INTERNATIONALIZATION OF PROFESSIONAL SERVICE FIRMS: EXPLORING THE RELATIONSHIP BETWEEN HUMAN RESOURCE MANAGEMENT AND THE CHOICE OF ENTRY MODE

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INTERNATIONALIZATION OF PROFESSIONAL SERVICE FIRMS:

EXPLORING THE RELATIONSHIP BETWEEN HUMAN RESOURCE

MANAGEMENT AND THE CHOICE OF ENTRY MODE

Master Thesis, MSc International Business and Management University of Groningen, Faculty of Economics and Business

August 2015

Jelle van der Leck Student number: 2421801 Tuinbouwstraat 67a 9717 JC Groningen Tel.: +31 (0)6 12 88 78 52 E-‐mail: jellevanderleck@hotmail.com Supervisor: Dr. M.M. Wilhelm Referent: Dr. K. van Veen Acknowledgements

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ABSTRACT

This study investigates the relationship between human resource management (HRM) and foreign entry mode choices of professional service firms (PSFs) in the context of the increasing internationalization of this sector. Based on HRM, staffing and foreign entry mode theories, this study formulates ten hypotheses to illustrate the relationship between HRM and foreign entry mode choices of professional service firms. Due to the lack of research in the professional service sector, and in order to explore the relationship between HRM and entry mode choice, this study uses an illustrative case study of a ‘pure’ PSF, working in the corporate real estate services industry. Key findings from this illustrative case study show that, whilst foreign entry mode decisions could force adjustments on HRM strategy, the same was not true inversely. This study concludes by discussing the implications of these findings from conceptual and practical perspectives and suggests ways in which this initial research may be taken forward.

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1. INTRODUCTION

The internationalization of the service sector is becoming an increasingly more critical aspect of global business activities. According to UNCTAD’s World Investment Report (2012), total foreign direct investment (FDI) in the service sector reached up to $570 billion, which represents around 40 percent of total FDI in 2011. Service sector companies are known within current literature as professional service firms (PSFs) and are distinguished by the fact that they provide customized knowledge to clients, often by highly educated and professionalized employees (Empson, 2007; Maister, 1993). PSFs represent a distinct type of service firm, characterized as being knowledge-‐intensive, based on professional skills, which are highly intangible and require a high degree of face-‐to-‐face contact (Erramilli & Rao, 1993). Some examples of PSFs and areas that they perform include management consulting, real estate consulting, legal and accounting services.

The increased importance of services in the global business activities has fueled research on the choice of entry and HRM strategies over the last few decades (Anand and Delios, 1997; Aharoni and Nachum, 2000; Bouquet et al., 2004). However, despite the increased research on PSFs, much of the prior studies are regularly compared and based on the manufacturing industry (Anand and Delios, 1997). The service industry however, is “fundamentally different from manufacturing, in terms of relative intangibility, perishability, simultaneity of production and consumption, and customization” (Contractor et al., 2003: 9).

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expanding globally (Belderbos and Heijltjes, 2005). The competitive advantage of PSFs, which firms need to be successful, is largely rooted in their intangible assets such as human capital, firm-‐specific experience, reputation and goodwill. More specifically, due to these intangible assets, foreign subsidiary staffing decisions become an even more critical aspect for a successful internationalization process (Belderbos and Heijltjes, 2005; Delios and Bjorkman, 2000; Colakoglu and Caligiuri, 2008). Due to the knowledge-‐ intensity and the implications this has on the on the internationalization of PSFs, they make different decisions on HRM than manufacturing companies (Bouquet et al., 2004; Brouthers and Brouthers, 2003; Erramilli and Rao, 1993). This study will therefore, focus on the HRM strategy and more specific on the staffing decision of PSFs.

Another challenge companies face when expanding internationally is choosing the appropriate foreign entry mode strategy. Usually internalization theory has focused primarily on explaining which strategies firms use to expand across borders, i.e. foreign entry mode choice. Prior studies on foreign entry modes in the service sector are still debating whether the determinants of foreign entry decisions are the same for PSFs and manufacturing firms (Bouquet et al., 2004). However, PSFs’ are shaped by their unique characteristics, such as knowledge-‐intensity, and therefore restricted in their choice of foreign entry mode.

In this study we propose that these two challenges are highly related, which implies that HRM decisions have strong implications for choosing the appropriate foreign entry mode and vice versa. An inappropriate fit between the choice of foreign entry and the HRM strategy may block opportunities and decrease performance, which may even result in an exit from the foreign market (Ekeledo and Sivakumar, 2004). HRM and entry mode strategy need to be compatible and are therefore related. Previous PSF studies that are conducted in the law (Faulconbridge, 2007), accountancy (Sluyterman, 1998), computer services (O’Farrel et al., 1998), engineering consultancy and management consultancy (Roberts, 1999) sectors are explaining certain HRM or foreign entry mode choices, but do not explain the relationship between them both. Nevertheless, previous research has studied foreign entry mode decisions and its influence on HRM decisions. These previous studies moreover, have shown that the interaction between the choice of foreign entry mode and the HRM strategy significantly influences the performance of the foreign subsidiary (Konopaske et al, 2002; Bouquet et al., 2004). However, these studies are not based solely on the service sector and do not explain the relationship between foreign entry modes and HRM decisions.

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an extended literature review. Ten hypothesis are developed, which are tested by an illustrative case study. In order to address this gap within the research, this study will examine the following question:

What is the relationship between HRM and foreign entry mode choices for professional service firms?

This study will propose that there is an interdependent link between foreign entry modes and HRM in three primary objectives. Firstly, it will fill the research gap by providing a theoretical framework for the relationship between HRM and foreign entry modes in the service sector. This framework is based on both the different HRM and foreign entry mode choices for PSFs.

Secondly, ten testable hypotheses are presented that may serve as a bases for future empirical research. This research will contribute to both our conceptual understanding and empirical knowledge of the relationship between HRM and the foreign entry mode strategy.

Thirdly, due to the lack of research in the professional service sector, an illustrative case study will be used to test these hypotheses. This will contribute to the creation of new information, as well as being used as a basis for the direction of future research. This illustrative case study will be executed at a major corporate real estate service company. The corporate real estate sector uses human capital to provide services involved with intangible products such as information, knowledge, and advice directly for their customers. Due to the high degree of face-‐to-‐face contact and the low degree of tangibility, the corporate real estate service industry is seen as a ‘pure’ (Patterson and Cicic, 1995) service industry. Furthermore, the corporate real estate industry is one of the most rapid international expanding businesses within the service sector (Weber, 2015).

Subsequent sections describe the critical role of HRM on internationalization strategies; the effects of HRM on the choice of foreign entry mode and the effects of foreign entry modes on HRM being elaborated in greater detail. Hypotheses will be developed based on the theoretical framework discussion in the literature review and an illustrative case study will allow us to test our hypotheses. Theoretical, empirical, and practical implications will be discussed at the end of this research.

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2. THEORETICAL FRAMEWORK

2.1. The Critical Role of HRM for PSFs

A PSF refers to “a company where most work can be said to be of an intellectual nature and where well qualified employees form the major part of the workforce’’ (Alvesson, 2000, 1101). PSF are knowledge-‐intensive (Anand et al., 2007; Morris, 2001), which refers to the professional knowledge, which constitutes both the main input and output. Service input is mainly the knowledge embedded in the employees of the PSF. The service output is mainly in the form of customized knowledge-‐ or experience-‐based solution for clients (Empson, 2007).

The expertise and capability of the employees or the accumulation of knowledge within a PSF is referred to as human capital (Hitt et al., 2001). PSFs create value through the use of human capital, which refers to the stock of skills and knowledge embodied in individuals that can be used to produce high quality professional services for clients (Becker, 1964; Wright and McMahan, 2011). Therefore, human capital is the most important assets of PSFs. The level of human capital can vary from country to country due to the educational level of a specific country. PSF employees need to be highly educated and they need a lot of training during their professional career. Education and on the-‐job training within the PSFs are means to build up, stimulate and secure human capital within the company (Hitt et al., 2001; Fu, 2013). In addition, to obtain high levels of human capital, PSFs need to identify, attract, and retain high-‐class professionals, which can be achieved through selection, recruitment, and skill-‐based pay (Fu, 2013). Further, human capital is not only important for PSFs because it creates value for the firm, it is also important because the clients of PSFs are searching for firms with the highest-‐level of human capital, because it indicates the quality of the services.

HRM practices improve “firm performance by enhancing employees’ skills and abilities” and it “affect a firm’s financial performance by creating higher human capital skills, experience, and knowledge” (Fu, 2013: 245). HRM is seen as critical for PSFs because these firms needs to manage and motivate their employees effectively, in order to create value as well as to strengthen the market position of the firm. PSFs success or failure rests more heavily on HRM, as people are their main resource. However, due to the fact that knowledge is embodied in the employees, the transfer of knowledge and thus the internationalization process can be hindered.

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2.2. Internationalization and Foreign Entry Mode Choices of PSFs

The internationalization process of PSFs, despite the increased growth of the service sector, is still strongly based on the manufacturing industry. However, some notable difference between manufacturing and service firms can be found within the motivation to internationalize, why they internationalize differently, and the different foreign entry mode strategies.

2.2.1. Internationalization of PSFs

The service sector has different motives to internationalize than manufacturing firms do. Manufacturing firms expand to foreign markets in search for new customers (Brouthers and Brouthers, 2003). In comparison, Vandermerwe and Chadwick (1989: 79) argue that the most cited motivation of internationalization in service sector literature is “client following”, “As producers go global, their service suppliers must follow”. The PSFs that focus solely on domestic market clients are likely to miss out on the benefits of this demand for PSFs’ global presence. Besides, an increasing focus on core-‐activities in the manufacturing sector leads to greater need of professional services and therefore a growth in the service sector (Roberts, 1999). Because of these motivations, the number of PSFs operating international markets has grown significantly.

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environments. Secondly, difficulty may arise from selecting activity locations as a function of supply side. In contrast, manufacturing firms are able to separate their upstream and downstream activities and locate these separately to host environment requirements. It is also possible for manufacturing firms to make location choices subject to supply side optimization criteria, in contrast to PSFs who exhibit a relative lack of such flexibility whilst having to adapt their upstream and downstream activities separately. PSFs often cannot select the most efficient location from a supply side perspective to produce services in the way that manufacturers can. Rugman and Verbeke (2008: 403) state, “The locus of consumption dictates the locus of production”. This means that PSFs need to deliver their activities close to their consumers and their upstream and downstream activities need to be coupled. Due to this characteristic of inseparability within services, effective adaptation to high distance foreign markets is much more complex and the location choice of PSFs is more constrained when compared to manufacturing firms.

Intangibility is seen as the third characteristic, which implies that services cannot be stored, touched or transported. This implies the following: firstly, physical ownership cannot occur as there is no transfer of possession of ownership when services are sold (Buckley et al., 1992). Secondly, clients can only experience the service after purchase. In comparison a manufactured good is tangible, which implies that clients know what they purchase before actually purchasing (Rugman and Verbeke, 2008). Thirdly, due to the intangible nature of service products, they need to be adapted more to local requirements, in comparison to manufactured products (Zeithaml et al., 1985). Lastly, because a service cannot be stored or transported, services require local presence in foreign markets and therefore have a limited number of alternatives to internationalize (Buckley et al., 1992).

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consumer, but it is also expected that services differ across geographic space (Rugman and Verbeke, 2008). This means that PSFs internationalizing can be seen as very risky and uncertain. As a result of the heterogeneity, PSFs always depend on a more local approach for their internationalization strategy (Gronroos, 1999).

These characteristics of services influence the internationalization process of PSFs and this creates a distinction between the service and the manufacturing sector. For example, PSFs rely more on its human capital than on its physical infrastructure, due to its knowledge-‐intensity (Erramilli and Rao, 1993; Campbell and Verbeke, 1994). In comparison, manufacturing firms require large-‐scale investments in physical assets such as capital equipment and facilities to establish a presence in foreign markets. Thus human capital is extremely important in PSFs, much more that it is in the manufacturing sector.

2.2.2. Foreign entry mode choices of PSFs

Despite of the different motives and the unique characteristics of services, till this day, researchers are debating whether the determinants of foreign entry decisions are the same for PSFs and manufacturing firms. Ekeledo and Sivakumar (2004) studied the foreign market entry mode strategies of manufacturing firms to see whether applicable to service firms. Their study revealed that the individual impact on entry mode choice does not always lead to the same entry mode choice for both manufacturing and service firms. The unique characteristics of services, such as knowledge-‐intensity affect a PSFs’ choice of entry mode. However, various entry modes are available to firms in general, such as licensing and franchising to joint ventures and wholly owned subsidiaries. These entry modes can be placed into two distinctive forms, full-‐control modes (i.e. wholly owned) and shared-‐control modes (i.e. partnerships such as joint ventures and alliances) (Bouquet et al., 2004). These entry modes differ in terms of resource commitment, risk, potential of returns and degree of control. The degree of control refers to the control that a multinational company can exercise over its foreign subsidiaries. In full-‐control modes, the PSF maximizes the amount of control while limiting the local resources it can gain access to (Konopaske et al., 2002). In shared-‐ control modes, the PSF has less control over the foreign operations, but has rapid access to new markets and therefore can operate more effectively (Schuler et al., 2004).

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licensing, greenfield establishments, and mergers and acquisitions are the main entry mode for PSF internationalization. Next to this, Fernández (2001) argues that foreign owned business services tend to perform better than locally owned businesses. This statement is based on the study of Roberts (1999), who found that PSFs from the UK with foreign revenue are more likely to have multinational companies as clients. The main point of FDI is that PSFs must enter a foreign market all at once through different forms of FDI (Netland and Alfnes, 2007).

Ochel (2002) and Eriksson et al. (1999) argued that not wholly owned subsidiaries, but cooperation strategies as joint ventures, networks, and strategic alliances in some cases are more suited. An alliance implies a lower degree of control, investment and risk than wholly owned subsidiary. Next to this, due to the fact that PSFs are people-‐centered and trade restricted, market and cultural characteristics play a significant role in the customer’s requirements. In order to overcome these problems, the choice for an alliance is more suited.

The current literature agrees on one point, due to the unique characteristics of services, they are not exportable. The inseparability characteristic makes it impossible to sell services without physical presence in the foreign market and therefore we can assume that export is not a viable option as entry mode for PSFs (Vandermerwe and Chadwick, 1989).

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assets. The foreign entry mode choice will vary due to the needed degree of idiosyncratic asset investments. Brouthers and Brouthers (2003) found that PSFs preferred joint venture modes of foreign entry when high levels of behavioral uncertainty in the foreign market is perceived, when a PSF is from a high trust propensity culture, and when PSFs perceive higher levels of legal restrictions. They concluded that large PSFs as well as PSFs with more region specific experience prefer wholly owned modes and when the foreign market is characterized as through its high environmental uncertainty.

The current studies on foreign entry mode choice in the service sector are defined by the difference between PSFs and manufacturing firms. However, the current literature does not consider the implications that entry mode choices have on PSFs operations. The literature shows that HRM is seen as critical for a successful internationalization strategy. We therefore argue that HRM has a strong implication on the foreign entry mode choice of PSFs.

2.3. The Choice of HRM Strategy and the Effect on Foreign Entry Mode Choices Barney and Arikan (2001) argued that to be successful, firms need a competitive advantage and the appropriate resources for internationalization. To achieve a competitive advantage, firms need to possess valuable, rare and inimitable resources (Barney and Arikan, 2001). PSFs’ knowledge can be seen as a competitive advantage, when it is valuable, rare and inimitable (Hitt et al., 2006). This can be the case, for example, when a high-‐quality service that is based on the employees’ knowledge is valuable, rare and difficult to imitate. Thereby it provides PSF a competitive advantage (Hitt et al., 2006). Next to that, due to this intangibility and the fact that knowledge is specific in the context of a region, country or product (Abdelzaher, 2012), the transfer of knowledge and thus the internationalization process of PSFs can be hindered. Therefore, it can be concluded that the management of knowledge and thus HRM has a critical role in the internationalization strategy of PSFs.

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oriented to the selection of the most qualified personnel, regardless of nationality and destination (Esperanca et al., 2006).

2.3.1. The choice of staffing strategy

HRM’s most critical role in the internationalization strategy of PSF’s is the decision concerning how to staff the foreign operation. Staffing is an important tool within HRM to establish and maintain control in the foreign subsidiary. This can be accomplished by assigning expatriates to foreign subsidiaries and letting them control the top management teams (Luo, 1999). This can also be achieved by exercising control over the selection of host country nationals who have the required technical skills, who will accept the organizational authority, and who perform in accordance with the parent firm rules and regulations (Konopaske et al., 2002). Regarding to PSFs, the most effective staffing strategy is based on the fit between the professional service characteristics (i.e. knowledge-‐intensity, people-‐centered, intangibility and heterogeneity) and the access to qualified staff in the host country. Qualified staff can overcome host country challenges in terms of culture, economic conditions, and local regulations. When there is limited access to qualified staff, other staffing strategies may be more applicable. Therefore, we argue that the most effective staffing strategy needs to be compatible with the access to qualified staff in the host country.

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line of this argument, it can be suggested that an ethnocentric strategy is more costly, due to housing, travelling and higher compensation packages.

Focusing on the ethnocentric staffing decisions of the professional service sector, Bouquet et al. (2004) found that the favorability of expatriate managers increased with the levels of human capital intensity and customer interaction within a sector. They concluded the following: the greater the human capital intensity and less separable a firm’s industry, the more likely a firm is to choose for a greater proportion of expatriate staff in foreign subsidiaries. This indicates that PSFs, in general, select for a great proportion of expatriate staffing to be staffed abroad, because PSFs need a high level of human capital. However, the Bouquet et al. (2004) study does not focus on the foreign market characteristics in terms of access to qualified personnel and barriers in terms of culture of language.

Nevertheless, knowledge is seen as a competitive advantage and one of the most important assets of PSFs. Ethnocentric staffing ensures a more successful transfer and deployment of knowledge and this strategy is most favorable when there is a scarcity of locally skilled personnel. Therefore, we argue that an ethnocentric staffing strategy is most favorable in the professional service sector when the access to qualified staff in the host country is low. This suggests the following hypothesis:

Hypothesis 1: Professional service firms are more likely to choose an ethnocentric

staffing strategy when the access to qualified staff in the host country is low.

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(Konopaske et al., 2002). The polycentric strategy has also some disadvantages concerning the differences between the local language and culture and the host and headquarters’ personnel (Konopaske et al., 2002).

Focusing on the polycentric staffing decisions of the professional service sector, the polycentric staffing strategy is most favorable, when the foreign country’s level of human capital is high and when there are big difference between the host and foreign culture, regulations and institutions. The professional service sector is characterized by it knowledge-‐intensity and the services need to be adapted to the local and client requirements. Human capital is important for PSFs because it creates value for the firm and clients are searching for firms with the highest level of human capital. For PSFs it is important that they gain new knowledge and experience. With this new knowledge and experience they may create new competitive advantages. Therefore, we argue that a polycentric staffing strategy is most favorable in the professional service sector when the access to human capital, and therefore, qualified staff in the host country is high. This suggests the following hypothesis:

Hypothesis 2: Professional service firms are more likely to choose a polycentric staffing

strategy when the access to qualified staff is in the host country is high.

2.3.2. Staffing and the effect on foreign entry mode choice

Prior literature has explored the staffing decision to control foreign operations in relation to the firm’s internationalization strategy or foreign entry mode (e.g. Konopaske et al., 2002; Esperanca et al., 2006). These studies found that staffing moderates the relationship between entry mode and the performance of a firms’ foreign subsidiary. Staffing interrelates to other types of control such as foreign entry mode strategy. This is because both are major mechanisms controlling resources, risks, management, and foreign operations (Konopaske et al., 2002). Therefore, a staffing strategy needs to be accompanied by a compatible foreign entry mode strategy to create the best performance. It is expected that the foreign subsidiary will perform worse when there is a misalignment between the two. In line of this, we propose that, within the professional service sector, the HRM strategy (i.e. staffing strategy) influences the foreign entry mode choice. This implies that an ethnocentric staffing strategy has a different effect on the choice of entry mode choice in comparison to a polycentric staffing strategy.

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knowledge and know-‐how from the parent firm to the foreign subsidiary. Furthermore, this strategy implies that the parent firm wants to have full-‐control over foreign operations. For this reason, we argue that PSFs with an ethnocentric staffing strategy are more likely to choose for a wholly owned foreign entry mode strategy, which is also related to a full-‐control entry mode. Prior studies showed that a firm with an ethnocentric staffing strategy is more likely to choose a wholly owned foreign entry mode (Konopaske et al., 2002). The alignment between the two leads to higher levels of foreign subsidiary performance. In addition, the Brouthers and Brouthers (2003) study found that PSFs prefer wholly owned modes when PSFs need to make high asset specific investments, which indicates that PSFs prefer wholly owned modes when the foreign country level of human capital is low. To overcome this low level of human capital, we argue that an ethnocentric staffing strategy is most favorable.

Therefore, in line with these studies two studies, we argue that PSFs with an ethnocentric staffing strategy are more likely to choose a wholly owned foreign entry mode, in comparison with a joint venture mode of entry. This suggests the following hypothesis:

Hypothesis 3: Professional service firms with an ethnocentric staffing strategy are more

likely to choose a wholly owned foreign entry mode strategy.

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when PSFs do not need to make high asset specific investments. This indicates that when the access to qualified staff is high, PSFs are more likely to choose a joint venture mode of entry. We argued that when the access to qualified staff is high, a polycentric staffing strategy is most favorable. In line with this reasoning, we argue that PSFs with a polycentric staffing strategy are more likely to choose a joint venture foreign entry mode. This suggests the following hypothesis:

Hypothesis 4: For polycentric staffing strategy, professional service firms are more likely

to choose a joint venture foreign entry mode strategy, in comparison with a wholly owned mode of entry.

2.4. The Effect of Foreign Entry Mode Choices on HRM

Within a PSF, foreign entry mode selection is a fundamental control strategy that affects the firm’s ability to control host country operations (Luo, 1999). A staffing strategy needs to be accompanied with a compatible foreign entry mode strategy to create the best performance. However, the choice of foreign entry mode has profound effects on HRM. In the previous chapter the effect of HRM on foreign entry mode choices were discussed. To fully understand the relationship between these two strategies we also discuss the effects of foreign entry mode choices on HRM. The literature defined two distinctive forms of foreign entry modes forms, full-‐control modes (i.e. wholly owned foreign entry modes) and shared-‐control modes (i.e. joint ventures), which both have different advantages and disadvantages and different effects on the HRM strategy.

2.4.1. The effect of a wholly owned foreign entry mode on HRM

Bouquet et al. (2004) suggested that a wholly owned subsidiary is most favorable within the professional service industry. A wholly owned foreign entry mode includes two types of strategies: greenfield investment and an acquisition of a foreign firm or subsidiary. For most PSFs it is too costly and time consuming to build up a new brand and subsidiary within a foreign market. Therefore, we argue that an acquisition is the most common foreign entry mode within the professional service sector.

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acquisition leads to stress on the employees, which are caused by the uncertainty in the new environment, the cultural differences, and the differences in organizational structure and management styles. In some cases the employees can lose the identity associated with the acquired firm due to the different organizational culture. In other cases, an acquisition of a lesser known, smaller or less profitable firm by a better one can lead to feelings of superiority among the employees of the acquiring company. The uncertainty among the employees after the acquisition diverts the focus of employees from productive work to issues like job security, career path, new jobs and new teams. The acquisition causes changes in the employees defined career paths and future opportunities in the organization. Also the employees may suffer from the loss of identity, lack of information, anxiety, survival, lost talent, and family repercussions. These people-‐related areas of concern are also known as post-‐acquisition trauma (Tanure and Gonzalez-‐Duarte, 2007). Due to the post-‐acquisition trauma, it is argued that the acquisition leads to early retirements, resignations, and disengagement of key personnel, which are seen as the negative aspects of the acquisition. These losses can either help or hinder the post-‐acquisition integration (Tanure and Gonzalez-‐Duarte, 2007). Ulrich et al. (1989) argue that the ability to manage people-‐related changes is the most challenging issue during the post-‐acquisition stage and is, in reality, more important than dealing with systems and structural issues (Tanure and Gonzalez-‐ Duarte, 2007). To demonstrate the importance of HRM, Barros (2001) presented that more than 60 percent of acquisitions were said to fail due to problems related to the management of people.

In these radical changing processes within the firm, HRM needs to take a strategic role, because value creation within these processes depends on the successful management of people-‐related issues. Due to the knowledge-‐intensive and people-‐ centered characteristic of PSFs, HRM is argued to be most important. In the post-‐ acquisition phase, HRM will have to deal with different issues, such as terminations, talent retention, training, and the creation of a new culture that differs from that of acquired or even the acquiring companies (Tanure and Gonzalez-‐Duarte, 2007).

In this line of reasoning, we argue that a wholly owned foreign entry mode (i.e. an acquisition) has negative effects on the acquired employees. Employee termination and resignation are most common in the post-‐acquisition stage. Therefore, we argue that when a wholly owned foreign entry mode was used, an HRM department becomes more preoccupied with employee termination and resignation than with the need for learning and motivation. This suggests the following hypothesis:

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Hypothesis 5: HRM departments of professional service firms need to deal more with the

“negative aspects” (i.e. termination and resignation of employees) when a wholly owned foreign entry mode was used.

Within the post-‐acquiring stage, value needs to be created. Value creation means the transfer of strategic capabilities and the application of these capabilities. The challenge within the acquired company is to transfer the knowledge from the parent firm to the foreign subsidiary and apply them in order to create a competitive advantage. Due to the knowledge-‐intensive service characteristic and the barriers within the transfer of knowledge, this is seen as a challenging barrier that needs to be overcome. The transfer of strategic capabilities, organizational learning and organizational change depends on how HR issues are managed within the acquired company. As such, we argue that when a PSF uses a wholly owned foreign entry mode strategy (i.e. acquisition), the successful transfer of knowledge from the parent firm to the foreign subsidiary is seen as the main challenge to value creation. This suggests the following hypothesis:

Hypothesis 6: HRM department of professional service firms need to focus more on the

transfer of knowledge from the parent firm to the foreign subsidiary when a wholly owned foreign entry mode was used.

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between entry modes and staffing in the context of small Portuguese multinationals in Spain. They tested which international personnel competencies the employees must possess to be able to undertake management roles in a foreign market (i.e. Spain), and which entry mode is the most appropriate for their employees. Nevertheless, the Esperanca et al. (2006) study shows that firms, when entering a foreign market through a wholly owned mode, need more experienced and knowable employees.

Following from this, we argue that PSFs who enter through a wholly owned foreign market entry mode require more knowledgeable and experienced personnel and that acquired personnel need to be managed through knowledgeable and experienced expatriates. Further we argue that an ethnocentric staffing strategy is most compatible in terms of control, whilst both strategies exercise full control over the foreign subsidiary. Therefore, we argue that PSFs who choose a wholly owned foreign entry mode are more likely to choose an ethnocentric staffing strategy. This suggests the following hypothesis:

Hypothesis 7: Professional service firms that enter through a wholly owned foreign entry

mode strategy are more likely to choose an ethnocentric staffing strategy.

2.4.2. The effect of a joint venture foreign entry mode on HRM

The literature defined various reasons that firms form a joint venture. Harrigan (1985) argued that joint ventures possess superior competitive abilities due to the synergy of the combined owners. Schuler (2001) stated the most common reasons that for a joint venture are: to gain knowledge, rapid market entry and growth, access to local market channels, and to spread risks.

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performance and for commitment to the organizations, and recruitment), which can be seen as the more positive aspects of HRM. Schuler (2001) stated that the lack of success in joint ventures is “due to human resource issues such as lack of competent and motivated staff, staff not matched with the requirements of the competitive strategy, staff not socialized and committed to the joint venture itself, or staff not able to manage dual loyalties” (p.8). In this line of reasoning, Schuler (2001) argued that recruiting, selecting and managing senior staff could make or break the joint venture.

Therefore, we argue that the HRM department needs to deal more with the “positive aspects” when a joint venture foreign entry mode was used. This implies that when a joint venture foreign entry mode was used, the HRM department has to deal more with the requirements of employee training and recruitment than with the need of employee termination and resignation. This suggests the following hypothesis:

Hypothesis 8: HRM department of professional service firms need to deal more with the

“positive aspects” (i.e. motivation and recruitment of employees) when a joint venture foreign entry mode was used.

Through a joint venture mode of foreign entry, firms could improve or gain human capital or other forms of knowledge that is important for PSFs (Cascio, 1999). Knowledge and human capital are seen as the PSFs’ main asset. The transfer of knowledge within a joint venture is not without challenges, which can act as both a disadvantage and an advantage. However, after the starting phase, value needs to be created. Due to the fact that firms enter joint ventures to gain knowledge, value creation means the transfer of knowledge from the foreign subsidiary to the parent firm. Due to the knowledge-‐intensive service characteristic and the barriers within the transfer of knowledge, this is seen as a challenging barrier that needs to be overcome. The transfer of strategic capabilities, organizational learning and organizational change depend on how HR issues are managed within the joint venture. Therefore, we argue that when a PSF uses a joint venture foreign entry mode strategy, the main challenge to create value is the successful transfer of knowledge from the foreign subsidiary to the parent firm. This suggest the following hypothesis:

Hypothesis 9: HRM department of professional service firms need to focus more on the

transfer of knowledge from the foreign subsidiary to the parent firm when a joint venture foreign entry mode was used.

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Further, the staffing policy that firms imply is critical. Schuler (2001) argues that the success of the joint venture depends on the staffing strategy, as well as getting the right people in the right places. Konopaske et al. (2002) studied the relationship between foreign entry modes and staffing within Japanese multinationals and found that when a joint venture was used to enter a foreign market, subsidiary performance was higher when a polycentric staffing strategy was used. Esperanca et al. (2006) found that joint venture foreign entry mode requires personnel that have country specific knowledge such as knowledge of foreign languages and foreign culture. In contrast, younger more adaptable personnel were more associated to a joint venture mode of entry. This implies that joint ventures need to be staffed with local personnel. Therefore, we argue that PSFs that enter a foreign market through a joint venture mode of entry are more likely to choose a polycentric staffing strategy. This suggest the following hypothesis:

Hypothesis 10: Professional service firms that enter through a joint venture foreign entry

mode strategy are more likely to choose a polycentric staffing strategy.

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3. ILLUSTRATIVE CASE STUDY

The next section shows an illustrative case study to explain the importance of HRM within the internationalization strategy of professional service sector. The purpose of this research is to generate information on how HRM may influence the choices of foreign entry modes and vice versa. The data collection (methodology) underlying this illustrative case study can be found the appendix A.

3.1. The Corporate Real Estate Service Sector

In the last couple of decades, firms within the corporate real estate service sector have expanded their area of operations beyond local markets (Bardhan and Kroll, 2007). In 2014, corporate real estate companies worldwide (around 25,000 companies operating in the commercial field) generated annual revenue of $30 billion (Weber, 2015). Bardhan and Kroll (2007) state that technological changes, the increasing opening up of formerly closed economies, the liberalization of business licensing, taxation and property ownership regulations are the main factors that have led to the transformation of this industry. Correspondingly, manufacturing firms and other large consumers of real estate are becoming increasingly global. Corporate real estate service firms follow these large consumers of real estate to prevent their competitors from “stealing” their clients and therefore expanding their footprints. Further, client groups are searching for corporate real estate service firms who can provide them with global service. However, despite rapid globalization, real estate is still primarily influenced by local factors (Bardhan and Kroll, 2007). Examples for these local factors are national regulation, local networks, culture and other local institutions, which play a significant role in providing services in the real estate sector. These local factors ensure that real estate services remain highly knowledge-‐intensive. However, this knowledge-‐intensity, as well as high degrees of intangibility, heterogeneity and inseparability means that real estate sector services are not easily exportable and need a high degree of face-‐to-‐face contact to provide the client with the service. The knowledge-‐intensity is embodied in the employees of the corporate real estate service firms and therefore HRM decisions are highly important when internationalizing. The quality of the service provided need to be the same globally, and therefore corporate real estate service firms are expected to have high staffing standards, which influences the decision to internationalize and the choice of entry mode.

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The corporate real estate service firm that has been chosen to for this illustrative case study has been providing property services since 1784. A European joint venture between three companies from England, France and the Netherlands in 1993 was the beginning of the international expansion of the firm. Throughout the years, they expanded through organic growth, partnerships and targeted acquisitions. The following table shows how this corporation expanded throughout the years.

History

1784 Beginning in England

1993 Expansion in Europe through a joint venture

1995 Expands to South Africa through a joint venture

1998 Expands through an acquiring into the property services business

1999 Expands to Asia through an equity exchange with Asian partners

2004-‐2008 Global expansion

Throughout 2004, continued its global growth with the opening of offices in India and Bahrain and its continued expansion into China.

These years saw global growth across India, the Middle East, China, the United Kingdom, Canada and the USA.

2006 Expanding to North America through an acquiring of 50% interest

2007 Further expansion

In July it acquired the business and assets of a privately owned UK-‐based property consultancy. The acquisition reinforced the company’s position as a top global property consultancy, ranked in the top two in the UK and top three in Europe.

Also grew its Australian operations in July, with the acquisition of 100% of a company specialist industrial and logistics businesses, located in North Sydney.

In August, the company acquired a privately owned commercial real estate adviser based in Stockholm, Sweden. This transaction augmented the company’s position as one of Europe's top three global advisers in commercial real estate.

In November the company acquired Canada's largest independently owned, full service commercial real estate services company, which has owned affiliate offices across Canada and provides a comprehensive range of commercial real estate brokerage services covering all commercial real estate asset classes such as office, industrial, capital markets, investment, retail, hospitality and corporate services.

2009 The company increases its stake in the Sweden business to 100%

INTERNATIONALIZATION OF PROFESSIONAL SERVICE FIRMS: EXPLORING THE RELATIONSHIP BETWEEN HUMAN RESOURCE MANAGEMENT AND THE CHOICE OF ENTRY MODE