International Business Review 19 (2010) 209222

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International Business Review

journal homepage: www.elsevier.com/locate/ibusrev

Foreign market entry mode behavior as a gateway to further entries:

The NAFTA experience
Rajshekhar (Raj) G. Javalgi a, Seyda Deligonul b, Amit K. Ghosh a, Douglas M. Lambert c,
S. Tamer Cavusgil d,*
a

Cleveland State University, United States

St. John Fisher College, United States
Ohio State University, United States
d
Georgia State University, Institute of International Business, United States
b
c

A R T I C L E I N F O

A B S T R A C T

Article history:
Received 2 November 2007
Received in revised form 2 December 2009
Accepted 2 December 2009

Trade liberalization policies have created a vibrant economy in Mexico by successfully

increasing the ow of trade and foreign direct investments. This study investigates
whether involvement in Mexico is considered attractive as a market in and of itself, or
whether it is also attractive because Mexico can also serve as a gateway to other Latin
American markets. We call this latter idea The Gateway Proposition and present it
against the backdrop of NAFTA. The Gateway Proposition suggests that the ability of rms
to expand their markets further into Latin American countries in the future could be an
additional incentive to invest in Mexico. Accordingly, we analyze entry mode strategy for
U.S. and Canadian rms in Mexico as well as their involvement level, equity participation,
resource commitment, risk tolerance, and control. The ndings of these analyses support
The Gateway Proposition, suggesting that a rms future involvement level is motivated
not only by the Mexican market potential, but also by Mexicos ability to serve as a
gateway to other Latin American markets. Evidence also suggests that large multinational
rms with past experience in Mexico are inclined to respond to emerging Latin American
market opportunities by becoming more involved in Mexico.
2009 Elsevier Ltd. All rights reserved.

Keywords:
Entry mode choices
Involvement levels of rms
NAFTA
Regional trading blocs

1. Introduction
Over the past two decades, globalization has profoundly affected the economies of both developed and developing
countries. By increasing the ow of trade and foreign direct investments, trade liberalization policies have transformed and
modernized the economies of emerging markets. In the case of Mexico, trade liberalization policies that were instituted
under NAFTA have led to an increase in foreign direct investment from $4 billion in 1993 to nearly $20 billion by 2006 as
Canadian and U.S. rms increased their investments in Mexico (Cavusgil, Knight, & Reisenberger, 2008: 235). This economic
transformation has made Mexico one of the wealthiest countries in Latin America in terms of per capita income. The success
of economic reforms and rising foreign direct investment in Mexico has prompted other Latin American countries to open up
their markets to foreign competition (Buckley, Clegg, Forsans, & Reilly, 2003; Galan & Gonzalez-Benito, 2006; Garcia, 2009).
These changes in governmental policies could lead to signicant market opportunities beyond Mexico for Canadian and U.S.
rms. In this paper, we investigate whether entry mode and investment decisions are driven by the perception that Mexico is

* Corresponding author. Tel.: +1 404 413 7284; fax: +1 404 413 7276.
E-mail address: cavusgil@gsu.edu (S.T. Cavusgil).
0969-5931/$ see front matter 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.ibusrev.2009.12.001

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an attractive target market in and of itself, or whether such decisions could be also due to Mexicos ability to serve as a
gateway to other emerging markets in Latin America.
The extant literature on entry mode decisions by rms has focused on general aspects of entry decisions at the rm level
(Erramilli & Rao, 1993; Kim & Hwang, 1992; Kumar & Subramaniam, 1997; Madhok, 1997), as well as on industry and
country characteristics (e.g., Anderson & Gatignon, 1986; Galan & Gonzalez-Benito, 2006; Kogut & Singh, 1988; Rugman &
Gestrin, 1993; Tse, Pan, & Au, 1997). The patterns and determinants of entry mode have been explained by an eclectic set of
factors (e.g., Canabal & White III, 2008). Past research has also emphasized the ownership and control issues implied by
various modes of entry (Agarwal & Ramaswami, 1992; Contractor, 1990a; Erramilli, 1991; Hennart, 1991; Hennart & Reddy,
1997), and the effect of factors such as cultural distance, country risk, and economic development on entry mode decisions
(e.g., Cho & Radmanabhan, 1995; Gatignon & Anderson, 1988; Kogut & Singh, 1998).
While the past literature has identied several key factors that inuence entry mode decisions, the issue of investing in a
country because it can serve as a gateway to other emerging economies has not been addressed. In the context of Latin
America, past studies have examined entry mode decisions to Mexico and other Latin American countries separately (Galan
& Gonzalez-Benito, 2006; Garcia, 2009). The potential for Mexico to serve as a gateway to other Latin American countries,
however, has drawn only scant attention (Richardson, 1993). One of the contributions of this study is that the attractiveness
of Mexico as a nal market is treated separately from its attractiveness to serve as a gateway to other Latin American
markets. This distinction is critical, since some Latin American countries have also instituted aggressive economic reforms
(Porzecanski & Gallagher, 2007), thus becoming more attractive to U.S. and Canadian rms. Our analysis extends the existing
literature by showing a unique entry mode strategy based on the interplay of macro-policy considerations and microvariables. We explore U.S. or Canadian rms current involvement level in Mexico and the factors that can contribute to their
future intentions to invest in Latin America. Our investigation treats the entry to a foreign market and the mode of that entry
under the multilateral macro-agreements.
Garcia (2009) notes that, as a consequence of NAFTA, Mexican trade is highly concentrated within the North American
bloc. The rms pursuing internationalization as a strategy and/or adopting it as an entrepreneurial perspective need to
leverage their resources and look beyond the region or markets they currently serve (Anderson, 2000; McDougall, 1994;
Ruzzier, Hisrich, & Bostjan, 2006). According to internationalization theory, rms could reduce risk by investing in markets
that are close in terms of geography or culture and by entering foreign markets through such modes as acquisition (Daniels,
Krug, & Trevino, 2007). We argue that trade liberalization agreements such as NAFTA may create a friendly business
environment for the rst entry, which provides experience and opportunities for further expansion into other countries that
are culturally and economically connected to the rst. By expanding into the neighboring markets, both U.S. and Canadian
rms can access new markets, enhance production, and reduce costs (Garcia, 2009), thus enabling rms to achieve scope and
scale to compete in the global environment.
The rest of this article discusses the theoretical background, conceptual model and hypothesis development, and then
describes the methodology and data. Finally, the ndings and conclusions are discussed.
2. Theoretical background
Past studies on entry mode employed a variety of approaches, including the transaction-cost perspective (Cleeve, 1997;
Erramilli & Rao, 1993; Gatignon & Anderson, 1988; Hennart, 1991; Makino & Neupert, 2000; Padmanabhan & Cho, 1996;
Taylor, Zou, & Osland, 1998), resource-based theory (Chang, 1995), and eclectic theory (Agarwal & Ramaswamy, 1991; Hill,
Hwang, & Kim, 1990; Kim & Hwang, 1992). The transaction-cost explanation emphasizes the preeminent role of control that
each type of mode affords an entrant. The resource-based theory posits resource availability and utilization advantages in
choices among modes of entry (Chang, 1995). The eclectic discussion considers the effects of a wide variety of factors on
entry mode. Some of these factors are rm size (Caves & Mehra, 1986), multinational experience (Erramilli & Rao, 1993;
Kogut & Singh, 1988), ability to differentiate products (Anderson & Coughlan, 1987), corporate strategy (Caves & Mehra,
1986; Contractor, 1990b), and learning (Barkema & Vermeulen, 1998; Kogut, 1988).1 Other studies, stemming from the
institutional perspective, suggest that the choice of entry mode is based on legitimacy criteria: rms choose entry modes
structures as a way to respond to isomorphism in both external and internal environments (Brouthers, 2002; Davis, Desai, &
Francis, 2000; Yiu & Makino, 2002).
The past literature also suggests that the level of involvement affects the protability and the strategic options of the rm
and those of its competitors (Agarwal & Ramaswami, 1992; Anderson & Coughlan, 1987; Cavusgil, Yeniyurt, & Townsend,
2004; Emden, Yaprak & Cavusgil, 2005; Klein & Roth, 1990). Accordingly, higher involvement levels (for example, whollyowned subsidiaries) can reduce manufacturing and distribution costs, enhance market presence, increase service levels, and
improve control over marketing strategy (Galan & Gonzalez-Benito, 2006; Jain, 1993). Commitment to a mode, however,
involves deployment of resources for long periods, since once a particular mode has been chosen, any subsequent change
entails considerable loss of time and money (Root, 1987).

1
This stream of research, albeit fragmented, is in agreement that a rm makes deliberate efforts to (1) enhance its discretion over critical resources, (2)
attain a higher level of competitiveness at a lower risk, and (3) increase efciency. The differences among researchers stem from the fact that each proposes
a different set of antecedents for these three objectives.

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Mexicos trade liberalization policies in the 1980s have dramatically transformed its economy (Garcia, 2009).
Furthermore, removal of trade barriers and the restrictive regulations under NAFTA have enabled some industries (i.e., the
automotive, chemical, electronic, textile, and apparel industries) to integrate production across a wide region, and have
substantially strengthened competition and NAFTAs regulatory framework (Hill, 2004). As a closed economy, Mexico
received only $1.3 billion annually in foreign direct investments (Serra, 2004). When Mexico joined GATT, it received $3.5
billion per year. Further, since Mexico joined NAFTA, foreign direct investments have increased to over $14 billion per year.
Seventy percent of these investments originate from North America. Other positive economic indicators in Mexico can also
be attributed to NAFTA. One example is a reduction in Mexicos ination rate, which is now more closely aligned with the
rate in other NAFTA member countries. Arguing for NAFTA, Serra (2004) underlines the signicance of market predictability
and stability, particularly with respect to ination. Improved economic indicators could have boosted the commitment of
Canadian and U.S. rms to doing business in Mexico. As Garcia (2009) has pointed out, Mexico went from being essentially
an oil-exporting country to becoming a major platform for manufactured goods to the U.S. (p. 376). Therefore, NAFTA has
resulted in greater trade ow for Mexico through increased exports and larger ow of foreign direct investments.
As noted above, macro-trade agreements such as NAFTA reduce entry risk in Mexico by lowering exchange rate
uctuations and enabling access to more stable and growing markets (Serra, 2004). Lower risks mean more new entrants
into Mexico. These new entrants may then expand their operation into other parts of Latin America. Multi-stage expansion is
likely to be further facilitated by reduced market volatility and economic stability (Garcia, 2009). Our contribution to this
research stream is the exploration of Mexicos potential to act as a gateway for further expansion into other Latin American
countries, especially for Canadian and U.S. rms. We call this concept The Gateway Proposition. The Gateway Proposition
hypothesizes that the rst experience turns into a stepping-stone-entry that initiates further entry into connected markets
by preemptive stabilization at the macro-level. After a higher trade and investment coupling between the countries initiated
by the rst entry, we argue, the entrant rms nd opportunities to step into a familiar and stabilized environment that is
conducive to higher investment commitments.
3. Conceptual model, constructs, and operationalization
The analysis of entry mode as a gateway to further possibilities requires, initially, consideration of the commitment level
of the entrant rm (e.g., Kumar & Subramaniam, 1997; Pan & Tse, 2000). The dependent variables in our research models are
current and future involvement (see Fig. 1). At the high end of involvement options, we consider the equity-based modes.
These require opting for wholly-owned operations and equity joint ventures; at the lower level of commitment options, we
consider non-equity-based modes involving contractual agreements and export. From high to low, the dependent variables

Fig. 1. Antecedents of a rms involvement level in Mexico.

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in this study capture information about decreasing levels of equity participation, resource commitment, risk involvement,
and control (e.g., Buckley et al., 2003; Chung & Enderwick, 2001; Kwon & Konopa, 1993). Our model also includes the
independent variables of rm size, Mexican and Latin American market growth expectation, Mexican market experience,
and multinational status (see Fig. 1).
One of the distinctions of this model is the conceptualization of strategy from the perspective of managerial expectations.
Our conceptualization is based on the premise that no risky venture escapes the shadow of future (Dyckman, 1964). Hill
(1990) notes that, except in those rare cases when the actor considers a market entry or exit, current strategic behavior is
patterned, in part, by that actors expectations of the future. By focusing on managerial perceptions of the Mexican market
and of Mexicos possible role as a gateway to other Latin markets, the present study attempts to address the question of what
role managerial expectations have on future foreign investment decisions in the context of NAFTA.
This study recognizes the earlier research on foreign market expansion that considered differences in resource
deployment patterns (Agarwal & Ramaswamy, 1991), levels of control and risk (Kim & Hwang, 1992), and political and
cultural awareness (Dalli, 1995). Since a rms entry mode choice impacts its overseas business performance (e.g. Kim &
Hwang, 1992) the literature is replete with calls for managers to consider carefully the selection and implementation of entry
strategies (Li, 1995; Li & Guisinger, 1991; Woodcock, Beamish, & Makino, 1994).
Our constructs are presented against the backdrop of NAFTA because of its strategic importance in creating a regional
trading bloc. Instituted in 1994, NAFTA formed the worlds largest trading bloc, comprising 439 million people and over $16
trillion worth of gross domestic products. Since NAFTA came into effect, trade among the NAFTA partners has tripled,
reaching over $894 in 2007 (naftanow.org). Every 30 minutes, $35 million of NAFTA trade occurs and $10 million in foreign
direct investment reaches the continent (Hendricks, 2004). NAFTA has provided U.S. and Canadian companies with more
competitive goods, with increased opportunities for market stability and growth, and with a gateway to other countries in
Latin America and beyond. North American companies are increasingly considering NAFTA as a tool that allows them to
achieve a sustainable competitive advantage (Hendricks, 2004).
3.1. Involvement level
A rms involvement level reects a hierarchy of structure, as described in earlier literature (Kumar & Subramaniam,
1997; Pan & Tse, 2000). Firms engaging in export risk little and commit few resources, but returns are likewise low and
difcult to predict or control. Joint ventures occupy the middle ground, demanding moderate levels of risk and investment
and offering moderate levels of return and control. When management is willing to risk more and invest more in order to
exert greater control and maximize the chances for high returns, a wholly-owned foreign subsidiary might well be a better
choice (Galan & Gonzalez-Benito, 2006; Ramcharran, 2000). Thus, the involvement level of rms in foreign markets reects
substantial difference in equity participation, resource commitment, risk involvement, and control across various entry
mode strategies (Chung & Enderwick, 2001; Kwon & Konopa, 1993). The impact of a rms involvement level on its business
performance is well established and has been the focus of extensive research (Agarwal & Ramaswami, 1992).
In this study, involvement is classied not only by degree or intensity but also by temporality. Current involvement, is
distinctively separated from future involvement.2 Current involvement of U.S. and Canadian rms in Mexico reects
investment that, as it has already been made, is likely to have been guided by past perceptions of Mexico and other Latin
American markets. On the other hand, planned or potential involvement 5 years into the future is dictated by current beliefs
about the future prospects of these markets. The liberalizing measures of NAFTA, many of which will be phased in over a
decade, combined with continuing political and economic reforms in Latin America, are likely to impact costs associated
with strategic changes (Rugman & Gestrin, 1993). Thus, the method of servicing a foreign market may change over time,
leading to differences between a rms current and future levels of involvement.
3.2. Mexican and Latin America market growth expectation
The attractiveness of a foreign market, dened by its potential for growth, is an important determinant of a rms level of
foreign involvement (Chung & Enderwick, 2001; Forsyth, 1972; Pan & Tse, 2000; Terpstra & Yu, 1988). A rm that expects
high market growth potential in a foreign market is more likely to use an investment mode that provides greater long-term
protability and enhances market presence (Agarwal & Ramaswami, 1992). Hennart and Park (1993) nd that acquisitions
strategies are favored in industries and markets that are growing and suggest that acquisitions in such industries could be
driven by the need of rms to enter growing markets quickly. In order to explore the issue of using Mexico as a gateway to
other Latin American countries, we attempt to determine the target market of rms that operate or are planning to operate in

2
In order to operationalize the current involvement (CURRINV) level of a rm, we asked executives about the rms current business structure in Mexico.
Future involvement (FUTINV) was measured on the basis of company executives predictions of the rms involvement level in Mexico over the next 510
years. The long time horizon was based on past literature that indicates the difculty of changing involvement level signicantly in short time periods (Root,
1987). Secondly, data collected on the involvement level spanned the continuum, ranging from exporting to wholly-owned subsidiary. In order to add
sensitivity or discrimination power, the measure of involvement differentiated among the various forms of exporting (exporting to a local agent, exporting
to an agent in the other country, or direct exporting), as suggested by Agarwal and Ramaswami (1992). (The measurement details for all constructs appear in
Appendix A.).

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Mexico. In other words, we attempt to determine whether Mexico is the nal market or whether it is the gateway to other
Latin American markets. Therefore, our study differentiates between how managers perceive Mexicos market growth
potential and how they see the growth potential of other Latin American markets due to NAFTA.3
3.3. Firm size
To measure rm size, researchers have used measures such as total assets (Kogut & Singh, 1988), equity and deposits
(Cho, 1985) and sales volume of company (Agarwal & Ramaswami, 1992; Calof, 1993; Cavusgil & Nevin, 1981; Kimura,
1989). For this paper, total sales volume of the rm was chosen as an indicator of rm size (SIZE) for several reasons. In the
marketing literature, market power/clout through high sales has been linked to several sources of competitive advantage as
well as protability (Buzzell & Gale, 1987; Szymanski, Bharadwaj, & Varadarajan, 1993). Brands with higher sales seem to
enjoy greater familiarity, market presence, and brand inertia (Aaker, 1996; Hoyer & Brown, 1990; Keller, 1992).
3.4. Mexican market experience
Firms with greater knowledge of the unique business practices of the Latin American market and the practices required
for success are more likely to exploit the advantages of higher involvement modes in Mexico (Eder, 1996; Mele, 1994; Neff,
1994). Assuming that the length of a rms experience in Mexico is a good indicator of its knowledge of the Mexican market,
Mexican experience (MEXEXP) was measured by recording how many years of business experience in Mexico a rm had. Our
measure is similar to that used by Agarwal and Ramaswami (1992) and Erramilli (1991).
3.5. Multinational status
Past studies in international business have combined market-specic knowledge and skills of MNCs into one construct,
using measures such as ratio of foreign sales to total sales (Collins, 1990; Daniels & Bracker, 1989; Rugman, Lecraw, & Booth,
1985) and self-reported degree of multinationality (Agarwal & Ramaswami, 1992) to operationalize this construct. In
contrast, we differentiate between a rms Mexican market experience and its multinational status. Multinational status
(MULTST) is measured as a categorical (yes/no) variable. Our measure does not discriminate between rms based on the
number of countries targeted or on the size of market in each country. Our categorical measure is simple and is designed to
avoid subjectivity-related problems that might accompany a more complex measure of multinational status. Our measure is,
however, consistent with theoretical studies in international business that have linked MNCs, regardless of their size and
scope, to various sources of competitive advantage (Dunning, 1993).
4. Hypotheses
4.1. Mexican market
In the past decade, Mexico has privatized and deregulated industries, reduced foreign tariffs, and lifted restrictions on
foreign business ownership (Galan & Gonzalez-Benito, 2006). The enactment of NAFTA has also beneted Mexicos economy
(Rugman & Gestrin, 1993) and has substantially increased the total trade volume among NAFTA members. Not surprisingly, the
Mexican consumer market has grown as the economic climate has improved. Research suggests that governmental
commitment to economic stability and market-friendly policies in growing markets often results in FDI resurgence (Birch &
Halton, 2001). NAFTA encourages Mexican market growth, and the treatys liberalizing measures provide U.S. and Canadian
rms with greater condence in their investment decisions. Firms are likely to choose high involvement levels in such markets
to increase their long-term protability and market presence in an emergent, growing, and investment-friendly marketplace
(Galan & Gonzalez-Benito, 2006; Rugman & Gestrin, 1993). Thus, we hypothesize that the higher the prospects of growth in
Mexican market potential due to NAFTA, the higher the rms current involvement levels in Mexico will be. Specically:
H1a. Expectation of the potential growth of the Mexican market due to NAFTA is likely to positively inuence a rms
current involvement level in Mexico.
NAFTA is likely to enhance Mexicos market potential as that nations economic environment continues to improve,
prompting rms to focus on long-term market dominance and protability and to counteract the lower returns and growth

3
This study considers perceived growth potential of the Mexican market separately from perceived growth potential of other Latin American markets. To
improve the measurement properties of the scale, multiple items were used to record managerial beliefs about market attractiveness. The items were
formulated based on past research (Agarwal & Ramaswami, 1992) and on in-depth interviews with company executives. Six items were specically
formulated to investigate beliefs about the market growth potential for Mexico and for the other Latin American markets. Care was taken to ensure that each
question reected market perceptions due to NAFTA, since positive perceptions could result from the economic reforms in pre-NAFTA Mexico. Pretests were
conducted to ensure the validity of these questions and a factor analysis of the responses to these items was conducted to empirically determine the two
underlying dimensions (market growth potential of Mexico due to NAFTA versus that of other Latin American markets). Factor scores were used as
indicators of a rms beliefs about market attractiveness.

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in developed nations. The efforts of the government and the private sector in all three NAFTA nations to improve the Mexican
infrastructure (Waller, DAvanzo, & Lambert, 1995) should also alleviate anxieties about future business conditions in
Mexico. Finally, the large inux of FDI and the resultant presence of multinationals from EU nations and North America in
Mexico are also likely, over time, to improve Mexicos operational procedures and commercial policies. Thus, positive
expectations about Mexicos growth potential are likely to increase the chances of a rms high involvement in the future.
However, uncertainty related to Mexico and perceptions of the potential economic realities of Mexico could impact future
involvement levels. While NAFTA is meant to create a regional trading bloc by reducing trade and non-trade barriers, many of
its liberalization measures are being phased in over time. Unambiguous free trade due to the future deepening of NAFTA is
likely to eliminate both trade and non-trade barriers as well as to reduce transaction costs. Exporting, having been simplied,
might be viewed as serving the Mexican market adequately. U.S. and Canadian rms might thus be prompted to choose low
involvement levels in the future (Rugman & Gestrin, 1993). Moreover, it is also important to consider the impact of cultural
and business differences between Mexico and the U.S. or between Mexico and Canada on rms involvement levels. Cultural
afnity has been associated with quick transfer of know-how and facilitation of operational procedures and commercial
policies already established in the home country (Graham, 2001; Hennart & Larimo, 1998; Hofstede, 1980; Kogut & Singh,
1988; Shane, 1994).
On the operational side, past studies suggest that Mexicos supplier base, information systems, distribution, and
manufacturing facilities may not meet U.S./Canadian standards. Cultural differences in the business practices of Mexico
might also prove to be challenging. Time is perceived as more exible in Mexico, meaning that appointments, schedules, and
deadlines are more or less relative. Such relativity jeopardizes implementation of concepts such as just-in-time (JIT)
management. The longer lead times and frequent delays might compromise the service standards and performances of U.S.
and Canadian rms. Similarly, in Mexico, maintaining trust in business relationships is often deemed more important in than
satisfying business requirements (e.g., providing quality service) (Waller et al., 1995). It is possible, therefore, that rms not
comfortable with the cultural and business environment in Mexico might choose low involvement levels (Galan & GonzalezBenito, 2006). However, based on the large increase in investment by Canadian and U.S. rms in Mexico over the past decade,
we speculate that rms are bullish in their assessment of Mexico and hypothesize that:
H1b. Expectation of the potential growth of the Mexican market due to NAFTA is likely to positively impact a rms future
involvement level in Mexico.
4.2. Other Latin American markets
Historically, U.S. and Canadian rms have been cautious about other Latin American markets. Under the regionalization
argument, Central and South America markets present disadvantages because they lack psychological, cultural and
geographical proximity to their much more northern neighbors. Lately, however, governmental policy throughout the region
has become more welcoming as these countries attempt to encourage the foreign investment that can improve their economies
(Baer & Weintraub, 1994; Galan & Gonzalez-Benito, 2006; Ramirez, 2002; Trevino & Mixon, 2004). The market-friendly policies
and privatization initiatives of these Latin American countries, along with the prospect of growth of these emerging markets, are
leading to a major increase in foreign direct investments in the region (Barbosa & Eiriz, 2009; Becker, 2002; Birch & Halton,
2001; Trevino & Mixon, 2004). Thus, FDI growth rate to Latin American countries jumped by over 30% in the second half of the
nineties (Galan & Gonzalez-Benito, 2006). The expansion however, carries risks concerning foreignness and newness.
On the other hand, the improving Mexican economy and the perks offered by NAFTA offer risk-reducing opportunities
to North American rms. Investing in Mexico, rather than investing heavily in second-tier countries, could allow North
American rms to use Mexico as a gateway to Latin American markets (Marketing News, 1995; Vojdovich, 1996). U.S. and
Canadian investments, already growing as a result of Mexican economic reform, snowballed after NAFTA, suggesting that
investment there is viewed as less risky and more promising. Because Mexicos southern neighbors have comparable
consumer preferences, labeling requirements, and business environments, rms stand to benet from beginning in Mexico
and learning from their experience as they expand further. Mexicos trade pacts with other Latin American countries should
also allow lower operating costs when rms serve those markets from Mexico (Dominguez & Brenes, 1997). North American
rms based in Mexico can avoid the uncertainties due to the slower introduction of market-friendly policies and less-thanoptimal business environments in some nations, while enjoying the advantage of NAFTA and geographical proximity.
Thus, we hypothesize that, while a positive attitude about other Latin American markets is not likely to impact current
involvement levels in Mexico (since these levels are more dependent on past condence in these markets than on present
perceptions), it is likely to impact future involvement levels in Mexico. If North American rms are planning to use Mexico as a
gateway to access other Latin American markets, then current market perceptions of Latin American markets should impact
future involvement levels in Mexico. This is the Gateway Hypothesis. If current market perceptions of Latin American markets
do not impact future involvement levels in Mexico, the Gateway Hypothesis can be discarded. The implication of the lack of
impact would be that rms prefer to increase involvement levels directly in the countries they are targeting, as suggested by
Dunnings paradigm.
H2a. Perceptions of the potential growth of other Latin American markets are likely to reect a rms current involvement
level in Mexico.

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H2b. Perceptions of the potential growth of other Latin American markets are likely to impact a rms future involvement
level in Mexico positively (the Gateway Hypothesis).
4.3. Firm size
Firm size has been shown to be a surrogate measure for many aspects of ownership advantages (Brouthers, Brouthers, &
Werner, 1999; Nakos & Brouthers, 2002). Past studies demonstrate that large rms are innovative and technologically advanced
(i.e., they have greater proprietary and human capital skills) and can support a diverse product line (i.e., they have greater ability
to differentiate products). Large rms can also raise capital at preferential rates due to their bargaining power with nancial
institutions and are likely to achieve economies of scale due to their market power (Dunning, 1993; Kimura, 1989).
Since rm size is an indication of the amount of resources the rm has at its disposal, larger rms are in a better position to
enter foreign markets with an equity mode of entry (Agarwal & Ramaswami, 1992), thus providing control over ownership of
operations for rms (Brouthers et al., 1999; Nakos & Brouthers, 2002). Hennart and Park (1993) indicate that R&D intensity,
which is correlated with rm size, increases a rms likelihood to embrace higher risk involvement (Greeneld investments).
Past literature also suggests that rms with a larger scale (Caves & Mehra, 1986) and rms with greater number of
subsidiaries (Shaver, 1998) are more likely to sustain growth through acquisition. Kogut and Singh (1988) argue that larger
rms possess the ability to routinize the process of expanding abroad through direct investment. It is, therefore, not
surprising that empirical studies report that larger rms are more likely to utilize equity modes of entry such as whollyowned subsidiaries and joint ventures (Brouthers et al., 1999; Caves & Mehra, 1986; Nakos & Brouthers, 2002; Terpstra & Yu,
1988). Accordingly, we hypothesize that larger rms are more likely to choose higher involvement levels in Mexico.
H3a. Larger rms are likely to have a higher level of current involvement in Mexico.
It is likely that rms seeking to establish a strong market presence and ensure future market domination in a rapidly
growing market might nd high future involvement level in Mexico attractive. This strategy offers several advantages. It
guarantees quick entry into a growing market, rapid access to a large customer base, effective transfer of management
models and practices, and strategic advantages based on manufacturing and servicing products in close proximity to the
customer (Galan & Gonzalez-Benito, 2006). Considering that such advantages require signicant adaptation prowess, a
large-scale rm, with its stronger capability and asset base, has a better chance to attain success in the Mexican environment.
Past studies also indicate that the largest market segment in Mexico is primarily motivated by low prices because of
consumers low purchasing power (Waller et al., 1995). Ability to deal with the elastic demand of this market base requires
the larger rms to utilize their resources by choosing a high involvement level. Therefore we propose the following:
H3b. Larger rms are likely to have a higher level of future involvement in Mexico.
4.4. Multinational status
The advantages of multinational corporations are well documented. MNCs know-how best to manage foreign operations
and coordinate multiple facilities (Hennart, 1991). Their geographically dispersed facilities also enable risk diversication
and enhance their operational exibility by offering wider opportunities for arbitrage, production shifting, and sourcing
(Dunning, 1993; Yip, 1995). In contrast, regional or national rms with no or limited multinational experience prefer less
risky and less involved modes of market entry (Caves & Mehra, 1986; Terpstra & Yu, 1988). The many advantages of NAFTA
that have been discussed are thus likely to encourage U.S. and Canadian MNCs to choose high involvement levels in Mexico.
Once they adapt to the business environment and the infrastructure in Mexico, they are likely to possess superior
coordination skills and greater ability to manage operations in Mexico. At that time, they may be motivated to venture
further into the other Latin American countries. Thus, we hypothesize that MNCs are likely to focus on a longer horizon with
stronger commitment.
H4a. Multinational rms are likely to have a higher level of current involvement level in Mexico.
H4b. Multinational rms are likely to favor a higher level of future involvement level in Mexico.
4.5. Mexican business experience
As discussed before, the relative inferiority of Mexicos infrastructure in communications, technology, and logistics could
pose formidable barriers to U.S. and Canadian rms and dramatically affect the performance of those rms (Waller &
Emmelhainz, 1995). Market-specic experience is likely to help ease the adjustment to the Mexican business environment.
Firms with greater experience in Mexico are likely to have managers who know the unique business practices of the Latin
American market and how to meet the challenges presented by this market (Eder, 1996; Hood & Logsdon, 2002; Mele, 1994;
Neff, 1994; Ramirez, 2002). Experience allows such rms to avoid bottlenecks, customize products to local demands (to meet
the varying requirements in customer tastes, packaging, and labeling), individualize distribution based on local needs, and
exercise control over operations in Mexico (Chung & Enderwick, 2001). Experienced rms are also likely to have established

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personal relationships with Mexican businesses and possess the ability to utilize these relationships to meet business
objectives. A parallel argument is that these rms are likely to have more experience managing and valuing operations.
Therefore, rms with greater scale and experience are likely to choose acquisition entries and a higher level of involvement.
We, therefore, hypothesize that experienced rms are likely to favor high involvement levels in Mexico.
H5a. Firms with greater experience in Mexico are likely to have a higher level of current involvement level in Mexico.
H5b. Firms with greater experience in Mexico are likely to favor a higher level of future involvement level in Mexico.
5. Research method
5.1. Sampling, questionnaire, and data
To ensure generalizability, we carefully examined past NAFTA-related studies to identify factors that might raise
questions about reliability and validity. The past research suggests that perceptual data collected from subsidiaries in Mexico
are likely to be accurate, since business practices may vary over subsidiaries (Singh, Verbeke, & Rhoads, 1996), and local
managers are likely to be better informed about the Latin American market (Mele, 1994; Zinn, 1996). Therefore, rms (or
their subsidiaries) in all three North American nations were surveyed.
The membership lists of the Council of Logistics Management (U.S.) and the Canadian Association of Logistics
Management (Canada) served as the sampling frame for this study. These lists were also used to identify the highest-ranking
executive who had NAFTA-related responsibilities. In Mexico, the faculty of the Tecnologico de Monterrey identied a
representative cross-section of executives in rms across different involvement levels. A pre-survey telephone call asked
executives to identify the best person to answer the questionnaire. Relevant NAFTA experience of respondents was
conrmed, names and addresses veried, and goals and objectives of the research explained. Respondents were promised a
summary report of the ndings.
Questionnaires included a cover letter and a postage-paid return envelope. In the United States, questionnaires were
mailed to 1422 companies. Three mailings (an original and two follow-ups) were sent to reduce non-response error. Three
hundred and four companies responded, yielding a 21% response rate. In Canada, 232 questionnaires were mailed (original
mailing and one follow-up) and 47 responses were receiveda 20% response rate. In Mexico, a translated version of the
questionnaire was hand delivered to each respondent by individuals who waited while the respondent completed the
survey. Questionnaires were completed by 242 respondents. Out of these 583 completed responses, 212 companies were
actively involved in Mexico or were planning to enter the Mexican marketplace.
Two different tests were performed to determine whether response bias existed. First, as suggested by Armstrong
and Overton (1977), responses to the rst mailing were compared to responses to subsequent mailings. Negligible
statistical differences across groups were revealed. Second, responses to the original questionnaire were compared to
answers to a condensed version, as recommended by Lambert and Harrington (1996). No statistically signicant
differences were found at the .05 level of signicance. These measures offered evidence that response bias was not a
problem among U.S. and Canadian respondents. Since the survey was hand delivered, the same could not be used to
determine biases in the Mexican sample. Response bias did not seem to be a major problem, however, since most
surveys were returned.
The prole of the respondents revealed that more than half (58.1%) who completed the survey were managers. The
second largest group consisted of directors (22.8%). Most respondents (64.25%) indicated that their positions included both
line and staff responsibilities. These responses represent a large scope of industrial bases, including manufacturers,
distributors, and service providers, from companies that focused on consumer markets and from those in industrial markets.
Company size (measured in sales volume) ranged widely. Seventeen percent had annual sales of under $100 million; 20%
averaged between $100 and $500 million; 17% averaged between $501 million and 1 billion; 20% averaged between $1 and
$5 billion; and 15% averaged over $5 billion.
The questionnaire developed to gather these data also included other NAFTA-related questions and a section on company
demographics. The questionnaire was pretested on six company executives who completed the entire questionnaire and
identied items that were unclear or confusing. Based upon their input, the questionnaire was subsequently modied.
5.2. Method
Factor analysis was performed on the six questions related to the market growth potential in order to distinguish the two
concepts related to market growth potential. The rst factor represents expansion into only the Mexican market; the second
factor captures expansion beyond the Mexican market. The factor representing the larger Latin American market beyond the
borders of Mexico is labeled Latin American market growth potential (LTAMGR); the other, Mexican growth potential
(MEXGR). In the regression analysis, these two factors are used as independent variables. The use of factor scores simplies
data analysis and interpretation, since variables are both fewer (two instead of six) and clearer in meaning based on loading
pattern.
After the factor analysis, hypotheses were tested with two separate regression models. To this end, factor scores for each
dimension of market growth opportunity were used in place of responses to the six original items. Eq. (1) was used to

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217

Table 1
Formulation of hypotheses and results.
Factors impacting involvement levels

Hypothesis
Number

Current involvement level of rms in Mexico

IA. Ownership advantages
(i) Size
H1a
(ii) Multinational status
H2a
(iii) Mexican experience
H3a
IB. Market growth potential
(i) Mexican market
(ii) Latin American market
Adjusted R2
Overall F-statistic

H4a
H5a

Adjusted R2
Overall F-statistic

Hypothesized relationship

Parameter estimate

Hypothesisa supported

a1 > 0
a2 > 0
a3 > 0

.0291**
1.1093
.0404**

Yes
No
Yes

a4 > 0
a5 = 0

.7527**
.0166*

Yes
Yes

b1 > 0
b2 > 0
b3 > 0

.0414**
.5401*
.0215**

Yes
Yes
Yes

b4 > 0
b5 > 0

.7128**
.3488*

Yes
Yes

30.00%
19.09**

Future involvement level of rms in Mexico

IIA. Ownership advantages
(i) Size
H1b
(ii) Multinational status
H2b
(iii) Mexican experience
H3b
IIB. Market growth potential
(i) Mexican market
(ii) Latin American market

Results

H4b
H5b
18.34%
10.48**

Hypothesis testing is based on the estimated asymptotic covariance matrix of the estimates under the hypothesis of heteroskedasticity.
Statistically signicant at the .05 level of signicance.
**
Statistically signicant at the .10 level of signicance.
*

uncover determinants of current involvement level and Eq. (2) to investigate future involvement levels. The regression
equations are as follows:
CURRINV i a0 a1 SIZE a2 MULTST a3 MEXEXP a4 MEXGR a5 LTAMGR ei

(1)

FUTINV i b0 b1 SIZE b2 MULTST b3 MEXEXP b4 MEXGR b5 LTAMGR ei

(2)

While considerably lower than total investment, the logistics budget of a rm in Mexico is likely to be strongly correlated
to investment in Mexico. Thus, the average logistics budget for each level of involvement can be used to investigate the scale
property of the dependent variable. A comparison of the average logistics budget for each involvement level (reported in
Appendix A) indicates that, while the dependent variable is likely to be ordinal (with increasing investment amounts for
increasing involvement levels), it is not perfectly intervally scaled.4 In this situation, though the OLS parameter estimates of
regression analysis are likely to be unbiased, the estimate of the covariance matrix might be inconsistent (Aldrich & Nelson,
1986). Therefore, as suggested by White (1980), an asymptotically consistent covariance matrix was estimated under the
hypothesis of heteroskedasticity (which is likely occur when a dependent variable is not intervally scaled). t-Tests based on
this covariance matrix were used to determine whether the regression parameters supported the hypotheses.
6. Results
Factor analysis results show that using the criteria of eigenvalues greater than one and analysis of the screen plot, a twofactor solution was supported, which explained about 95.6% of the variance in the data. Varimax rotation was utilized to
name the two factors. Items such as NAFTA is a stepping stone to Latin American markets, NAFTA will result in Latin
American marketing opportunity, and NAFTA will result in an integrated market, loaded heavily on the rst factor. Since
these items relate to a larger American market beyond the borders of Mexico, especially to the other Latin American markets,
the factor was named Latin American market growth potential (LTAMGR). The items we expect increased sales in Mexican
market due to NAFTA and NAFTA creates signicant market potential in Mexico loaded heavily on the second factor,
which was named Mexican market growth potential (MEXGR).
Regression analysis was conducted using the current involvement levels (refer to Eq. (1)) and future involvement levels
of rms (refer to Eq. (2)) as dependent variables (see Table 1 for results). The F-test for the overall models suggested that

4
Regression analysis was handy in testing of all the hypotheses formulated in the last section and conducive to generalizations about the involvement
level of rms. Though regression analysis can accommodate categorical as well as continuous independent variables (as in this study), the dependent
variable must be interval scaled to ensure valid conclusions. Therefore, the scale property of the dependent variable was investigated by comparing the
logistics budgets (external and internal) of rms in Mexico.

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R.R.G. Javalgi et al. / International Business Review 19 (2010) 209222

ownership advantages and perceived market growth potential were useful in explaining current involvement levels
(F = 19.09; p = .0001) and future involvement levels (F = 10.48; p = .0001). The t of the models was adequate (adjusted R2 of
30.00 and 18.34%, respectively). Most parameter estimates were statistically signicant at .05 or better and all parameter
estimates were in the hypothesized direction, indicating lack of specication error.
Beliefs about the Mexican market growth potential (t = 3.85; p = .0002), rm size (t = 1.92; p = .05), multinational status
(t = 3.90; p = .0001), and degree of Mexican experience (t = 4.52; p = .0001) were useful in explaining current involvement
level of rms, thereby supporting hypotheses H1a, H3a, H4a and H5a. Hypothesis H2a was not supported, suggesting that
beliefs about the potential growth of other Latin American markets had no signicant impact on current involvement levels
(t = 0.09; p = .93).
Analysis related to the antecedents of future involvement level indicated that perceived market attractiveness, namely
beliefs about Mexican market growth potential (t = 3.35; p = .001) and other Latin American market growth potential (t = 1.78;
p = .07), appeared to inuence future involvement levels. H1b and H2b were thus supported. Furthermore, ownership
advantages such as size (t = 2.73; p = .007), multinational status (t = 1.72; p = .08), and degree of Mexican experience (t = 3.04;
p = .003) were signicantly related to the future involvement levels of rms, thereby conrming H3b, H4b and H5b.
7. Discussion
Industry analysts agree on NAFTAs ability to foster rapid growth of the Mexican market (Fawcett, 1995; Meyer, 1995;
Orr, 1995). Extensive economic reforms have also played a part in Mexicos new status as one of the largest recipients of
foreign investment among developing economies. Mexicos success has encouraged other Latin American countries to open
up their markets and to position their markets as potential investment opportunities. Serving these new markets from
Mexico improves geographical access for U.S. and Canadian rms while decreasing these rms investment and contractual
risks. By allowing goods to move freely across the Mexican border, NAFTA reduces the trade costs and decreasing the risks
associated with Mexico. Thus, NAFTA offers U.S. and Canadian rms considerable competitive advantage in Latin America.
However, success depends partially on the choice of an involvement level that affects manufacturing and distribution costs,
service levels, and the nature and amount of control a rm might have over its marketing strategy (Jain, 1993). Our ndings
suggest that expectations of market growth inuence the current and future level of involvement in Mexico. An examination
of these involvement levels provides insights about the sources of competitive advantage for rms planning to exploit the
market opportunities produced by NAFTA.
7.1. Current involvement levels
Current involvement levels are likely to be based on pre-NAFTA managerial perceptions of Mexico, since commitment to
an investment mode takes considerable time (Root, 1987). Dunnings eclectic paradigm successfully explains the current
involvement levels of U.S. and Canadian rms in Mexico, which are positively associated with market attractiveness and
rm-specic ownership advantages. While our results are not surprising, they lend some external validity to the study.
A rms current involvement level is inuenced primarily by beliefs about Mexicos market growth, remaining relatively
unaffected by beliefs about other Latin American markets. Thus, U.S. and Canadian rms seem to be investing in Mexico to
target the Mexican market. The increased trade between U.S. and Mexico (triggered by economic reform in Mexico) and
Mexicos geographical proximity may have encouraged rms to target this market in the short run. Because past perceptions
often determine current involvement levels, the perception that some nations south of Mexico are less stable may have
discouraged rms from using Mexico as a gateway to target other Latin American markets. Current involvement level is also
associated with ownership advantages such as size, degree of Mexican experience, and multinational status. Firms that have
ownership advantages can counter advantages of local rms such as low tariffs, familiarity with markets, knowledge of
business practices, and established relationships with consumers and distributors.
The results presented here are consistent with those of Dunning (1993) and Kimura (1989), and reiterate that the greater
skills and resources (nancial and non-nancial) that characterize large companies enable them to dominate new markets.
On the other hand, the unique traditions, culture, and business customs of the Mexican market demand attention and
adaptation from non-Mexican rms (Eder, 1996; Mele, 1994). The ndings also emphasize the importance of managing and
coordinating multiple operations and dealing with such risks associated with foreign operations as currency uctuations
(Yip, 1995), since MNCs consistently choose high involvement levels.
7.2. Future involvement levels
Future involvement levels are also positively associated with market attractiveness and rm-specic ownership
advantages. As a result, future involvement levels are likely to be inuenced by NAFTA, as the dynamics of trade within a
regional trading bloc might affect rm strategies. In view of NAFTAs role in reducing trade and non-trade barriers, NAFTA
provides some advantages for local rms too. Low involvement may thus seem a reasonable response for U.S. and Canadian
rms, particularly for rms that are not comfortable with the infrastructure or the business climate in Mexico. Indeed,
exports in the year following NAFTAs enactment rose dramatically for several product categories, such as specialized
machinery, consumer electronic products, and automobiles.

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219

Despite the lower consensus level for future involvement, the results indicate that large multinational rms
with past experience in Mexico are inclined to respond to Latin American market opportunity by becoming more
involved in Mexico. Though dominant rms take short-term risks by competing in the Mexican business environment,
they may be motivated by faith in a long-term payoff. Since the Mexican market is likely to continue to grow in NAFTAs
wake, early entrants who establish market presence and create entry barriers stand to reap great rewards (Robinson &
Fornell, 1985). The strategies of rms are also consistent with the trend of globalization among major corporations
worldwide to maintain and build differential advantage (Yip, 1995). As North American rms try to keep up with foreign
competitors such as China, Japan, and the EU nations, seizing competitive advantage in Latin America assumes even
greater importance. The proactive approach by U.S. and Canadian rms in Mexico is encouraging. Not only do these
rms seem to choose high involvement levels, but also some continue to actively improve the manufacturing and
distribution infrastructure in Mexico to further increase their competitive advantages. Companies such as Braun and
Kraft, among others, have invested heavily in Mexican distribution systems, while Mattel is building core carrier
programs.
The analysis of future involvement levels also suggests that plans to invest in Mexico are motivated by an intention to
target not only Mexicos growing market, but also that of its southern neighbors. Efforts by the U.S. government to expand
the scope of NAFTA underscore this point. The formation of regional trading blocs might open up new strategic options.
Rather than investing in emerging markets, rms might choose to service them from Mexico. Our study conrms Mexicos
attractiveness as a gateway to other Latin American markets.
8. Conclusion
By reducing barriers to trade, NAFTA is expected to continue to increase the growth potential of the Mexican market.
Mexico, both as a nal market and as a gateway to other growing Latin American markets, provides its NAFTA partners
with a competitive edge. The edge, however, depends on a rms involvement in Mexico. Involvement, in turn, is related
to the characteristics of a rm and to its managerial perceptions of the attractiveness of the Mexican and larger Latin
American markets. Results of this study suggest that current involvement of U.S. and Canadian rms in Mexico is
inuenced primarily by the perceived growth prospects of the Mexican market. Future involvement, in contrast, is
affected by Mexicos ability to serve not only as a nal destination, but also as a gateway to other Latin American
markets.
The Gateway Hypothesis, which is empirically conrmed in this study, involves consideration of future expectations
when venturing into a new foreign market. The backbone of the proposition is that the rst experience may turn into a
stepping-stone-entry which initiates further entry decisions in related markets. This type of entry is expected especially
when a macro-level agreement such as NAFTA incentivizes the focal company with such drivers as less volatility, increased
stability, higher predictability, lower exposure to exchange risk, and improved transparency. Indeed, when an entrant rm
steps into a familiar and stabilized environment, a higher investment commitment and better learning ensue. Under those
conditions, as in the case of Mexico and NAFTA, the rst successful entry becomes a possible prelude for extending the focal
companys attempt to further entry options.
This study suggests an important aspect of entry mode literature. Specically, it shows that entry decisions, in some cases,
require the examination of the interplay of country-level factors and of company-level variables. Such interaction will not be
captured unless the external factors in the target market are included into the study as endogenous macro-policy factors.
Also, this study considers the possibility of drawing entrants into new markets by paving the way with macro-NAFTA-like
agreements so that the focal companys earlier experience furthers its expansion into culturally and economically connected
targets. Our study indicates that, in addition to macro-incentives relevant to The Gateway Proposition, there are other
inducements. The entrant rms current involvement level in the target market is one; the variables that contribute to future
intentions to invest in related countries are also important.
However, several limitations of this study must be noted. The present investigation does not explicitly
consider Mexicos other locational advantages (e.g., cheap labor force) or disadvantages (e.g., inferior technological
and logistical infrastructure). The impact of these factors on a rms involvement level remains to be investigated.
As has been the case in past studies (Anderson & Coughlan, 1987; Chung & Enderwick, 2001), it was not possible to
include all the relevant factors in a single study. Increasing the scope of this study to investigate the investment
philosophies of European, Asian, and Pacic Rim rms in Mexico could yield interesting results. We did not explore
what makes a market attractive, nor did we scrutinize the reasons that rms might like to expand into the Latin
American market. An analysis of these factors will offer a better understanding of the globalization strategies of
Canadian and U.S. rms.
Acknowledgements
The authors acknowledge the assistance of Tecnologico de Monterrey faculty and students for help in collecting data in
Mexico. We thank the Council of Logistics Management and the University of North Florida for sponsorship of and nancial
assistance to this project. We thank the reviewers for their valuable suggestions which have helped to improve the
manuscript.

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Appendix A
1. Items used to measure beliefs about market growth5
a. NAFTA will result in an integrated market
b. NAFTA is a stepping stone to Latin American markets
c. NAFTA will result in Latin American marketing opportunity
d. We expect increased sales in Mexican market
e. A North American strategy helps our customers
f. NAFTA creates signicant market potential in Mexico
2. Items used to measure rm characteristics
a. What is the sales volume for the total company? (In millions of dollars) _____
b. My company is part of a multinational corporation:
c. My company has been operating in Mexico for ______ years
3. Measurement details of the involvement level of rms in Mexico
a. Current Involvement was measured by asking the following question:
Please indicate the business structure which best describes your current situation in Mexico by checking the
appropriate box
b. Future Involvement was measured by asking the following question:
Please indicate what business structure may be in place in Mexico 510 years from now
c. The categories of involvement level were6:
Sell to local exporter who exports and distributes to foreign market

Average logistics budget

(288)

Export to foreign distributors

(520)

Export directly to foreign customers from local operation

(1297)

Joint venture with foreign company

(3428)

Wholly-owned subsidiary organization

(5426)

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