Channel Switching between Domestic and Foreign Markets

Abstract

The authors develop a transaction cost model of the circumstances in which small, knowledge-intensive firms switch from the channel they use in the domestic market to a different channel in a foreign market. The authors argue that the domestic channel is frequently extended into a foreign market to gain economies of scale, because product characteristics are generally similar and because of strategic momentum. In knowledge-intensive sectors, integrated channels predominate in both domestic and foreign markets. Integrated channels facilitate the protection of knowledge-based assets and high levels of interaction with customers. However, firms may switch to a less-integrated mode in a foreign market if asset specificity is relatively low, as a response to environmental diversity, and when the market makes a small contribution to overall sales. Data gathered through a disk-by-mail survey of the export channel choices of Canadian software developers generally support these propositions. The authors make a contribution to the literature by rephrasing the channel selection decision so that the conditions under which firms switch modes are emphasized, thus linking the choice of modes in a foreign market to experience in the domestic market. The authors suggest that managers need to be aware of the momentum created by domestic channels and fully evaluate alternatives before extending existing channels into a foreign market. The results help identify conditions under which an international channel strategy that is different from the one used in the home market should be considered for a knowledge-intensive product.