Product Quality and the Mode of Entry to Foreign Markets

Beer is costly to transport, making local production essential for serving foreign markets. Yet maintaining consistent product quality across dispersed production sites is challenging, particularly when quality effort is largely non-contractible. We develop a model in which consumer demand depends on perceived quality that evolves with current and past investment, and organizational form determines how strongly producers internalize the reputational returns to quality provision. The model predicts systematic sorting across entry modes: brands with low intrinsic quality prefer unilateral licensing, those with intermediate quality opt for cross-licensing — which sustains higher effort through reciprocal enforcement — and those with high quality choose integration to retain direct control. We test these predictions using data from the global beer industry, modelling organizational mode as a nested decision between integration and licensing, with a lower-stage choice among potential partners that accounts for network interdependencies in cross-licensing relationships. Our empirical results confirm that higher-quality brands are significantly more likely to adopt organizational forms that better align incentives for sustained quality investment, and that stronger contractual enforcement in destination markets reduces the need for hierarchical control.