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international
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review
International Business Review 16 (2007) 362376
www.elsevier.com/locate/ibusrev

Foreign market entry mode in the hotel industry:

The impact of country- and rm-specic factors
Diego Quer, Enrique Claver, Rosario Andreu
Department of Management, University of Alicante, Spain
Received 2 September 2005; received in revised form 10 October 2006, 14 January 2007; accepted 16 January 2007

Abstract
One of the key decisions in the internationalisation process of hotel rms is the choice of the entry
mode into a foreign country. Many different factors inuence this strategic decision. From a sample
of 127 entries carried out by Spanish hotel rms between 2001 and 2003, this study provides new
empirical evidence that cultural distance reduces the likelihood of choosing equity entry modes, while
rm protability and internal nancial funds availability favour the assumption of greater
commitment in the international expansion process.
r 2007 Elsevier Ltd. All rights reserved.
Keywords: Hotel rms; Internationalisation; Entry mode; Target/destination country; Firm factors

1. Introduction
Tourist activity in general, and the hotel industry in particular, have a markedly
international character nearly by denition; this is why they are totally imbued with the
phenomenon of globalisation. In recent years, along with the diversication and horizontal
and vertical integration processes, another corporate growth strategy that is being followed
by an increasing number of hotel rms consists in developing their operations on an
international scale. The difculties to grow in their country of origins traditional
destinations, the appearance of new emerging tourist destinations in other countries, or the
attempt to avoid depending exclusively on a single destination before the competitive
pressure and the power of tour operators, are some of the reasons underlying the
Corresponding author. Tel./fax: +34 965 903 606.

E-mail address: diego.quer@ua.es (D. Quer).

0969-5931/$ - see front matter r 2007 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ibusrev.2007.01.003

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internationalisation strategies implemented by Spanish hotel rms. Since the rst relevant
international operation carried out by a Spanish chain in the mid-1980s (Sol Melia in Bali,
Indonesia), this type of strategies have grown exponentially until the present day, when we
nd over 600 Spanish hotels in about 50 countries.
One of the critical decisions in that internationalisation process is the choice of an entry
mode. This decision is determined not only by the specic characteristics of the rm and of
the country where the entry operation is planned, but also by the distinctive features of the
hotel business. The analysis of the factors inuencing the choice of an entry mode is one of
the research topics most commonly treated in the literature on international business.
Although most works have tended to focus on manufacturing rms, a growing interest has
recently developed in analysing the peculiarities of service rms when it comes to adopting
this strategic decision (Brouthers & Brouthers, 2003; Ekeledo & Sivakumar, 2004; Sanchez
& Pla, 2006). Among the second group of research studies can be found some that have
dealt with this issue in relation to the hotel industry; they are less numerous though
(Brown, Dev, & Zhou, 2003; Contractor & Kundu, 1998; Erramilli, Agarwal, & Dev, 2002;
Pla & Leon, 2002; Ramon, 2002).
Within this framework, our paper seeks to complement the existing contributions by
providing new empirical evidence about the way in which factors linked with the target
country and the rm itself have determined the entry modes used by Spanish hotel rms in
their most recent internationalisation process (20012003). With this aim in mind, the paper is
structured as follows. In the rst place, we will show the peculiar characteristics of the hotel
industry and the way in which they affect the entry mode, after which, based on a thorough
literature review, a number of hypotheses will be proposed. Once the characteristics of the
sample and the data used have been presented, we will offer the results obtained. The paper
will nally offer some conclusions and will equally refer to some of the contributions made by
this research as well as its limitations, after which future orientations will be suggested that
can help scholars to make further progress in this line of research.
2. Theoretical background and literature review
2.1. Hotel industry characteristics and entry mode
Entry modes abroad can be divided into three large groups according to the generic
options that are available to an enterprise in order to make the most of its specic
advantages beyond the domestic market: supplying foreign markets through commercial
transactions (exportation); transferring knowledge to the destination country through a
contractual agreement; or moving productive or commercial capabilities, providing capital
through foreign direct investment (FDI), either jointly (joint venture) or on its own (wholly
owned subsidiary). These modes of entry fall into two broad categories: non-equity entry
modes (including exports and contractual agreements) and equity entry modes (including
FDI modes).
Considering the exchange ows and the characteristics of each alternative, FDI implies
better control of operations abroad and greater prot potential, but at the expense of
committing more resources and consequently assuming a greater risk. In the case of the
hotel industry, a high degree of control can also be achieved with contractual agreements,
but, since it is not necessary to invest in real estate, growth can take place faster and
assuming less risk.

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Choosing one or the other entry mode depends, among other factors, on the nature of
the activity to be performed at the destination. It must be remembered that the hotel
industry has a number of distinctive features derived from its status as a service activity.
Information and communications technology may allow bookings, payments, tourist
advice and perhaps other services, all embedded in a package, to be delivered remotely.
However, if a hotel wants to offer its core hospitality services in a foreign tourist
destination, it has to operate facilities in that country. Thus, one of the characteristics that
has a direct bearing on the entry mode is the simultaneity between production and
consumption; after all, this is a soft or inseparable service, i.e. it requires the proximity of
both the supplier and the customer or the presence of the object on which the service is
going to be delivered (Erramilli, 1991; Erramilli & Rao, 1993). This means permanent
contact with the customer, as a result of which the latter becomes actively involved in the
production process. The constant interaction with the customer, added to the impossibility
to store and transport the service, makes it necessary for the rm that has decided to
undertake internationalisation to have a suitable, signicant presence at every single
market it is operating in. Therefore, the rm will not be able to export strictly speaking,
and will have to choose any of the other contract-based (management contract,
franchising, etc.) or investment-based (joint ventures or wholly owned subsidiaries)
entry modes.
From the reasoning above, we are now going to propose a series of hypotheses about
the factors linked with the location country and the hotel rm itself that can lead
the organisation to carry out FDI instead of resorting to contractual cooperation
agreements.
2.2. Country factors and entry modes
The specic characteristics of each destination turn out to be essential when choosing the
entry mode. In this regard, cultural distance and the risk existing in the target country have
traditionally been two of the variables most often used in previous research works.
Cultural distance refers to possible differences concerning the way in which individuals
from different countries regard certain behaviours, something that will become essential in
order to determine whether the transfer of practices and work methods from one country
to another is valid or not (Hofstede, 1980). The literature offers various alternative
arguments about the negative impact caused by cultural distance on the rms degree of
commitment with its entry mode.
One rst line of argument is based on Transaction Cost Economics, the most relevant
application of which on international business is the Internalisation Theory (Anderson &
Gatignon, 1986; Buckley & Casson, 1976; Rugman, 1981). This theory suggests that
cultural distance may generate additional costs associated with information collection and
disrupt communication processes which require some common ground in order to code
and decode the information (Pak & Park, 2004). Therefore, being less familiar with the
target country makes integration more difcult and increases internalisation costs, which is
why the rm may prefer to assume a lower resource commitment level (Randoy & Dibrell,
2002). Another reasoning derives from the contingency approach, according to which
contractual agreements can be seen as entry modes that improve the level of exibility for
rms to leave a destination market if they do not manage to adapt to an unfamiliar
location (Kim & Hwang, 1992).

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Additionally, according to the resource dependency perspective, a greater cultural

distance may force the rm to look for local support in order to facilitate product
adaptation, share risks and avoid mistakes (Azofra & Mart nez, 1999; Chen & Hu, 2002),
and also to assume management on a local scale, and even delegate more culturally
sensitive tasks (Contractor & Kundu, 1998; Hennart & Larimo, 1998; Pak & Park, 2004).
Finally, the resource-based view of the rm suggests that, when it comes to exploiting
a competitive advantage, the enterprise must take into account the specic context
knowledge, i.e. the special way of doing business that is typical of a specic country. Thus,
cultural distance hinders the application of routines that are characteristic of a rm, which
is why the latter may opt for entry modes based on collaboration with local agents
(Madhok, 1997).
All the above leads to the assumption of an inverse relationship between cultural
distance and the degree of commitment with the entry mode that has been empirically
veried in various studies (Brown et al., 2003; Gatignon & Anderson, 1988; Hennart &
Larimo, 1998; Kim & Hwang, 1992; Osborne, 1996; Pak & Park, 2004). This is reected in
the following hypothesis:
H1. Equity entry modes will be negatively associated with cultural distance.
In addition to cultural distance, when the time comes to reect on the possibility of
entering a foreign country, the hotel rm must take into account that countrys social,
legal, economic and political framework. It is in this context that we nd one of the most
inuential variables in internationalisation decisions: the target country risk. From a
broad perspective, this risk can include various types of interrelated specic risks: that
derived from uncertainty about the demand, about competitors, costs and other market
conditions; that which jeopardises the countrys actual nancial solvency; and nally, the
political risk. In this case, there are alternative lines of argument according to which a
higher risk will be associated with entry modes that imply lower resources commitment.
The rst argument that goes in this direction is once again based on Transaction Cost
Economics. The political risk or the uncertainty associated with foreign ownership are
precisely some of the possible costs to be assumed when a rm decides to internalise.
Therefore, faced with conditions of political instability and uncertainty, foreign enterprises
will be reluctant to commit many resources through FDI (Pak & Park, 2004).
On the other hand, from the contingency approach, it can be argued that the rm will
have to nd a exible position that allows it to modify its decisions if environment
conditions change, and even to leave the country without incurring substantial losses. For
this reason, the rm will prefer non-ownership-based or low-investment entry modes
(Aulakh & Kotabe, 1997; Gatignon & Anderson, 1988; Hill, Hwang, & Kim, 1990; Kim &
Hwang, 1992; Luo, 2001; Nakos, Brouthers, & Moussetis, 2002; Osborne, 1996).
The resource dependency perspective can also offer arguments according to which the
organisation may not be self-sufcient, that is, the rm may not be able to internally
generate all the resources it needs to be successful when entering a high-risk country. For
this reason, the enterprise may need the help of a local partner that provides access to
knowledge about the target country and minimises the exposure of the rms assets, thus
sharing the risk involved (Azofra & Mart nez, 1999; Brouthers, 2002).
In short, much of the reasoning above suggests a negative association between target
country risk and the degree of commitment assumed with the entry mode, this being the
relationship that has actually received the greatest empirical support (Aulakh & Kotabe,

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1997; Azofra & Mart nez, 1999; Brouthers, 2002; Brouthers & Brouthers, 2003; Contractor
& Kundu, 1998; Gatignon & Anderson, 1988; Kim & Hwang, 1992; Luo, 2001; Nakos
et al., 2002; Osborne, 1996; Pak & Park, 2004; Pla & Leon, 2002; Ramon, 2002). All this
leads us to propose the following hypothesis:
H2. Equity entry modes will be negatively associated with target country risk.
2.3. Firm factors and entry modes
Apart from the characteristics of the country, the rms specic factors also turn out to
be essential in entry decisions. One of the pioneering approaches that tried to justify FDI
and consequently the existence of a multinational enterprise is the Monopolistic
Advantage Theory (Hymer, 1976; Kindleberger, 1969). According to this conceptual
framework, based on Industrial Economics, a foreign-owned rm must have some
ownership advantages that allow it to compete with local enterprises on equal terms.
This argument is equally mentioned in the rst of the three pillars on which Dunnings
Eclectic Paradigm (1981) is supported. The other two are internalisation advantages (which
determine whether the rm will organise its activities through the market or internally) and
location advantages (which inuence the choice of a target country). Dunning and McQueen
(1982a, 1982b) somehow reinterpreted the Eclectic Paradigm adapting it to the hotel industry.
Thus, with respect to internalisation advantages, they claimed that a large part of the
commitment of rms in foreign hotels through routes other than capital usually has the same
characteristics that are associated with FDI, insofar as real control is ensured. This is why,
apart from having a sufcient ownership percentage, these authors think that contractual
agreements (especially management contracts) also allow the rm to manage both the daily
operations of foreign hotels and the long-term strategy.
These traditional FDI theories are compatible with the resource-based view of the rm
(RBVF), since, as Fladmoe-Lindquist and Tallman (1994) point out, ownership
advantages are conceptually similar to the rms specic resources, internal factors being
the ones that generate competitive advantages. Following these lines of argument, we will
now propose a new set of hypotheses that focus on the inuence that different rm
resources may have on the entry modality chosen by hotel rms. More precisely, we are
going to refer to one of the factors traditionally used in previous research works (rm size)
and to another two factors that, despite having received less attention, can also determine
the resource commitment level assumed according to the RBVF: protability and internal
nancial funds availability.
Starting with rm size, Horst (1972) already argued that, considering the inherent risks
and xed costs, the proneness to invest abroad must increase with the dimension of the
rm. Besides, greater size implies greater availability of nancial and managerial resources,
which makes it easier to set up full-ownership subsidiaries (Tallman & Fladmoe-Lindquist,
2002). In keeping with this, a large part of the empirical research has observed that rm
size correlates positively with the degree of commitment assumed with the entry mode
(Agarwal & Ramaswami, 1992; Brouthers, Brouthers, & Werner, 2003; Campa & Guillen,
1999; Osborne, 1996; Ramon, 2002; Rialp, Axinn, & Thach, 2002; Stopford, & Wells,
1972; Trevino, & Grosse, 2002; Yu, 1990). This is why we can argue that larger-sized hotel
rms will have better guarantees to assume the commitment derived from an FDI
initiative, which leads us to formulate the following hypothesis.

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H3. Equity entry modes will be positively associated with rm size.

Firm protability has traditionally been considered a dependant variable in many studies
which focused on analysing the impact that the choice of one particular entry mode can have
on the results obtained (Brouthers, 2002; Chen & Hu, 2002; Pan, Li, & Tse, 1999). However,
Trevino and Grosse (2002) used it as an independent variable, assuming that it is a possible
approximation to the nancial resources and other tangibles owned by the rm. These
authors found that ex ante protability exerted a positive inuence on the degree of
commitment assumed with the entry mode. Extending the RBVF to the international
context, they suggest that protability can be interpreted as an indicator of the existence of
sustainable competitive advantage; i.e. the rm must have been competitive in order to
generate prots and, the higher its protability, the greater its competitive advantage. In
their view, prots can be interpreted as an indicator of the rms wealth, insofar as a larger
amount of accumulated prots will leave the organisation in a better position to expand
abroad through FDI. This allows us to propose the next hypothesis.
H4. Equity entry modes will be positively associated with ex ante protability of the rm.
The RBVF claims that one of the justications for the growth of a rm is that it has a
resource surplus after investing the resources required to keep its current level of activity.
In fact, Penrose (1959) already argued that growth opportunities exist in the rm because
there are always unused productive resources. The availability of a nancial resource
surplus will make the rm more likely to adopt growth strategies entailing greater resource
commitment (Chatterjee and Wernerfelt, 1991). Chatterjee and Singh (1999) shared this
view when they referred to internal nancial funds, which included liquid money and the
unused debt capacity. Linking this reasoning with the fact that FDI involves more
commitment than contractual agreements takes us to our last research hypothesis.
H5. Equity entry modes will be positively associated with rms availability of internal
nancial funds.
3. Empirical research methodology
3.1. Sample and data
We must rstly point out that this study on hotel internationalisation forms part of a
wider research that covers the different growth strategies of Spanish hotel rms in recent
years (market penetration, internationalisation, diversication and vertical integration).
For this reason, we will only use the sub-sample corresponding to the international side of
the geographical axis for the verication of the hypotheses proposed.
The starting research sample was elaborated from the news items published on the
webpage of the specialised newspaper Hosteltur (www.hosteltur.com), which offers a daily
account of the most relevant events in the tourism industry and has a news library that
dates back to 2001. The information obtained in this way was completed and contrasted
through other sources like the BARATZ database, where are collected all the news items
published in the economic press since 1981, and the web pages of the hotel rms
themselves, as many of them offer pieces of news about their main actions and the most
outstanding events.

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Using the above-mentioned sources, and through the compilation of all the news items
that referred to the growth of Spanish hotel rms between 2001 and 2003, we obtained
information about the type of strategy followed (market penetration, diversication,
vertical integration or internationalisation), the development mode (internal, external or
based on cooperation), the date on which the operation had been carried out, and the
destination where the new opening or acquisition had taken place. On the other hand, we
resorted to the SABI (Sistema de Analisis de Balances Ibericos)Iberian [Peninsula]
Balance Analysis Systemdatabase in order to obtain all the information related to the
specic variables of each enterprise.
After analysing all the data available, we identied 127 international entry decisions
made by Spanish hotel rms during the 20012003 period. These decisions involved setting
up some establishment abroad.
Before presenting the empirical study explanatory analyses, we are going to offer an
initial descriptive approach to our data from diverse frequency distributions. On the one
hand, it can be inferred from Table 1 that the number of internationalisation decisions was
somewhat smaller in 2002 (34 entries, as opposed to 47 in 2001 and 46 in 2003). On the
other hand, regarding the entry modality, contractual alternatives (83) clearly prevail over
investing ones (26). Finally, Europe was the main geographical implementation area (54
entries), followed by Latin America (43) and the rest of the world (28). The fact that the
number of observations in the variables entry mode and target geographical area do not
add up to 127 is due to the existence of some cases in our sample for which it was not
possible to obtain any information.
In addition, Mexico (18 entries), Tunisia (13) and Morocco (9) were the main
destination countries, while Riu Hotels (21 entries), Sol Melia (19) and Barcelo Hotels &
Resorts (18) were the most dynamic Spanish hotel companies during the period.
3.2. Dependant variable
Entry mode. Following previous research on entry mode choice (Brouthers & Brouthers,
2003; Ekeledo & Sivakumar, 2004; Erramilli & Rao, 1993), we shaped a qualitative dependant
variable with two categories: (0) non-equity entry mode; and (1) equity entry mode. Non-equity
Table 1
Descriptive analysis of international market entries (20012003)
Variable

Category

Number of market entries

Year

2001
2002
2003
Total

47
34
46
127

Entry mode

Non-equity entry mode

Equity entry mode
Total

83
26
109

Target geographical area

Europe
Latin America
Rest of the world
Total

54
43
28
125

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entry modes include contractual agreements such as franchising, management and renting
contracts, while equity entry modes cover different types of FDI (equity joint ventures,
acquisitions and greenelds). As we anticipated above, the resource commitment in contractual
alternatives (category 0) is lower than in investing ones (category 1).
3.3. Independent variables
3.3.1. Cultural distance
In order to assess the cultural distance existing between Spain and each target country,
three dichotomous variables were created according to the region where each destination was
located: Europe, Latin America and rest of the world. Assuming that Spanish rms have to
face a smaller cultural distance when the target is a European or Latin American country, we
decided to choose the variable rest of the world as the reference category in the empirical
test. This way to approach cultural distance depending on the geographical area where the
entry is made has been used in previous works, like those by Azofra and Mart nez (1999) or
Chang and Rosenzweig (2001). Another possible way of measuring cultural distance is based
on the index elaborated by Kogut and Singh (1988) from Hofstedes dimensions (Hofstede,
1980). A potential problem about this index lies in the fact that there are many countries for
which no indicators are available. Some works (Erramilli, 1991; Pla & Leon, 2002; Ramon,
2002) tried to solve this problem by assigning to those countries the score of others that,
according to these authors, were culturally similar. Nevertheless, since our sample contains
quite a few countries in that situation, we think that using this index would imply making too
many value judgements, which could reduce its reliability.
3.3.2. Target country risk
As a way to approach the risk assumed by the enterprise in each country where it
performs an entry, we shaped a quantitative variable that makes it possible to classify
countries according to the risk existing at each entry moment considered. We monthly
collected the covers that the Compana Espanola de Seguros de Credito a la Exportacion
(CESCE)Spanish Export Credit Insurance Companygave to the different countries
and grouped them on a scale from 1 (open cover in all periods) to 10 (closed cover in all
periods), placing in intermediate positions those covers that were subject to some kind of
restriction (growing from value 2 to value 9). This scale is therefore directly related to risk
level (lowest-risk countries are those with value 1, whereas the ones with the highest risk
have a value 10). Although not based on CESCE, other research works have also presented
an approach to country risk in which a classication of countries according to some index
is used (Azofra & Mart nez, 1999; Contractor & Kundu, 1998; Pak & Park, 2004; Pla &
Leon, 2002; Ramon, 2002). An alternative way to measure target country risk that can also
be found in the literature is based on managerial perceptions (Aulakh & Kotabe, 1997;
Brouthers, 2002; Brouthers & Brouthers, 2003; Brown et al., 2003; Kim & Hwang, 1992;
Luo, 2001; Taylor, Zou, & Osland, 2000). However, because we were working with
secondary data, it was not possible for us to use this approach.
3.3.3. Firm size
We used the average rm turnover in the 3 yr prior to the study period (with a
logarithmic transformation) as a measure of the dimension of each hotel rm, this being a
measure previously used by Campa and Guillen (1999) and Tahir and Larimo (2002)

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among others. We did not consider the variable number of employees due to the
peculiarities of the hotel industry, in which many workers are temporary and might
consequently not be included in our database count. In other words, the information
supplied by this measure could be wrong, and would therefore not help us in our attempt
to obtain a rm size indicator.
3.3.4. Ex ante profitability
This variable was approximated by means of the return on assets (ROA), again taking as
a reference the average of the 3 yr prior to the period analysed. The ROA [results before
tax/total assets] appears as one of the most commonly used in studies on enterprise growth,
among which stand out those of Park (2002, 2003), who used it as an independent variable.
3.3.5. Internal financial funds
Internal funds can be approximated from the liquidity available to the rm (Chatterjee
and Wernerfelt, 1991). That is why we used the rms liquidity ratio [current assets less
stocks (inventories), divided by liquid liabilities] as a measure for this variable, once again
considering the average of the 3 yr prior to the start of the period.
3.4. Control variables
3.4.1. Indebtedness
The rm can take different steps to avoid the agency problems derived from the
separation between ownership and management, e.g. a reward and incentive system based
on protability, or an increase of the debt level. Regarding the latter, authors like Jensen
(1986) have argued that the rms indebtedness level can determine the type of strategies it
adopts. Thus, when the indebtedness level is high, managers may feel pressed to follow the
most protable strategies, whether or not they t their personal interests. For this reason,
we decided to include the enterprises degree of indebtedness as a control variable. In order
to assess it, we applied the indebtedness ratio [total liabilities less own funds, divided by
total liabilities], taking once more as a reference the 3 yr prior to the period.
3.4.2. Initial risk
The risk that the rm is willing to assume will depend on its initial risk level. This can have
a twofold interpretation. On the one hand, the growth strategies that mean entering business
sectors not related to the current eld of activity or new markets different from the
traditional ones become riskier due to the enterprises lack of knowledge and to the fact that
it may not have available all the resources and capabilities required. However, those same
strategies can contribute to reduce the global risk assumed by the rm through the lower
prot variability that results from the fact that income ows are less related (Jarillo &
Mart nez, 1991). That is why we decided to monitor the possible effect of the rms initial
risk level before starting the analysis period. In order to assess it, we used the standard
deviation of the enterprises ROA in the 3 yr prior to the period covered in our sample.
3.4.3. Market size
Larger market size is likely to encourage quicker, larger FDIs. However, empirical
evidence has not been conclusive. Yu (1990) found that market size had a positive impact
on inward FDI, but not for small rms investing in developed countries. In addition,

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Mascarenhas (1992) found that entry occurs earlier into markets which were larger.
However, Clark and Pugh (2001) did not nd support for the hypothesis that larger
countries were the recipients of international activity before smaller ones. In addition, Te
Velde and Nair (2006) obtained that the impact of market size on inward FDI was not
signicant. Therefore, this lack of conclusive empirical evidence in previous research led us
to consider market size as a control variable. Market size was measured by gross domestic
product (GDP), using data from the World Bank.
3.5. Statistical model
A binomial logit regression model is proposed to verify the hypotheses. This technique
has been used in numerous research studies about the entry mode that, like ours, consider a
dichotomous dependant variable (Brouthers & Brouthers, 2003; Ekeledo & Sivakumar,
2004; Erramilli et al., 2002; Erramilli & Rao, 1993). It is a statistical model that makes it
possible to estimate the effect of an increment of each independent variable on how likely
the dependant variable (entry mode) is to take value 1 (equity entry mode) as opposed to
value 0 (non-equity entry mode).
Before applying that logistic regression, we show the correlation coefcients between the
independent variables in Table 2. We calculated the variance ination factor (VIF) for all the
variables with the aim of verifying the possible existence of multicolinearity. This test measures
the extent to which the variances of the coefcients estimated in a regression are inated when
compared to the cases in which the independent variables are not linearly related. High VIF
values can become indicators of the existence of multicolinearity. As can be seen, the highest
VIF was 2.55, which is well below 10, the cut-off point recommended by Neter, Wasserman
and Kutner (1985). This allows us to rule out the presence of multicolinearity in our data.
4. Results and discussion
Table 3 provides the results of the binomial logistic model used to verify the hypotheses.
The logistic regression was signicant (po0.01) and explained 83.1% of the entry modes
selected.
Table 2
Correlation matrix and multicolinearity diagnosis
Variable

1. Europe
2. Latin America
3. Rest of the world
4. Country risk
5. Size
6. Ex ante protability
7. Internal nancial funds
8. Indebtedness
9. Initial risk
10. Market size

0.63
0.47
0.32
0.20
0.23
0.27
0.09
0.17
0.63

0.39
0.41
0.12
0.16
0.18
0.10
0.14
0.25

0.10
0.10
0.09
0.12
0.01
0.04
0.43

Correlations above /0.19/ are signicant with po0.05.

Correlations above /0.25/ are signicant with po0.01.

0.07
0.14
0.11
0.05
0.07
0.10

0.36
0.32
0.15
0.13
0.05

0.26
0.48
0.48
0.26

0.21
0.15
0.16

0.52
0.17

VIF

0.19

2.36
2.55
1.42
1.27
1.58
1.98
1.68
1.56
1.76
1.63

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Table 3
Logit binomial model estimates (dependent variable: equity entry mode 1; non-equity entry mode 0)
Independent variable

b coefcients

Europe (H1)
Latin America (H1)
Rest of the worldreference category(H1)
Country risk (H2)
Size (H3)
Ex ante protability (H4)
Internal nancial funds (H5)
Indebtedness (control)
Initial risk (control)
Market size (control)
Intercept

0.65
2.18**

0.11
0.11
0.35**
0.77**
0.00
0.08
0.51*
2.97

w2: 30.69***
Percent correctly classied: 83.1%
***po0.01; **po0.05; *po0.1.

Starting with cultural distance, high statistical signicance with a positive sign is
observed, but only for the case of Latin America (b 2.18, po0.05). Taking into account
the way in which the variable was shaped, this result would be interpreted as follows:
belonging to the Latin America category as opposed to the category that acts as the
reference (rest of the world) is positively associated with equity entry modes. In principle,
this result conrms our H1, in the sense that the smaller cultural distance existing in Latin
American countries increases the likelihood of Spanish hotel rms being ready to assume
higher commitment in their entries, opting for equity entry modes. Some examples of this
are the FDIs of NH Hotels in Argentina or Riu Hotels in Mexico.
Something different happens with the Europe category though. No statistical
signicance was obtained which allows us to assume that the entries into other a priori
culturally close European countries are carried out through FDI and not by means of
contractual agreements. This lack of signicance could possibly hide the fact that cultural
distance in the tourism industry can be interpreted in another alternative way. Building on
the Transaction Cost Economics literature, Contractor and Kundu (1998) argue that
cultural distance can not only make it difcult to nd a local partner, but also generate
costs when transferring know-how to that partner, all of which can make the enterprise
prefer high-ownership entry modes. On the contrary, implementing a contractual
agreement can be easier in countries where cultural distance is lower. In fact, the empirical
research papers carried out by Pla and Leon (2002) and Ramon (2002) identied a positive
relationship between cultural distance and the degree of commitment assumed by Spanish
hotels abroad.
As for target country risk, a negative-sign inuence was identied, which is in keeping
with the formulation of our H2. This inuence is not statistically signicant though.
Therefore, perhaps the role of this variable is not so critical in the choice of an entry mode
under certain circumstances. Following Transaction Cost Economics arguments, when the
enterprise perceives high levels of uncertainty in the target country, transaction
internalisation may prove to be a better option than establishing contracts in order to
avoid the possible opportunistic behaviour of a local partner (Aulakh & Kotabe, 1997) or

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nd a faster solution that does not require reaching an agreement with a partner
(Brouthers & Brouthers, 2003).
Contrary to the H3, we found a negative sign for rm size, but without statistical
signicance. In this regard, and although, as we pointed out when that hypothesis was
formulated, the positive inuence on the degree of commitment assumed had been the most
frequent result in many previous research works, there is also empirical evidence in the hotel
industry in which that relationship is not totally conrmed either; see, for example, the
studies by Brown et al. (2003) and Contractor and Kundu (1998). According to these
authors, that result reinforces the belief that many hotel rms may grow in size through the
construction of a network of contractual alliances and not necessarily through capital
investments. The fact that the vast majority of entry modes used by Barcelo Hotels &
Resorts during the period were contractual agreements is a good illustration of this point.
Our H4 has indeed been conrmed by the model, since we checked that hotel rm ex
ante protability has a positive and statistically signicant inuence on the chances to opt
for equity entry modes (b 0.35, po0.05). Therefore, taking up again what we explained
above, it can be concluded that the most protable hotel rms were in better starting
conditions at the beginning of the period covered in our study to assume higher
commitment levels in their internationalisation decisions.
The results obtained also support our H5, as the logistic regression analysis shows a
strong relationship between the liquidity ratio and the probability of using equity entry
modes (b 0.77, po0.05). Therefore, following a line of argument similar to the previous
one, we can deduce that a greater availability of internal nancial resources at the
beginning of the period may have materialised in surpluses that made it possible to
undertake entries abroad through capital investments.
Finally, concerning control variables, it can be highlighted that the indebtedness and initial
risk levels did not prove signicant and have consequently not determined the choice of the
entry decisions analysed. Only market size of the host country turned out to be moderately
signicant (b 0.51, po0.1). The negative sign for the GDP variable suggests that nonequity modes are preferred in larger markets. The interpretation of this result leads us to
acknowledge that measurement of market size is more difcult in the tourism industry than in
market-seeking manufacturing FDI. Normally, GDP is used as the market size variable in
regressions explaining FDI. However, in the case of tourism, FDI may depend not only on
the general market but also on the potential for the tourism market, which is inuenced by
factors such as tourism arrivals or real exports of services (Te Velde & Nair, 2006).
5. Conclusion
This research allows us to conclude that the resource commitment assumed with the
decisions to enter foreign countries made by Spanish hotel rms in recent years has been
determined both by factors linked with the target country and by others associated with
the companies themselves. On the one hand, it was checked that the smaller cultural
distance existing in Latin America with respect to other world regions has led to a
preference to enter via FDI, to the detriment of contractual cooperation agreements. On
the other hand, two ex-ante factors like the initial protability and the availability of
internal nancial funds turned out to be resources favouring the hotel rms decision to
choose that investing alternative in their internationalisation process. Moreover, our
results suggest that the entry mode decision is also inuenced by other location-specic

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factor, although with low signicance. Rising levels of equity and control are negatively
associated with the GDP in the country where the hotel rm is located.
Our study on hotel rms shows some results contrary to those found in several
manufacturing sectors. Some of the underlying arguments regarding the inuence of cultural
distance and country risk on the choice of equity entry modes seem to require a reinterpretation
in the hotel industry, building on Transaction Cost Economics. Cultural distance can make it
difcult to establish contractual agreements and increase the costs of transferring knowledge to
other organisations. Furthermore, before a high target country risk, internalisation may be a
better option than contractual agreements in order to avoid the possible opportunistic
behaviour of a local partner. The lack of support for a positive relationship between rm size
and equity entry modes suggests a different argument. A network of franchisees and hotels
under management service agreements enable hotel rms to capture some of the advantages of
global supplies, reservations or brand recognition. In addition, our nding regarding the
negative impact of GDP on equity entry modes needs further research before a meaningful
conclusion can be drawn. As was suggested above, FDI of hotel companies may depend not
only on general market conditions but also on specic determinants of tourism potential.
In our opinion, this study provides contributions in several contexts. Concerning the
implications for extant theory, our results suggest that a theory of entry mode choice in the
hotel industry cannot rest only on conditions in the host country environment. Similarly,
rm-specic factors can provide only a partial explanation. A complete theoretical
framework of entry mode choice in the hotel industry is therefore necessary, including
factors linked with the location country and the hotel companies themselves.
On the other hand, we think that having provided new empirical evidence, with
information at the level of individual rms, about one of the most important research issues
in international businessthe entry mode choicehas made it possible to complement the
still scant research done about hotel rms in this eld. This issue becomes even more relevant
if we consider that internationalisation is undoubtedly one of the main growth strategies that
hotel rms must follow if they want to maintain and improve their competitive advantages in
the tourism industry, which plays an important role for the economy of many countries.
Nevertheless, we are aware of the fact that our study has some limitations, mainly
derived from the nature of the data we have worked with. For this reason, it was not
possible to incorporate other variables which can also determine the entry mode, e.g. the
rms international experience, its technological and commercial capabilities or the actual
perceptions of the managers involved. These limitations could be overcome in future
research works, above all as far as obtaining primary data is concerned. Replicating this
research in other service industries would also be benecial in order to accumulate ndings
and compare among models of entry mode choice. Furthermore, another interesting line of
future research would be to analyse the effects of information and communications
technologies, especially the Internet, on foreign market expansion by hotel rms, e.g. on
the speed of their internationalisation process.
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