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Many studies have examined the choice between different types of equity and non-equity modes; however, none has focused on the choice between different types of non-equity modes that service-firms employ routinely. This study develops a theoretical framework based on the "organizational capability" perspective to explain the choice between two non-equity modes-- franchising and management-ser
vice contracts. While previous studies are based on the premise that foreign-market entrants choose a mode-equity or non-equity-that offers them most control given their particular circumstances, the premise of this study is that foreign entrants choose a non-equity mode that, in addition, offers effective transfer of the firm's capabilities to the host-country venture.
INTRODUCTION
Non-equity modes, defined as modes that do not entail equity investment by a foreign entrant, are becoming increasingly popular among service firms for organizing overseas ventures/operations. Non-equity modes are especially popular among consumer-services firms (such as hotel and restaurant firms) as compared to professional-services firms (such as consulting firms) (Erramilli, 1990). Non-equity modes are essentially contractual modes, such as leasing, licensing, franchising, and management-- service contracts (Dunning, 1988).
For many service firms desirous of entering foreign markets, an important question is not how to choose between different equity and non-equity modes but how to choose between different non-equity modes for organizing their operations in the foreign markets. While several previous studies have examined the choice between equity and non-equity modes for manufacturing (e.g., Gatignon and Anderson, 1988; Agarwal, 1994; Tse, Pan, and Au, 1997; Arora and Fosfuri, 2000; Pang and Tse, 2000) as well as service firms (e.g., Agarwal and Ramaswami, 1992; Erramilli and Rao, 1993; Fladmoe-Lindquist and Jacque, 1995; Erramilli, 1996; Contractor and Kundu, 1998a; Contractor and Kundu, 1998b), the extant literature does not offer a theoretically sound-and empirically corroborated-framework for how service firms could choose between different types of non-equity modes. The present study attempts to address this issue in the context of the multinational hotel industry. The reason for choosing this industry is that hotels are renowned for their use of non-equity modes (Contractor and Kundu, 1998b). In the hotel industry, non-equity modes account for 65.4% of multinational properties worldwide (Contractor and Kundu, 1998b). The two most commonly employed non-- equity modes by the hotel industry are franchising and management-service contracts (MSC)....