be related to the development of new LB-FSAs (Rugman & Verbeke, 1992). Furthermore, also contextual developments exogenous to the firm such as changes in market characteristics, institutions, or relationships with third parties influence the operation mode role. Such events can cause that an operation mode becomes less important or even inappropriate at a later moment in time (Benito et al., 2009; Pedersen et al., 2002). In the case that the role of a mode changes, this can be regarded as an indicator of an increase or decrease in international commitment by the MNE (Benito et al., 2009).

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WP6: PSFs are likely to apply segmented mode packages, which comprise primary and supportive operation modes during their intra-regional expansion.

Following the conceptualization of LOF and entry, and operation modes in the context of PSFs’ regionalization, the applied methods of this study is discussed, which lead to the validation of the working propositions as well as to answering the posed research question.

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3. METHODOLOGY

This section serves to elaborate on the methodology applied in this study. First, the ontological and epistemological philosophies are discussed before advancing to the applied research design, which includes the multiple-case study design, quality criteria, and the case selection. This section concludes with an overview of the data collection and data analysis.

3.1. RESEARCH PHILOSOPHY

In general, the research philosophy of a study defines the researcher’s perspective of the world (Saunders, Lewis, & Thornhill, 2009). More specifically, the ontological and epistemological perspective guide what is considered “as a valid, legitimate contribution to theory” (Brannick & Coghlan, 2007, p. 62) and hence influence how the determined gap in the literature is being investigated. Regarding the ontology, it can be distinguished between subjective and objective ontology where, according to the subjective perspective, reality is a construct of the researcher’s mind (Brannick & Coghlan, 2007), which implies that the study can be influenced by personal attributes such as values, norms and beliefs. In contrast, in the objective perspective, which is adopted in this study, the researcher functions as an independent individual, studying the reality without influencing or changing it (Brannick & Coghlan, 2007). Epistemology focuses on who has the ability to know what information (Ryan, 2006). The post-positivist epistemological perspective considers reality as a reflection of science, but also as probabilistic, which implies that verification is not possible (Rynes & Gephart, 2004). The post-positivist perspective is appropriate for this study, as it facilitates the analysis of data in a historic and cultural context and in an objective manner, thereby allowing for the development of a holistic picture (Ryan, 2006). To conclude, for this study, an objective post-positivist stance is adopted.

3.2. MULTIPLE-CASE STUDY RESEARCH DESIGN

Following Benito et al.’s (2009) call for qualitative research of MNEs’ operation mode configurations as “the configuration of [operation] modes along the value chain can be […] complicated” (Benito et al., 2009, p. 1461), this study adopts a qualitative, multiple-case study design. A qualitative multiple-case study is the appropriate approach as it allows for the holistic, in-depth analysis of complex phenomena in real life (Yin, 2009). Further benefits of the multiple-case study are first, that the explanatory nature allows for the investigation of operational links over time, which facilitates the longitudinal approach of this study and also a

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better understanding of the complexities of the researched phenomenon (Bryman, 2012). Second, analytical generalizations can be made, which means that the specific results from the investigated cases can be generalized to the theory from the conceptual foundation of this study (Eisenhardt, 1989). As this study seeks to answer a research question through the evaluation of several working propositions, which have been developed based on a conceptual foundation, the adopted approach is explanatory (Yin, 2009), also referred to as bottom-up deduction (Shepherd & Sutcliffe, 2011).

Figure 2: Case Design (Source: Author)

Notes: EM = Entry Mode, OM = Operation Mode

As it has been opted for a multiple-case study research design, several cases are studied, as displayed in figure 2 above. Four cases with two embedded units of analysis have been chosen within the same industry, which are the largest PSFs Deloitte, PwC, EY, and KPMG, also commonly known as the Big Four (Baaij, 2011). The four PSFs operate within the same service industry and were originally known as the big accountancy firms. All four PSFs operate with a network structure, which means that firms of the network are privately owned and managed independently under the common PSFs’ brand name (Kolk & Margineantu, 2009). Over the last decades, all PSFs have expanded their services from auditing to also providing consulting, tax and legal services (Baaij, 2011). Building on the conceptual foundation, the case selection is following a literal replication logic, which implies that analyzing the working propositions in every case, the same results are anticipated for each of them (Yin, 2009). As the PSFs are operating in the same industry, they are expected to face similar challenges when expanding intra- and inter-regionally, such as LOF, and moreover, they are expected to react similarly in dealing with those challenges. The embedded units of analysis within each case are the entry and operation modes respectively (see figure 2). First, during the within-case analysis each PSF’s entry into and expansion within a foreign region is studied individually and analyzed to

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look for patterns. This is then followed by a cross-case analysis where the findings of all cases are compared and generalizations are made, based on the underlying conceptual foundation.

3.2.1. QUALITY CRITERIA

Besides the before-mentioned benefits of a qualitative multiple-case study, such studies are prone to criticism such as the lack of generalizability and objectivity (Eisenhardt, 1989; Yin, 2009), as well as a lack of rigor, (Yin, 2009), which the following four quality criteria address. First, construct validity refers to the selection of appropriate and sufficient methods to investigate the focal phenomenon, which is especially challenging for the qualitative case study design (Yin, 2009). Therefore, in order to increase construct validity, a structured approach was applied, using carefully determined search terms when searching corporate sources and databases. Furthermore, by applying two different perspectives, namely the firm and location perspective, theoretical triangulation is facilitated, which increases the robustness of the data analysis (Denzin, 1978) and thereby the construct validity. To further strengthen the construct validity, data triangulation is applied, using different sources to collect data (Denzin, 1978), which has the advantage that multiple measures of the same phenomenon can be studied (Yin, 2009). For this study, this implies that different sources provide supporting and complementary information on the regional orientation, entry and operation modes of the PSFs as, for example, the database Orbis provides detailed information on JVs and M&As while the database LexisNexis also includes information on alliances and greenfield investments.

Second, internal validity is a major concern for this study as it is of an explanatory nature and “[seeks] to establish a causal relationship, whereby certain conditions are believed to lead to other conditions, as distinguished from spurious relationships” (Yin, 2009, p. 40). To enhance internal validity, the developed working propositions, which support determining patterns and thereby causal relationships, are based on the conceptual foundation and the relationships are explained in detail (see chapter 2). Furthermore, the pattern-matching logic is applied, which enhances internal validity through the investigation of patterns across all cases and the comparison of such to the initially developed working propositions, which is facilitated through the previously discussed literal replication logic (Yin, 2009).

Next, external validity attends to the extent to which the findings are generalizable beyond the cases studied (Yin, 2009). As this study is adopting a multiple-case study research design, external validity is enhanced through the anticipation of the literal replication logic across the different cases, thereby aiming to achieve generalization of the results to the broader theory

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included in the conceptual foundation, which is also known as analytical generalization (Yin, 2009).

The last quality criteria, reliability, refers to the extent to which a study can be repeated and lead to the same results. Therefore, a clear chain of evidence is established, which means that each step taken is clearly outlined to facilitate reconstruction and to allow for replication of this study (Yin, 2009). Furthermore, all findings are stored in a case study database and are available upon request.

3.2.2. CASE SELECTION

Applying purposeful sampling, four cases have been selected. For the purpose of this study, purposeful sampling provides the advantage that PSFs can be selected based on the determined criterium that they are part of the Big Four. This guarantees that sufficient data is available and can hence be collected (Patton, 1990), as the Big Four have been internationalizing for a long time, following their clients in their expansion journeys (Baaij, 2014; Kolk & Margineantu, 2009). In addition, increasing pressure from the public on PSFs to increase their transparency in the disclosure of information (Baaij, 2014) assures the availability of sufficient data.

Inter-regionalization efforts present a strong value for MNEs in order to maximize firm value and to satisfy shareholders (Rugman & Oh, 2010). Especially for PSFs the value of inter-regionalization is represented in meeting the demands of their clients, which are becoming increasingly international and spread around the world (Baaij, 2014; Kolk & Margineantu, 2009). After two decades of mergers within the professional services industry (Suddaby & Greenwood, 2001) and the closure of another leading PSF, Arthur Anderson, due to its involvement in the corporate Enron scandal in 2002 (Baaij, 2014), the four PSFs Deloitte, PwC, EY, and KPMG have emerged as the market leaders, controlling nearly 90 percent of the global audit market and 20 percent of the global consulting market (Suddaby & Greenwood, 2001).

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Case Company Home Country Home Region HQ Active Countries Active Regions Description 1 United Kingdom Europe New York, United States 155 7

Deloitte was founded in 1845 in London. After several international mergers, of which the latest was between Deloitte Haskins & Sells and Touche Ross in 1989, the single global brand ‘Deloitte’ was introduced in 2003. Deloitte provides the following services (Deloitte, n.d.):

• Audit and assurance, • Consulting, • Risk advisory, • Financial advisory, • Legal, and • Tax 2 United Kingdom Europe London, United Kingdom 157 7

The first founders of PwC, Samuel Lowell Price and William Cooper, founded their firms in 1849 and 1854, respectively. After several mergers, the world firm Price Waterhouse was formed in 1982 (PwC Press room, n.d.). PwC provides the following services (PwC Global, n.d.).:

• Advisory,

• Audit and assurance, • Entrepreneurial and private

clients, • Family business, • IFRS reporting,

• Legal,

• People and organization, • Sustainability and climate change,

and • Tax 3 United Kingdom Europe London, United Kingdom 155 7

Ernst and Young was founded in 1989 after the merger of Ernst & Whinney and Arthur Young & Co. EY offers (EY, n.d.):

• Advisory, • Assurance,

• Strategic growth markets,

• Tax and law, • Transactions, and • Specialty services 4 The Netherlands Europe Amstelveen, The Netherlands 152 7

KPMG was founded in 1987 after the merger of Peat Marwick International and Klynveld Main Goerdeler. KPMG provides the following services (KPMG, n.d.):

• Audit and assurance, • Advisory,

• Enterprise, and • Tax

The long-term development of professional services firms' entry and operation modes : a regional approach