Signaling Commitment or Keeping up with the Jones? A Status-Based Perspective on Embedded Ties Between Professional Services Firms and Emerging Market Clients

Abstract

In professional services markets, exchange relationships between clients and suppliers often last long and occur across multiple service domains. Although the influence of such embedded market ties on the behaviors and outcomes of market actors (i.e., suppliers) is well documented, little is known on how this relationship might differ by suppliers’ status. Combining insights from research on organizational status, embedded ties, and competitive positioning we examine how elite and non-elite suppliers are differentially affected by embedded market ties in their expansion into emerging foreign market. Specifically, we focus on the role of embedded ties to clients in an emerging foreign market before suppliers establish their physical presence in those clients’ home market, or pre-entry embedded ties to emerging market clients, in the context of U.S. law firms’ expansion into China. We posit that in general elite law firms will be more reluctant than non-elite counterparts in officially entering an emerging market (i.e., branch opening) because such action can be viewed as status-diluting despite potential economic benefits. Yet, we contend that such status-based disincentive might shift for the elite law firms connected to the emerging market through pre-entry embedded ties, because, although their elite status and the signal of competence it conveys might still be transferable to clients located in remote markets without geographic proximity to those clients, their commitment to those clients ought to be demonstrated in order to maintain continued relationships. By contrast, we argue that the extent to which pre-entry embedded ties increase the likelihood of non-elite law firms’ entry depends on how intensely their status-similar rivals previously entered that market. We reason that given the relative stability of status hierarchy in the professional services industry, non-elite law firms pay more attention to maintaining their market position relative to rivals, and thus engage in a costly action only if their current market position is threatened by failing to keep up with status-similar rivals’ actions. We find overall support for these claims in the analyses of U.S. law firms’ activities involving China from 1983 to 2017. Further, we find that after entering China, elite U.S. law firms are less likely to leverage on post-entry client ties than non-elite suppliers in growing their branch presence.