Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization

INTMAN-00546; No of Pages 11 Journal of International Management xxx (2015) xxx–xxx

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Journal of International Management

Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization Chris R. Meyer a,⁎, Bruce C. Skaggs a, Sudhir Nair b, David G. Cohen c a b c

Isenberg School of management, University of Massachusetts at Amherst, Amherst, MA, United States International Business, Peter B. Gustavson School of Business, University of Victoria, Victoria, BC, Canada Management and Business Department, Skidmore College, Saratoga Springs, NY, United States

a r t i c l e

i n f o

Article history: Received 28 February 2014 Received in revised form 21 March 2015 Accepted 13 April 2015 Available online xxxx Keywords: Customer interaction uncertainty Internationalization Knowledge deployment Services

a b s t r a c t Uncertainty in production processes has proven to be a useful lens through which to explain the international entry mode choices of large manufacturing firms. This paper adapts that approach to suggest that service firms determine their internationalization mode based on the uncertainty arising from their interactions with customers. In our model, service firms counter customer interaction uncertainty by deploying knowledge in two primary forms: in processes and procedures or within workers themselves. We suggest that the location of this knowledge deployment impacts the choice of which mode firms will use when they deploy their services internationally. Also, befitting the greater alternatives available for conducting business internationally for service firms, we explore and model a wider range of modes than traditionally suggested by manufacturing-centric scholarship. © 2015 Elsevier Inc. All rights reserved.

1. Introduction Researchers have long sought to explain the internationalization of firms. They have done so by employing various theories originally used to explicate entry mode choices of manufacturing firms, including the Resource Based View (Herrmann and Datta, 2005; Hult and Ketchen, 2001), the Uppsala/Stage model (Johanson and Vahlne, 1990), the network model of internationalization (Athanassiou and Nigh, 2002), the Dunning Eclectic Model (Dunning, 1980), and transaction cost economics (Erramilli and Rao, 1993; Hennart, 2010). This scholarship, focused on the location and governance of production, has greatly improved our understanding of the internationalization processes of manufacturing firms. The literature described above has not, we argue, paid sufficient attention to the specific nature of service production. In particular, international operations of services are driven not by the ownership of physical assets or the distribution of physical goods, but rather by the service process itself. These processes involve the participation of the customer (Normann, 1984) and the uncertainty that stems from that interaction (Gittell, 2002; Skaggs and Huffman, 2003). However, the service internationalization literature ignores two strategic choices made by service firms with regard to their processes: the level of customer interaction uncertainty allowed into the process (Jones, 1987; Larsson and Bowen, 1989) and where and how the service firm chooses to locate critical knowledge resources in order to contend with that uncertainty (Shostack, 1987). Both of these factors are critical to service firm operations, and both are at the center of how service firms perform (Skaggs and Huffman, 2003; Skaggs and Youndt, 2004). Therefore, their omission in the service internationalization literature is a significant one. Moreover, it should be noted that neither of these is of major concern to manufacturers — they are largely only of concern to service firms.

⁎ Corresponding author. E-mail address: [email protected] (C.R. Meyer).

http://dx.doi.org/10.1016/j.intman.2015.04.003 1075-4253/© 2015 Elsevier Inc. All rights reserved.

Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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In addition to paying too little attention to the nature of service transactions, the internationalization of services literature has not fully recognized that services can be internationalized in different ways than manufacturing (Cattaneo et al., 2010). Manufacturing takes place in a fixed location separate and apart from the use of the product, but service production occurs wherever the service provider is located and the customer is involved in the production process. This means that service firms can temporarily transport the firm (in the form of its workers or its codified knowledge) across borders to the customer, or the customer can come across borders to join in the service process. In what follows, we develop a model of service firm internationalization based on customer interaction uncertainty in the service transaction (Skaggs and Huffman, 2003) and the service firm's deployment of knowledge in the face of that uncertainty. Our model relies on the Resource-based View (Barney, 1991; Herrmann and Datta, 2005) and the Knowledge-based View of the firm (Grant, 1996; Nonaka and Von Krogh, 2009), in that service firms can employ two resources to handle customer interaction uncertainty: they can structure their production process to adjust the risks of disruption from their customer interactions (Skaggs and Huffman, 2003) or they can use human capital to deal with the uncertainty (Pennings et al., 1998; Skaggs and Youndt, 2004). We argue that these two choices are actually two sides of the same coin — with the coin being the firm's knowledge resources. Processes and procedures represent knowledge that has been codified into organizational routines (Kogut and Zander, 1992; Stan and Vermeulen, 2013). It is a form of explicit knowledge that details in advance how the firm is to deal with uncertainty. On the other hand, people possess productive knowledge (Hitt et al., 2001) that they can use to make decisions as to how best deal with the customer uncertainty that confronts them (Skaggs and Youndt, 2004). Employing Shostack's (1987) model for service production we theorize that the method of internationalizing for service firms is driven by a strategic choice about where and how to locate knowledge resources (i.e., in process structures or people), which is in turn driven by the firm's strategic choice about the level of customer interaction uncertainty it wishes to tolerate. The model includes two additional elements that relate to the deployment of knowledge in an internationalization context: the need for a permanent local presence and the uniqueness of host country requirements. The paper begins with a brief review of the service internationalization literature and our definition of internationalization of services. Then, since one cannot explain a phenomenon without being able to effectively describe that phenomenon, we next construct a typology of service firm internationalization modes, combining the four modes of service internationalization identified by the WTO with the entry modes used in the internationalization literature. We then discuss customer interaction uncertainty, knowledge, and service production literatures. We link these ideas to develop propositions relating to internationalization for service firms. 2. Internationalization of services The organizational literature examining internationalization of services has largely focused on two areas. One focuses on aspects of services that differentiate them from goods and then describes the commensurate impact of internationalization on those aspects. The second area focuses on the international aspects of global commerce without specifically taking into consideration the characteristics of services. We briefly examine some key exemplars in each stream. In the first stream, early work by Carman and Langeard (1980) examined the impact of intangibility and simultaneity of consumption on international operations of firms. Lovelock and Yip (1996) went beyond the classic IHIP (Intangibility, Heterogeneity, Inseparable and Perishable) characteristics of services (Fisk et al., 1993) and presented eight characteristics of service firms that distinguish them from pure product firms. They then examined the consequences of these for firms seeking to globalize. Scholars such as Cloninger (2004) then delved more deeply into individual characteristics (such as intangibility) in service firms' value creation internationally. More recently, Liu et al. (2011) examined how service characteristics can help explain location of international outsourcing, and Elango et al. (2013) used service firms as the context to examine the impact of international diversification on risk evaluations of firms. The second stream has emphasized issues such as comparative advantage, quantum of investment, entry mode (in the form of governance), and distance, rather than the specifics of service firm internationalization, treating services as a context rather than a phenomenon. The Uppsala/Stage model (Johanson and Vahlne, 1990), for example, describes international expansion as a process of organizational learning — as the firm gains experience abroad it changes the way it operates internationally. However, this important work did not specifically address the structure in which service firms apply knowledge, as our model does below. There are other examples as well. Erramilli and Rao (1993) used an adaptation of TCE to explain entry mode of firms and presented a fine-grained analysis of level of control in entry modes (full vs. shared control). This is problematic, though, in that TCE, as conceptualized and applied by Williamson (1985), applied to intermediate market firms, and not service firms. Contractor et al. (2002) indicated that there may be a three stage sigmoidal relationship between entry into international markets and firm performance. Chen (2006) focused on the impact of the different aspects of distance (cultural, economic) on service offerings to examine the impact of creating appropriate value chains to deliver the focal services. 2.1. What is missing? The considerable body of work has helped deepen our understanding of the issues service firms face when conducting business internationally. However, both streams are limited by their conception (taken largely from the internationalization of manufacturing literature) of how service production processes actually operate and what it means for service firms to internationalize. An important missing piece, for example, is when capital intensive service firms internationalize by having customers cross national boundaries to come to the home country of the service firm in order to consume a service. This occurs when patients go abroad for Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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medical tourism or students go abroad for an international education. This mode of internationalization is not part of our academic literature. A second common example of service firms operating across borders in a fashion that doesn't take place with manufacturers is where a service provider travels temporarily to the host country of a client. This prevalent practice for consultants, lawyers, investment managers, and many others is not described by any of the traditional manufacturing-based entry modes. A plant cannot pick up and move from country to country, but an accountant can and does. Speaking broadly, the lack of a more holistic view of international services stems from the early adaptation of classic work on internationalization of physical goods and the resultant focus on definitions of MNEs, even while analyzing service firms (e.g., Aharoni, 1971; Behrman, 1974). Even when there has been specific focus on international service offerings, the discussion has adopted frameworks developed in the traditional MNE literature. In the extreme, scholars have suggested that “all MNEs are ultimately service MNEs” (Boddewyn et al., 1986:51). Others have tangentially addressed the locational aspects of services but have then focused on the offshoring of work rather than the locational aspects of the consumption of services (Rugman and Verbeke, 2007). Clearly, new models are needed that address how service operations are structured and managed, and they must address service internationalization by describing the ways in which service firms actually internationalize. While management scholarship has relied too heavily on past work relevant to manufacturers, policy work done by the WTO has moved to accurately quantify international trade in services. (It addresses the two examples noted above.) Building on their empirical work in capturing international services (MSITS, 2010), we define international services as “those services that necessitate the crossing of at least one national boundary by either the service provider or the consumer of a focal service, regardless of whether the service is delivered in the service provider's or consumer's country”. This definition informs our paper. It is reflected in the internationalization strategies for service firms that we see as the outcomes of the model (described next, below). It also fits with the key drivers of the model– customer interaction uncertainty and knowledge deployment — which we argue are critical to understanding service production across borders. We build on the typology developed by the WTO since there has not been extensive research in the organizational academic literature that examines international services (Francois and Hoekman, 2010) as opposed to services per se. For example, the literature has developed typologies for services based on the nature of the service and its recipient (Lovelock, 1983); the delivery process (Schmenner, 1986); dimensions of the service (Sasser et al., 1978); level of contact with customer (Chase, 1978); and interorganizational relationships (Laing and Lian, 2005) to name a few. The economics literature in the international trade, growth and policy streams has more recently focused on this WTO typology for international services (for example, Brown and Stern, 2001; Colecchia, 2000). However, the General Agreement on Trade in Services (GATS), which provided definition of international services for data collection by WTO member nations, only came into force in 1995; and thus there has been limited time for scholars to develop alternative typologies in the area of international services. We have therefore adapted the WTO typology to build on what is currently missing in the organizational literature. Lastly, the service internationalization literature has lacked for explicit links to strategic decisions that service firms make. Our contribution in this vein stems from our model linking customer interaction uncertainty, a key strategic variable for service firms (Skaggs and Huffman, 2003), and the strategic resources they deploy in order to compete (e.g., Barney, 1991; Herrmann and Datta, 2005; Kirca et al., 2011) in the form of knowledge, to the mode of internationalization that service firms pursue. In what follows, we model a service firm's choice of internationalization mode by utilizing the four different types of service internationalization identified by the WTO. These are cross border supply, in which the service provider and customer both remain in their home countries (Type 1), such as the use of software or an internet-based service; consumption abroad, in which the customer travels to the home country of the service provider (Type 2), such as medical or recreational tourism; commercial presence, in which the service provider has a permanent presence in the host country (Type 3), such as a consulting or legal firm with a host country office; and

Table 1 A typology of service internationalization strategies for providing services across national boundaries, modified by type of host country presence (based in part on Cattaneo et al., 2010). Internationalization strategy

Description

Critical knowledge

Potential customer interaction

Examples

1 (Crossborder supply)

Service supplied in one country from the territory of another

Home country

2 (Consumption abroad)

Service supplied to a customer from one country who has traveled to another country

Home country

A custom software package is written in one country and sent to a customer in another country. A patient travels to another country for health care.

3 (Commercial presence) 3(L) — Licensing/franchising 3(J) — joint venture 3(S) — subsidiary 4 (Movement of natural persons)

Service supplied in one country by a permanent commercial presence of a firm from another country. Service supplied in one country by a natural person temporarily present in another country.

Either home or host country

Low (no direct contact between customer and service provider) Medium to high (customer is temporarily in the home country; can be a onetime interaction or a continuing relationship) High (service provider and customer are co-located and can have an ongoing relationship)

Both home and host country.

Medium (provider is only temporarily in the host country)

An accounting firm based in one country serves clients at an office in another country. A consultant travels from one country to another in order to provide services.

Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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movement of natural persons, in which the service is provided by a person temporarily coming into the customers home country (Type 4), such as an architect or consultant that maintains no permanent presence except in their own home country. The typology is described in tabular form in Table 1. We suggest the mode of choice in entering a new market will be driven by the strategic choices they made in establishing their business model; specifically, the extent to which they allow customer involvement in production and where they locate knowledge resources within the firm. These are endogenous factors that the firm has agency over. Thus, for example, a fast-food restaurant, which limits customer interaction by having a set and simple menu and which locates key knowledge away from its customer interaction, is likely to use a different approach to internationalization than a gourmet restaurant with much higher customer interaction and knowledge located at the point of transaction. 3. Internationalization in services 3.1. Uncertainty in internationalization Much of the extant internationalization research has turned on the need of manufacturing firms to avoid uncertainty in their production process. Thus, for example, research using the lens of Transaction Cost Economics (Williamson, 1981, 1985) has suggested that firms choose an international governance mode that minimizes the transaction costs of finding foreign partners, negotiating workable contracts and then enforcing them (Hennart, 2010). MNEs move abroad in order to internalize externalities that otherwise might allow partners to overprice or undersupply (Hennart, 1993, 2010). However, setting aside the argument that TCE is not a particularly practical theory (Gosha and Moran, 1996), this work is not readily applicable to service firms for at least two reasons. First, the risk of opportunism that could harm the firm is greatly reduced because with service firms there is typically an information asymmetry that favors the firm (Nayyar, 1993). Second, and more importantly, service firms are more concerned with the uncertainty due to interacting with customers (Larsson and Bowen, 1989). The service firm is not able to internalize the customer, of course, so that the make or buy decision is moot. Williamson himself recognized this limitation, noting that his own work focused on intermediate product market firms (Williamson, 1985). Further, a critical assumption implicit in all manufacturing-centric approaches is that production can be owned or controlled by the firm and buffered from the external environment. Where possible, this protection of the core value-producing activities of the firm is desirable (Thompson, 1967). In order for buffering to take place, though, the production and delivery of the product must occur separately from use of that product. This separation is largely unobtainable for service production processes (Mills, 1986). The customer must order the meal and eat it; the patient must describe his or her ailment and cough when requested to cough; the customer must be measured for his or her bespoke suit; and the client must participate in his or her defense. In terms of internationalization strategies, there are two fundamental ramifications of these differences. First, the very nature of delivering services to customers across borders is different. The process may need to be brought directly to the customer, the customer can be brought to the process, and the relationship between producer and customer is likely to be much more dynamic and flexible. Thus, the focus on ownership and movement of property (either for production or as the final good to be sold) that drives manufacturing work will not be applicable. And second, the core uncertainty that must be understood and dealt with in order to ensure smooth production will be different. For service firms, the critical uncertainty they face is not the transacting of physical goods in the intermediate market; rather, it is the transacting of intangible services to the final customer (Mayer et al., 2009). As a result, the critical type of uncertainty that these types of organizations face comes from their interaction with customers (Skaggs and Huffman, 2003). Moreover, service firms cannot use the traditional range of entry modes to shield themselves from this uncertainty, for it is nonsensical for a firm to “buy” the final customer, and the firm does not even ‘own’ much of the means of production — its workers (Youndt and Snell, 2004). Given this, we build our model based on the main type of uncertainty that service firms encounter: the uncertainty due to interactions with customers (Skaggs and Huffman, 2003). Since knowledge is the resource needed to contend with uncertainty (Galbraith, 1974; Skaggs and Youndt, 2004), we then suggest that this uncertainty will elicit responses from firms that will drive the location of their knowledge resources and ultimately impact the way in which service firms internationalize. 3.2. Customer interaction uncertainty and knowledge Uncertainty must be addressed by firms in many forms and over a wide variety of domains (Galbraith, 1974; Kreiser and Marino, 2002). It can arise due to suppliers, partners, customers, markets, and more (Martin et al., 2015). Service focused scholarship has long recognized that for service firms, a key area of uncertainty is the uncertainty that comes about as firms interact with their customers (Argote, 1982; Gittell, 2002; Larsson and Bowen, 1989; Skaggs and Huffman, 2003; Tansik, 1990). Manufacturers are able to buffer the core of their work from customers (Thompson, 1967) and then simply deliver the product to the consumer. In so doing, any uncertainty due to customer idiosyncrasies, etc., is kept out of the production process. Manufacturers may opt to customize their products to consumer tastes, but even as they do, the consumer doesn't interact with the actual production. Jones (1987) wrote an early description of customer-induced uncertainty, defining it as the degree to which customer interactions are non-standard. His core focus was at the transaction level, noting that, for service firms, “transaction uncertainty exists to the degree that organization-client transactions are unstandardized or unpredictable” (1987: 200). Larsson and Bowen (1989) suggest a definition of customer interaction uncertainty that consists of two elements. The first is the range of alternatives the firm offers. This is an intuitive parameter, as the more alternatives the firm must be prepared to contend with, Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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the greater the uncertainty with regard to the customer's interaction with the service process. The second is the extent of their interaction with clients. Some services are performed completely in the customer's presence and with their ongoing input. In such cases, the varying nature of humans will simply create more uncertainty for the service firm. If the firm limits this interaction through greater capital intensity, such as they might do by using technology as an interface and delivery mechanism, this human-based variance will be much more limited in its impact on the process. Their model asserts that these two elements constitute the critical input uncertainty for the service production system. Scholars have subsequently shown that service firms deploy a variety of resources to address customer uncertainty. Ultimately, the correct fit between customer uncertainty, strategy, and resources improves service firm performance (Skaggs and Huffman, 2003). Customer interaction uncertainty is all the more important for service firms because, unlike most forms of uncertainty which are exogenous, “the nature of customer-induced uncertainty is taken as a strategic variable rather than as the target of an attempt to affect an organization design to eliminate it” (Tansik, 1990: 59). Service firms determine the level of customer uncertainty they will allow as a strategic decision. For service firms customer uncertainty is not necessarily something to be avoided or removed, but rather is to be understood and managed as a strategic element. Service firms choosing to face low levels of customer uncertainty have few contingencies to be concerned with. These firms are able to deploy lesser levels of resources and utilize simple production processes. The service interactions are brief and straightforward. Most retail firms, for example, are able to allow very little uncertainty, providing rigorous guidelines for employee interactions with customers (Mayhew and Keep, 1999). Choosing a process to allow for considerable customer interaction uncertainty, though, entails deploying knowledge. According to the Knowledge-based View of the firm (Grant, 1996), heterogeneous knowledge resources are the key to firms' competitive performance (Arend et al., 2014). This is consistent with the VRIN model, where knowledge resources that are valuable, rare, inimitable, non-substitutable, can be the basis for sustained competitive advantage (e.g., Barney, 1991). Moreover, knowledge is the critical organizational resource for dealing with uncertainty (Galbraith, 1974; Spender and Scherer, 2007; Thompson, 1967). By studying the deployment of knowledge in the service production process we can break down the problem of how firms respond to customer interaction uncertainty and build a model for how it impacts the resources and structure of service firms. Galbraith (1974) noted that firms cope with uncertainty using knowledge in two broad forms: they can enact decision rules or rely on human judgment. Thompson (1967) described something similar when he spoke of computational and judgmental decision-making. Reflecting this dichotomy, Grant (1996) and other scholars have thus contrasted tacit knowledge, which is deeply embedded in humans, and explicit knowledge, which can be articulated and shared. Both can be useful in the face of uncertainty (Cowan and Foray, 1997; Nonaka and von Krogh, 2009). Knowledge can remain in humans or be articulated and embedded into a firm's processes (Argote and Ingram, 2000). For service firms, where there is little to no machinery in which to embed the knowledge, embedding knowledge in the process involves carefully describing and enacting a set of codified procedures. Work manuals, training courses, and basic instructional sheets are common ways in which service firms enact their production processes using decision rules. The use of technology offers the same, as firms can have service workers process uncertainty by entering information and responding to a sequence of computerized prompts, for example, that leave substantial decision making to the software. The service firm's decision of where to embed knowledge will be based on a series of strategic decisions around how the firm wants its service delivered and what level of investment in knowledge resources it wants to make. Knowledge embedded in humans is more flexible, offering easier adaptation and customization (Skaggs and Youndt, 2004), but knowledge that has been codified and recorded is more divisible and is more easily shared (Kogut and Zander, 1992). Thus the location of the firm's knowledge in people or processes must work in concert with the type of production that the service utilizes. Because critical resources easily imitated or acquired by competitors are a poor source of sustainable competitive advantage (Barney, 1991), we suggest that how a firm chooses to deploy its knowledge will be an important consideration for its mode of internationalization. In line with other work linking firmspecific strategic resources and capabilities and internationalization (e.g., Kirca et al., 2011), our model takes these strategic decisions – the extent of customer interaction uncertainty and the type and location of knowledge deployed in the production process – and applies them to the decisions involving international expansion.

3.3. Knowledge and service production Researchers have described service firm production processes in a variety of dimensions, such as replication or customization (Winter and Szulanski, 2001); mass production or high involvement (Batt, 2002); their levels of routineness, complexity and interactiveness (Liu et al., 2011); and complex or divergent processes (Shostack, 1987). Shostack's work is particularly useful for consideration of customer interaction uncertainty, as the two types of processes she describes reflect the deployment of knowledge in either the process or the workers. Shostack describes complex processes as having numerous steps and pre-defined, pre-engineered pathways in order to account for contingencies. Complex processes embody knowledge in the form of procedures that drive process decisions based on inputs and events that take place as the process proceeds. Decision trees would be analogous to complex processes. Enacting such a process structure brings precision and regularity to service production. Audit processes, for example, are careful, lengthy sets of prescribed steps, as opposed to consulting work, which may progress in a number of different ways. Audits have a clear beginning, middle, and end, providing the consistency and precision that is required. Consulting engagements, conversely, typically do not contain analogous specific steps in a sequence. Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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On the other hand, divergent processes have a “high level of executional latitude” (Shostack, 1987: 35). Process variance is accepted, and contingencies are dealt with as they arise by using the judgment of workers. The service production process still requires knowledge and skill in order to deal with uncertainty, but the service process itself is not pre-engineered and knowledge remains in the firm's employees. Divergent processes allow for a wide variety of pathways and outcomes. We suggest that the use and location of these knowledge resources will impact how service firms conduct business internationally. We suggest that service firms will select their method of internationalization based on their strategy to deploy and control the knowledge assets they use to contend with customer interaction uncertainty (i.e., complexity and divergence). Having the requisite level of control over and the optimal form of deployment of the knowledge assets will minimize both costs and the risks of process disruption. Process disruption could come from either the appropriation of knowledge by competitors or by the misapplication of knowledge. The requisite form of control will also maximize performance. The full model can be seen in Fig. 1, below.

4. A model of service internationalization In the most basic scenario, in a business model that allows service delivery with low customer interaction uncertainty, knowledge requirements are low as well, and service production processes are simple. The risks of process disruption are small as is the risk of losing control of critical knowledge resources, since few knowledge resources are deployed at the point of interaction. Critical knowledge resources, such as brand management, can be kept and managed in the home country where they are better protected. Decisions with regard to internationalization mode will be typically made based on the need for control vs. the costs of such control (Erramilli and Rao, 1993). In the case of low customer interaction uncertainty, absent the need for high levels of control, the choice of an internationalization mode will be driven by a desire to avoid unnecessary investments in high control structures with greater legal, HR, real estate, and other related costs. Additionally, such firms would want to avoid making unnecessary commitments, expanding internationally with a “light footprint” such that the expansion could be easily reversed if it were not profitable. Accordingly, we expect that firms with low exposure to customer interaction uncertainty will either simply send their services into the host country from their home country or will use contractual means of internationalization such as joint ventures or franchising. The determination between those two types of internationalization, we suggest, will depend on whether or not the firm needs a permanent presence in the host country. The need for such a permanent presence can stem from the nature of the service relationship itself, i.e., if it is an ongoing or one-off service, or from marketing, competitive, or regulatory considerations.

Model and Propositions Preposition

Customer Interaction Uncertainty

Permanent Local Presence Needed

Service Process

Unique Local Requirements

Range of Product Offering

Internationalization Strategy

1a

Low

No

Neither Complex nor Divergent

N/A

N/A

1

Yes

Neither Complex nor Divergent

N/A

N/A

3J or 3F

1b

Low

2a

High, with High Interaction

No

Complex

N/A

N/A

4

2b

High, with High Interaction

Yes

Complex

N/A

N/A

3S

3

High

N/A

Complex

Yes

N/A

3S

4

High, with Limited Interaction

N/A

Complex

No

N/A

2 or 4

5a

High, with High Interaction

N/A

Divergent

N/A

Narrow

2

5b

High, with High Interaction

N/A

Divergent

N/A

Broad

3S

Fig. 1. Model and propositions.

Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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Proposition 1a. Service firms with business models featuring low levels of customer interaction uncertainty without the need for a permanent presence in the host country will be more likely to do business using a cross-border supply model (Strategy 1). Proposition 1b. Service firms with business models featuring low levels of customer interaction uncertainty and the need for a permanent presence in the host country will be more likely to do business using joint ventures or franchising (Strategy 3(J) or 3(F)). Next we discuss internationalization choice for service firms that do incorporate substantial customer interaction uncertainty into their business model. We divide them into two forms, using Shostack's (1987) process types (complex and divergent), and suggest that the level of control these firms require in their internationalization mode will therefore depend on where they store their process knowledge and the location in which they deploy it. 4.1. Internationalization strategy: complex service processes Where customer interaction uncertainty is high, firms will deploy knowledge resources using complex and/or divergent service processes. Firms that utilize complex service processes embed knowledge in the process, trusting the rules and codified decision criteria to provide the adherence to production standards that their business requires. This captured process knowledge can be documented and thus it can also be distributed or shared across distances (Kogut and Zander, 1992). Service firms using high levels of process knowledge are thus able to deploy this knowledge either in the home or host country, for processes can be engineered in one location and carried out in another (one of the key benefits of codified knowledge). If such a firm so chooses, key portions of the uncertainty may be dealt with in the home country with some or all of the interaction taking place remotely. For example, a firm might offer a highly sophisticated analytical service, but do so with software that runs and is safely maintained in their home country. However, where firms need to have their process knowledge deployed in the host country, greater control would be needed abroad in order to ensure continuity in the service production. We suggest that two factors will drive the decision as to whether to locate this codified knowledge (i.e., a complex process) in the home or host country: the extent of the customer interaction and the uniqueness of the local requirements for the service. Customer uncertainty has been defined as consisting of two additive elements: the range of alternatives offered and the extent of the customer interaction (Larsson and Bowen, 1989). While Bateson suggests that extensive interaction results in greater uncertainty due to “the diversity and unpredictability of consumers” (2002: 111), even firms that decide to accommodate a wide range of customer demands by limiting interaction would still face a high degree of customer interaction uncertainty. In either case, the firm would require the deployment of substantial knowledge resources in order to cope with this uncertainty. Even where firms have sought to build much of their process around codified knowledge (i.e., by using a complex service process), they must determine how much to interact with clients along the way. In architecture, for example, a firm might meet initially with a client to learn their requirements and then severely limit communication while the drawings are developed, meeting with the client again only to present the final product. Conversely, they might meet with clients on a regular basis as the project progresses, wherein each meeting would involve some level of uncertainty that would impact production of the service. Gadrey and Gallouj (1998) describe a very similar choice in management consulting work. Thus, the firm's strategic decision with regard to the extent of their customer interaction will impact the decision as to whether to locate their process knowledge at home or abroad. Firms that choose to offer extensive customer interactions will be more likely to place their process and their process knowledge in the host country. Those that limit their interactions would be more apt to maintain their process and key knowledge in the home country, where it is more easily protected and/or controlled. As with the previous set of propositions, this need or lack of need for a permanent host country presence will subsequently impact the choice of internationalization strategy. There are two strategies for internationalization in the model that would suit these purposes. Firms will either use Strategy 4, exposing knowledge in the host country only temporarily, or they will be permanently present in the host country, but will use full subsidiaries (Strategy 3(S)). Either strategy accomplishes the objectives generated from utilizing this combination of customer interaction uncertainty and a complex production process. Proposition 2a. Service firms that choose to allow high levels of customer interaction uncertainty, including high levels of customer interaction, and that utilize a complex production process without a permanent presence in the host country will be more likely to do business by sending in a service provider from the home country (Strategy 4). Proposition 2b. Service firms that choose to allow high levels of customer interaction uncertainty, including high levels of customer interaction, and that utilize a complex production process with a permanent presence in the host country will be more likely to do business by owning their international offices (Strategy 3(S)). The existence of unique local requirements may also impact the location of process knowledge for firms using complex processes. Unique, specific local requirements dictate that the service be performed according to local standards or rules. Accounting work and financial services, for example, are typically subject to host-country laws and regulations. As noted in the example of medical tourism, medicine is not always bound in this way. In these cases, while some knowledge may be kept in the home country, substantial firmspecific expertise will be needed locally in the host country. In such cases substantial process knowledge would be located in the host country, with a commensurate need for higher control levels in order to protect it from appropriation or misapplication. A service that can be performed using codified process knowledge to generate a globalized service product will be less likely to need process knowledge located in the host country. This local requirement's impact on the location of process knowledge Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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deployment will also subsequently impact the internationalization strategies used for complex service processes. For example, disease is not a locally specific phenomenon, so where the ability to diagnose remotely exists, in laboratory processes and such, there is little need for local control of a legal entity. Conversely, financial transactions are typically subject to rigorous local laws and regulatory review. Such firms need processes in place to ensure that customer transactions are handled properly. It is this combination of substantive process knowledge assets being deployed along with the need to satisfy locally specific requirements that drives the internationalization strategy in these cases. These firms, we suggest, will use an internationalization strategy requiring a high level of control within the host country itself and that provides close contact with and adherence to those local requirements. Proposition 3. Service firms that choose to allow high levels of customer interaction uncertainty using complex production processes with unique locally specific requirements will be more likely to do business using fully staffed, fully-owned entities in the host country (Strategy 3(S)). The converse of Propositions 2a, 2b and 3 is a scenario in which service firms that utilize complex processes may not need a permanent international presence. For their strategic choice with regard to customer interactions, such firms would have determined to allow substantial customer interaction uncertainty into their process by accepting a wide range of demands, but not to allow constant interaction with the client. Additionally, absent the second condition noted above, i.e., if such firms did not face substantial unique local requirements, service firms using complex production processes would be able to employ one of two internationalization strategies that offered them the ability to utilize and protect their knowledge resources in a manner that minimizes expense, investment, and commitment. These firms could eschew a full foreign subsidiary and simply either deploy temporary knowledge resources in the host country or force customers to come to them in their home country. High levels of control over the knowledge resources would still be in place, but at a lower cost. In practical terms, such firms in the first scenario might send in an employee for a temporary assignment and/or engage an agent in order to help facilitate the provision of the service. An architect facing few locally specific requirements that limits their interaction with customers might have a representative office that is little more than a storefront with a meeting room, for example. In the second scenario, of course, the firm would simply force the customer to come to it. Proposition 4. Service firms that choose to allow high levels of customer interaction uncertainty using complex production processes with limited customer interactions and few unique locally specific requirements will be more likely to do business by either sending people into the host country temporarily (Strategy 4) or having the customer come to their home country (Strategy 2).

4.2. Internationalization modes: divergent service processes Divergent service processes deal with customer interaction uncertainty by deploying knowledge in the form of skilled, knowledgeable workers. Shostack's (1987) primary example of a divergent service production model was a painter. Art in this form, of course, is a highly tacit form of knowledge (Polanyi, 1962). Consultants often use divergent processes, as do lawyers, traders, and M&A bankers, among others. Since a divergent process involves placing the task of resolving uncertainty into the hands of a human, we would expect firms using divergent processes to deploy and locate their knowledge resources (their workers) directly at the point of customer interaction, at least for a significant portion of the service process. In the context of internationalization, extending the firm-specific knowledge assets out to the interaction point may therefore include locating knowledge (human capital) abroad, in the host-country. As with any valuable resource of the firm being placed in a foreign country, the firm will want to have governance that puts sufficient control in place so as to protect against loss of the resource and against the risk of service disruption overseas. In the case of the resource being human capital put in place to enact a divergent process, such a disruption could occur with the defection of key service providers themselves. This risk would be mitigated by using a wholly owned subsidiary over contracting with an agent. Knowledge workers often have contractual restrictions in place, such as non-disclosure and non-compete agreements, to further control their activities and keep them within the purview of the firm. These agreements are more easily deployed and enforced in the context of an employment contract than they would be with a temporary contract. Employees will be more apt to sacrifice some personal autonomy in exchange for the security of employment, while contractors, with less of a sense of permanence, are less likely to lock themselves in for a long period of time. Further, what constitutes a high control internationalization strategy may differ from what constitutes a high control entry mode for other types of firms. Where the assets of the firm are contained in its workers, the process is obviously quite mobile. Having locally controlled manufacturing assets requires legal protection for property rights, since these assets are not mobile and can be appropriated. Humans, though, are mobile, and their knowledge can't be easily appropriated (Bowman and Swart, 2007). Williamson notes this difference, describing “human asset specificity” (1981:555) as opposed to assets that are physical or linked to a specific physical site. Due to the mobile nature of human capital, high control entry modes for service firms can be more than simply the full ownership of a legal entity in the host country. A service firm can have maximum control over its process by simply having home country workers perform the service in the host country. Consultants, for example, may deploy knowledge locally by having workers on assignment in foreign countries, as could engineers, architects, and other professions. Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003

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Lastly, this distinction – using home country workers or establishing a full subsidiary in order to enact a high control internationalization strategy – should be impacted by a firm's strategic decision with regard to the range of service products it offers (again, one of the two key elements of customer interaction uncertainty). Firms in knowledge-intensive service industries may choose to take advantage of information asymmetries in order to cross-sell more products to a given client (e.g., Nayyar, 1993). Thus, where firms offer a broad range of products, they will be apt to have skilled knowledge workers in the host country to take advantage of these inherent cross-selling opportunities. Conversely, for a narrow range of products, they would have less need for such a presence, but could simply ensure that the service provider and the client could meet to interact as much as was necessary without that permanent presence. Based on this strategic distinction, we suggest the following propositions. Proposition 5a. Service firms offering extensive customer interaction and a narrow range of service products using divergent production processes are more likely to do business using home country personnel in the host country (Strategy 4) or requiring customers to travel to their home country (Strategy 2). Proposition 5b. Service firms offering extensive customer interaction and a wide range of service products using divergent production processes are more likely to do business using fully staffed, fully-owned entities in the host country (Strategy 3(S)). Thus, a highly specialized consultant could use a high level of human capital to enact a divergent process, but since they only offered a narrow range of products, they could have high levels of control while choosing to send a home country worker abroad for an engagement. Doing so would clearly be less expensive than establishing a host country office and legal entity. Should this consulting firm decide to broaden the range of its offering, the costs of enacting other transactions with a given client could be less if they established a full subsidiary with local staff. In either case, high levels of control would be in place.

5. Contributions and implications We have sought to build a model of service firm internationalization based on the unique and specific aspects of service production processes: the inability of service firms to buffer their production from disruptions, the uncertainty introduced by the end user, and the deployment of knowledge resources in the service process to counter that uncertainty. Our paper therefore extends scholarship on internationalization by suggesting a model for service firms that involves the uncertainty that is of importance to these firms – customer interaction uncertainty – and the knowledge resources used to counter that uncertainty. Given the importance of customer interaction uncertainty for service firms (Argote, 1982; Gittell, 2002; Jones, 1987; Larsson and Bowen, 1989; Skaggs and Huffman, 2003), this is a lens that should provide a useful perspective on internationalization strategy. We believe our paper constitutes the first extension of this work on customer interaction uncertainty into the realm of internationalization. As such, it is also the first extension of this literature that points to how customer interaction uncertainty can ultimately drive both growth (noted again, below) and organizational structure. Thus, it enriches both our understanding of internationalization of service firms as well as our understanding of the importance of customer interaction uncertainty. Our paper contributes to existing literature linking strategic (i.e., valuable, rare, inimitable and nonsubstitutable) resources and capabilities to internationalization (e.g., Kirca et al., 2011), by delineating the importance of knowledge resources to service production and their relation to internationalization strategies. This is a new extension of the RBV (Barney, 1991) and KBV (Grant, 1996), as to our knowledge no prior work has explicitly linked knowledge resource deployment to the form of international expansion of service firms. Further, the paper brings endogenous factors – strategy and resources – into service firm internationalization, where much of the literature has focused on exogenous factors such as culture and the aspects of the services themselves.1 We also contribute to the internationalization literature by using a set of internationalization strategies in our model that are more applicable to service firms. Using the work of Cattaneo et al. (2010) has allowed us to more appropriately model the internationalization modes that service firms utilize. These strategies move beyond the manufacturing-based entry modes that describe the ownership and location of physical assets, as well as the distribution of physical product, and include the wider and more appropriate range of possibilities available to managers of service firms. Our model also contributes to the strategic management literature. We link several strategic choices: the level of customer interaction, the range of service product alternatives offered, and the deployment of strategic resources to the internationalization of service firms. The model has knowledge resources at its core, but offers two interesting links that are often missing from resource-driven models. First, the model links these resources to the firm's strategic choice regarding customer interaction uncertainty. Second, it links resources to an important structural decision: internationalization. Thus our model is consistent with the notion of strategic fit, melding strategy, resources, and structure. Note, for example, the seemingly curvilinear relationship of Strategy 3 – a full, permanent presence in the host country – as a solution to two very different strategic choices: high customer interaction uncertainty (where it is necessary to protect knowledge resources) and low customer interaction uncertainty (where there is little risk to knowledge resources). This highlights that while manufacturing modes of entry range simply from low to high levels of control, service internationalization is a more nuanced, complex array of alternatives. Our model helps both scholars and practitioners navigate this array, tying the alternatives to strategic decisions.

1

We would like to thank an anonymous reviewer for suggesting this point.

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In addition, our research provides a new insight into the complex interrelationships between internationalization, customer interaction uncertainty, and capital intensity in service firms. As we have noted, capital intensity in service firms is a strategic choice related to the level of customer interaction uncertainty a service firm wishes to allow. Where capital investments in service firms can limit the choices of customers, and thus limit customer interaction uncertainty, knowledge-intensive service allows for greater customer interaction uncertainty. What has not previously been examined is how this decision affects choice of internationalization mode. We hope our model sheds some light on the potential tradeoffs between capital and knowledge intensity relative to their ability to address customer interaction uncertainty. The paper has implications in related areas of scholarship as well. First, internationalization is fundamentally a growth process, and while our model has sought to explain international growth, it may also help to understand the growth of service processes in general, whether foreign or domestic. Service firm expansion is a matter of process replication (Winter and Szulanski, 2001). Our model may be usefully applied to understand how service firms replicate, using either codified process knowledge or human capital. Further, the model primarily addresses knowledge-centric service processes, and thus could augment existing service firm growth scholarship that has thus far focused largely on growth in franchising firms (e.g., Combs and Ketchen, 1999; Winter and Szulanski, 2001). Similarly, our research offers potential new insights into the literature on dynamic capabilities and environments. Not only is an internationalizating firm facing a new environment but globalization has been linked to increasingly dynamic environments that require firms to develop dynamic capabilities (Eisenhardt et al., 2010; Schreyögg and Sydow, 2010). Furthermore, it is conceivable that service firms with high levels of complex and/or divergent processes are creating knowledge routines that could also allow for the eventual creation of higher-order capabilities (e.g., Winter, 2003). We firmly believe that examining the interplay between a service firm's location/structure of knowledge in the production process (i.e., divergence and complexity) and the existence of dynamic capabilities represents a very fruitful area for future research. The paper also offers implications for practitioners. We specifically attempt to apply theories of internationalization to policy work more fully describing the internationalization modes in services. This links management and organizational scholarship with work being done under the auspices of a global development organization (i.e., the World Bank), tying in strategic management work on improving firm performance to global economic development. We suggest that future work test our propositions against the available empirical data that is being collated by governments and supra national bodies such as the WTO. The model also has practical implications for the strategic decisions with regard to local adaptation and customization. Under a scenario similar to that described by proposition four, with a complex process and limited customer interaction, managers of a firm that did not face substantial local requirements would face a strategic choice with regard to how much it wants to customize its service products to local tastes and preferences. That choice could then be the driving factor between placing knowledge resources in the host country or holding them back at home, an important choice that practitioners might struggle to make. In addition to empirical testing of the model, each of these related areas of scholarship would provide fruitful ground for future research based on this paper. Along with our call for the use of trade data to empirically test these propositions, we also suggest extensions of work using existing scales for customer interaction uncertainty and service knowledge resources (e.g., Skaggs and Youndt, 2004). The paper has substantive limitations. First and foremost, it is a conceptual manuscript, so we encourage future empirical work to address this limitation. The model has not differentiated between the types of service firms, such as Professional Service Firms, which could provide useful extensions. Our model is also limited in only focusing on intrinsic aspects of the firm. Extrinsic factors, such as cultural distance, etc., (Morschett et al., 2010) provide another area of productive research that would expand upon the paper. 6. Conclusion Customer interaction uncertainty is a critical construct for service firms. It is a strategic variable that operates at the heart of service production and has implications for the deployment of knowledge and the structure of the service process itself. With this in mind, we have developed a model and propositions relating customer uncertainty to knowledge resources, service processes, and internationalization strategies. We have argued that the method and location of knowledge deployment to counter customer interaction uncertainty is the key to understanding cross-border activity by service firms. Lastly, in a further effort to bring the model closer to the reality of service firm internationalization, we have used an expanded version of the internationalization modes used by the WTO in line with the General Agreement on Trade in Services (GATS). It is our hope that this model will stimulate further research that can usefully build our understanding of two of the most important segments of the modern economy: service firms and international operations. References Aharoni, Y., 1971. On the definition of a multinational corporation. Graduate School of Business, Stanford University. Arend, R.J., Patel, P.C., Park, H.M., 2014. Explaining post-IPO venture performance through a knowledge-based view typology. Strateg. Manag. J. 35, 376–397. Argote, L., 1982. Input uncertainty and organizational coordination in hospital emergency units. Adm. Sci. Q. 27 (3), 420–434. Argote, L., Ingram, P., 2000. Knowledge transfer: a basis for competitive advantage in firms. Organ. Behav. Hum. Decis. 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Please cite this article as: Meyer, C.R., et al., Customer Interaction Uncertainty, Knowledge, and Service Firm Internationalization, J. Internat. Manag. (2015), http://dx.doi.org/10.1016/j.intman.2015.04.003