Journal of International Business Studies (2004) 35, 524–544

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Transaction cost determinants and

ownership-based entry mode choice:
a meta-analytical review

Hongxin Zhao1, Yadong Luo2 Abstract

and Taewon Suh3
1
Boeing Institute of International Business,
Saint Louis University, St Louis, MO, USA;
2
Department of Management, University of
Miami, Coral Gables, FL, USA; 3Department of
Marketing, McCoy College of Business
Administration, Texas State University-San
Marcos, San Marcos, TX, USA
Correspondence:
H Zhao, Boeing Institute of International
Business, John Cook School of Business,
Saint Louis University, 3674 Lindell Blvd.,
St Louis, MO 63108, USA.
Tel.: þ 1 314 977 3834;
Fax: þ 1 314 977 7188;
E-mail: zhaox@slu.edu
Entry mode choice is a critical ingredient of international entry strategies, and
has been voluminously examined in the field. The findings, however, are very
mixed, especially with respect to transaction-cost-related factors in determining
the ownership-based entry mode choice. This study conducted a meta-analysis
to quantitatively summarize the literature and empirically generalize more
conclusive findings. Based on the 106 effect sizes of 38 empirical studies, the
meta-analysis shows that the findings of the existing studies are moderated to
varying degrees by both study-setting factors and statistical artifacts, although
the combined overall effects of transaction cost-based determinants are
consistent with the predictions of transaction cost economics. We extensively
discuss the implications of meta-analytical results, especially moderating effects
of location, country of origin, industry type, and statistical artifacts, highlight
the measurement adequacy, equivalence, and multidimensionality of transac-
tion cost determinants, and present our suggestions to improve theoretical
inquiries and empirical verifications on entry mode choice.
Journal of International Business Studies (2004) 35, 524–544.
doi:10.1057/palgrave.jibs.8400106

Keywords: entry mode; meta-analysis; FDI

Introduction
As one of the most critical decisions in international expansion,
entry mode choice has strong implications for organizational
control over foreign operations, investment risk involved, and
resource commitment required. Research has hence proliferated in
the past 15 years to explore how entry mode is selected, and the
factors that determine this selection. Major theoretical explana-
tions of foreign entry mode choice include evolutionary process
logic, the knowledge-based perspective, and transaction cost
economics (TCE).1 The evolutionary model stresses the importance
of learning in the process of increasing involvement in interna-
tional operations (Johanson and Vahlne, 1977, 1990; Chang and
Rosenzweig, 2001). In entering foreign markets, firms progressively
shift from exporting to higher forms of international operations
such as foreign direct investment as they gradually accumulate and
Received: 27 December 2002
Revised: 25 March 2004
integrate the knowledge of foreign markets. Whereas this logic
Accepted: 1 June 2004 emphasizes the importance of the learning experience and cultural
Online publication date: 23 September 2004 familiarity as determinants of entry mode choice, the TCE
 Entry mode choice of international entry strategies
perspective views the entry mode choice as a
critical decision of governance. Resting on the
interplay of two key assumptions of bounded
rationality and opportunism and the three key
dimensions of transaction (i.e., asset specificity,
uncertainty, and frequency), TCE advocates a
governance form that can minimize the costs
associated with governing and monitoring transac-
tions (Williamson, 1975, 1985, 1992, 1996).
Departing from the thesis of TCE, the knowledge-
based view treats a multinational enterprise as ‘a
social community that serves as an efficient
mechanism for the creation and transformation of
knowledge’ (Kogut and Zander, 1993, p. 627). Some
critical knowledge, such as information-intensive
resource, is embedded in the people working for an
organization. As a firm is conceived as a reservoir of
knowledge that constitutes the ownership advan-
tage to be exploited in the foreign market, the
boundaries of a firm’s decisions depend on the cost
of communication, coordination, and combina-
tions as the primary metric rather than on the cost
of transaction (Kogut and Zander, 1992, 1993,
1996b; Conner and Prahalad, 1996). The difficulties
of codifying and transferring knowledge through
market transactions such as renting or licensing are
daunting (Kogut and Zander, 1993). Hence an
appropriate entry mode should be the one that
can efficiently coordinate and combine knowledge
transfer activities within an MNE community
(Kogut and Zander, 1996a) or foster and improve
capability building and upgrading in new product
domains or geographic territories (Chang, 1995;
Silverman, 1999).
Despite several major limitations (see Ghoshal
and Moran, 1996), TCE has served as the over-
riding perspective for theorizing entry mode choice
and, accordingly, transaction-cost-related covari-
ates have been recognized as major determinants
of entry mode decision. As explained later, we
suggest that some of these limitations can be, and
should be, complementarily addressed by the
evolutionary and knowledge-based theories. Still,
entry mode choice is an economic decision, and an
MNE is expected to choose the entry mode that
offers the highest risk-adjusted return on invest-
ment (Williamson, 1985; Anderson and Gatignon,
1986; Hennart, 1988). The assessment of TCE
determinants remains important, as the alignment
between entry mode and transaction properties has
subsequent performance consequences (Woodcock
et al., 1994; Li, 1995). Evidently, however, our
cumulative understanding of these determinants in
Hongxin Zhao et al
525
relation to entry mode choice is mixed and
inconclusive, as the existing literature has docu-
mented disparate results and yielded inconsistent
findings with a wide range of different methodol-
ogies employed. This inconclusive knowledge con-
tributes less than could be expected to the field’s
theoretical and managerial impacts on interna-
tional entry practices.
To unveil a clearer picture of the determinants
that drive entry mode choice, this study attempts
to offer an updated review through a quantitative
meta-analysis of what can be concluded from prior
studies that have presented mixed results about
entry mode determinants. Meta-analysis has often
been employed in other business disciplines such as
marketing, organizational behavior, and strategic
management, but it has rarely been applied in
international business. Although it has some
inherent limitations, notably the heterogeneity of
samples in different studies, the meta-analytical
approach permits not only statistical aggregation of
research findings, but also a systematic assessment
of the influence of between-study moderators that
may intervene in the consistency of findings. Such
a systematic evaluation also helps in determining
the strength of the explanatory power of various
entry determinants uncovered in the past and in
enlightening future research directions on entry
mode choice. In our view, a meta-analysis is very
useful in the field of international business, where-
in many critical research issues, from joint venture
equity arrangements and managerial control to
foreign location selection and product diversifica-
tion, have been extensively examined by a sub-
stantial number of empirical studies that have
generated valuable but mixed insights, thus calling
for more conclusive quantitative summaries.
Our meta-analysis focuses on transaction-cost-
related determinants, and delimits the entry choice
to ownership-based entry modes (OBE) because
OBEs (joint ventures, cooperative alliances, and
wholly owned subsidiaries) often represent more
complex investment forms and structures than
contract-based entry modes (e.g., exporting, sub-
contracting, licensing, and franchising), and these
‘high order’ entry modes have generated more
research attention, which gives us enough data for
a meta-analysis. With these foci, we aim to (1)
verify the conclusiveness or overall significance of
TCE-based factors in determining OBE choice, and
(2) identify intervening effects of study-setting
factors (location of sample firms, sample firms’
country of origin, and industry type) and statistical
Journal of International Business Studies
 Entry mode choice of international entry strategies
526
artifacts (measurement error and data type) that
may moderate the relationship between these
determinants and OBE choice.
Literature review
Entry modes represent institutional arrangements
for organizing and conducting international busi-
ness transactions (Root, 1987). The rationale for
strategic choice of international entry mode has
been well positioned within the TCE paradigm
(Teece, 1986; Hennart, 1988, 1991; Kogut and
Singh, 1988). However, the systematic application
of TCE to international entry strategy appeared
initially in the work by Anderson and Gatignon
(1986), who explicitly linked TCE with the strategic
choice of entry mode in the international context.
Their research advanced a set of testable proposi-
tions based on the theoretical reasoning of TCE.
The key consideration of TCE lies in cost mini-
mization in selecting governance forms that are
‘mechanisms of exchange’ (Hesterly et al., 1990).
Firms adopt governance forms that minimize the
sum of transaction costs. If transaction costs are
low, a rational firm will prefer its transactions to be
governed by the market. However, if the costs of
adaptation, performance monitoring, and safe-
guarding against opportunistic behavior are too
high, the firm will prefer an internal governance
structure such as a wholly owned subsidiary or a
dominant joint venture (Hill and Kim, 1988;
Madhok, 1997). In a perfectly competitive market,
market specialists will perform efficiently, and thus
keep transaction costs low. By allowing specialists
to perform some of its functions, the firm can avoid
some of the disabling forces associated with build-
ing intra-firm bureaucracies. Therefore, the firm is
better off using a market governance structure for
its transactions. In reality, however, the market is
often imperfect. There are some instances in which
bounded rationality and opportunism can lead to
increased transaction costs, making an internal
governance structure more attractive (Anderson
and Gatignon, 1986). Internalized control is also
preferred because it mitigates the hazards resulting
from ‘hold-up,’ opportunism, and appropriability
created ex post transaction (Williamson, 1996).
Uncertainty (internal and external) and asset
specificity (including specificity-related free-riding
risk) have been overwhelmingly studied as the core
attributes of a transaction, the leading exchange
conditions, and the primary determinants of cost
efficiency of a governance choice (Williamson,
1979, 1985, 1991, 1996). Asset specificity concerns
Journal of International Business Studies
Hongxin Zhao et al
a broad scope of resources particularly tailored to a
relationship, and reflects a firm’s ability to differ-
entiate its strategy and products. Specificity exists
when one or both parties to the transaction make
investment that involves design characteristics or
unique resources specific to the transaction. This
investment will have a lower value in alternative
uses (Williamson, 1996). Knowledge- or informa-
tion-based assets are often embedded in the people
working for an organization. Intangible assets
generate monopolistic advantages for firms to
exploit in foreign markets, but the very nature of
intangibility and the difficulties of codifying and
transferring knowledge also create a need for
internalization, because licensing through market
transactions involves high costs (Dunning, 1981).
In addition, proprietary and specialized knowledge
is subject to maladaptation and opportunism
(Hennart, 1988). This nature of specialized assets
therefore requires safeguarding exchanges to reduce
behavioral uncertainty ranging from honest dis-
agreement to opportunism (Hesterly and Zenger,
1993). Teece (1986) argues that the high presence of
specialized assets tends to lead to a high degree of
integration and control. When it is difficult to
protect proprietary technologies, vertical integra-
tion simplifies protection. In survey data, verba-
lized scale items have often been used to measure
this construct. R&D intensity and component
complexity were used as a proxy for physical asset
specificity, whereas worker-specific knowledge and
knowledge intensity (i.e., investment in training
over sales ratio) were used as a proxy for human
asset specificity (e.g., Shelanski and Klein, 1995).
TCE posits that both external and internal
uncertainties surrounding a transaction will influ-
ence entry mode choice. External uncertainty
connotes the inability of an organization to predict
future events (Milliken, 1987), and it often results
from the volatility of environmental conditions in
a host country (Hill and Kim, 1988). Volatile
environments compel firms to choose a flexible
entry mode rather than an ownership-based entry
mode. Internal uncertainty arises when a firm is
unable to accurately assess its agent’s performance
by readily available output measures (Anderson and
Gatignon, 1986). Internal uncertainty also mani-
fests itself in a firm’s deficient experience or
knowledge of foreign markets. Firms lacking inter-
national experience are hesitant to pursue foreign
market entry aggressively. It follows that, when
external and internal uncertainties are high, entry
modes with a high degree of integration or control
 Entry mode choice of international entry strategies
are more desirable (Williamson, 1991). However,
the propositions of uncertainties are also prone to
the counter-argument in the tradition of TCE. As
Anderson and Gatignon (1986) stated, if an entrant
has already formed a partnership arrangement
(with a low degree of control), lock-in would
eliminate the flexibility needed to avoid the
volatile environment. The more experienced and
knowledgeable a firm is in international business,
the less need there is for this firm to choose high
control. Proxies frequently used in measuring
uncertainty include country risk (external uncer-
tainty), international experience, and cultural dis-
tance (internal uncertainty).
TCE also suggests that higher control modes are
more efficient where the potential for ‘free-riding’
is higher (Anderson and Gatignon, 1986). The free-
riding risk concerns the probability that a firm’s
reputation or image overseas is tempered by its
local partner’s misconduct, unilateral pursuit, or
wanton behavior. In Williamson’s original frame-
work (1985, 526), brand name capital is regarded as
one type of asset specificity. Following Anderson
and Gatignon’s (1986) scheme, examiners of entry
mode tend to separate free-riding potential from
physical asset specificity (often measured by R&D)
to specifically manifest the risk side (free-riding of
reputation) of asset specificity. Thus, free-riding
potential is not a concept parallel to asset specifi-
city but rather a special indicator of risk property of
asset specificity. Generally, local partners seldom
would be interested in managing a foreign entrant’s
reputation as they have less to lose from degrading
a foreign firm’s reputation than does the latter
(Caves, 1982). Thus the foreign entrant uses entry
mode control to protect its name (Davidson, 1982).
Empirically, this view is operationalized as such
that ‘high control is appropriate for heavily adver-
tised brands’ (Anderson and Gatignon, 1986, 20).
In terms of this determinant, advertising or market-
ing intensity (advertising/marketing expenditure
over sales ratio) is the only proxy found in the
literature.
Meta-analytical methods
Procedure
This study employs a meta-analysis to quantita-
tively synthesize the current empirical studies on
entry mode choice. This quantitative approach has
been used in various subfields in management,
such as the alignment between strategy and
performance (Datta and Narayanan, 1989), the
Hongxin Zhao et al
527
effects of merger and acquisition (Datta et al.,
1992), the outcome of advertising and marketing
(Farley et al., 1995; Grewal et al., 1997; Geyskens
et al., 1998), antecedents of employee turnover
(Hom et al., 1992), determinants of organizational
innovation (Damanpour, 1991), and consequences
of union commitment (Bamberger et al., 1999). The
major strength of a meta-analysis lies in its
analytical ability to aggregate small-sample studies
to obtain statistical power equivalent to that of a
large sample study in testing for experiment effects.
Consequently, more valid inferences can be drawn
from a meta-analysis than from narrative reviews
(Hunter and Schmidt, 1990). Meta-analytical pro-
cedures also decrease the possibility of type II errors
far more than the traditional reviewing method
(Rosenthal, 1984). A meta-analysis is also an
appropriate substitute for a longitudinal design.
We acknowledge, meanwhile, some limitations of
this approach as well. For instance, for the purpose
of meta-analysis, the implicit assumption is made
that the effect sizes collected from sample studies
are from homogeneous population of studies, and
that causes of heterogeneity are isolated. However,
this is not often the case, as pointed out by Fern
and Monroe (1996), as there exist many differences
across populations of sample studies that typically
do not offer sufficient observations to test for the
differences. Thus, readers should treat the effect size
as averages.
The two most commonly used estimates of effect
size are r and d (Glass et al., 1981; Hunter et al.,
1982). Even though most studies assessing TCE
determinants have used multiple linear models,
regression slopes and intercepts cannot be mean-
ingfully accumulated in a meta-analysis as they are
not comparable across studies. They must be
converted to the same scale-free unit, r or d (Hunter
and Schmidt, 1990). The d-statistic represents
standardized differences between means, and the
r-statistic is related to the Pearson’s product–
moment correlation and represents a standardized
measure of association between continuous vari-
ables. The effect size metric selected for our analysis
is the r-statistic, because it is easily interpretable
and scale free. We used partial correlation as a unit
of aggregation rather than simple correlation,
because the partial correlation coefficient is more
useful ‘when the researcher is interested in the
relationship between two variables without the
unintended influence of other variables’ (Fern and
Monroe, 1996, 91). Therefore each effect size
estimate, which is a partial r, was calculated from
Journal of International Business Studies
 Entry mode choice of international entry strategies
528
the t-statistic or P-value in the tests. Effect sizes are
then weighted by their sample size (or, more
accurately, by the inverse of their variance) when
they are averaged across studies, so as to produce an
estimated effect size that is closer to the population
value. The 95% confidence interval (or P-value)
should be reported to confirm that the range of
values will contain the population value. Having
calculated an effect size for each study and then a
weighted average of all the effects, we calculated
average effect sizes for subsets of studies. In
calculating these statistics, the comprehensive
meta-analysis software program developed by Bio-
stat was used. The program provides comprehen-
sive meta-analytical statistics including estimates of
the effect size and moderating factors.
Sampling
Computerized searches through ABI/Inform with
various keywords were conducted, covering pub-
lished literature from 1986 to 2002. This time frame
was chosen because there had been no empirical
study investigating the relationship between TCE
factors and OBE before 1986, when the seminal
article by Anderson and Gatignon was published.
Additionally, in an extended search for studies
published before 1986, there were no research
pieces containing sufficient information to calcu-
late effect size estimates between OBE and the
explanatory variables. Also conducted were issue-
by-issue searches of the Journal of International
Business Studies, Management International Review,
Academy of Management Journal, and Strategic Man-
agement Journal. Another manual search included
checking citations from previous studies, books,
and review articles. We recognize that, as for any
meta-analytic study, the data used in this study
may suffer from a ‘publication bias’ due to the focus
on published articles. Therefore, we contacted
several researchers in the area and asked whether
they were aware of any other studies that might
have been reported other than those we reviewed.
Studies were included in our meta-analysis if they
met the following criteria:
(1) the ultimate dependent variable must contain
an ownership-based entry mode in the interna-
tional context;
(2) the identified study must be conducted at firm
(subsidiary) level, not at the industry level; and
(3) the predicting variables must include some
TCE-related determinants.
Journal of International Business Studies
Hongxin Zhao et al
If one study used multiple yet separate sets of
samples, each individual correlation coefficient was
included as a separate unit of analysis. This is
because each correlation coefficient obtained from
an independent estimation model represents a
unique relationship with that dependent variable.
Thus each pairwise relationship was treated as an
observed coefficient used in the meta-analysis.
We used the study by Anderson and Gatignon
(1986) as the organizing framework to classify the
variables from sample studies into TCE constructs.
TCE explanatory variables that represent asset
specificity, uncertainty, and free-riding, respec-
tively, were included. The selected explanatory
factors were categorized into one of the six variables
under the three TCE constructs discussed earlier:
(1) asset specificity (AS) (when survey items were
used) or R&D intensity (R&D) (when archival
information was used) for asset specificity;
(2) country risk (CR) for external uncertainty or
cultural distance (CD) and international experi-
ence (IE) for internal uncertainty; and
(3) advertising intensity (AI) for free-riding potential.
This process yielded 38 studies with a total of 106
observed coefficients to be included in our meta-
analysis. We realize that, although empirical
researchers commonly follow Anderson and
Gatignon’s (1986) framework, this does not mean
that the measurement of the above variables is
without limitation. For instance, studies used AI as
a proxy for free-riding potential. However, free-
riding potential may also arise in part from high
R&D intensity, because technology transfer or
sharing within an alliance/joint venture mode
involves appropriability hazards (Oxley, 1997).
Hence, free-riding risk in these studies can be
interpreted narrowly as expropriation hazards asso-
ciated only with brand name and corporate image.
It does not represent overall ‘free-riding’ hazards.2
Results
Sample statistics
Table 1 summarizes 38 studies reviewed in the
meta-analysis and displays the significance level
and the coefficient signs. It provides information
for each study about sample size used, industry
type, measurements of OBE, country of origin of
study samples, location of study samples, and data
collection methods. Sample size varies significantly,
ranging from 25 to 2827 subsidiaries, but most
 Table 1 Descriptive statistics of meta-analysis samples
Study Sample Industry Country Location of OBE Datae Effect size and significance
size type a of originb study samplec measured type of TCE-based variablesf

AI AS R&D CD IE CR

Entry mode choice of international entry strategies

Agarwal (1994) 148 M US M B SD  
Agarwal & Ramaswami (1992) 285 S US M C O þ þ
Anand and Delios (1997) 1609 S Japan M B SD + *
Anderson and Coughlan (1987) 94 M US M B SD +
Arora and Fosfuri (2000) 2133 M Japan M B SD  + 
Aulakh and Kotabe (1997) 108 M US M C O * + *
Brouthers (2002) 178  M M B O + * *
Brouthers and Brouthers (2001) 231  US M B O *
Chen and Hennart (2002) 269  Japan M B SD + *
Chang and Rosenzweig (2001) 816 M M US B SD  *
Contractor and Kundu (1998a) 720 S M M C O * * + *
Contractor and Kundu (1998b) 517 S M M B O +
Davidson and McFetridge (1985) 1226 M US M B SD + +
Delios and Henisz (2000) 2827 M Japan M C SD * + *
Domke-Damonte (2000) 157 S US M C O *
Erramilli (1991) 151 S US M B O  *
Erramilli (1996) 337 S M M B SD *
Erramilli et al. (1997) 177  Korea M C SD *
Erramilli and Rao (1993) 381 S US M B O +  *
Gatignon and Anderson (1988) 1267 M US M B SD + + + 

Hongxin Zhao et al
Gomes-Casseres (1989) 1532  US M B SD * * +
Gomes-Casseres (1990) 1877  US M B SD * +
Hennart (1991) 158 M Japan US B O * * +
Herrmann and Datta (2002) 271 M M M B SD  *
Kim et al. (2002) 25 S Korea M C O * + *
Klein et al. (1990) 346 M Canada M B O *
Kogut and Singh (1988) 228  M US B O * *  *
Kwon and Hu (1995) 192 M US M B SD +
Lu (2002) 1194 M Japan M B SD + * *
Makino and Newport (2000) 131 M US Japan B O +
Meyer (2001) 576 M M M C O *
Padmanabhan and Cho (1996) 839 M Japan M B SD + * *
Padmanabhan and Cho (1999) 605 M Japan M B SD * * *
Journal of International Business Studies

Palenzuela and Bobillo (1999) 265  Spain M B O  

Rajan and Pangarkar (2000) 83 M Singapore M E O + * * 
Shrader et al. (2000) 212  US M B SD + 
Terpstra and Yu (1988) 1131 S US M B SD +
Zhao and Zhu (1998) 815 M China China E SD * 
a
M¼manufacturing, S¼service.
b,c
M¼multiple countries.
d
B¼binary measure; C¼categorical measure; E¼% of equity.
e
SD¼secondary data; O¼survey data.
f
+, positive significance; , negative significance; *, no significance or mixed finding (in case of multiple report); as R&D intensity is often used as a proxy measure for asset specificity (e.g., Brouthers,
2002), the broader category of asset specificity may include R&D intensity.

529
 Entry mode choice of international entry strategies Hongxin Zhao et al
530

studies report a sample size larger than 150. In all,
51% of studies used sample firms in the manufac-
turing sector; only 24% used samples in the service
sector (the rest failed to report industry type). Firms
from the United States remained the most investi-
gated (41%), but over time there was an increasing
tendency to examine firms from elsewhere, such as
Japan and Europe. To measure OBE choice, most of
the existing studies adopted the binary measure
(80%). The methods of data collection were almost
evenly split between survey-based data and second-
ary data.
Table 1 seems to show considerable variations
and inconsistencies in the link between TCE factors
and OBE choice across different studies. Of the
various TCE effects, 41 are found to have no
significant effect, or mixed effects. A sense of
consistency does not permeate the aggregation of
the studies, although more studies conform to the
conjecture that high uncertainty discourages firms
from choosing low ownership forms, and that
international experience is a key determinant of
entry mode choice. The report of this meta-
analytical study reveals the reasons behind the
seeming disparity of the current empirical findings.
Aggregate results
Table 2 reports the combined effect size of each TCE
variable fixed by sample size. At the aggregated
level, all the six determinants are found to signi-
ficantly influence OBE choice, judged by the
P-values. Although all are significant at the 1%
level, country risk (CR) and international experi-
ence (IE) are more conspicuous than other variables
(combined effect size ¼ 0.109 and 0.101, respec-
tively). Collectively, country risk turns out to be
the most influential determinant of OBE choice,
with a combined effect size of 0.109, and cultural
distance (CD) the least influential factor (effect size
¼ 0.029) among the six determinants. As expected,
the effect size of one internal uncertainty factor (IE)
and the ‘free-riding’ potential factor (AI) are positive
in direction of influencing choice of OBE. CD and
CR negatively impact the OBE choice. Thus, based
on the total sample of studies, we are able to
conclude that the existing literature indeed estab-
lishes an overall significant relationship between
each TCE variable and OBE. This is consistent with
the major primary predictors of TCE.
Moderating factors
One promise of a meta-analysis for theory devel-
opment is the ability to detect intervening effects of
moderators, which in this study are study-setting
variables (location of sample firms, country of
origin of parent firms, and industry type) and
statistical artifacts (OBE measurement and data
type). Two procedures were used to diagnose such
intervening effects. First, following Hunter and
Schmidt (1990) and Hedges and Olkin (1985) we
conducted a diagnostic analysis by computing the
variance of sampling errors and Q-statistics to
identify the existence of moderators that account
for between-study variance in observed effect sizes.
According to Hunter and Schmidt’s rule (1990,
168), we would conclude that moderators exist if
the observed variance in the effect sizes of each TCE
determinant is less than 75% and the Q-statistic
of each TCE effect size yields a significant value.
Q-statistics compare the observed variance with
that expected from sampling error. If the proba-
bility of observing the variance is less than 0.05, the
null hypothesis that sampling error alone is the
cause of differences in effect sizes is rejected. Thus
this rejection indicates the existence of moderators.
Second, because diagnostic tests ascertain the
existence of moderating factors, but do not reveal
the degree of each moderator, we supplemented
these tests with an additional test of homogeneity.
The homogeneity tests that produce the Q-statistic’s

Table 2 Combined effect size estimates and test of null

Variable TCE category Mean effect size Standard error Lower limit Upper limit z-value P-value

AI Free-riding potential 0.063 0.017 0.030 0.096 3.589 0.000

AS Asset specificity 0.079 0.025 0.029 0.127 3.208 0.001
CR External uncertainty 0.109 0.014 0.136 0.082 7.871 0.000
CD Internal uncertainty 0.029 0.011 0.052 0.008 2.673 0.008
IE Internal uncertainty 0.101 0.006 0.090 0.113 16.994 0.000
R&D Asset specificity 0.055 0.012 0.033 0.074 5.025 0.000
Total 0.052 0.004 0.044 0.062 12.125 0.000
Q-value (between classes)¼248.076; df¼5; P¼0.000.

Journal of International Business Studies

 Entry mode choice of international entry strategies
Table 3 Diagnostic results of moderators: meta-analysis of TCE
effects on OBE (all studies)
TCE determinants Number of % of
effect size variance
Advertising intensity 9 39.76
Asset specificity 9 13.59
Cultural distance 15 13.49
Country risk 11 89.34
International experience 46 24.71
R&D intensity 16 24.22
***Po0.01.
**Po0.05.
*Po0.10.
analogue to a w2 distribution were performed to
determine which moderator contributes to the
variability of effect sizes for a given TCE determinant.
Table 3 presents the variance and Q results of the
diagnostic analysis for each TCE determinant.
Except for CR (8.97% variance), all other TCE
determinants have far below the 75% threshold
value and hence correspond with significant
Q-statistics (15.27–158.45). This result evidently
demonstrates a need for further discerning moder-
ating effects.
To examine such moderating effects, we per-
formed the homogeneity tests on study-setting
and statistical artifacts, respectively. Table 4 reports
the results of the homogeneity test for study-setting
factors. As the results show, all the effects of TCE
determinants are significantly moderated by study-
setting factors in one way or another. Location does
not impact on the effects of AS, but significantly
moderates the effects of CD (Q ¼ 17.11, Po0.01)
and R&D (Q ¼ 9.43; Po0.01). Country of origin
moderates three TCE effects: AI (Q ¼ 11.94;
Po0.01), CD (Q ¼ 12.09; Po0.01), and IE (Q ¼
29.17; Po0.01). Two additional findings are note-
worthy. First, industry type moderates significantly
all the effects of TCE determinants. The larger mean
effect sizes of two asset specificity factors (AS and
R&D) are more consistently found for manufactur-
ing firms than for other industry types. Second, of
the six TCE effects, CD is subject to all the
moderating effects of study-setting factors, whereas
other TCE effects were only partially influenced by
moderators.
Past studies used different types of data and
measures of OBE in their statistical analyses.
Table 5 presents the moderating tests of these
statistical artifacts.3 The results show that the
different measures of OBE used by sample studies
Hongxin Zhao et al
531
contributed only to significant inter-study var-
iances of AS (Q ¼ 24.21; Po0.01) but not to other
Q-statistics TCE determinants, suggesting the stability of OBE
as used by the existing studies. The effect size of
asset specificity is larger when OBE is defined by a
15.27** percentage of equity than by a binary measure.
54.81***
Overall, this result suggests that the effect of TCE
88.32***
8.97
determinants (except asset specificity) on OBE
158.45*** choice is not sizably contaminated by different
48.31* measurement methods for OBE. Data type are
found to significantly moderate the effects of CD
(Q ¼ 14.79; Po0.01) and R&D (Q ¼ 9.25; Po0.01),
but not the effects of other TCE determinants.
Discussion
The meta-analytical findings presented in the
preceding section divulge important information
about study-setting factors and statistical artifacts,
but leave a number of unanswered questions to be
addressed by researchers. In this section we bring
out these questions, in conjunction with some of
the recent critiques of TCE and its related con-
structs reviewed in this paper, to identify key issues
for further study. In particular, we discuss TCE
moderators, TCE determinants and related mea-
surements, and integration of alternative theoreti-
cal perspectives.
TCE moderators
Overall, the moderating effects of location, country
of origin, and industry type raise concern about the
generalizability of TCE determinants across
national settings. The TCE effects of cultural
distance, international experience, and AI on OBE
choice vary significantly, depending on the country
of origin of parent firms. The large effect sizes are
consistently found to be associated with sample
firms’ country of origin. It appears from the test
results that the sample firms located in the US or
with the US as country of origin yield a stronger
link between these TCE variables and OBE than
other sample firms. This implies that some con-
textual variable in other countries or inherently
embedded in non-US firms may intervene with the
power of TCE factors in predicting the OBE
decision. The influences of cultural distance and
R&D intensity on entry mode choice are also
moderated by the location of the sample firms.
Thus these findings give rise to a number of
research questions to be addressed in future, such
as those highlighted below.
Journal of International Business Studies
 Entry mode choice of international entry strategies Hongxin Zhao et al
532

Table 4 Results of homogeneity tests of study setting factors Table 4 Continued

Study setting factors Mean Standard P-value Q-value Study setting factors Mean effect Standard P-value Q-value
nested in TCE effect error nested in TCE size error
determinants size determinants

Advertising intensity (AI)a R&D intensity (R&D)

Country of origin Location
US 0.21 0.03 0.00 US 0.06 0.04 0.12
Non-US 0.03 0.03 0.49 11.94*** Non-US 0.07 0.01 0.00 9.43***
Industry type Country of origin
Manufacturing 0.12 0.03 0.00 US 0.06 0.01 0.00
Service 0.21 0.05 0.00 Non-US 0.05 0.02 0.02 0.92
Non-specified 0.20 0.05 0.00 26.86*** Industry type
Manufacturing 0.12 0.02 0.00
Asset specificity (AS) Service 0.03 0.04 0.38
Location Non-specified 0.01 0.02 0.63 29.85***
US 0.03 0.04 0.53
***Po0.01.
Non-US 0.07 0.02 0.00 0.69 **Po0.05.
Country of origin a
All locations are non-US.
b
US 0.06 0.02 0.00 All locations are non-US.
Non-US 0.06 0.14 0.14 0.05
Industry type
Manufacturing 0.12 0.03 0.00
Service 0.01 0.02 0.60 10.22*** Moderating effect of country of origin
Country of origin affects the OBE effects of AI,
Cultural distance (CD) CD, and IE. This raises a number of questions to
Location
be addressed in future. As entry decisions are made
US 0.14 0.03 0.00
Non-US 0.01 0.01 0.48 17.11*** at the level of top management teams, is the
Country of origin moderating effect of country of origin in essence
US 0.16 0.04 0.00 indicative of managerial preferences arising from
Non-US 0.02 0.01 0.13 12.09*** different cultural traits of decision-makers, or is
Industry type it a mere reflection of country-specific knowledge
Manufacturing 0.06 0.02 0.00 and decision-specific experience of the top manage-
Service 0.04 0.02 0.02 ment team? Through what possible paths does
Non-specified 0.24 0.05 0.00 36.48***
country of origin actually influence transaction
cost determinants of entry mode choice? Is it
Country risk (CR)b
Country of origin through cultural distance, environment familiarity,
US 0.11 0.02 0.00 liabilities of foreignness, or a combination of
Non-US 0.11 0.01 0.10 all three? Can individual firms overpower such
Industry type country of origin effects through their enhanced
Manufacturing 0.11 0.02 0.00 0.04 experience and learning? Because the IE effect is
Service 0.06 0.03 0.05 significantly moderated by the parent firm’s loca-
Non-specified 0.19 0.05 0.00 5.90** tion and industry type, it implies some interaction
effects between experience- and setting-sensi-
International experience (IE)
Location
tive variables of country of origin and industry
US 0.06 0.02 0.02 type. This intertwining effect has rarely been
Non-US 0.11 0.01 0.00 2.92 addressed in the past, thus necessitating some
Country of origin dismantling in the future through a subgroup
US 0.14 0.01 0.00 analysis or moderating test. In addition, the non-
Non-US 0.08 0.01 0.00 29.17*** linear relationship between interactive influence of
Industry type IE and CD on OBE should be further investigated,
Manufacturing 0.09 0.01 0.00 which was only considered in Erramilli’s (1991)
Service 0.10 0.01 0.00
study. Incorporation of this interactive term in
Non-specified 0.12 0.01 0.00 6.13**
the empirical tests may offset the moderating
influences.

Journal of International Business Studies

 Entry mode choice of international entry strategies Hongxin Zhao et al
533

Table 5 Results of homogeneity tests of statistical artifacts Moderating effect of location

Statistical artifacts Mean Standard P-value Q-value Location significantly moderates the effects of CD
nested in TCE effect error and R&D. CD and R&D factors influenced OBE
determinants size choice differently depending on where the firms
studied in the sample were located. To the extent
Advertising intensity (AI) that firms opt for entry strategy in response to the
OBE measure
location-specific disadvantages (Anand and Delios,
Binary 0.07 0.02 0.00
% of equity 0.16 0.08 0.05 1.36
1997), the results seem to suggest that the effect of
Data type R&D, as a dedicated asset within which know-how
Secondary 0.06 0.02 0.00 is embedded, was offset by location specificities.
Survey 0.06 0.04 0.14 0.02 This gives rise to several questions to be addressed
in future research. In what ways do location-
Asset specificity (AS) specific disadvantages (or advantages) constrain
OBE measure (or delimit) the transferability of firms’ proprietary
Binary 0.06 0.03 0.03 assets, the nature of which influences the choice of
% of equity 0.56 0.11 0.00 24.21***
entry mode? Which aspects of location specificity
Data type
Secondary 0.08 0.03 0.00
attenuate or strengthen the OBE effects of CD and
Survey 0.08 0.03 0.00 0.79 R&D? How do CD and R&D interact with location
characteristics? What is the interplay of local
Cultural distance (CD) culture within a foreign market, as CD is mostly
OBE measure measured by national culture? In a broader sense,
Binary 0.04 0.01 0.01 given the moderating effects of location and
% of equity 0.20 0.11 0.08 country of origin, is environmental uncertainty
Categorical 0.02 0.04 0.53 2.68 postulated by TCE theory virtually country- or
Data type
location specific? If strategic roles of foreign sub-
Secondary 0.02 0.01 0.21
Survey 0.11 0.02 0.00 14.79*** sidiaries differ (Bartlett and Ghoshal, 1989; Dun-
ning, 1993; Birkinshaw et al., 1998), then does site
Country risk (CR) specificity, which is left out entirely in the existing
OBE measure studies (delineated by Williamson, 1985, as a
Binary 0.11 0.02 0.00 ‘cheek-by-jowl’ relationship between the buyer
% of equity 0.23 0.11 0.04 and seller, reflecting ex ante decisions to minimize
Categorical 0.07 0.04 0.05 2.27 inventory and transportation expenses), play a role
Date type
in entry choice?
Secondary 0.12 0.02 0.00
Survey 0.09 0.03 0.00 0.68
Moderating effect of industry type
International experience (IE) With regard to industry type, our finding shows
OBE measure that it moderates all the TCE variables, and that
Binary 0.10 0.01 0.00 studies of manufacturing firms tended to report a
% of equity 0.13 0.08 0.09 larger effect size of advertising intensity, asset
Categorical 0.12 0.02 0.00 1.61 specificity, and R&D intensity than those focused
Data type on service or other industries. These results suggest
Secondary 0.10 0.01 0.00
that TCE determinants are industry specific, and
Survey 0.09 0.01 0.00 0.00
that caution should be taken when generalizing
R&D intensity (R&D) TCE effects on OBE across industries. Specifically,
OBE measure the skewed results towards the manufacturing
Binary 0.06 0.01 0.00 sector point to: (a) the need to continue to treat
Categorical 0.01 0.03 0.65 3.04 different industries separately when analyzing the
Data type entry mode determinants in future studies, as
Secondary 0.07 0.01 0.00 several existing studies have already done; and (b)
Survey 0.02 0.03 0.25 9.25*** a further step to be taken in future research to
***Po0.01. explore whether structural dynamics of different
**Po0.05.
industries within each type (e.g., manufacturing)
may moderate the impact of TCE determinants on

Journal of International Business Studies

 Entry mode choice of international entry strategies
534
entry mode choice or affect this choice indepen-
dently. It also leads to four related research ques-
tions. Insofar as service industry tends to be
location bound (Carman and Langeard, 1980),
and service and manufacturing firms respond
differently to transaction-cost-based uncertainties
(Brouthers and Brouthers, 2003), is industry type
simply a moderating variable in TCE and entry
mode relationships, or does it interact with location
specifics to intervene in the TCE effects? Should
industry-specific attributes (e.g., the nature and
degree of competition, entry barriers, industrial
policy of local governments, the supportiveness of
related industries) be conceptually and methodolo-
gically captured and incorporated, as many of the
industry attributes themselves constitute dimen-
sions of external uncertainty? Can we find such
cross-sectional answers that can hold across differ-
ent national settings? How, and in which aspects of
TCE variables, are national settings related to
industry specifics? These questions naturally call
for more refined delineations of industry-specific
attributes to be captured and larger cross-sectional
data to be collected for rigorous tests in future
research.
Moderating effect of statistical artifacts
The findings show no moderating effects of OBE
measures and data type on AI, CR, and IE. The OBE
measure strongly influenced the relationships only
between AS and OBE, but not the other two
specificity-related variables (brand name specificity
or AI and physical asset specificity or R&D). This
finding implies that AI and R&D, which are less
prone to the different OBE measures, represent
better predictors of OBE than AS, which is mostly
operationalized by survey questions in the sample
study. It thus suggests using the refined measure of
various types of asset specificity described by
Williamson (1996) in future research, rather than
relying on the crude aggregate measure (see our
discussion of measurements of TCE determinants
below). The type of data used for empirical tests
turned out to moderate the OBE effects of R&D and
CD. Data type, however, showed no significant
impacts on the other four TCE effects. The results
indicate that survey data tended to yield large effect
size for CD, whereas the opposite was true with
R&D. However, this result cannot lead us to
conclude that one type of data is better and more
reliable than the other. Aside from the measure-
ment issues of R&D and CD discussed below, it can
be suggested, purely based on the effect size and the
Journal of International Business Studies
Hongxin Zhao et al
nature of the cultural factor, that future studies
should rely more on data collected through surveys
for constructing the CD variable, as first-hand
primary data at individual level may contain richer
behavioral and cultural information.
TCE determinants and related measurements
Apart from the moderating effects revealed above,
our meta-analysis highlights important methodo-
logical and measurement issues. Table 6 displays
the actual measures of TCE constructs along with
the research objectives used in the sample studies,
and Table 7 presents the results of homogeneity
tests of IE and R&D measurement types. Table 6
indicates that both AS (asset specificity) and IE
(internal uncertainty) were operationalized by
more than one measure. Combined together, our
further diagnoses unveil the following measure-
ment-related issues: measurement adequacy, mea-
surement equivalence, and multidimensionality of
TCE determinants.
Measurement adequacy
Cultural distance The mixed empirical support
reported by the extant literature and associated
moderating factors can be attributed to inade-
quate measurements. The effect of CD as an
uncertainty factor on OBE choice is compounded
by four out of five moderators (subsidiary loca-
tion, industry type, country of origin, and data
type). This raises questions about the adequacy of
using cultural distance as a measure of internal
uncertainty, as currently used by the sample
studies.
First, the use of Hofstede’s cultural index (used by
most of the studies) as a measure of uncertainty
seems ineffective to capture the diversity and
subtlety of cultural influences. Hofstede’s four-
dimension cultural index comprises cultural group-
ings defined by national or geographic boundaries.
However, cultures and nations are not equivalent,
as claimed by Hofstede himself and others (Hof-
stede, 1980; Erez and Earley, 1993; Shenkar, 2001).
Using broad national cultural groupings to measure
the uncertainty surrounding a decision choice of
foreign entry mode at firm level is at best a crude
measure to capture the broad national cultural
differences, and may obscure regional-level (loca-
tion-type) and industry (industry-type) cultural
differences within a host country. To address this
issue, more rigorous analyses using more culturally
diverse samples is needed in future study. One
 Entry mode choice of international entry strategies
Table 6 Measurement types and major research questions of meta-analysis samplesa
Sample study Major research questions OBE TCE constructs
measure and measuresbc

FR AS IU EU

Agarwal (1994) The probability of choosing the joint venture form is expected to be moderated by the B CD (I) CR (I)
firm-specific characteristics as well as by country-specific characteristics.
Agarwal and Firms with experience have a greater tendency to enter foreign markets; Firms tend C IE (I) CR(I)
Ramaswami (1992) to avoid markets that have high investment risks.
Anand and How differences in the amount of production are related to location-specific disadvantages B CD (I)
Delios (1997) and market entry strategies. IE (H)
Anderson and Ownership is associated with the degree of asset specificity in the distribution function. B AS (S)
Coughlan (1987)
Arora and IE favors WOS and CD, and presence of competition favor the use of licensing in the B CD (I) CR (I)
Fosfuri (2000) chemical industry. IE (M)
Aulakh and Examining transaction-specific (AS, CR), organizational capability (IE) and strategic factors C AS (S) IE(F) CR (S)

Hongxin Zhao et al
Kotabe (1997) influencing channel choice.
Brouthers (2002) Testing the value of TCE in ownership choice; firms whose mode choice is based on B AS (S) IE (Y)
TCE perform better.
R&D (R)
Brouthers and CD is related to both JV and WOS, depending on the level of investment risk. B CD (I)
Brouthers (2001) IE (M)
Chen and Japanese firms facing high market barriers are more likely to choose JV, whereas those B AI (R) R&D (R)
Hennart (2002) possessing strong competitive capabilities are more likely to set up WOS.
Chang and The variables that explain early entries may not hold for later ones; IE is important. B CD (I)
Rosenzweig (2001) IE (F)
Contractor and Hotel sector’s ownership choice is determined by both country- and firm-specific variables. C R&D (S) CD (I) CR (I)
Kundu (1998a) IE (M)
Journal of International Business Studies

Contractor and A mix of factors including IE influences hotel firms’ propensity to franchise. B R&D (S) CD (I) CR (I)
Kundu (1998b) IE (M)
Davidson and McFetridge (1985) Investigating the effects of technology and parent characteristics on ownership choice. B R&D (R) IE (H)
Delios and IE mitigates the hazards in equity ownership in the case of Japanese MNCs. C AI (R) R&D (R) IE (M)
Henisz (2000)
Domke-Damonte (2000) Testing influence of strategy and technology of service firms; IE as control C IE (Y)
Erramilli (1991) U-shaped relationship exists between IE and service firms’ propensity for WOS. B CD (I)
IE (M)
Erramilli (1996) There are significant differences in ownership preferences among various nationalities. B IE (N)
Erramilli et al. (1997) Testing the influence of firm-specific advantages on ownership levels among Korean MNCs. C R&D (R)
Erramilli and Rao (1993) Service firms generally tend to favor shared-control modes more when asset specificity B AS (S) CD (I) CR (B)

535
is low than when it is high
Journal of International Business Studies

536
Table 6 Continued
Sample study Major research questions OBE TCE constructs
measure and measuresbc

FR AS IU EU

Entry mode choice of international entry strategies

Gatignon and Anderson (1988) Suggesting TCE is a useful explanation of ownership choice. B AI (R) R&D (R) IE (N) CR (B)
Gomes-Casseres (1989) JV preferred when TCE variables are costly. B AI (R) R&D (R) IE (H)
Gomes-Casseres (1990) The relative bargaining power of firm and government affects the ownership structure B R&D (R) IE (H)
of the subsidiary.
Hennart (1991) TCE variables determine the ownership choices made by Japanese firms. B AI (R) R&D (R) IE (H)
Herrmann and Testing CEO characteristics associated with full ownership, with TCE factors as controls. B CD (I)
Datta (2002) IE (M)
Kim et al. (2002) Investigating influencing factors on ownership choice in system integration industry. C AS (B) CD (I)
IE (Y)
Klein et al. (1990) The ability of the market to limit the opportunistic tendencies is important in channel structure. B AS (S)
Kogut and Singh (1988) Testing the effect of national culture on entry choice. B AI (R) R&D (R) CD (I)
IE (M)
Kwon and Hu (1995) Export/foreign production orientation is a good proxy for market entry strategy. B IE (M)
Lu (2002) Support for institutional isomorphism in ownership choice; IE moderates institutional influences. B AI (R) R&D (R) IE (M)
Makino and Newport (2000) TCE holds true in both the US and Japanese contexts, but with variation. B R&D (R)
Meyer (2001) Host country institutions in transition economies have an impact on the choice of entry mode; C IE (M)
IE as control.
Padmanabhan and IE (HO), CD, and R&D have positive influence on full ownership. B R&D (R) CD (I)
Cho (1996) IE (M)
Padmanabhan and Examining the importance of IE for ownership structure decisions. B R&D (R) CD (I)

Hongxin Zhao et al
Cho (1999)
IE (M)
Palenzuela and Applying TCE and bargaining power theories to ownership choice pattern of Spanish firms. B AS (S) CR (B)
Bobillo (1999)
Rajan and Relating to control, cost, and competence are posited to affect ownership levels of E AS (S) CD (B) CR (B)
Pangarkar (2000) Singaporean MNCs. IE (M)
Shrader et al. (2000) Ventures managed risks by exploiting trade-offs among foreign revenue exposure, CR, and B IE (M) CR (I)
ownership level.
Terpstra and Yu (1988) The determining factors in manufacturing sector are also applied to services sectors such as B IE (F)
advertising industry.
Zhao and Zhu (1998) The determinants of foreign equity share of international joint ventures. E R&D (R) CD (I)
a
B, binary measure; C, categorical measure; E, equity percentage; F, foreign sales ratio; H, experience in host country; I, composite index; M, multiple measures; N, number of countries; R, ratio; S,
surveyed measure; Y, number of years
b
FR, free-riding potential; AS, asset specificity; IU, internal uncertainty; EU, external uncertainty; measure type in parenthesis
c
FR is not a parallel construct of AS, but rather a property of AS
 Entry mode choice of international entry strategies
Table 7 Results of homogeneity tests of TCE measurement type
Measurement type of TCE variable Mean effect size
International experience (IE)
Host experience 0.12
Number of countries (multinationality) 0.03
Percentage of subsidiary assets 0.12
Number of years 0.09
R&D intensity (R&D)
Parent firm 0.06
Subsidiary 0.04
Industry 0.03
***Po0.01
**Po0.05.
possible approach is to focus on cultural hetero-
geneity, which is the extent to which there are a
number of culture clusters, over which invest-
ments, employees, or partner firms are dispersed
(see Ronen and Shenkar, 1985). Another approach
is to rule out the complication of these two levels of
cultural distance by using more homogeneous
samples in the same region or industry – at the
expense, however, of decreasing the robustness of
the results. An alternative is to use survey-based
data that cover not only national-level but also
regional-, industry-, corporate-, and individual-
level cultural barriers. In particular, future studies
should focus on uncovering the effects of subcul-
tural variances exhibited at the level of managers
involved in making entry strategies since, in the
spirit of microanalysis of TCE, uncertainty is also
apparent at behavioral level. As is theorized in the
TCE literature, behavior uncertainty stems from
difficulties in monitoring the contractual perfor-
mance of exchange partners (Williamson, 1985).
The varying behavior of individuals may be due to
the different subcultural traits that may induce
uncertainty. Operationalizing behavior uncertainty
by collecting subculture data is thus a viable
alternative to the current measurement, as indivi-
dual perceptions of country distance tend to differ
from aggregated national cultural distances (Stot-
tinger and Schlegelmilch, 1998; Lenartowicz and
Roth, 1999, 2001).
Second, the high sensitivity of the CD variable to
moderators can also be attributed to the significant
inherent conceptual and methodological inade-
quacy relating to cultural distance constructs
(Shenkar, 2001). The conceptual and methodologi-
cal inadequacies based on unsupported assump-
tions create, respectively, the illusions that
Hongxin Zhao et al
537
Standard error P-value Q-value
0.01 0.00
0.01 0.03
0.02 0.00
0.01 0.00 32.76***
0.01 0.00
0.01 0.00
0.04 0.82 3.87**
undermine CD validity and biased instrumentation
that distort the accurate measurement of CD.
Finally, our meta-analysis reported that secondary
data (mostly Hofstede’s) and survey data produced
different results with respect to the cultural effect
on entry mode choice. In future research, one
should validate the convergence of these two
sources for measuring cultural distance, or other-
wise specify the reasons (methodological and
conceptual) for electing one of them.
International experience The sample studies
reviewed relied primarily on firm-level infor-
mation. The diverse set of measures includes
firms’ host country experience, transnationality
index, number of years in international business,
and percentage of foreign assets. Although some
IE measures bare close correspondence to the
learning notion of the evolutionary theory, others
resemble the degree of internationalization. The
test of homogeneity of IE measures demonstrates
that IE effects varied significantly depending on IE
measure types, with host country experience and
percentage of international assets exhibiting larger
effect sizes (Table 7). This unstable nature of IE can
be attributed to the predominant use of firm-level
measures, which may be inadequate to capture
the complete effects of behavioral uncertainty, as
IE can be personal (Padmanabhan and Cho, 1999).
Personal international experience of decision-
makers can serve as an important factor mitiga-
ting potential hazards associated with a given entry
decision. For instance, prior business experiences
(e.g., negotiation, contractual experience) in a
foreign market may develop skills and knowledge
that assist in identifying trustworthy partners,
and hence may increase the chance of entering
Journal of International Business Studies
 Entry mode choice of international entry strategies
538
a partnership-based entry. Thus this omission
of personal-level measure, relying instead on the
convenient measure at firm-level IE, may leave
out the potentially important effect of behavioral
uncertainty, because entry decisions are, after all,
made by persons with preferences due to different
prior foreign experiences.
R&D Some researchers have used R&D intensity
as a proxy of asset specificity (e.g., Brouthers, 2002).
Table 6 also includes R&D and AS under the
category of ‘asset specificity’. However, continuous
measures such as this (AI suffers the same problem)
do not distinguish this specific investment from
other durable or generic investments as espoused in
the industrial economics literature. Further, Table 7
shows that the effect of R&D on OBE varied
significantly depending on the level of R&D
measurements. It seems that the measurement
level of R&D at parent firms tends to yield larger
effect size that those at subsidiary and industry.
However, in most of the sample studies that used
R&D of parent firm to represent asset specificity, it
is difficult to differentiate contractual hazards from
firm-specific capabilities (Boerner and Macher,
2001), because specificity is investment-related
and is associated with the resources that a firm
brings to its foreign operation. Thus a measurement
such as this makes interpretation difficult, because
it is hard to distinguish the effect of transaction
cost consideration from confounding factors. This
concern suggests that R&D specifically devoted to a
foreign country (entry) may be a better measure
than overall R&D, as the former more accurately
indicates a project’s susceptibility to the
expropriation hazards in a host country.
Measurement equivalence
Measurement inequivalence arises when the same
construct is operationalized by different measures,
and can cause the estimation results to vary
significantly between studies. As Table 6 indicates,
despite the conceptual agreement for the most part,
the TCE construct of internal uncertainty investi-
gated by the sample studies suffers from this
problem in their operationalization of internal
uncertainty construct. This inequivalence not only
creates considerable conceptual confusion, leading
to lax interpretation of TCE determinants, but it
also casts doubt on the adequacy of both CD and IE
as measures for internal uncertainty, because both
of them are prone considerably to moderating
effects. As a result, it impedes the establishment
Journal of International Business Studies
Hongxin Zhao et al
of what Kuhn (1962) prescribed as the ‘dialogue’
between TCE paradigm and empirical evidence, as
the inconsistent measures of constructs failed to
provide such a common platform and focus. Future
research thus needs to verify which measure
represents the true construct of internal uncer-
tainty. If CD and IE constitute two distinct dimen-
sions of internal uncertainty (IU), more efforts
should be made to examine the commonalities
and differences between them. Although IE is
plagued with other problems, as discussed below,
the use of CD, which was measured mostly by
national cultural grouping, as an indication of
internal uncertainty does seems acceptable.
IE itself was also operationalized by a diverse set
of measures (Tables 6 and 7). Even assuming that IE
stands as a true indicator of internal uncertainty,
the problem of measurement inequivalence still
arises. Despite the best efforts of researchers, errors
may occur, and the reliability estimates are likely to
be low, and rarely equivalent when the same
construct (IE in this case) was measured differently.
Thus future research efforts need to identify which
measure captures precisely the construct of internal
uncertainty, or to devote efforts to the development
of a composite measure that combines all facets of
the current measures. Finally, most of the TCE
variables in the literature have been measured
indirectly by using proxies. Even though these
proxy measures are relevant, the use of more direct
measures may improve the construct validity and
the result reliability. Moreover, some autocorrela-
tion among TCE determinants themselves should
be investigated. For instance, international experi-
ence (indicator of internal uncertainty) could
reduce the impact of other uncertainty factors such
as cultural distance and country risk on entry mode
choice. Employing a structural equation modeling
technique or using a longitudinal data source can
overcome the limitation of a cross-sectional regres-
sion design in establishing causality or assessing
this autocorrelation.
Multidimensionality of TCE constructs
The review shows that sample studies cover certain
components of two broad TCE constructs (uncer-
tainty and asset specificity). One question that
remains unanswered is: are there any substantive
benefits from measuring and examining the multi-
ple facets of transaction properties in isolation from
each other, or is a single global measure adequate?
The fact that it is logistically impossible to include
all the dimensions and components of TCE exposi-
 Entry mode choice of international entry strategies
tions in an OBE study does not necessarily imply
convenient omission of the fundamental TCE
properties that can contribute to the inconclusive
and mixed findings. For instance, country risk (CR)
as an external uncertainty factor is least affected by
the moderators among all TCE determinants.
However, country risk constitutes only a part of a
multidimensional construct of environment uncer-
tainty. TCE defines environment uncertainty as
‘unanticipated changes in circumstances surround-
ing an exchange’ (Noordewier et al., 1990, p. 82).
Empirical researches in other domains of studies
that operationalized multiple dimensions of envir-
onment uncertainty as unpredictability (Heide and
John, 1990), complexity (Anderson, 1985; Klein,
1989), and changeability (Klein et al., 1990) offer
some valuable insights and guidance. These dimen-
sions measured by industry and technological
characteristics can have opposite influences on
the choice of governance. Additionally, the indus-
try moderating effect on CR may be eliminated if
more dimensions of environmental uncertainty,
such as protection of intellectual property rights,
which reflect the contract hazards at either the
national or industrial level, can be captured in
future empirical tests to offer more insights into the
relationship between external uncertainty and the
choice of OBE. For instance, future studies can draw
on the logic of institutional economics (North,
1990) to incorporate some critical factors in the
empirical tests. At least two institutional constructs
can be included: enforcement indeterminacy (the
degree of not fully and strictly enforcing formal
institutions (Amsden et al., 1994) and dysfunc-
tional competitive behavior (an environmental
scenario of violating ‘the rules of the game in a
society’ (North, 1990, 3). As each of them varies
across countries and industries, and each can have
direct influences on the entry decision of firms, the
inclusion of these constructs will enrich our under-
standing of the relationship between external
uncertainty and OBE choice, along with other
TCE determinants.
Williamson (1985, 526; 1996, 58–60) specifically
identified six types of asset specificity: site specifi-
city, physical asset specificity, dedicated assets,
human asset specificity, brand name capital, and
temporal specificity. However, asset specificity in
the sample studies was never measured as William-
son suggested. Instead it is indicated by a dummy
measure or survey items for AS, by ratios for R&D,
or by AI for brand-name-related free-riding poten-
tial. These measures capture asset specificity only in
Hongxin Zhao et al
539
part. Transaction specificities of human asset, site,
brand name capital, and temporal specificity,
which have not been captured by the sample
studies, could have significant differential impacts
on the choice of OBE. For instance, human
investments associated with a particular given
foreign entry represent a substantial and important
cost that would not otherwise be made but for the
purpose of FDI. Hence, when these critical compo-
nents along OBE choice are left out, the empirical
studies offer only a partial picture at best.
Integration of theoretical perspectives
Aside from the moderating and measurement issues
discussed above, TCE – with its strong emphasis on
the cost side of the transaction and the purely
incentive-based logic premised on the assumption
of opportunism – does not necessarily provide a full
explanation of entry mode choice in the interna-
tional context. The mixed findings revealed by this
meta-analysis may be attributed not only to study-
setting factors and statistical artifacts but also to
some inherent shortcomings of the TCE itself. The
limitations of TCE include its over-determination
(Kogut and Zander, 1995), exaggerated threat of
opportunism (Hill, 1990), ad hoc theorizing (Simon,
1991), ‘bad practice’ implications as sole reliance
on rational control that deteriorates trust and
trustworthiness (Ghoshal and Moran, 1996), and
an under-socialized view of human motivation and
an over-socialized view of institutional control
(Granovetter, 1985). Although a detailed review of
alternative theoretical perspectives is beyond the
purpose of this paper, an emergent perspective – the
knowledge-based view – is especially noteworthy.
Viewing the firm as a social entity of knowledge
coordination and combination (Kogut and Zander,
1993, 1996), this view argues that the speed and
efficiency in creating, transferring and combining
knowledge by MNEs create value and differentiate
the competence of firms. Based on this reasoning,
therefore, the choice of entry mode as a governance
structure relies on the properties of knowledge. As
tacitness of proprietary knowledge increases, the
probability of choosing the internal mode for the
purpose of transfer increases. Thus, the knowledge-
based view brings to TCE a new dimension of the
efficiency explanation of entry mode choice by
explicitly acknowledging the exploitation of the
relative efficiency in transferring idiosyncratic
technologies (Kogut and Zander, 1992). A deriva-
tive and interrelated explanation from this view is
that the firm boundary decision is a capability-
Journal of International Business Studies
 Entry mode choice of international entry strategies
540
related decision, and that the choice of gover-
nance is not one of cost minimization, as proposed
by TCE, but rather of the benefits or value it
creates through generation and adequate use of a
firm’s capabilities (Dietrich, 1994; Zander and
Kogut, 1995; Madhok, 1996) or through knowledge
acquisition from alliance partners (Inkpen and
Beamish, 1997; Madhok, 1997). Given the mixed
findings of the current study, an integrative
approach that combines the logics of TCE and
the knowledge-based view would not only allow
for testing and comparison of predictions of
entry mode choice from different research streams
but would also add rigor and predictive power
to TCE, would provide more robust insights, and
would allow researchers to resolve many of the
criticisms of the TCE-based explanation. A number
of recent attempts integrating TCE reasoning
with insights derived from the knowledge-based
view and other organizational theories (Silverman
et al., 1997; Madhok and Tallman, 1998; Silverman,
1999) represent important initial steps in this
direction.
Conclusion
Since the first empirical work by Williamson
(1975), the theory of TCEs has quickly evolved into
an established research paradigm that has
prompted numerous studies in diverse domains.
TCE studies with empirical components have
cumulatively generated more than 600 articles
(Boerner and Macher, 2001). Using a meta-analy-
tical approach, this study quantitatively reviewed
TCE-related factors in the international business
literature that reflect asset specificity (R&D inten-
sity and asset specificity), external uncertainty
(country risk), internal uncertainty (cultural dis-
tance and international experience), and free-riding
potential (advertising intensity) in affecting own-
ership-based entry mode choice. Overall, our meta-
analysis validates the relative predictive strength of
these determinants as theorized by TCE, and
demonstrates that all six TCE determinants exert a
significant influence at an aggregated level on OBE
choice as hypothesized by most studies in the
literature. However, the findings of this study show
that a majority of the current studies in comparing
polar modes of entry (market vs hierarchy) found
support for TCE predictions about asset specificity.
A majority of other studies comparing hierarchy
with an intermediate mode of entry (JV) found no
support for these predictions. This may indicate
that TCE is more effective at dealing with polar
Journal of International Business Studies
Hongxin Zhao et al
modes than with intermediate modes. The exam-
ination of the study-setting factors and statistical
artifacts also reveals some significant moderating
factors that have contributed to the mixed findings
of the extant empirical studies. Based on these
findings, we have provided a thorough discussion
along with suggested questions to be addressed by
future research. We have extensively discussed the
implications of and future research directions
pertaining to the moderating effects of location,
country of origin, and industry type, and have
specifically outlined the measurement adequacy,
equivalence, and multidimensionality of transac-
tion cost determinants.
In conclusion, based on the recent criticism of
TCE and our findings, we suggest that, though TCE
has made rich contributions to our understanding
of the nature of entry mode choice, it is only one
perspective among others, and it has its limitations.
In particular, our main findings suggest that future
empirical studies using TCE logic to articulate
international expansion should improve specifica-
tion, replication and extension. As reported in this
study, current studies on entry modes are fragmen-
ted and diverse in specifying TCE constructs. Most
previous studies defined and measured these con-
structs in a very different way, thus making it
difficult to reach a generalized conclusion. A more
consistent specification will also be instrumental in
the formation of a platform for researchers in
conducting replicative studies. Successful replica-
tion of a uniform set of TCE constructs to other
populations, time periods, geographical areas, and
contexts improves not only the generalizability but
also the predictive power of TCE. In addition, our
study suggests that TCE is only one of the valid
perspectives to explain entry mode decisions.
Extending theoretical and empirical inquiries
beyond the TCE paradigm and integrating this
dominant paradigm with other related theories,
such as the resource-based, knowledge-based, and
ownership–location–internalization (OLI) views,
should be performed in progressing international
expansion research.
The above findings may also have some implica-
tions for advancing our understanding of other
international business issues. For instance, TCE has
been treated as a dominant logic to explain timing
of entry. It is likely that asset specificity, external
uncertainty, and free-riding potential are important
factors in the timing decision. However, these
transaction-cost-side factors may be insufficient in
fully explaining the timing behavior because they
 Entry mode choice of international entry strategies
cannot capture the insights of market return or
preemptive opportunities. In this case, unifying
TCE with OLI, diversification, and competitive
advantage theories seems to be imperative. Some
of the moderating factors we found, such as
industry type and location, seem to imply this
necessity. Likewise, TCE has been rigorously used as
an over-riding logic to explain the evolutionary
process of internationalization, including the
effects of experience and cultural distance on
international expansion. Our meta-analysis con-
firmed the appropriateness and reliability of inter-
national experience and cultural distance as
constructs to measure internal uncertainty. This
implies that international experience and cultural
distance are not only the major correlates affecting
liabilities of foreignness, as argued by the evolu-
tionary view, but can also capture a firm’s internal
uncertainty. This evidence, together with the
importance of country risk and asset specificity as
well as the moderating effect of country of origin
that we found, further verifies the robustness of the
evolutionary view of international expansion.
Finally, the above results suggest that resource
allocation in international expansion should con-
sider not only transaction cost minimization (as
documented by the importance of asset specificity
and external uncertainty) but also resource exploi-
tation in a promising location (as documented by
the moderating effect of location and industry). To
further address resource allocation, future research
may additionally benefit from integrating the
knowledge-based view and institutional theory
with TCE. Different natures and types of knowledge
associated with a given OBE choice may either
increase or decrease the internal uncertainty, and
varying institutional distances may alter the pre-
ference of firms in choosing an ownership-based
entry mode.
Methodologically, future research should
improve sample selection, data gathering, and
research design to resolve some of the issues
emerging from this study. The selection of samples
for future study may consider using firms of varying
size in multiple locations both within a given
market and across multiple national markets. This
may help to reduce the large-firm bias and balance
the moderating effects of location specificity and
country of origin as revealed in this study. Data
used in current studies are almost exclusively
collected at firm level. Future studies may gather
data from contract level, because the key premises
of TCE are centered on transaction contract.
Hongxin Zhao et al
541
Reliance on firm-level data may obscure the
detailed information about transaction properties
anchored in the TCE model. With regard to
research design, future study can conduct long-
itudinal studies of selected samples. Longitudinal
study is very valuable in discern two neglected
phenomena related to OBE: sequence of entry, and
mode switch. It is plausible that the sequence of
entry into a foreign market may be regulated by the
changing importance of TCE properties over time
(for example, the value and importance of a specific
proprietary asset committed by a foreign entrant
may diminish as time passes by). Also, firms are
likely to switch from one entry mode to another as
changes occur in the nature of partnership and in
the institutional environment (for example, gov-
ernments in one or more countries liberalize or
tighten the ownership control by foreign invested
firms). In conjunction with the longitudinal
design, both the evolutionary perspective and
strategic option theory may offer valuable explana-
tions that are complementary to the TCE paradigm.
Our research method itself is also not without
some limitation. Meta-analysis is informative, and
yields unbiased estimates of population relation-
ships from a collection of empirical studies after
correcting for various statistical artifacts (Hunter
et al., 1982), but it has some limitations, such as its
insufficiency in capturing all heterogeneous factors
associated with different populations, sample char-
acteristics, and research settings contained in meta-
analytical samples.
Acknowledgements
This study is supported by respective summer research
grants from the John Cook School of Business and
Saint Louis University. We thank Professor Brian
Silverman and three anonymous reviewers for their
valuable comments.
Notes
1
Other perspectives, such as bargaining power (e.g.,
Gomes-Casseres, 1990), internalization theory (e.g.,
Hennart, 1982), and the OLI paradigm (Dunning,
1981, 1993) were also used either to emphasize
specific facets or determinants of entry mode decision,
or to supplement these three perspectives to present a
more holistic framework. These perspectives, for
instance, often emphasize the behavioral or environ-
mental parameters to supplement the risk–return
analysis underpinned by TCE.
2
Also within this framework, asset specificity (AS)
was defined as the extent to which processes or
Journal of International Business Studies
 Entry mode choice of international entry strategies
542
products are highly proprietary and difficult to imitate.
This led later researchers to operationalize AS by R&D
intensity or by survey items that reflect the degree of
complexity of process, product or investment.
3
In the sample studies only a few studies provided
detailed classification of full ownership into entry
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About the authors
Hongxin ‘John’ Zhao (Ph.D. George Washington
University) is associate professor at Boeing Institute
of International Business, John Cook School of
Business, Saint Louis University. His research inter-
ests are in FDI-related issues such as entry strategy
and export. He has previously published in journals
such as Journal of International Marketing, Manage-
ment International Review, International Business
Review and International Marketing Review.
Yadong Luo (Ph.D., Temple University) holds the
Emery Findlay Distinguished Chair in Graduate
Business Studies and is Professor of Management in
the School of Business Administration, University
of Miami. His research interests include global
corporate strategy, foreign direct investment, inter-
national joint ventures, and management in transi-
tion economies.
Taewon Suh is an assistant professor in Marketing
at Texas State University-San Marcos. He received
his Ph.D. degrees from Saint Louis University (US)
in international business and marketing and from
Sogang University (Korea) in communication. His
research interest spans international marketing,
marketing communications, and corporate strate-
gies. He has published in journals such as Interna-
tional Marketing Review, Journal of Supply Chain
Management, and Journal of Marketing Communica-
tion, among others.